North Sea Oil and Gas Industry

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Ann McKechin (Glasgow, Maryhill): Does the hon. Gentleman actually believe that the exploitation of oil in developing countries should be talked about favourably when people there do not benefit from a more favourable tax regime? Is not oil a national resource? Should not people of this country benefit from it, rather than the dividend shareholders of BP and its chief executive, who earns a salary of £3.3 million per annum?

Sir Robert Smith: Does the hon. Lady not understand that the Chancellor is encouraging companies to go to Angola rather than use the North sea? He is driving them away from the North sea. The right place for them to invest is in the North sea, where we have a regime that looks after the environment in a way that many other countries do not and looks after health and safety. However, Government Members do not understand the distinction. Business units in the North sea are being taxed, not the parent oil companies. That message has to get through.

The subject for debate is not ''North sea oil and gas taxation''; it is actually ''North sea oil and gas

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industry'', and there are a couple of other issues behind the scenes. The Secretary of State talked about exporting skills. One of the key factors in the export of skills is having a home base from which skills are operated, which means investing there. The other key factor is making it as easy as possible for new entrants. At a recent meeting with the Aberdeen and Grampian chamber of commerce, I was impressed by its work in promoting the export of skills, and particularly its work in promoting the chances for smaller companies to get involved in fields such as Angola; there are chances to take part in the economy there. The work done by the chamber of commerce is something that I would hope that the Secretary of State and the Minister—when they have stopped whispering to each other—considered.

Away from the tax issue, it would be helpful if there were constructive dialogue on what can be done to help the economy and businesses of north-east Scotland. The Minister is probably well aware of the work of the chamber of commerce and I hope that he could look at ways of encouraging that work. It allows small companies to find a foothold in the fields, and once they have the confidence, they have the chance to expand.

I reinforce the point made by the hon. Member for Banff and Buchan about pipelines. The Government must reconsider some of the marginal tax rates on the older infrastructure in the North sea to encourage tie-backs and to encourage Norwegian gas to our shores so that the Chancellor gets a bigger cut in the long run. We all want to see long-term investment in the North sea, not just for our constituents' jobs—although that is a primary concern—but for jobs throughout the United Kingdom. That message has to get through to the rest of the House between now and the Report stage of the Finance Bill. We are concerned about security of supply, and enabling future generations to maximise the resource. It is not our right to exploit the resource in the short term to get the Treasury out of a short-term fix, because that would damage the long-term potential that still exists in the North sea.

12.8 pm

Mr. Frank Doran (Aberdeen, Central): I do not want to be difficult about this, but in what is, effectively, a two-hour debate, we have had three Front-Bench speakers and another two who will speak at half-past twelve. That leaves 20 minutes for Back Benchers.

Pete Wishart (North Tayside): Will the hon. Gentleman give way?

Mr. Doran: No, I will not take interventions.

I will be as brief as I can. I want to consider some of the myths that are being peddled by Opposition parties about the oil industry and the way in which taxation operates. The Opposition Front Bench spokesmen who have spoken are very experienced in the oil industry and they should know better. The first myth that I want to tackle is the idea that the North sea is somehow ring-fenced. It is not, except on the issue of taxation in the UK. No profits remain in the UK except for those made by UK companies. All profits from the North sea after taxation go back to Houston,

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Dallas, San Francisco, New Jersey or, perhaps, to London if the company is based in the UK.

Investment decisions are the same. They are not made on the basis of the profits made in the North sea in the previous year or years. Each company has its own pot of money to invest in the oil industry. The company will make a balanced decision about the profitability of the North sea against that of Kazakhstan, Angola, Nigeria or western Australia. Various elements come into the decision, including the amount of money already invested in the various locations and the return that is made. My right hon. Friend the Secretary of State has already made the point that the oil industry last year made a return of 34.2 per cent. on its capital employed. That is an attractive return, and it is taxed at a much lower rate than in any other oil-producing country in the world.

Mr. Salmond: Will the hon. Gentleman give way?

Mr. Doran: I am not taking interventions; the hon. Gentleman has already had 25 minutes.

The hon. Member for West Aberdeenshire and Kincardine (Sir R. Smith) said earlier, ''It is damn right that it is more profitable in Angola.'' That is not the case. There is an upper rate of tax of 80 per cent. in that country, whereas the rate in the United Kingdom will be 40 per cent.

Sir Robert Smith: Will the hon. Gentleman give way?

Mr. Doran: No, the hon. Gentleman has had 20 minutes already; I am totting all this up.

There are other expenses in Angola that are not taken into account. Another myth is that the oil industry is interested only in financial stability. It is interested in both financial and political stability. We should consider some of the countries in which the oil industry operates, such as Angola, Nigeria, Kazakhstan and Azerbaijan and some of those into which it is moving, such as Iran and some middle east countries. The comparative political stability of the United Kingdom is extremely important in decision making. A company does not have to pay the extra cost of protecting its pipelines with a private army. There is no graft to pay to Government Ministers. Those are additional costs that affect the attractiveness or otherwise of a particular area. That is extremely important.

My hon. Friend the Member for Falkirk, East (Mr. Connarty) has already alluded to the idea of the industry being unified. Of course the oil industry is upset about the increased taxation; we would all be upset about such increases. The reaction is predictable, but the industry is not unified. Certain people have examined and analysed the impact of the tax and found that they will be losers, but there are many gainers, including companies new to the North sea, such as Talisman. Its chief executive is starting to see the positives. In discussions elsewhere in the House, Members of all parties have talked about the future of the North sea. That future lies with companies such as Talisman and Tuscan, which are able to go into new territories. They are relatively small at the moment, but they are taking the risk.

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The hon. Member for Banff and Buchan rightly made the point that there is a serious problem with exploration at the moment. That started after the 1993 Budget, when the financial stability of the oil industry was rocked because the then Conservative Government changed taxes overnight.

Oil companies have become risk-averse. Professor Alec Kemp produced an analysis three or four years ago of the amount of money involved in drilling wells in the North sea, and their success rate. He discovered that one in 14 wells was successful. That is money down the drain. It is an activity for which there is no tax relief and which the banks will not finance; the money comes out of cash flow. Clearly, there are some difficulties in that area, and I hope that it will be examined.

I mentioned the 1993 Budget because it seems to have escaped the collective memory of the oil industry. It is illustrative to examine what happened then. I always listen carefully to the hon. Member for Banff and Buchan, and I was interested in what he had to say. What we have to remember about the SNP's approach to the oil and gas industry is that, for 40 years—since the North sea oil industry was a gleam in the eye—it has been telling us that Scotland could be independent and that oil and gas would pay for it. The SNP is always looking across the North sea to Norway and saying that Scotland could be like that, but Norway charges up to 88 per cent. on its oil and gas revenue. I do not understand where the party's sums come from. It is changing its policy? Has it ditched the old policy in order to pay for an independent Scotland?

The key aspect of the hon. Gentleman's speech was that it included not one sentence of SNP policy. It was a continual attack on what everyone else has had to say. For example—

Mr. Salmond: Will the hon. Gentleman give way?

Mr. Doran: The hon. Gentleman has had most of the morning; I shall finish this point and then I will happily give way.

In the 1993 Budget, the then Chancellor of the Exchequer changed the tax regime in the North sea overnight. That was extremely beneficial to certain oil companies. Those companies—such as BP, Shell and Esso—that are complaining about the present changes were major beneficiaries of the 1993 Budget. However, companies such as Texaco, Conoco and Amerada Hess, were major sufferers in 1993. To set the scene, the tax changes of 1993 were made at a time when oil prices were low.

The hon. Gentleman's speech was virtually the same one that he made in the Budget debate in 1993; scaremongering about jobs, the collapse of the Scottish economy and all the rest. However, he made one important point, which is relevant to today's debate. He said that a case could be made for increasing oil taxation at boom times, because oil is a cyclical industry. We are in a boom time now; over the past three years, oil companies have made record profits. We all know that that will not be sustainable because it is a volatile industry and depends on so many factors, particularly politics. For instance, none of us can be

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confident about the situation in the middle east, particularly with the threat of action in Iraq and what is happening between Palestine and Israel. However, the words never change; the focus of attack is the only thing that changes.

In 1993, the Tory Government took £700 million out of the oil economy. As I said, BP, Shell, Esso and the other companies that are complaining now were silent then because they supported that change. The companies that lost out then did so in exactly the same way as those losing out now. The United Kingdom Offshore Operators Association is now running a campaign telling us how bad the Budget is—it is using tactics similar to those used by the Opposition—and about the threats that it poses to the Scottish economy and the risks that are faced by the oil industry. In 1993, however, UKOOA was silent.

Another myth is that the industry has an effective voice. The industry has an effective voice only when it is unified. In 1993, it was not unified; only the small players are complaining now.

The Chancellor is following a consistent line through Pilot—and the oil industry task force before it—of encouraging new development and investment. I hope that royalty payments will be abolished soon, and certainly before the next tax year, but when that change is completed, taxation will be based entirely on profits. That is the fairest way of taxing the industry. In addition, capital reliefs will encourage investment in new fields and old. In particular, new entrepreneur companies such as Talisman and Tuscan, which the North sea oil industry desperately needs to ensure its future, will be even more encouraged, despite all the huffing and puffing from Opposition Members.

12.19 pm

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