Examination of Witnesses (Questions 40-59)
MR MALCOLM
WEBB AND
MR MIKE
THOLEN
20 JUNE 2006
Q40 Mr Davidson: So there is no evidence
that investment has been affected by the tax increase, just assertion?
Mr Webb: Yes, I cannot point you
to a list of projects that have been cancelled as a result of
that, but I do know from my conversations with my members that
projects are not going forward that might otherwise have gone
forward.
Q41 Mr Davidson: But it is undoubtedly
the case that had the tax increase not gone ahead there would
have been much more money going into shareholders' pockets? That
is clear.
Mr Webb: There would have been
much more money available to companies to spend as they saw fit,
yes. Some of that, I think, would have gone into investment as
well and the growth of these companies.
Q42 Mr Davidson: Yes, but growth
where? Would this just have been in growth abroad?
Mr Webb: No, I think it would
have been growth here as well.
Q43 David Mundell: There have been
reports that some parts of the industry have indicated to workers
already in the industry that there would be no further exploration
as a result of these tax changes. Are those reports accurate,
that the impression has been given within the industry that this
will end production?
Mr Webb: Not that I am aware of,
no. I hope UKOOA, for example, has been consistent in its message
here. We never believed that this latest tax increase was going
to have a short term impact. Most of the activity, as I said before,
was already contracted before this happened and we are in an area
of very high oil price at the moment and scarcity of resource,
so we did not see anything happening in the short term. Long term
commitments have been taken on contracts before the tax rise happened.
The central danger here is what happens if we have a downward
price correction from these high oil prices? If that happens I
think we are in a very uncomfortable position at that point. If
that were to happen you could see a tailing off of all sorts of
activities, both exploration and development, rather rapidly.
At the moment we are not predicting that anything like that is
happening. It is that risk that we think we have been exposed
to.
Q44 David Mundell: Perhaps you would
say a bit more about this issue around the oil price recovery,
which is currently, as I understand it, at round about $70 a barrel,
how the differential price affects investment decisions and at
what point, regardless of the tax regime, the exploration becomes
unattractive.
Mr Webb: We are enjoying high
oil prices at the moment. That is helping in a basin such as the
UK and it is another thing I do not think we should lose sight
of. In cost terms this is a somewhat uncompetitive basin, even
against some of our near competitors. If you take Norway, for
example, finding costs in the UK are five times as high as they
are in Norway. The reasoning for that is that when you find it
in Norway you still tend to find it big. Here you find it quite
small, so there is cost pressure on this basin and this basin
is helped by higher oil prices. This basin was last in very serious
crisis at the end of the 1990s when the price fell shortly to
$10 and languished at round about $12 or $13 for some time At
that level of price this industry frankly was in crisis. It was
out of that actually that the very good arrangements where industry/Government
co-operation and PILOT were born. I think that the danger point,
as I have said before, is much higher than $12 or $13, and I can
only say I think it is somewhere in the region of $30 to $40,
when we would begin to see the basin struggle and there would
be a need for corrective action. The most obvious corrective action,
because there is not much we can do about the physical issues
here, would be an adjustment in the tax take.
Q45 David Mundell: So you would favour
some form of almost index-linking of the tax take?
Mr Webb: No, I am not sure that
I do favour index-linking. What I favour is a fair and stable
tax regime going forward that we can all plan on. What indexation
misses, and it is quite an important point, is that all the risk
in the type of regime under which we work in the UK is with the
company. There is no Government money at risk, there is no taxpayers'
money at risk. The entire risk is taken by the companies. Having
taken that risk, if, every time the oil price bubbles up, the
Government comes along and peak-shaves something off the top that
in my view is unbalancing the game. That should not happen. What
we should do is agree what a fair fiscal regime is and employ
that, recognising that we have peaks and troughs in this industry.
Yes, today we are at $70 dollars. In 1998, 1999 we were at $10,
and that is the sort of planning cycle that we live with in this
industry. The fields can take two or three years in the planning.
They can then have a life of 10, 15 years. It is across that cycle
that the industry plans and it is across that cycle that it seeks
to get its return on its investment. If the Government keeps on
coming in at every peak and gobbling up the goodies, if I can
put it that way, and does nothing in the troughs when the price
falls, then we are in a serious problem.
Q46 Mr MacNeil: Just to follow up
the point that Ian was making earlier, you corrected me when I
said it was £2 billion and it seems the Chancellor has put
another £1.1 billion in a black hole, so it is actually £0.9
billion.
Mr Webb: Yes, it has not a black
hole because the Chancellor—and this would happen in any
event and maybe it is a sad reflection upon what has happened—is
enjoying increased tax revenues from the increased price, so he
is going to get about £12.5 billion, we think, this year
from the offshore oil account.
Q47 Mr MacNeil: With regard to the
question of the £0.9 billion being otherwise used for shareholders
or for exploration in the North Sea, what percentage roughly of
that £0.9 billion that is now in the Treasury would you have
expected would have gone to shareholders or on exploration in
the North Sea? Secondly, Ian asked about evidence and he said
there was no evidence at all. Do you collect evidence of non-activity?
How do you know things are not happening? It is easier to say
when things are happening than when they are not happening.
Mr Webb: It is a very good point.
No, we do not collect evidence of non-activity. It is very difficult
to obtain. Also, companies are somewhat loath to advertise that
they are not doing something. They are happy to advertise what
they are doing but they are not particularly keen on wasting their
time talking about what is not going to happen. We do not collect
data on lack of activity in that way. What I am aware of is various
conversations with people in the industry who are telling me that
the hurdle on size of prospect to look for has gone up, that they
are testing things at different tax rates now and that they are
being generally more cautious in their approach to that. Having
said that, the oil price at the moment is approaching $70 a barrel
and that is stimulating quite a lot of in-field development work,
as we can see. As I was saying before, we have got this big increase
in the development wells but not an increase in the exploration
activity, so you can see where the activity is going. It is going
into those shorter term plays at the moment.
Q48 Mr MacNeil: Do you know what
percentage that is?
Mr Webb: No, I am not sure I can
give you that.[5]
Can we reflect on that and maybe come back to you? I cannot give
you a division as to how that £0.9 billion is falling between
returns to shareholders and investment. I am not sure I am ever
going to be able to give you an answer but I promise you that
we will reflect on it. The other point I would make is that it
is not just tax that is the issue here. It is not just the tax
cost that has gone up but the other costs in the industry are
also causing pressures at the moment, and that, of course, is
showing its way into more expenditure because the same is costing
more these days owing to the significant price inflation that
we have in the industry.
Q49 Mr Davidson: It is this point about
the same costing more. That is, though, increased rent, as it
were, accruing to other players in the industry, not necessarily
the major developers but other parts of the industry are benefiting
quite considerably from the increased rent that they can draw
from the majors as a result of oil scarcity, and therefore overall
that means that some sections of the industry will undoubtedly
be financially much better off than other ones. That correction
in a sense is a redistribution of resources within the industry
rather than any loss.
Mr Webb: Yes, I think you have
a fair point to a significant degree there but not all of these
extra costs are within the industry. You will be aware, for example,
that most commodity prices have increased significantly, including
the price of steel. That is a cost increase that is not, if you
like, being kept within the family, so there definitely is leakage
to other parts of industry, if I can put it that way.
Q50 Chairman: If any information
is available can you please write to the Clerk? That would be
very helpful.
Mr Webb: We will be pleased to
do that.[6]
Q51 Chairman: It is obvious that the
drop in the price is a bigger threat to the industry than this
tax increase of £0.9 billion. I cannot understand: if a company
is selling their goods at $30 a barrel and the price goes up to
$70 a barrel, then why should the Government not take a share
of the huge profits that the company will be making?
Mr Webb: First, can I come back?
I think there is one thing I would like to underline. This tax
take is not £0.9 billion. It was an increase in corporation
tax rate, a doubling of the supplementary corporation tax rate,
which this year might result in an extra £0.9 billion but,
depending on your price assumption, is going to take tax next
year and the year after and the year after, so it is a very significant
tax hike. If you put it in money terms it is greater than £0.9
billion. On the second point, why not tax when the price is high,
I can only go back to what I said before: the price is not always
this high. It is high at the moment but this is a very volatile
market. I will not make a prediction on oil and gas prices but
I will tell you one thing: I am sure that they will not be where
they are today next year. Whether that is down or up I do not
know.
Q52 Chairman: But it depends what
the costs are. Professor Alexander G Kemp says here that if the
price falls below $30 there will be a need to review the tax rate.
There is a huge gap between $70 a barrel and $30 a barrel.[7]
Would you agree with that?
Mr Webb: As I said, I think I
would take a more conservative approach to that. I am worried
about a range of higher than $30. I would be concerned more towards
a level of $40.
Q53 Chairman: At what level would
you be concerned?
Mr Webb: As I have said, between
$30 and $40, and I think I would be starting to get concerned
at about $40.
Q54 Danny Alexander: I suppose some
people would say that if some of the major oil companies are put
off by the instability of the fiscal regime, there are plenty
of smaller companies which are keen to come in, and so if a major
pulled out there would be plenty of minnows to come in behind
them, or is it the case that if the majors pulled out you would
no longer get the investment in the infrastructure which the smaller
companies rely on to carry out their work?
Mr Webb: I think the answer is
that we need all the clubs in the bag. Going forward from here,
we need the continued dedication of the majors; we certainly need
the contribution from the new players. Thirty-five per cent of
the capital investment last year was made by companies that had
come into the North Sea since 1999, so these new players are having
a very significant impact and it is very good. I go back to what
the DTI has done in very good measure in making this an interesting
and attractive place for smaller companies to come and get involved
in, and we can also see that in the latest 24th licensing round
with the very large number of people there. That is all good,
but if we are going to make a success of the North Sea in its
second half, and we are into its second half now, we are going
to need all of the players to play their part. You are quite right:
the major companies have a significant part to play. They are
owners of a significant proportion of the infrastructure. It is
important that that is maintained and kept in place and that it
is there and available for these new players and these smaller
fields as they go forward. I think there is a role for everybody
and I think all parts of the industry are playing their part and
doing a good job at the moment.
Q55 Mr McGovern: If I can go back
to Angus's question about how, if the money had remained with
the companies, it might have been divided. I thought you said
in response to his original question that the money would have
been spent as the companies saw fit, and so, given that you have
got over 30 members in UKOOA, it would be wild speculation to
try and say how would they have divided it into 30 different companies,
so I do not know if that helps to answer his earlier question.
Do you think that the changes to the tax regime will mean that
there will be less money available for training?
Mr Webb: No. I think the industry
is putting in a significant effort on training and will continue
to put in a significant effort on training and I do not see that
there will be a deficit on that. In fact, I think there are some
very encouraging things going on at the moment, again, some of
them linked into that PILOT process as well, on training. The
industry is doing good work there. I do not see any signs of slackening
back on the training side. In fact, I see an increase in the training
spend because the industry is somewhat resource constrained. The
most important resource we have definitely is our human resource
and we are doing what we can to improve supply into the industry
and there have been some very encouraging initiatives launched
here in Aberdeen recently by OPITO, the industry's training body,
which has sought to bring more people into the industry and make
the industry more available to people in this country.
Q56 Mr McGovern: Thanks, Mr Webb,
I am delighted to hear that. There had been a fear in some quarters,
and perhaps it has been a bit too simplistic, that because of
the changes there would be an impact on training and that impact
would lead to one of two scenarios: one, that the same amount
of people would be trained but to a lesser skill level, with all
the implications that would have for employment levels, and the
second scenario would be that fewer people would be trained and
there would also be implications for health and safety. Has that
view been too simplistic and can you confirm that that is not
the case?
Mr Webb: Yes, I can, unequivocally.
I think the industry is doing more and it is committed to do yet
more on the training front. The industry leadership team under
PILOT launched a project last year called the "pinch-points"
project because there was a lot of apocryphal news out there that
the industry was being constrained by a labour shortage, so a
study was done and some particular pinch points were indeed discovered
and projects have been put in place to cope with that. Some of
these pinch points were very interesting. For example, riggers
and scaffolders were seen as particular pinch points. Now I am
pleased to say that projects are going ahead to train more people
in those skills and bring them into the industry and also projects
to bring more mature technicians from other industries into our
industry. We also run one of the most successful modern apprenticeship
schemes in the country. The Young Technician Training Programme
is delivering 100 highly qualified young technicians into the
industry every year, so the industry has got a good track record
there but it is not resting on its laurels and is continuing to
invest on that side and I have seen no evidence of cutback on
training.
Q57 Mr McGovern: Thanks again, and
again I am delighted to hear that, in particular about the apprenticeship
schemes. I had been told that there is a massive skills gap in
the industry currently, so it is great to see people being trained
up and there is possibly a bigger training budget than there has
been previously. Given all of these things would that not support
the contention in the local press that business is booming?
Mr Webb: I would not wish to deny
that right now this town is booming and I am very pleased to see
it booming and the industry is going full pelt at the job ahead
of it. There is no doubt about that. That is going on right now.
I come back to the point that the concern I have is do we have
a fiscal and regulatory regime that is fit for purpose for the
second half of the North Sea and can take the knocks that I think
will come when we get price adjustments?
Q58 Mr Davidson: I want to follow
up one point from Jim's comments. You said there would be no adverse
impact on training. Do I take it there is no possibility of adverse
impact on health and safety?
Mr Webb: Oh no.
Mr Davidson: Thank you. I just wanted
to have that on the record.
Q59 Mr MacNeil: In your memorandum
you say the Government cannot presume that the UK will remain
the preferred location for investment but do you think there could
be other preferred locations for investment?
Mr Webb: I suppose we could look
at that around the North Sea and then globally around the North
Sea. There is Norway, of course; that is right on our doorstep,
Holland to a lesser degree. They are in the same period of maturity
as we are but the tax take in Holland now is nowhere near what
it is in the UK. The tax take in Norway at the top end is roughly
the same as it is in the UK but, as I said, they are still finding
elephants and we are finding much smaller game here now, so you
have got competition there. Then you look elsewhere. The UK is
now uncompetitive, I would say, in terms of tax and probably cost
compared to the Gulf of Mexico, both shallow and deep, so those
areas are also strong competitors. Then you have got the whole
of the west coast of Africa, those African developments, as well.
There is lots of stuff around the globe that people can invest
in as opposed to coming here.
5 Note by Witness: UKOOA has reflected further
on this question and would advise that it has no further evidence
it can offer beyond that already provided to the committee. Back
6
Note by Witness: UKOOA has reflected further on this question
and would advise that it has no further evidence it can offer
beyond that already provided to the committee. Back
7
See Ev Back
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