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 lifegiven 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.
Capital 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 countrys 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.
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
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
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 everybodys 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.
Capital 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 States 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 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.
Losses: 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
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