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13 Nov 2002 : Column 121—continued

10.16 pm

The Economic Secretary to the Treasury (John Healey): I congratulate the hon. Member for Orkney and Shetland (Mr. Carmichael) on securing the debate and I applaud the reasoned and well argued way in which he presented his case. This short debate cannot do justice to the issues that he raises, nor the interest of other hon. Members, including the hon. Members for Banff and Buchan (Mr. Salmond) and for West Aberdeenshire and Kincardine (Sir R. Smith).

The Government are completely committed to maintaining an active oil and gas industry in the UK and to promoting the future development of the nation's oil and gas resources. The moves that we have made since 1997, including the tax changes in this year's Budget, underline that commitment. The oil and gas industry task force, established in 1998, was an early and strong commitment to the industry. Its work continues through PILOT, which we set up in January and which the hon. Member for Orkney and Shetland mentioned. I welcome his stress on the importance of that industry-Government partnership. No doubt PILOT will consider two of the issues that he mentioned, because the working time directive and health and safety concerns are meat and drink to such a forum.

The Treasury has always been, and will remain, fully engaged with PILOT's work. We will remain so because that body reflects the importance that the Government

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attach to the oil and gas industry within the wider economy, in terms of jobs, investment and contribution to the national income.

The hon. Gentleman outlined some of the difficulties and challenges that companies face in the North sea, including high costs and lower production levels. Those are classic characteristics of a mature industry and it is those problems that PILOT has been designed to help companies overcome. PILOT is looking to the long term, and the new tax regime—the subject of the debate—does the same. The changes are designed to provide certainty for the industry, by removing the element of fiscal risk, and to create the right investment incentives by introducing 100 per cent. first-year reliefs for virtually all North sea capital investment and by removing the old royalty system entirely.

I reject the suggestion that those changes were rushed or introduced without preparation. I remind the hon. Gentleman that the Government's first Budget, in 1997, announced the review of the North sea fiscal regime. The pre-Budget report that year stated:


A 1998 Budget press release confirmed that the Government would


The accompanying press release outlined a consultation document, with the options of extending the petroleum revenue tax or introducing the surcharge tax.

We confirmed that we would not go ahead later that year, because of the lower oil prices, but two years later, in the pre-Budget report speech, the Chancellor made this clear:


In his 2001 Budget speech, he said:


That is exactly what the Chancellor announced a year later in this year's Budget. Frankly, it gives the lie to the idea that, somehow, the changes to the tax regime were a surprise or that they were made without any consideration for or sufficient consultation with the industry.

I also reject the hon. Gentleman's argument that the industry cannot afford the changes and that investment will suffer, because last year, even after investing #4 billion, oil companies generated a net cash flow of #10 billion from the North sea, even after all the taxes they had paid. The pre-tax rate of return in the North sea oil industry, as the hon. Gentleman knows, is a massive 21 per cent.—double that, generally, of other industries.

Also, in post-tax terms, we see a significant difference compared with other sectors in recent years, so I reject the arguments that the changes cannot be afforded and that investment will suffer under the new regime. I have read Professor Kemp's report and the speech that he

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gave on Friday. I have also received a communication from him on the very issue. In a sense, the hon. Gentleman misrepresents his point about royalties, because he states very clearly that


Mr. Salmond: I welcome the mention of Professor Kemp, because, as the Minister knows and as the hon. Member for Orkney and Shetland said specifically, Professor Kemp is also very concerned about the differential taxation of gas infrastructure. Has the Minister had the opportunity to consider that issue specifically, bearing in mind the under-utilisation of large existing structures, and, from a Treasury point of view, the fact that if new structures are built, perhaps unnecessarily, they will attract substantial capital allowances? For the Treasury and for the environment, would it not be a good idea to tax existing gas infrastructure fairly?

John Healey: The hon. Gentleman asks whether I have considered the issue. I have. I have also considered the work that the joint UK-Norway group has been doing on the question. I shall come to that later, because it was raised by the hon. Member for Orkney and Shetland.

The starting point for the debate—an important reference point—is the fact that the North sea is accepted as a maturing oil region. Most major North sea finds are past their peak and overall production is beginning to decline. However, the UK still offers some good opportunities, although it is widely recognised that their nature has changed. As Beverley Mentzer, chair of the United Kingdom Offshore Operators Association fiscal policy group, said in relation to yesterday's report launch:


There is also general agreement that costs in the North sea are high by international standards. Average development costs are about $4 a barrel and operating costs are about the same, so that tax regime must, and now does, recognise that combination of high costs and a maturing sector.

We had two principal objectives for tax in the North sea: the regime must ensure that there are sufficient incentives to invest in a maturing industry and that the nation receives a fair share of the profits being generated by companies from a finite natural national resource. Every major oil-producing country has a special tax regime to reflect the economics of its oil industry and ensure that their country shares in its benefits.

The tax rates, moreover, had to be both credible and sustainable, and they had to remain competitive. The rates we have introduced are lower than those in all other major oil and gas producing nations—significantly lower in most cases—but we wanted to do more than keep the rates low. We also wanted a regime

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that recognised that the changing nature of the North sea. A tax regime should be designed to meet the challenges of the future, high costs and shrinking field sizes. Above all, it should provide the best possible help for future marginal North sea projects, to encourage both new field developments and incremental developments in the larger but older fields.

Building on the existing 100 per cent. relief for exploration, we have provided full and immediate relief for virtually all North sea capital expenditure, including the exploration drilling about which the hon. Member for Banff and Buchan (Mr. Salmond) is concerned. That is a significant move, and it has taken a while for the full impact to begin to sink in. I welcome the assertion of the hon. Member for Orkney and Shetland that the changes are Xnot all bad", and I regard that as a step forward.

The hon. Member for Orkney and Shetland. quoted some figures from the UKOAA survey, whose findings were published yesterday. Let me quote some more, because I think the early signs are encouraging. Although the findings were published yesterday, the survey was undertaken after the tax changes in the Budget.

Capital development spend this year is expected to meet the forecast made last year, before the Budget tax changes. More projects are under consideration in mature fields this year: the figure is up from 96 in 2001 to 144. Capital expenditure over the period to 2010 is forecast to be more than #23 billion, an increase of more than #1 billion on last year's forecast and since the Budget changes.

Mr. Carmichael: Will the Minister give way?


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