Examination of Witnesses (Questions 120-139)
MR DAVE
BLACKWOOD AND
DR REBECCA
BROWN
18 JULY 2006
Q120 Danny Alexander: Can I press
you on that, what changes do you think would help a company like
yourself on marginal projects in relation to the fiscal regime?
Dr Brown: I do not have specific
proposals if you like for tax changes, but we would welcome anything
that would support investment in marginal projects and small reserve
pools.
Mr Blackwood: If I can go back
to the question on countries which have changed more, the countries
that come to mind are Russia, Venezuela. I would like to think
of us not in that peer set in terms of fiscal stability. They
additionally have huge resource prizes to chase, they are much
less mature provinces with much bigger resources and a degree
of instability, while there is still a huge prize to chase, will
be tolerated by investors from around the globe; they are therefore
in a very different situation from ourselves. On the second part
about consultation on the fiscal regime going forward, we welcome
the consultation—we welcomed it before this increase—but
I think there is an issue there of we do need to be measured and
thoughtful about this. We would like to see a regime which is
maybe simpler and, in truth, a steady, consistent, preferably
low tax rate as we see ourselves into the next couple of decades.
The question is getting from here to there, we have a pretty complex
structure and getting from here to that place is something that
we need to do in dialogue in a very considered manner.
Q121 Mr MacDougall: This is a question
I was going to ask later on, but this seems a very appropriate
time to ask it. There have been press reports recently that BP,
along with four other companies, have taken a 49% share in the
Russian company Rosneft. That would seem to me to give an indication
of companies now beginning to look elsewhere for a variety of
reasons. Do you think that is the case, do you think that companies
are going to start moving into these areas much more quickly than
we imagined and is this the beginning of that process?
Mr Blackwood: As a multinational
oil company you are always going to keep a balance in this global
portfolio. The North Sea has, hopefully, a very healthy future
in front of it, but we cannot escape the physics—the individual
pool sizes are getting smaller, the costs are increasing. Hopefully
it has a healthy life in front of it for two or three decades
but it is finite, so corporately we will be looking to keep investing
overseas to keep the size of the corporation.
Q122 Mr MacDougall: Obviously, development
costs money and money requires oil in order to pay for the development.
At the end of the day a certain amount of resources could be steered
in one direction and you would think by that particular move that
that is the beginning of a move towards creating shares, spending
that money in other countries where it is much more profitable
and that at the end of the day a lesser commitment then falls
to the North Sea by that process. Even if it is only one minute
particle of commitment that is lessened to that process, it can
only then multiply as more development opportunities unfold themselves
within countries such as Russia. Would that not be the scenario?
Mr Blackwood: It is very fair
to say that any of the multinationals will keep a balanced portfolio.
The North Sea is unquestionably, as I keep coming back to, a matter
of physics; we would love to see it grow but we cannot, so that
share, that investment, will to some degree decline with the physics
and the ability to find new accumulations, so to a degree some
of this is inevitable.
Q123 Mr Devine: It is estimated that
oil companies in Britain paid just under £10 billion in taxes
last year and that in this financial year it is going to be over
£10 billion. That is not really a hard hit for the oil companies,
is it?
Mr Blackwood: I cannot speak for
the rest of them. I keep going back to the premise that the fundamental
question, if I can paraphrase it, is can we afford it? I do not
think the question is can we afford it? The question should be,
is this tax regime actually going to maximise recovery from the
basin, which is what we all want? My hypothesis is in the long
term no, and that is really to me the fundamental question.
Q124 Mr Davidson: Presumably the
way to maximise extraction from the North Sea is to have no taxes
at all; that would make it much more attractive, would it not?
It is a question of where do you strike the balance.
Mr Blackwood: Absolutely, striking
the balance is the key issue there. As the basin matures, as the
parcel sizes get smaller, as exploration becomes more difficult,
as development costs are increasing by the day, it is striking
that balance against that physical and economic backdrop.
Q125 David Mundell: Can I just ask
you a question about the PILOT, because I see that you have both
been involved with that and one of the issues which came up when
we were in Aberdeen was the fact that the changes in the tax regime
had not come through that channel and that that had not really
been an environment that dealt with that issue and was not perceived
by those who gave us evidence there as terribly helpful.
Mr Blackwood: The PILOT relationship
I actually believe has been very productive for both sides. It
keeps a very important line of dialogue open fundamentally between
the DTI and the industry and it has led us to work a lot of things
productively. The brown fields initiative—I do not know
whether you have heard of it—that gave rise to the fallow
and stewardship initiatives that have gone on I think have been
good examples of the Government and the industry working together
actually with this common aim of maximising recovery. It has done
a lot of good stuff on that front. The conversations that then
need to go beyond the DTI have been a bit more erratic and less
detailed, less intense. As PILOT and as UKOOA we find our way
in to see the Paymaster-General maybe a couple of times a year
and the intensity of dialogue in there is nothing like as detailed
as it is with the DTI within the PILOT. Something that would build
on the consultation process that is underway just now to start
to deepen that relationship can only be a good thing.
Q126 David Mundell: It is finding
a context because I sense that my colleagues remain sceptical
of the view that the industry is not in fact over-egging it in
relation to the damage that the tax changes will or could do.
Surely it must be about finding a forum of trust by which there
can be at least some consensus on what the effect of any particular
measure is.
Mr Blackwood: Part of the desire
for a bit more dialogue is that within PILOT with the DTI we have
hopefully demonstrated as an industry that we can take quite thorny
issues and work on them together and actually come up with some
very good initiatives, fundamentally on self-regulation. We have
been able to demonstrate to the DTI that we are an industry that
is capable of policing itself in some areas; if we could take
that depth of dialogue to fiscal issues I believe we would get
a better result sometimes. Some of the disappointment has been
that despite this richness of dialogue with the DTI in 2002 and
in the recent exercise also there has been no prior consultation.
Q127 Mr McGovern: You have heard
that a couple of weeks ago we took evidence from UKOOA in Aberdeen.
Can I ask you both how you would view UKOOA's assertion that the
tax increase has led to the UK acquiring "an international
reputation of fiscal instability within the industry"?
Dr Brown: I would agree with that
statement. One of the factors that attracted Apache to the North
Sea was the fiscal stability, and that was I guess when we were
looking at the region four years ago, and I do not think we could
make the same statement today that it is stable.
Mr Blackwood: If I can go back
to prior comparators, as I said I had a trawl around our company
to see where we have changed in the last five years, where we
have changed more than the UKCS. The list produced Russia and
Venezuela so we are up there compared to other oil-producing regimes,
we have changed as much as anyone. We used to have an enviable
reputation for stability, but we have destroyed that pretty quickly
in the last three or four years.
Q128 Mr McGovern: I have a feeling
members of the Committee would maybe beg to differ with that.
You have maybe touched on this in prior questions as well but
exactly how would a stable fiscal regime help promote maximising
production from the UK Continental shelf?
Mr Blackwood: We are making significant
investment decisions for large new fields which get into tens
or hundreds of million pounds. Part of that is looking at the
20 years and trying to evaluate the economics and if you cannot
plan on any certainty in the fiscal regime in the 20 years the
confidence to make those investments will decrease. People will
factor in higher risk profile or will not make the investments;
that is the damage that instability does, it is destroying that
confidence for a 10, 15, 20 year investment.
Q129 Mr McGovern: Just as a supplementary
to that can I just ask you to clarify what suggests stability
in 10 years, 15 years or 20 years?
Mr Blackwood: At the moment all
we have to go on is to the end of this Parliament.
Q130 Mr McGovern: But is that new,
has that not always been the case?
Mr Blackwood: The history has
been much better than that until the last four or five years.
In the days of the large developments in the North Sea we had
much more stability than we have seen in the last four or five
years.
Q131 Mr McGovern: If I can just press
you on that a little, please, what in the past would define for
you that stability would go beyond the life of a Parliament?
Mr Blackwood: Quite simply just
the history that it did not and the reality of it. The reality
of the last four years is three changes in four years.
Q132 Mr McGovern: With all due respect
that is easy to say with hindsight, but back then how did you
know that things would not change beyond the life of a Parliament?
Mr Blackwood: The simple answer
is that I was not around then to know but I am assuming that the
people who were making in those days the developments of the Forties
and the Brents, multibillion pound investments, had some degree
of comfort that they were actually going to see a regime that
was not going to change year on year.
Mr McGovern: I am not entirely confident
that you have answered it, but I will accept that.
Q133 Mr Davidson: Given that you
are multinational companies, how can we be assured that as it
were you do not have just one big bucket of money from which if
we were not drawing it in tax you would have just spent it somewhere
else—I mean, BP has just spent a huge amount in Russia.
How do we know that if we had not levied this additional tax you
would actually just have spent more buying shares in the Russian
company; how do we know that it would actually have gone back
into the UK and been invested in the North Sea?
Mr Blackwood: The simple truthful
answer is we do not know, we do not know the proportions of what
would have been reinvested in the North Sea, what would have been
returned to shareholders. The one I would put to you is that it
is money that is not reinvested in BP somewhere, and in our case
it is not into stuff that it is going to find its way back into
the London listed company where it is paying all of its corporate
taxes. One way or another it was coming back into the UK.
Q134 Mr Davidson: Up to a point.
Can I just clarify whether or not there is any tax increase ever
anywhere that you have actually welcomed?
Mr Blackwood: Not to my knowledge.
Q135 Mr Davidson: I thought that.
In terms of stability, if the price of oil falls and we heeded
your point about decreasing tax in those circumstances, would
you regard a tax increase then as being a cause of instability.
Mr Blackwood: A tax increase in
the event of a price fall.
Q136 Mr Davidson: Sorry, a decrease
then.
Mr Blackwood: I get your point,
we like stability when it is going up and we do not like it when
it—
Q137 Mr Davidson: Yes, is that correct?
Mr Blackwood: Yes.
Q138 Mr Davidson: You can cope with
the instability if it is in your direction but you cannot cope
with instability if it is in our direction.
Mr Blackwood: The stability I
am seeking is the reassurance from the Government now that if
and when that price comes back down, this tax increase will be
revisited. Call it stability, call it certainty, that is what
we want.
Q139 Mr Davidson: I have more sympathy
for that position, I understand that much more clearly and it
seems to me that the corollary of that again is that if the price
continues to rise then we could continue to increase the taxation.
Mr Blackwood: Can we separate
two issues here? One is this notion of index-linking as it were;
the whole idea of index-linking—I am glad to see it appears
that the Government does also agree with where we are, that this
is not a good idea for anyone: you have volatility in your tax
receipts, we have volatility in what we try to plan for by way
of investments, I just do not see that as a model that works for
anyone. There is one concept of where should the tax take be at
different prices? The index-linking just creates too much volatility
for everyone and the issue, if I can paraphrase, that instability
is okay when tax rates are going down, it is not a variable either,
it is an absolute. If we stay with this cost base that we are
working our way up to at the moment, and this tax regime, and
in three or four years out there we see the price softening down
again—it is not a relative thing, it is an absolute, investment
will drop.
Mr Davidson: I do understand that but
we have also got to take that in the context of drilling prices
going up 300% or 600% and so on; given that, you face all those
other pressures as well and it is highly unlikely that you would
ever be able to identify the impact that this tax increase had
because you cannot take it in isolation.
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