Examination of Witnesses (Questions 180-199)
MS JUDITH
KNOTT, MS
JO WAKEMAN
AND MR
EDWARD ZAMBONI
31 OCTOBER 2006
Q180 Mr Davidson: Can I just follow
that? Surely the oil industry and its lobbyists in particular
are bound to be a bit like farmers in the sense that they are
never happy because it is either too wet or too dry or too hot
or too cold, and if they give the impression they are happy you
would assume that something was wrong and that they therefore
ought to be taxed a bit more, so they are never going to be happy?
Has there ever been an occasion when the oil industry and its
lobbyists have indicated that they were happy?
Ms Knott: I think the issue is
that what we need to do is strike a balance between the needs
of the producers and the UK taxpayer, and what these changes strove
to do was to strike that balance. One of the issues that has clearly
come over as of great concern for the industry going forward is
stability, so not necessarily just the actual amount of tax but
also the stability of the regime, and the discussions we have
been having with them have allowed us to deal with some of those
issues.
Q181 Mr Davidson: That was basically
no, then? There has never been an occasion when they have actually
been happy? There are some times when they have been less unhappy
than others?
Ms Knott: I would not want to
comment on their state of mind. We continue to have a very constructive
dialogue with the oil industry and with the individual companies
within it.
Q182 Mr Davidson: In terms of your
initial report, when you talk about a fair post-tax return can
you clarify for me how you believe the post-tax return for the
oil industry compares with, say, the manufacturing industry in
the UK? Comparing the oil industry with other industries or other
areas of economic activity, how do their post-tax returns compare?
Ms Knott: I cannot give you a
specific comparison with manufacturing but what I can say is that
one of the issues that we studied in the lead-up to these changes
was the profitability of the oil sector compared to general profitability
outside the financial sector, so general non-financial companies,
and there we found that the oil companies were showing profitability
of about 35% compared to about 13%.
Ms Wakeman: That was pre-tax profitability.
Q183 Mr Davidson: So pre-tax they
are roughly three times as profitable as the rest of the economy?
Ms Knott: Almost, excluding the
financial sector, and that was one of the reasons why we felt
we needed to redress the balance between the producers and taxpayers.
Q184 Mr Davidson: That seems very
reasonable to me. Turning to the other point you made about the
need for the UK to get a fair share of the revenues, how does
the amount of money that the UK gets from oil compare to other
jurisdictions, say, Norway, Saudi Arabia, Dubai? What are we to
compare the oil industry here with in terms of contributing to
the national exchequer?
Ms Knott: Generally we feel that
in terms of competitiveness we have a reasonably competitive regime.
Ms Wakeman: We are broadly comparable
with our main competitor regimes, such as the Gulf of Mexico and
the Netherlands, and in fact significantly more favourable than
some of the regimes, such as Norway and Denmark, and indeed Italy.
Q185 Mr Davidson: Could you let us
have a note of the regimes that you believe are less favourable
to the oil industry than the UK, because again maybe it is a farmer
syndrome but listening to them when we met them in Aberdeen you
would have thought that they were being uniquely harshly treated
by Britain and everywhere else was far better and more generous
to them. It would certainly contradict that if we had some evidence
from yourselves that there were other jurisdictions where they
were paying more.
Ms Knott: We are happy to do that.[1]
Mr Davidson: That would be very helpful.
Q186 Mr Walker: Are either the Treasury
or Revenue & Customs involved in the PILOT project or is that
the responsibility of the DTI only? You are aware of the PILOT
project?
Ms Knott: We are indeed aware
of the PILOT project.
Ms Wakeman: There is a PILOT task
force.
Ms Knott: We are involved in it
although tax itself is not part of the discussions with that group.
Jo in particular is involved in that.
Ms Wakeman: There is a representative
from Treasury who will attend PILOT meetings which I believe are
held every three or four months and there will occasionally be
more attendees from Treasury than that but, as Judith said, the
forum is not a forum which covers fiscal issues and therefore
representation from the tax side of the house in Treasury is not
appropriate.
Q187 Mr Davidson: There was coverage
in the press during the last year, I think it was in the Daily
Express so it must be true, that the oil revenue for the UK
was of the order of £10 billion. Would you clarify for us
what the rough figure was that we drew from that?
Ms Knott: We do have figures.
That sounds roughly right.
Ms Wakeman: In 2005-06 in the
end we took some £9.7 billion in revenues and the forecast
for 2006-07 is in the order of £10.3 billion.
Ms Knott: Is that corporation
tax and—
Ms Wakeman: That is all North
Sea revenues, so that would include petroleum revenue tax.
Q188 Mr Davidson: When BP gave evidence
to us they stated that they would really be concerned if the price
per barrel were to fall to $40 or below. Is there any indication
that you are aware of that that might occur within the foreseeable
future?
Ms Knott: Certainly when we made
the change last year we were looking at the medium term outlook
for prices and the change was made on the basis that there had
been a sustained increase in the medium term expectation.
Mr Zamboni: We do not ourselves
make long term projections of the oil price but we have certainly
not relied on any continuation of the current price in the case
for making the change a year ago, so we cannot say a specific
price threshold at which the case would not exist but it certainly
does not depend on the continuation of the current oil price.
Q189 Mr Davidson: I think you can
understand the general position of the companies because after
some discussion with ourselves they were forced to concede that
the end of the world had not yet arrived. However, they were suggesting
that it would arrive if the oil price dropped to $40. In those
circumstances is there a mechanism by which Treasury could revisit
the taxation regime to give them some sort of comfort so that
in the event that the Apocalypse happened and you did have the
price dropping to $40, which they said they could not possibly
cope with, you would be able to revisit that and perhaps give
them some relief?
Ms Knott: The Treasury obviously
keeps taxes under review from year to year, although, as I mentioned,
the Chancellor is committed to no further increase during the
life of this Parliament and obviously cannot bind future Parliaments
in terms of what would happen then. The issue would be, if the
oil price were to fall, whether that was a sustained fall or simply
a blip, but I think the Chancellor of the day would have to look
at all the factors and all the circumstances.
Q190 Mr Davidson: I think we understood
that to be the position, that if the price fell to $40 and it
looked as if that was going to be a long term occurrence and was
going to cause serious damage to the industry a prudent Chancellor
would want to look again at the question of whether or not the
taxation burden on the industry was fair.
Ms Knott: But one thing I would
point out is that when the changes were made in 2002 to introduce
the 10% supplementary charge the oil price then was back down
to $20.
Ms Wakeman: Medium term.
Ms Knott: The medium term projection
at that stage was $20 a barrel, so $40 is still substantially
more than that $20.
Q191 Chairman: What you are saying
here is that producers are now making $60 a barrel, the Government
is happy, producers are happy, but that when they gave us the
figure that if the price fell below $40 it would be unbearable
for the industry that view of the industry is not correct?
Ms Knott: I would not particularly
want to give a specific view on that. As things develop, depending
on how the oil price moves, obviously, the Chancellor of the day
would want to look at all the factors. I am simply pointing out
that $40 is still a lot more than $20 a barrel which we saw when
the 2002 change was made.
Ms Wakeman: One of the points
that was made to you by the industry representatives was that
the costs in the North Sea and across the globe generally for
oil production and exploration have gone up significantly in recent
months and years as the oil price has been sustained at higher
prices. Quite clearly that has changed the context within which
we would be looking at the oil prices.
Q192 Chairman: How can we have a
fair assessment of at what level it will be difficult for the
industry to survive, earning less money? You are saying $20, the
industry is saying $40.
Ms Knott: I was not necessarily
saying $20. I was just comparing what the position was back in
2002 but, as Jo has said, there is a whole range of factors—there
is the oil price, there are the producers' costs. It is very difficult
to pin down one particular factor and say if something happened
to that there would be difficulties.
Q193 Mr Davidson: Can I follow this
point up? Am I right in thinking that there is a degree of comfort
for the industry in knowing that a British Chancellor would want
to look again at the rate should the price collapse, yet the industry
have been given a commitment that there is going to be no further
increase in North Sea tax during the lifetime of this Parliament,
according to your statement, so in fact from the industry's point
of view there is no down, as it were, if prices go up but there
is a potential up if prices go down, so they have the best of
all possible worlds in the circumstances?
Ms Wakeman: You are absolutely
right in saying that the Government has made a commitment that
there will be no further increases in North Sea taxation during
the lifetime of this Parliament, and also the Government has an
interest in ensuring that the fiscal regime continues to deliver
its policy objectives and will continue to agree to ensure that
that will be the case.
Q194 Mr Walker: What is your model
showing for the pricing of oil over the next three to four years?
Demand is increasing from the developing economies so you must
have a model that forecasts the price of oil.
Ms Wakeman: We do not actually
forecast. We are not in the business of forecasting oil prices
in the future. We certainly look at what external forecasters
would say.
Q195 Mr Walker: What are external
forecasters talking about? You have probably looked at that more
closely than I have. The lifetime of the next Parliament is not
going to be more than three and a half years, is it? It cannot
be, so what are you seeing the oil price being over the next few
years?
Mr Zamboni: The external forecasts
we have seen, for the medium or even longer term, are all saying
over $40 and some well over.
Q196 Mr Walker: And the medium to
long term would be three to five years probably, would it?
Mr Zamboni: And longer.
Q197 Mr McGovern: When we asked UKOOA
about the possible effects of the £2 billion tax increase
on the industry's infrastructure it was pointed out to us that
this year's increase would be probably less than half of that.
Do you consider that UKOOA and the oil industry have been crying
wolf, as it were, and have over-reacted and the possible effects
could not possibly be what they had projected?
Ms Knott: When you say that it
would be less than half of that are you referring to the changes
in the forecast?
Q198 Mr McGovern: My understanding
is that they were forecasting the effect that a £2 billion
tax increase would have on the industry's infrastructure and it
was then pointed out that in this year the actual increase would
be less than half of that. Is it your opinion that they over-reacted?
Ms Knott: There is a specific
reason for that reduction in the amount of tax that we are taking
this year. The reason for that is purely a timing issue, that
a lot of the oil companies chose to pay more tax last year and
less in this year. This was because of a facility we gave them.
When we brought the change in we allowed them to defer their capital
allowances to this year rather than last year and a lot of the
companies chose to do that and did so very quickly. They made
the election to do so very quickly and paid us more tax last year
than this year, so there was a timing issue in the receipts. The
projected view from the change is broadly about £2 billion
a year.
Q199 Mr McGovern: I realise you have
had some really constructive meetings with UKOOA, so possibly
their position has shifted in the past few months, but how would
you respond to UKOOA's assertion to us back in the summer that
the tax increases have led to the UK acquiring "an international
reputation of fiscal instability within the industry"?
Ms Knott: We would not agree with
the UKOOA assessment of that. We feel that we still have a stable
regime.
Ms Wakeman: Quite clearly the
Chancellor has given a measure of stability in the medium term
with the commitment to no further increases in North Sea taxation
during the lifetime of this Parliament. As Judith said, it is
not possible for the current Government to bind the hands of a
future administration, so any commitment beyond that period would
be meaningless and therefore the Chancellor did not make such
a statement. The commitment for the lifetime of this Parliament
demonstrates the Government's understanding of the industry's
need for fiscal stability.
Ms Knott: The other point I would
make is that the discussions we have been having with industry
about the longer term structure of the North Sea regime have also
in a sense increased that stability in that we know what the issues
are. We have been having a very open dialogue with the industry
about the long term issues that might arise from decommissioning,
and I think that in itself will have increased stability.
Ms Wakeman: Absolutely, because
it is not just changes in the tax rates that can cause fiscal
instability for industry. There could be aspects of the fiscal
regime itself which introduced a measure of fiscal instability
over the longer term, and it is these particular concerns that
we have been attempting to address and understand during the course
of these discussions with industry.
1 See Ev 38. Back
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