Angela
Eagle: I welcome the fact that the Opposition recognise
that the measure is a beneficial change that will allow capital
expenditure on long-life assets for use wholly in the ring-fence rate
to qualify for 100 per cent. first-year allowances. That will ensure
that there is no tax disbenefit of investing in plant and machinery
that has a longer life—given that the fields are now mature, and
that reserves might be more marginal, it will be an
incentive. The
measure has been widely welcomed in the industry and I commend it to
the Committee.
Question
put and agreed
to. Clause
103 ordered to stand part of the
Bill.
Clause
104Capital
allowances: decommissioning
expenditure Question
proposed, That the clause stand part of the
Bill.
Justine
Greening: We have already talked about decommissioning and
the current uncertainty that the oil business has in that regard.
Hopefully, some of that is addressed by clauses that we have already
debated. However, I wish to follow up on the devil of the definition of
“general decommissioning expenditure” in the clause. It
raises the question of what can be considered “general
decommissioning expenditure”, and what expenditure will remain
outside its scope.
Specifically,
I wanted to raise with the Exchequer Secretary the issue of financial
security agreements for decommissioning liabilities. We recognise the
need to take steps to ensure that we can extend the life of our North
sea oil assets for the country’s benefit, as has been said. One
way in which companies might cope with the risk burden of
decommissioning costs is by entering a financial security agreement
with a third party on the risk burden of the
costs. 1.45
pm Because
the costs that companies may incur in future in setting up financial
security agreements are associated with creating finance facilities to
deal specifically with decommissioning costs, will they be classed as
costs associated essentially with decommissioning? Will they fall in
the general decommissioning expenditure scope or will the definition of
the scope in clause 104 be more restrictive and, therefore, those
financial security agreement costs will not be classed as general
decommissioning
expenditure? Clearly,
such agreements, which are almost insurance agreements, may provide
industry participants with a welcome tool to manage the risks of
decommissioning costs. We have talked about the fact that the costs
could be between £15 billion and £20 billion over the
years until 2030. As the industry continues to innovate and to develop
its ability to manage the decommissioning costs and the associated
risks, it is important that our regime on PRT can similarly
accommodate, and not hinder, that innovation in the fresh areas that
the industry confronts as it develops. We want to see all sorts of
innovative measures, whether on the fiscal side, with financing and
risk sharing, or on the exploration side, to ensure that we remove the
unnecessary barriers that may hold back our oilfields, which may not
have been
pumped because of an inability to successfully manage decommissioning
risks, from being as pumped over the coming years. Will the
Minister provide me with some assistance on my question? Will any
Treasury guidance that may be issued as a result of the Finance Bill
cover such issues? Will such things be addressed specifically, or will
we have a general decommissioning expenditure definition with enough
examples that nevertheless gives the industry a clear understanding of
whether such finance arrangement costs could be classed as part of
general decommissioning?
Peter
Viggers (Gosport) (Con): Financing offshore oil has played
a large part in my life, so I know that the whole subject is important.
I would like to ask a few general questions of the Exchequer Secretary.
First, who polices the whole decommissioning operation? Someone must be
responsible for ensuring that appropriate standards are met when
decommissioning takes place, and I would like to know exactly how that
works. The Exchequer Secretary referred to squeezing the last drop of
oil from oilfields, but that is not the way that it works. Primary
producers go in initially to start the field, they will probably move
on and pass it on to secondary producers, who will use processes such
as water flooding, and then there may be a third tier using steam
flooding or something along those lines. There are techniques now that
enable chemicals to be used to allow more and more oil to be produced.
Nevertheless, the amount of oil taken out of a field is never more than
about 50 per cent. So, it is a complicated process that involves a
series of
operators. It
is unusual for the primary operator to go in and still be there when
decommissioning takes place. It will probably have passed its interest
on to another company. To what extent is the primary producer still
responsible for decommissioning costs many years later? Are there
insurance or deposit arrangements, whereby the primary producer must
ensure that the decommissioning costs are eventually met, whether the
primary producer is there or not, or can the primary producer pass his
decommissioning obligations on to subsequent operators? If that is the
case, what happens if a subsequent operator cannot meet the
decommissioning costs and the primary producer has perhaps gone out of
business and wound up its operations? Who pays if there is a failure to
pay decommissioning costs? What is the record in the North sea of
failure to pay decommissioning costs? If the policeman decides that the
decommissioning must be carried out to a certain standard, what happens
if there is no one able to carry that work through?
How many
cases have there been in which decommissioning needs to take place but
no one can be found to take on that responsibility? Upon whom does that
obligation fall? Does the taxpayer have to pay that cost, or is there a
system whereby, perhaps through insurance, the industry pays? I should
be grateful if the Minister could give us her thoughts. If it proves
impossible for her to respond to my questions now, I should appreciate
a written answer as this issue is of significant
importance.
Angela
Eagle: The clause extends the availability of 100 per
cent. special allowances to all expenditure incurred in decommissioning
redundant offshore installations and equipment whenever incurred by a
company carrying
out a ring-fenced trade during the life of that field. That will amend
the existing legislation whereby 100 per cent. special allowances are
received only for decommissioning undertaken at the end of field life,
with decommissioning expenditure incurred before that point receiving a
25 per cent. writing-down allowance, rather than a 100 per
cent. allowance.
Analysis
suggested that that discrepancy could lead to the fiscal regime acting
to influence the timing of decommissioning, potentially increasing its
cost. The measure will therefore allow companies to undertake
decommissioning at the optimum economic point, which should have the
effect of reducing the overall cost of decommissioning and therefore
the cost to the Exchequer through tax relief.
The
escalation of costs across the oil and gas industry is a concern, as it
reduces the impact of investment. As I mentioned earlier, the North sea
fields, given their maturity and the adverse conditions, have been
particularly affected by cost inflation. The Government therefore
believe that such measures, which can help to reduce costs both now and
in future, are desirable. Again, the move has been widely welcomed by
operators in the oil industry. The hon. Member for Putney asked about
financial security agreements for decommissioning expenditure and
whether they would be classed as decommissioning costs. The position is
that such costs would normally fall within ongoing revenue expenditure
rather than become decommissioning expenditure. She also asked about
guidance and whether it would be available. Obviously, it would be, but
we are still discussing that with the industry. It is in
everybody’s interests for there to be as much detailed
understanding as possible about the implications of any activities that
are being
considered. The
hon. Member for Gosport asked a series of questions. He is quite right:
oil wells tend to get passed on. That was a point I made earlier, when
I said that we needed to have a regime which facilitated in an
appropriate way the passing on of those assets so that they can be
exploited in what is usually a very long tail before decommissioning
takes place. That is the principle behind many of the changes that we
are debating today. He asked who policed decommissioning, and I can
tell him that it is policed by the Department for Business, Enterprise
and Regulatory Reform under its regulatory system. He asked about
decommissioning security, which depends on a particular deal between
companies on trading. Under DBERR rules and regulations,
decommissioning can go back against previous, as well as current,
owners. If
there is failure all round, the Government have to meet the costs.
There is only one case in which a current operator has defaulted. In
that case, costs were covered by previous asset owners and security
agreements, so we have not had a disaster without anyone left to pick
up the costs. In a final instance of total failure, with the loss of
the original owner of a well and all the companies who subsequently
exploited it, the Government would take the fall-back position, but we
have introduced a series of robust policing arrangements and checks as
the assets are passed on to ensure that we greatly minimise the risk
that that will happen. With those explanations, I hope that Committee
members will ensure that clause 104 stands part of the
Bill. Clause
104 ordered to stand part of the
Bill. Schedule
34 agreed to.
Clause
105Capital
allowances: abandonment expenditure after ceasing ring fence
trade Question
proposed, That the clause stand part of the
Bill.
Justine
Greening: The Opposition welcome the clause, which
essentially means that, after trading has ceased, the time during which
companies can claim corporation tax relief for decommissioning will be
increased from three years to whenever the field is properly
decommissioned. The extension of that post-cessation period should in
theory be a welcome change, because it provides more flexibility for
the oil producer
concerned. I
want to raise just one issue regarding the Secretary of State’s
involvement. The clause says that the Secretary of State for Business,
Enterprise and Regulatory Reform will make a judgment about whether the
abandonment programme has been carried out satisfactorily. I want to
understand how the Secretary of State will make that judgment in
practice. Presumably, somebody will have to perform a site visit or do
some kind of check. How will the Secretary of State reach a judgment
about whether a programme has been carried out
satisfactorily? I
have a couple of related questions, which are queries rather than
concerns. Giving companies three years to decommission restricted them
somewhat, but it encouraged them to be efficient and thorough during
that process. Does the Minister think that there is any downside to
extending that period and drawing out the process indefinitely, leading
to a risk that environmental damage may increase? That is not a major
concern on my part, but it would be helpful if the Minister outlined
the thinking behind the
provision. Finally,
does the Treasury have any evidence that companies were struggling to
meet the three-year decommissioning limit, or is the change that will
be brought about under the clause merely a way of giving them more
flexibility in future over the time limit than they have had in the
past? Was there a particular problem with the three-year limit, or is
the provision viewed as an upside, providing even more time for
companies?
Angela
Eagle: Again, the hon. Lady has made a correct
observation. The current three-year period allocated for
decommissioning costs is replaced by a period determined by the time
limits and requirements imposed by the Secretary of State for Business,
Enterprise and Regulatory Reform during an approved abandonment
programme, in relation to the Petroleum Act 1998. The Secretary of
State would be acting as the policeman, if we take on board the points
made by the hon. Member for Gosport on the previous clauses. The
allowable decommissioning costs for the period are then relieved either
in the final period of trading or in the earlier periods under the
corporation tax loss carry-back
rules. That
change means that where in the past relief was available only on
decommissioning expenditure that occurred within three years of
cessation of production, the time period is now more sensible. During
our discussions with oil and gas stakeholders over the past two years,
it has become apparent that the processes and challenges of
decommissioning are more demanding than either
the industry or the Government previously realised. It is unlikely that
many companies would be able to fully decommission their assets within
three years of the cessation of their ring-fenced trade, and so obtain
appropriate relief for those costs. Evidence suggests that the existing
rules may drive up decommissioning costs—a perverse
result—by causing companies to bring forward decommissioning
programmes outside the optimum economic window. A proportion of that
increased cost would in turn be borne by the Exchequer. Therefore, it
is possible that the regime that is replaced by the clause may cause a
company to decommission their final North sea interests earlier, to
co-ordinate with other nearby fields, resulting in the loss of
hydrocarbon
production. 2
pm The
measure was first proposed in December 2007, when we published the
consultation document. It was originally proposed to increase the
number of years for which relief would be available from three to
seven. The proposal was welcomed by stakeholders, but following further
discussions, consultation and evidence it was decided that the optimum
solution was to create another link to the requirements set out in the
Petroleum Act
1998. The
hon. Lady asked how the Secretary of State for Business, Enterprise and
Regulatory Reform will judge that decommissioning has been achieved. I
can assure her that it will not be by a personal visit or a trip in a
diving bell to have a look at the ocean floor, but through advice from
engineers, specialists and experts working for DBERR to ensure that all
the work is completed to the required standard. That is part of the
policing
process. The
hon. Lady asked whether there are any efficiency downsides to the
extended period. We would not have changed the period if we thought
that there were. We were convinced by arguments that the
decommissioning process takes longer than three years, and that
standards are higher. We did not want to be as prescriptive as the old
laws, and that is why we have changed the period. Again, the change has
been widely welcomed by the industry. It could save both Exchequer and
DBERR costs, and in some circumstances lead to a more efficient
production of the assets, and potentially even more output. On that
basis, I hope that the hon. Lady will support the
clause. Question
put and agreed
to. Clause
105 ordered to stand part of the
Bill.
Clause
106Losses:
set off against profits of earlier accounting periods
Question
proposed, That the clause stand part of the
Bill.
Justine
Greening: Again, we welcome this clause, which means that
the time limit for the carrying-back of decommissioning costs for
corporation tax purposes will be increased from three years to a fixed
point of 17 April 2002. That is a welcome change, because it gives
companies greater flexibility, and it will ensure broader access to
corporation tax relief for decommissioning
costs, which is a further step towards encouraging more investment. My
only question is about the Treasury’s estimate of the revenue
impact, following the introduction of clause 107. Has there been an
assessment of that Treasury revenue impact, and will the Exchequer
Secretary take this opportunity to clarify what it
is?
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