The Exchequer Secretary to the Treasury (Angela Eagle): The hon. Lady is right to identify some of the issues that inevitably occur as oilfields mature. Some of the fields that we are talking about are more than 40 years old. The UK continental shelf contains many mature fields in one of the harshest environments in the world. It is an engineering marvel that they are exploited, which makes capital investment costly in comparison with fields in other parts of the world that have potential for exploitation. As the fields have matured, a series of specialist companies has emerged that have particular expertise in squeezing out the last drops of oil. As the big boys move on to more easily exploited fields, we have a more dynamic situation with the ownership of fields on the UKCS.
All the clauses that we are discussing today recognise that we are in a more dynamic situation, and begin to change the tax and capital allowances regimes that occur in the UK ring-fence trade on the continental shelf to reflect that reality. These are the first clauses to do that in relation to decommissioning. They seek to facilitate the switching of assets from large oil companies, which are off exploring new fields, to specialists who have a particular expertise that they continue to develop and who can profit from the more marginal bits of fields that have already been developed. That is the background to all the clauses, and it will help if hon. Members keep it in mind as we consider them.
The clauses provide for relief from petroleum revenue taxI shall try to pronounce the term, after my lunch, Sir Nicholas, which did not include a haircutwhere an ex-participator in an oilfield is required to meet all or part of the decommissioning costs of the field owing to a default by an existing participator in respect of their decommissioning obligations. As the hon. Lady knows, when an oilfield comes to the end of its productive life, those companies that are licensed by the Department for Business, Enterprise and Regulatory Reform to extract oil from a field are also responsible for the costs of decommissioning that field. If a licensee defaults on their decommissioning obligations, DBERR can require former licensees to meet the costs. Under the current petroleum revenue tax legislation, no PRT relief is available for a company if it is no longer a participator, because it has no licensed interest in the field.
Providing relief for ex-participators in default situations ensures that such companies are not unfairly penalised by the actions of other companies, which they perhaps sold their interest on to, but whose subsequent actions are clearly, by definition, beyond their control. The clauses therefore extend the definition of participator
In addition, if the former participators are subsequently reimbursed by the participator for all or part of the payment that they have had to make, such amounts received are also brought into account for PRT purposes. That mirrors current legislation applying to existing participators in default circumstances when payments are relieved and reimbursed once they are taxed. The oil industry, as the hon. Lady was gracious enough to accept, has welcomed the proposal as removing an anomaly that impacted on asset trade and led to tax-motivated behaviour in which companies held on to a licence interest solely to ensure that petroleum revenue tax relief remained available should a future participator default. It was not a particularly sensible situation. The Governments new clause, to which I shall refer briefly as a technical clause that is consequential to the changes being introduced in the legislation, amends two sections of the Finance Act 1991, which apply the PRT provisions in order to ring-fence corporation tax and ensure that there is an effective read-over.
The hon. Lady asked some questions to which I hope I shall be able to give some answers. She asserted that investment had dropped by £1 billion in real terms in one year. In 2007, capital investment went down by £1 billion, but she did not say that operating expenditure went up by £500 million, or that exploration expenditure, which relates to todays observations about the future potential of the UKs continental shelf, also went up by £500 million. So, overall, investment is constant at £12.4 billion.
Justine Greening: We just need to be careful that we do not become complacentthat because we see spend continuing to hold up, we do not assume that the actual investment is the same. The industry says that because cost pressures are growing, although spend is holding up, what it will buy is not. Therefore, whatever the figures say, in reality there is a real-terms reduction in investment.
Angela Eagle: I assure the hon. Lady that we are not complacent at all. We understand the competitive position that the oil industry is in and the resource and technical constraints on the global industry. That is why we are in constant discussion and communication with the oil industryso that we can both understand what motivates its behaviour and see what we can do to maximise production from the UK continental shelf. I hope that she is under no illusions. We are not complacent about that issue at all.
The hon. Lady mentioned that production has been consistently below that which has been forecast, but that tends to be the pattern with oil companies: they tend to over-forecast and produce less. On clause 99, she asked what all reasonable steps might mean. In the circumstances, we would expect companies to take the normal steps that fellow participants would be required to take in any dispute to ensure that all reasonable due processes had been used. That would resolve the issue of all reasonable steps.
I agree that June 2008 seems an odd date. The reason for it is simply that that is the last day of the current chargeable period. The next chargeable period starts the
The hon. Lady also talked about the next steps on petroleum revenue tax following the consultation document. Consultations are ongoing on some issues, one of which is the future of petroleum revenue tax. The current round of consultations finishes at the end of June like the chargeable period, although I am sure that that is a complete coincidence. The Government will consider the industrys suggestions and proposals and if necessary will discuss the matter further with the industry to ensure that we have a fiscal regime that fully supports the Governments stated objective of maximising the economic recovery of the UKs oil and gas reserves.
Justine Greening: Does the Treasury expect to be in a position to come out with some stated outcomes from the latest discussion before the pre-Budget report? I understand that the consultation will reach a gateway point at the end of June, but how long will the industry be waiting before it gets some resolution about what are fundamental issues for it?
Angela Eagle: The future of petroleum revenue tax is a fundamental issue for oil companies, but it is also fundamental for UK taxpayers. It is quite right, given that the UK owns the gas and oil reserves, that we should ensure that there is a reasonable return for their exploitation, especially if super-profits are made. That is why the petroleum revenue tax was legislated for in the first place. The balance that we are trying to strike through our ongoing consultations with the oil and gas industry is between having a reasonable taxpayer return on important UK assets and ensuring that we can enable and facilitate their exploitation rather than see them left in the ground.
Mr. Mark Field (Cities of London and Westminster) (Con): While along with any sensible person I accept what the Exchequer Secretary is saying about the importance of this asset, the concern that my party and the Scottish National party have is that all too often with oil and gas reserves, the Government have had a rather precipitate and uncertain approach, which is a barrier to longer-term investment in this area. I appreciate that that may also be true of Governments before 1997. It is all too easy to point the finger, as the Government do, at the super-profits of oil companies, but a significant proportion of the increased petrol prices that affect each and every one of our constituents goes directly into the hands of HMRC. That is the biggest beneficiary of such super-profits.
Angela Eagle: The hon. Gentleman has described the exact balance that I said Governments have had to strike since the discovery of oil and gas reserves on the UK continental shelf. That period included Governments of at least two colours and persuasions that I can think of. That balance must always be examined. It would be less than sensible to create a circumstance where taxation rates were seen as so high and so difficult for the industry to operate under economically in what is a global market with limited amounts of kit, machinery
Mr. David Gauke (South-West Hertfordshire) (Con): The Exchequer Secretary makes a good point about the need to achieve a balance. I think that she agreed with the point about uncertainty made by my hon. Friend the Member for Cities of London and Westminster. What views does she have on the implications of a windfall tax on oil exploration companies? Does she think that that would have a damaging effect on certainty?
Angela Eagle: I cannot see any reference to a windfall tax in the clauses. Therefore, I will not be tempted down that very interesting path of speculation. Given the explanations that I have given the hon. Member for Putney, I hope that she will accept that clauses 98, 99 and 100 are drafted to facilitate the changes in structure in the oil industry. Hopefully, they will bring about a win-win situation for both the UK Government and the oil industry itself. However, I can see that she is about to leap to her feet.
Justine Greening: I am going to briefly ask the Minister to give us a date for when the Government will have finished their deliberations on the consultation paper. I notice that she did not give any time lines. Whether it is a year or six months, it would be helpful for us to know the process that the Treasury is going through and when it expects to get to the end of it.
Angela Eagle: I apologise. I got dragged off to discuss with the Opposition how one taxes oil assets in general and I got distracted from the point that I was asked to talk about. We are in consultation with the oil industry, and we expect those consultations to continue. The date for the end of this particular round is 20 June. If interesting points are made or if evidence is given to us after that date, we will consider them. There is a pre-Budget report process in which we can come up with some other results from the consultation. There is also a subsequent Budget process. I do not see this engagement with the industry coming to an end for ever in June; it is ongoing. It is in both its interests and ours to keep the dialogue going to understand the structures of the industry and how it is changing. We also need to know what impact our tax regime is having on its decisions, particularly globally, to put investment into the UK continental shelf. We will keep searching for the right balance in those issues to maximise the production from the UK continental shelf for both the industrys benefit and profit and ours. I hope that that satisfies the hon. Lady.
I hope that hon. Members will accept that these changes are wholly beneficial and have been widely welcomed by the industry, and that they will vote to get clause 98 and the whole group of clauses, including technical new clause 7, into the Bill.
Question put and agreed to.
Clause 98 ordered to stand part of the Bill.
Clauses 99 and 100 ordered to stand part of the Bill.
Returns of relevant sales of oil
Question proposed, That the clause stand part of the Bill.
Justine Greening: Briefly, the Conservatives welcome the clause. As I said, we want the North sea oil tax regime to have simplification embedded into it, and the clause aims to do that because, under it, only the returns of relevant sales of oil will need to be submitted to the Treasury. As I understand it, companies that used to have to report sales of all oil to HMRC will now have only to report sales of certain categories of oil, specifically category 2. The measure is welcome, and I hope that the Treasury continues to work with the industry to tackle burdensome and unnecessary paperwork and regulation, as clause 101 will do, and to find more opportunities for such action. In the meantime, the Conservatives support the measure.
Question put and agreed to.
Clause 101 ordered to stand part of the Bill.
Clause 102 ordered to stand part f the Bill.
Schedule 33 agreed to.
The Chairman: We can gallop through these quite quickly, and Opposition spokesmen need to be well and truly on the ball.
Capital allowances: plant and machinery for use in ring fence trade
Question proposed, That the clause stand part of the Bill.
Justine Greening: Sometimes, shuffling ones papers takes longer than a tenth of a second, even if I only intend to make brief comments, but I am pleased that I have caught your eye, Sir Nicholas, and that I can make such comments on clause 103.
Again, we welcome the clause, which is about expenditure on long-life assets and decommissioning. Without a banding, assets involved in mid-life decommissioning within the ring fence will now be treated the same as all plant and machinery in the ring fence. Those assets will now get 100 per cent. first-year allowances for corporation tax, rather than 24 per cent. as they did previously.
We welcome the clause because we hope it will address to some extent our concerns on encouraging investment. We feel that the measure will take us in the right direction, and that the Bill, as far as North sea oil is concerned, will encourage badly-needed inward investmentthe long-term investment trend seems to be downward at the moment.
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