Examination of Witnesses (Questions 167-179)
MS JUDITH
KNOTT, MS
JO WAKEMAN
AND MR
EDWARD ZAMBONI
31 OCTOBER 2006
Q167 Chairman: Good afternoon, ladies
and gentlemen. Welcome to today's evidence session on the Scottish
Affair's Committee's inquiry into the Effects of tax increases
on the oil industry. Before we ask detailed questions would
you like to make any opening remarks?
Ms Knott: Yes, I would, please.
Can I also introduce the people here? I am Judith Knott. I am
Head of the Corporate Taxation Team in Her Majesty's Treasury.
On my right is Jo Wakeman, Head of the North Sea Branch within
my Corporate Taxation Team in Treasury, and on my left is Edward
Zamboni. He is Head of Large Business and International Analysis
in Her Majesty's Revenue & Customs. It is important to emphasise
the Government's commitment to a strong and vibrant UK oil and
gas industry. This is reflected in the twin policy objectives
for the North Sea fiscal regime: to promote investment in UKCS
while ensuring the UK receives a fair share of revenues from what
is a national resource. These contribute to overall Government
objectives to maximise economic recovery of the UK's oil and gas
reserves. The Government must therefore strike the right balance
between oil producers and consumers by promoting investment and
ensuring fairness for taxpayers. Oil companies should receive
a fair post-tax return for their risk and investment in the North
Sea and the UK needs to get a fair share of the revenues derived
from this national resource. There have been significant increases
in the oil price since late 2001, particularly marked since spring
2004 with oil prices significantly exceeding market expectations.
As a result of these developments market forecasters have increased
their expectations of the medium-term outlook for oil prices.
Although prices are expected to moderate from current high levels,
they are predicted to be sustained at a higher level than the
average over the last 20 years. Increased oil prices feed directly
into North Sea company profits and, as a result of the recent
sustained rises in oil prices, North Sea companies have experienced
significant increases in the economic rents they derive from the
exploitation of UK oil reserves. With the shift upwards in the
outlook for oil prices the increase in economic rents can be expected
to continue for a number of years. By last year, therefore, it
was clear that the regime put in place in 2002 was no longer appropriate
in view of the changes in the global oil market. The increase
in the supplementary charge payable by North Sea producers from
10% to 20%, announced in PBR 2005, restores the balance between
oil producers and consumers and reflects the world as it is now.
The Government is encouraged by current evidence of continued
strong investment and healthy activity in the North Sea. For example,
spending by the oil and gas industry is expected to increase to
over £10 billion this year with investment within that increasing
to over £5 billion, the highest figures in a decade. In addition,
the recent 24th licensing round showed continuing strong interest
in exploration and investment in the North Sea with a 35-year
high in levels of licence applications, including from 28 new
entrant companies. The Government is also committed to ensuring
that the North Sea fiscal regime is fit for purpose going forward
and to this end opened discussions with the industry earlier this
year to tackle wider structural issues for the North Sea fiscal
regime. This demonstrates the Government's continuing commitment
to tackle the strategic issues for the North Sea fiscal regime
that are of concern to the oil and gas industry and to Government
because of their potential implications for the stability of the
regime, for example, decommissioning as the basin matures. At
the same time the Government has committed to no further increases
in North Sea tax during the lifetime of this Parliament. In summary,
the North Sea fiscal regime continues to promote investment while
now being fairer to UK taxpayers generally, so meeting the Government's
twin objectives.
Q168 Chairman: Thank you. We are
seeking to discover whether tangible damage has been done to the
oil industry by the tax increases announced by the Chancellor,
and whether the more marginal fields have become uneconomic. What
analysis have the Treasury and Revenue & Customs done to predict
the likely impact the tax increases will have on the oil industry
and on the Scottish economy?
Ms Knott: We did a considerable
amount of analysis before these changes were made and the conclusion
of that analysis was that the impact on the industry, on investment
and more widely was likely to be very small indeed. I will ask
Jo on my right to give any further details and Edward may also
want to add some detail.
Ms Wakeman: As Judith said, we
carried out a detailed analysis before introducing the changes.
Clearly, the Government wanted to ensure that the regime would
continue to deliver the twin policy objectives, following the
introduction of the increased tax, of continuing to promote investment
in the North Sea while ensuring that the UK gets a fair return
from what is a national resource. As Judith said, the conclusions
from the analysis indicated that there was very little risk of
there being any significant damage to investment in the UK Continental
Shelf.
Q169 Mr Walker: Can you quantify
what "little risk of... any significant damage" is?
That is little risk of significant damage but is there greater
risk of some damage? Those are two slightly contradictory phrases
in the same sentence.
Ms Knott: Edward actually did
this analysis.
Mr Zamboni: I can give you an
indication of the way we approached the analysis. The analysis
in fact was a mixture of top-down analysis and bottom-up analysis,
but one part of it was to look at the cash flows of 68 prospective
new oil field developments individually, so we were able to see
on an individual project-by-project basis what the effects of
the tax might be, what the effect of typical oil prices might
be and so on. What we found from this analysis was that the precise
outcome in terms of numbers of projects impacted depended on the
economic assumptions and we tried to use a variety of assumptions
but under some assumptions there was no impact. Probably the most
likely scenario was perhaps one or two projects with some impact
but in any event a very small number.
Q170 Mr Walker: So one or two projects
out of 68 became perhaps marginal in their viability?
Mr Zamboni: Indeed.
Ms Knott: Under some assumptions.
Q171 Mr Walker: And you are working
to the same numbers and figures as the oil companies are working
to? There is shared information between the two of you?
Mr Zamboni: Exactly. We use data
that they provide as part of surveys conducted by the DTI and
the UKOOAtrade association.
Q172 Chairman: Obviously, we all
feel that the oil and gas industry is very precious to Scottish
jobs and the Scottish economy and that is why we are doing this
investigation. Does the Scotland Office or the Scottish Executive
take part in discussions concerning financial matters, such as
changes in taxation rates, which might have particular implications
for Scotland? Do you have discussions with the Scottish Executive
or the Scotland Office?
Ms Wakeman: We do have conversations
with the Scotland Office, yes, and quite clearly the Chancellor
will have meetings with the First Minister and with the Secretary
of State for the Scotland Office. Clearly, we are not privy to
the detail of those discussions but the oil and gas industry is
likely to feature among those.
Q173 Mr Walker: But the Chancellor,
am I right in thinking, would view these oil reserves as national
reserves as opposed to Scotland's resources so that might preclude
him having a conversation with the First Minister? He is not obliged
to have a conversation with the First Minister but he might choose
to out of courtesy. Would that be right?
Ms Knott: The general point is
that tax matters are for the Chancellor. As a matter of course
the Chancellor does have discussions with ministers but we are
not privy to the detail of them.
Q174 Chairman: We appreciate that
tax matters are Government matters, but what we are asking is,
since there are going to be serious implications for the Scottish
economy and Scottish jobs does the Government, before it makes
big changes in taxation, discuss those with the Scotland Office
or the Scottish Executive?
Ms Wakeman: We talk to the Scotland
Office during the course of the year as a matter of business at
any time. I would reiterate the point that fiscal decisions are
for the Chancellor and he does meet on a regular basis with the
First Minister and with the Secretary of State and will no doubt
discuss these issues with them.
Q175 Mr Walker: But under your model
that we were just discussing you do not believe there will be
any significant job losses, so again you would not need to have
that discussion with the First Minister because in your view it
is going to have minimal impact, if any at all, on overall employment
levels in the oil industry?
Ms Knott: Absolutely. We believe
that the overall impact on investment, and hence down the supply
chain on to jobs, et cetera, would be minimal.
Q176 Mr Walker: In July the Government
published its energy review. In the section dealing with the UK's
oil and gas resources it is stated that the Treasury's review
of the fiscal framework will be "vital". Could you tell
the Committee how that review is going?
Ms Knott: I assume you mean the
fact that we have been having discussions with the oil industry
over the last few months about fiscal structure going forward.
They have been successful and Jo can give you more detail on those.
Ms Wakeman: I have been leading
the discussions from the Treasury point of view. We launched these
at Pre-Budget Report in 2005 and then finally closed these at
the end of September 2006. These have been successful. We have
been extremely encouraged by the response from industry and other
stakeholders in the North Sea oil and gas industry, including
the supply chain. We have had more than 30 meetings with a range
of companies, representative bodies and academics, consultants
and also other lobby groups. We have covered a range of issues
which are of concern to industry and, of course, Government, as
Judith mentioned in her opening statement, to establish what they
see as being particular issues of wider concern in terms of aspects
of the fiscal regime which are likely to have impacts on the ongoing
stability of the regime in the future.
Q177 Mr Walker: Have you seen the
evidence given by the oil producers to us in July of this year?
Ms Wakeman: Yes.
Q178 Mr Walker: Would you say that
they are happier about life now than they were perhaps three or
four months ago?
Ms Wakeman: It is hard for me
to comment but I would like to think so.
Q179 Mr Walker: A lot of the concerns
that they raised with us you feel have been covered with you and
they are perhaps slightly more comfortable with their position
now?
Ms Wakeman: We certainly had two
or three very constructive conversations with UKOOA during the
course of these discussions, and we will have discussions going
forward, which I would say made some very helpful and constructive
contributions, so I would hope they feel as we do, that it is
a positive relationship that is developing between Treasury and
the industry.
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