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My second point is about the uncertainty out there about the fiscal treatment of decommissioning, which we are told is beginning to have an impact on asset trading. We need plenty of asset trading for the health of the UK continental shelf. We need therefore some decisions on tax issues concerning decommissioning. With the agreements that were signed to start with, my understanding was that decommissioning would come with quite a big cost to the Treasury, so probably none of us would welcome it. Linked to decommissioning,
however, is a window of opportunity. I have said that most new development is linked to the older infrastructure. That older infrastructure has an economic life, and 45 per cent. of it could be closed down by 2020. Without that infrastructure, however, much of our remaining oil and gas recovery would be uneconomical, which would mean reserves being abandoned. That would be a nightmare scenario, because we would lose indigenous energy, investment in jobs and the tax revenues from that. However, if we can sustain current activity, that decommissioning can be avoided. If investor confidence is maintained, decommissioning could be delayed by 10 to 15 years on many of the systems out there, bringing benefits for everybody.
Briefly, another issue is the gas reserves in West of Shetland, which really need to be unlocked. There are talks on that, and I urge my hon. Friend the Financial Secretary to take a personal interest in them. West of Shetland could provide 3 per cent. of the whole countrys gas by 2011 and 6 per cent. by 2016, but it must be economic. If we cannot make it economic again, the gas will remain there, and we will get no tax returns from it.
Everything that I have said suggests that the Treasury needs to think what the right level of tax is to sustain investment and recover the remaining reserves. We have to watch out for fields and platforms that were invested in many years ago on the basis of oil being $20 a barrel, and which are still pumping away with oil at $60 a barrel. Those kinds of platforms do not need any fiscal incentive, because we cannot guarantee that their profits will be reinvested in the North sea. We need to focus on new investment. I have not yet done the sums on todays announcement on corporation tax and capital allowances, so I do not know whether the industry is better off being treated differently from the other industries. My initial response was that the choice of capital allowances rather than corporation tax for a reduction may be right, because capital allowances focus more on investment, although I say that guardedly. However, the question we need to consider is whether the total amount of tax still being taken will result in insufficient investment for the future.
I should like to draw my hon. Friend the Financial Secretarys attention to two things in the consultation document. The fourth criterion that he will use to make decisions is that any change should be equitable. I remind him of what I have said about oil and gas: companies focusing on gas are not being treated equitably, because they are paying a supplementary charge, which was levied essentially to deal with the high oil price, the profits from which need to be shared. The initial conclusion is that the Treasury probably wants to keep petroleum revenue tax and not make any changes.
I note that the Treasury is quite cool on any incentives targeted at exploration. My general feeling is that my hon. Friend the Financial Secretary is not minded to make any changes. The industry will find that disappointing. However, it will notice that the doors are still open and that things are not closed down. Where are we going with the process and when will it concludeit started with the pre-Budget report
of December 2005? When will the consultation conclude, and should it not involve the industry-Government body PILOT?
Finally, the activity survey to which I have referred points to two possible futures for our oil and gas province. The better future would mean still being able to supply 40 per cent. of our needs by 2020; alternatively, we could let the existing trends continue and supply only 8 per cent. I am told that the industry is willing to step up to the plate, but we need to attract and sustain the investment. We will need a fiscal regime for the second half of the life of the North sea field that can do that. I hope that when the consultation finally concludes, my hon. Friend the Financial Secretary will come forward with that answer.
The Financial Secretary to the Treasury (John Healey): I congratulate my hon. Friend the Member for Waveney (Mr. Blizzard) on securing this debate today, in time for the Budget. His timing is excellent as always, as is the authority with which he speaks on the subject. He is the chairman of the all-party British offshore oil and gas industry group, and is active and knowledgeable as a result. I also welcome the interest of the hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith), who also has a track record of concern about the industry.
I shall deal later with my hon. Friends observations that todays Budget somehow means no change for the North sea oil and gas industry. That may be the case in respect of the business tax package that my right hon. Friend the Chancellor announced, but some important developments are captured in the discussion paper that we published alongside the Budget this morning, The North Sea Fiscal Regime.
Our approach to the North sea is underpinned by our continuing commitment to maintaining a vigorous North sea oil and gas industry, with the aim of maximising the economic recovery of the UKs oil and gas reserves. The North sea oil and gas industry is one of this countrys great success stories. It is globally competitive, with many important global players. It utilises much of the latest technology and operates in what is recognised throughout the world as one of the most hostile environments for the recovery of natural resources, as I saw for myself last October when I went out to the Claymore platform with Talisman. My hon. Friend is right; it is a fact not only that, to date, we have managed to extract about 36 billion barrels of oil-equivalent in the working life of the North sea, but that substantial reservesan estimated 15 billion to 20 billion barrelsremain. As my hon. Friend rightly argued, that indigenous supply should and can continue to play a vital role in the UKs energy security and consumption for many years to come.
A combination of underlying geology and, as my hon. Friend mentioned, future oil and gas prices are the dominant drivers of investment. However, we also have an important role in ensuring that the right fiscal and regulatory regime is not only appropriate for the North sea, but does its best to encourage the required investment for the future. In recent years, Her Majestys Revenue and Customs, the Department of Trade and Industry and the Treasury have been working closely with each other and the industry to try to achieve that.
On the regulatory side, there is the well established PILOT forum, in which the industry and the Department of Trade and Industry consider regulatory issues. There is a certain advantage in maintaining a separation from straight tax issues; it allows the industry to deal directly with the Treasury on tax matters. The industry does that now, and we are encouraging it to do it further, as I shall explain in a moment. On the fiscal side, the Treasury and Her Majestys Revenue and Customs have been considering the wider structural issues of the fiscal regime for the North sea, following the pre-Budget report 2005.
The announcement of the discussions at the pre-Budget report was part of the package of tax changes that we announced, reflecting an upward shift in not only contemporary prices, but the oil price outlook. It was an important rebalancing of the fiscal regime between the interests of oil producers, consumers and general taxpayers.
The discussions to date have been useful. We have explored important issues with the industry. There are many different companies in the North sea, so there is a wide range of viewpoints, sometimes directly contradictory. Nevertheless, some important and consistent themes have occurred and recurred in the discussions. Those have included the future of the petroleum revenue tax system, the treatment of decommissioning by the fiscal regime, incentivising future exploration and development, and how the North sea fiscal regime will apply to the change of use of assets. Some North sea companies are increasingly considering such change as they diversify away from hydrocarbon extraction to other activities such as carbon capture and storage, and offshore wind farms.
We responded to some concerns in the pre-Budget report in December last year. My hon. Friend was concerned about exploring the application of existing tax rules to changes of use of North sea infrastructure; that is the subject for consideration by a joint group that we have set up with the industry. It aims to report back this summer. We also announced the removal of petroleum revenue tax from North sea oilfields and gas fields that had previously been decommissioned to encourage new investment in old fields. That was another point raised by my hon. Friend.
My hon. Friends third point was about West of Shetland. I recognise that the issue is not only the high costs involved with working in a hostile part of the North sea, but that the limited amount of infrastructure is a potential barrier. We are working with the industry to examine whether there are collective approaches to dealing with such infrastructure difficulties.
We also wish to examine with the industry the other issues raised in the preliminary period. That is why we have published the discussion paper today. It summarises the discussions that we have had so far and sets out the initial views that the Government have drawn from the process. It also outlines the criteria that we will use to assess proposed policy options. First, any changes will need to be in line with the twin objectives for the fiscal regime of encouraging investment and ensuring a fair return for the UK taxpayer from our national, natural, finite resources. Secondly, they will have to make sure that the fiscal regime continues to have the minimum possible impact on investment decisions.
Thirdly, any changes will need, as my hon. Friend said, to be equitable; they should not fall unduly on any one type or section of companies involved in the North sea. Fourthly, they will need to be consistent with the Governments wider concern to reduce the administrative burden imposed on business generally. Finally, we are mindful of the long lead times for investment projects in the North sea; any changes to the regime should enhance the stability, certainty and sustainability of the system, both now and for the future.
There is a lot of ground to cover with the industry, and on our side there is a real interest in doing so. However, in light of those criteria, we have also announced today at the Budget the following decisions, which will settle concerns raised by the industry on two areas. By doing so, I hope that the certainty of the fiscal regime will improve.
In the document, we state clearly that we are not attracted to any mechanism that would remove petroleum revenue tax and rebalance the fiscal regime through increasing the supplementary charge. That would impact heavily on companies that operate in the North sea, but whose investments do not currently fall within the auspices of the petroleum revenue tax fiscal regime. It would therefore risk damaging the very thing about which my hon. Friend is principally concerned: investment in exploration and development. I also confirm that we are not attracted to any regime that explicitly links the tax level with the oil price. Such a regime would increase uncertainty for the industry and the Government; we will not be examining that proposal any further.
I turn to the Budget changes. My starting point is that the North sea has unique features and so presents unique challenges for industry and for the Government. It needs a tax rate that reflects those unique circumstances and characteristics and strikes a fair balance between
producers and consumers. The view that we took in the Budget was that the principal basis for the changes in the pre-Budget report for 2005 remains, particularly in light of the continuing high returns on the capital employed and the recognition of the importance that the industry places on stability and certainty. That has led the Government to conclude that, at this point, it would be inappropriate to make the changes to North sea taxation that we might have considered for the rest of the business tax regime.
Clearly, the industry might focus on the cut in corporation tax. The special and necessary, but generous nature of the capital release regime for the North sea means that the industry might not have studied the proposals that are part of that wider business package. A regime based, as this one is, on 100 per cent. capital allowances is important for the North sea and should not be changed as part of the general changes that we have considered.
On a separate regime for oil and gas, our initial analysis suggests that any changes to the fiscal regime intended to discriminate between oil and gas would have a minimal impact on investment, add considerable complexity to the regime and involve significant compliance costs. However, we have not discussed the issue widely with the industry; I invite it, if it wishes, to provide us with further evidence as part of our conversations.
It is for those reasons, and because we recognise the importance of stability to the industry, that we take the view that there is not a case for tax reductions or major changes such as those announced today for other business reliefs. I hope that the publication of the discussion paper shows the strong basis for further conversations with the industry, which we look forward to continuing