Ian
Pearson: As the hon. Gentleman says, the clause and
schedule are widely welcomed by the industry. As far as I am aware,
nobody is against what we propose—everybody is in
favour. Question
put and agreed
to. Clause
88 accordingly ordered to stand part of the
Bill. Schedule
43 agreed
to.
Clause
89Supplementary
charge: reduction for certain new oil
fields Question
proposed, That the clause stand part of the
Bill.
Mr.
Hands: This clause probably contains the most important
changes to the North sea oil and gas regime in part 6 of the Bill, and
I expect that we will want to press amendment 267 in due
course. Clause
89 refers to schedule 44. The other clauses and schedules that we have
discussed so far either represent relatively small changes or seek to
create conditions in which it is easier for new investment to take
place. Schedule 44, however, is the only part of the
Government’s package that attempts to offer direct incentives to
invest, and it is therefore worth recalling what the Government have
said about the need for incentives. In their document,
“Supporting investment: a consultation on the North Sea fiscal
regime” they described the UK continental shelf
as “facing
increasing challenges due to its nature as a maturing basin. The easy
to recover hydrocarbons have been exploited and the remaining
opportunities are, increasingly, either smaller in size or require the
use of cutting edge technologies to enable extraction. One result of
this is that many potential projects have become commercially marginal
and unable to compete with other projects around the globe. These
challenges are exacerbated by the current uncertainty over future oil
prices and the high cost levels faced within the North
Sea.” Schedule
44 is the Government’s attempt to answer that commercial
marginality and struggle for capital expenditure. We see it as a fairly
limited attempt to address the problem.
Oil and Gas UK
was formed by and represents the industry, and has met with both the
Chancellor of the Exchequer and the Prime Minister. I am not sure how
many Exchequer Secretaries it has had the pleasure of meeting in recent
days—as we know, there have been three in the past nine days. I
am not exactly sure who it has had the chance to meet with on that
front. Nevertheless, at various times Oil and Gas UK has met with the
Government to discuss the future of the North sea. In its public
response to the Budget—three Exchequer Secretaries ago—it
said:
“Oil
and Gas UK members have voiced their deep concern to us at what has
been left undone by the 2009 Budget. In the current climate, the
package of measures will have limited impact on the UKCS’s
economics, will have little effect on the UK’s competitiveness
and attractiveness to investment and will not lead to any significant
increase in activity....The consequences of the failure to act
decisively could be severe. Current economic circumstances are already
placing industry work programmes under extreme pressure. The fiscal
measures announced in April may help a small number of projects but
will not reverse the significant decline in capital investment forecast
by Oil & Gas UK — to around £3 billion by
2010.” That
is a fairly damning indictment of Government policy from the industry,
at least in relation to the 2009 Budget, especially given the warmth of
some of their other comments in relation to the actual consultation
process. The industry was very open and supportive of the
Government’s willingness to consult, but it has turned out to be
extremely disappointed by the result of the consultation.
Oil and Gas
UK does not stop there. Its response
continues: “Under-investment
at this stage in the mature UKCS life risks fatally undermining the
government's stated goal of maximising the recovery of the UK’s
remaining oil and gas reserves. Without new injection of oil and gas
from the development of outlying satellite fields, key offshore
infrastructure hubs will risk seeing their decommissioning being
brought forward...Once these strategic platforms and their
pipelines are removed, it is unlikely that they will ever be replaced
and the means to recover the estimated remaining oil and gas reserves
of up to 20-25 billion barrels...will be
lost.” Again,
that is a damning indictment of the Government’s approach from
UK Oil and Gas. It is clear that the industry does not—I see
that we are joined by the new Exchequer Secretary to the Treasury, the
hon. Member for Portsmouth, North. I should start off by welcoming her
to her new position as today’s Exchequer Secretary. I look
forward to a number—or a panoply, or smörgåsbord
of debates on different issues to
come. The
industry does not see the new field allowance that the Government are
proposing as the answer and certainly not in its current form. We have
some sympathy with the argument put forward by the
industry. The
Government’s proposals in schedule 38 will create an allowance
against the supplementary charge—in other words, the 20 per
cent. charge, which was increased from 10 per cent., that is applied to
ring-fenced profits as a supplement to corporation tax. That brings the
overall marginal tax rate on new fields to 50 per cent. As we know, the
new allowance will apply to three kinds of fields; small fields,
ultra-heavy oil fields and high-pressure, high-temperature
fields.
The small
fields that the Government talk about will have to be very small and
the allowance is set relatively low. We do not intend to debate those
at great length today. As a result of this measure, the industry
expects
only one or two more fields to have been brought into development than
would otherwise have been the case in the short to medium term. The
small-field change is not a particularly significant change in the
legislation. We touched on
the question of ultra-heavy oil earlier. If you turned a cup full of
heavy oil upside down, it would not come out; it is that heavy. There
are huge technical problems to be surmounted before ultra-heavy oil can
begin to be properly exploited, although there is plenty to be had if
this can be done.
The category
of high-pressure, high-temperature fields has left the industry feeling
aggrieved. This is a consistent view across the major players whom I
have met with in recent weeks. BP, for example, describes the field
allowance as being of negligible impact. None of their HPHT discoveries
would qualify for the new allowance. Only one HPHT discovery, across
the whole of the UK continental shelf, is thought to meet the
Government’s combined temperature and pressure criteria, and
that is the Jackdaw field owned by British Gas. This would cover only
one new field. Of course, that is only looking at fields which have
been discovered to date—others may be found. I understand that a
combined temperature and pressure rule, which the Opposition seek to
amend here, is not a good way to get people to look for these HPHT
fields, as there is no consistent relationship between high temperature
and high pressure.
4
pm Nor,
I am told, is a high-pressure, low-temperature or a low-pressure, high-
temperature field any easier to handle than a high-pressure,
high-temperature field. In other words, removing one of the two areas
of difficulty and having it either high- pressure or high-temperature
does not necessarily make it any easier to exploit.
Oil and Gas
UK have written to the Treasury to make six points on behalf of the
industry as a whole. First, the ultra-HPHT target is too tightly
defined to deliver the required benefit. Secondly, the ultra-HPHT
target does not mark the break from subsea to platform-based
development. Thirdly, other HPHT fields face similar development costs
to ultra-HPHT fields. Fourthly, the requirement to meet both ultra-high
temperature and ultra-high pressure is simply too onerous. Fifthly,
both ultra-HPHT pressure and temperature limits are set too high.
Sixthly, with modifications, the field allowance still has the
potential to influence HPHT exploration activity. So Oil and Gas UK are
looking for
modifications. Our
amendment seeks to relax the requirement in schedule 44 to meet both
the pressure and the temperature criteria at the same time, so that
only one of the two needs to be met. It must be either high pressure or
high temperature. This would help to reduce the random, lottery-winner
nature of the clause as it stands, and do more for exploration. Even
this amendment would still bring only a handful of known but
undeveloped fields within the scope of the allowance. It is not an
extremely radical approach. We just believe that what is brought in
under the schedule should be widened a little to try to encourage more
exploration. I am sure that we all agree that that is of huge
importance to this country and to our tax
intake. When
the Chancellor announced the field allowance during the Budget speech
on 22 April, he believed that it would encourage the development of the
equivalent of
about 2 billion barrels. As the clause stands, the Chancellor’s
claim looks wholly implausible. It is open to the Government to talk to
the industry and revisit the limits once the Finance Bill has gone
through the House. That is fair enough. Ian
Pearson indicated
assent.
Mr.
Hands: I see the Economic Secretary nodding. The limits
are open to adjustment by statutory instrument. In fact, any of the
definitions of small oil field, ultra heavy oil field or ultra
high-pressure, high-temperature field set out in paragraphs 20 to 23,
and also the total field allowance levels specified by paragraph 24,
can be amended by statutory order. That is made clear in paragraph
17. It
is worth pointing out that no costs are incurred either by our
amendment, or by lowering the limits. There is some difficulty in
trying to understand the fiscal implications. There is just an
unquantifiable loss of revenue from fields that may have been developed
anyway to be balanced against an unquantifiable increase in revenue
from fields where exploration and development would not have occurred
without it. We are looking at hypothetical revenue and allowances
against it. I will listen with interest to the Minister’s view
of this balance and where it lies. At the moment the proposals seem far
too restrictive.
As I said
when opening my remarks, when it comes to providing new incentives for
fresh investment, schedule 44 is the Government’s only current
answer. Hence it is worth noting the two policy areas it has left
untouched. The first is also a geographical area—the west of
Shetland area. In our debate on an earlier clause, I said that we would
be returning to that geographical area
later. As
I mentioned earlier, the UKCS is far more extensive than the North sea.
There is also the Atlantic, where there is oil too. Even old North sea
hands seem to become rather white at the knuckles when they describe
the weather conditions west of Shetland and some of the other
difficulties involved in working in that environment, with its deep
water and atrocious weather. However, the rewards would be substantial
and the Government have failed to do anything in the Bill that would
make the exploitation of that area more
likely. The
Government have established a joint west of Shetland taskforce with
industry representatives and I would be grateful for news of any
progress that that taskforce has made when the
Minister—whichever Minister it is—responds to the
debate.
There is a
second, wider problem. The Government are only talking about providing
incentives for new fields. There are no incentives for existing fields
and no such incentives appear to be under consideration. Where fields
are still going strong, by definition no incentives are required.
However, fields nearing the end of their life are a different matter
and a significant and increasing number of fields are in that category.
I return to my earlier point that we are now just under two thirds of
the way through the proven oil and gas reserves that are under the
North sea.
Encouraged by
the Government, smaller companies have already come in and are
specialising in the different operating challenges that such
fields—the ones nearing the end of their lives—present.
Those companies possess
a readiness and willingness to invest at that end-life stage. To take
just one example, Talisman Energy now operates in 23 different fields,
which is a higher number than for any other group on the UKCS.
Therefore, although it is a relatively smaller and newer entrant to the
sector, Talisman Energy operates in more fields than any of the
existing big players. However, the
changed financial background against which companies have to operate
will make it difficult to mop up all the remaining oil and gas. I would
appreciate it if the Minister explained the Government’s
approach to encouraging companies to invest in existing fields, as
there is nothing in the clause—in fact, there is nothing in the
entire Bill—to help those
companies. To
conclude, clause 89 is the most important clause in the Bill in terms
of the considerations about North sea oil. The industry welcomes the
existence of the new field allowance, which is designed to help the
exploitation of small fields and fields that are difficult to reach.
Schedule 44, in so far as it goes, is also welcomed by the industry,
but nobody thinks that it goes very far. Our amendment to schedule 44
would take it a little bit further by removing one of the lottery
elements, in other words the fact that a field has to qualify for both
“high pressure” and “high temperature” to
qualify for the relief. Our amendment would remove that lottery
element.
I hope that
the Minister, in responding to the debate, will explore the possibility
of going further still in this area, or at least offer some better
explanations as to why the Government are unwilling to do so. While the
days of plenty in the North sea are starting to fade, there is the
prospect of more adventurous and still more profitable activity for
decades to come. Whatever that may entail, what we know for certain is
that one new field, which is what we are talking about here with
schedule 44, simply will not cut the mustard. Unless we hear some
convincing arguments from the Minister, we will therefore seek to put
amendment 267 to the
vote.
Ian
Pearson: Clause 89 introduces a new field allowance into
the North sea fiscal regime, which will have the effect of reducing the
profits liable to supplementary charge for certain categories of new
field that have development concerns, on or after 22 April
2009.
The
Government believe that the measure can play a significant role in
ensuring that the North sea meets its full potential. We estimate that
it could lead to the production of an additional 2 billion barrels of
oil and gas, which might otherwise have been left in the ground. That
will be of major benefit, ensuring that the UKCS continues to be a
significant industrial success, with the employment skills and
technological benefits that that success brings. Furthermore, it will
benefit the UK more widely, by helping to secure the UK’s energy
supply.
A number of
stakeholders have warmly welcomed the measure. For instance, Oil &
Gas UK, in commenting on the overall package of measures,
said:
“We
acknowledge this demonstration of the Government’s commitment to
the future of this industry in the UK. The measures announced today are
a positive step for those companies trying to develop small and
challenging fields in this mature, high cost
province.”
The Oil and Gas
Independents’ Association
said: “Today’s
announcement by the Chancellor will assist both small and large
independent companies to continue their activities...the OGIA believes
this is an important first step in making the UKCS fiscal regime
competitive.” So
there is broad support for clause 89 and schedule 44.
Amendment
267 on the face of it seems relatively simple. It would change one of
the qualifying criteria for an oilfield to receive the new field
allowance from needing to be both ultra-high pressure and ultra-high
temperature to needing to be either ultra-high pressure or ultra-high
temperature. The hon. Gentleman went into some detail in explaining it.
I assume the amendment has been introduced to increase the number of
existing fields that are eligible for that allowance. The hon.
Gentleman suggested that the Government’s measure is very
limited. We certainly want to maximise the potential benefits to the UK
of the Government’s policy proposals in this area.
The
requirement for a field to be both ultra-high pressure and ultra-high
temperature was decided upon following extensive consultation with a
broad range of stakeholders. It is intended to provide significant
support for investment whether in exploration, appraisal or development
of some of the most technologically challenging and demanding
reservoirs in the North sea. In the course of those discussions, the
clear impression given to Government was that these challenges occurred
when both criteria were found in a reservoir, not just one. Reservoirs
with both extremely high pressures and temperatures need most support.
Equally, given the size of the incentive on offer, the criteria are
also carefully targeted at those developments that most need it and
would not go to developments that would proceed regardless. We believe
this approach is necessary to provide maximum value for money for UK
taxpayers. On the basis of the evidence presented to us, to relax those
criteria, as proposed in the amendment, would run the risk of giving
support to fields that do not face the degree of challenge that this
allowance was intended to support, at a potentially significant cost to
the Exchequer, while providing little extra benefit to the UK.
Therefore, while I understand what the hon. Gentleman is seeking to
achieve, I cannot recommend that the Committee accept the
amendment.
The hon.
Gentleman asked a number of specific questions to which I shall briefly
respond. Regarding the number of fields eligible for the field
allowance, it is impossible to estimate the number able to claim. It
will depend on the number of discoveries made by companies in the
coming years. One benefit of the allowance will be to encourage
companies to increase their exploration activities. It is the increase
in reserves that is important, rather than the number of fields. We
believe that there are around 2 billion barrels of untapped reserves
that the allowance will help to recover. Professor Alexander Kemp of
the university of Aberdeen estimates that 40-plus new small fields will
be brought into development. That is just one estimate. The 2 billion
figure includes not only existing discoveries but a range of prospects
from fields that the incentive will influence now, through to
discoveries and prospects that the incentive will help support in
further exploration and appraisal drilling. The figure of 700 million
barrels that has been quoted is a conservative estimate of the
potential impact over the
next 20 or so years. The final number could be much higher. Overall, the
intention of these incentives is to increase activity in these
challenging areas. The proposed
definitions of fields eligible for the allowance have been arrived at
following in-depth consultations and discussions with a range of
industry stakeholders as well as technical experts at the Department
for Energy and Climate Change. They have been designed to ensure that
the allowance is targeted on the areas that are most in need of support
to limit the dead-weight cost to the
taxpayer. Let
me make it clear to the hon. Gentleman that we are still committed to
further dialogue with stakeholders. If there is a convincing case, the
secondary powers in the legislation, to which he referred, will allow
the Government to take appropriate action once the full and correct
analysis has been
undertaken. The
hon. Gentleman asked a specific question about the west of Shetland.
The taskforce has made significant progress, leading to Total
oil’s announcement in the new year of its intention to take
forward the development of the Lagan tarmac field with its partners.
That will include the vital gas pipeline to open up the west of
Shetland. The
hon. Gentleman asked about existing fields. The Government considered a
range of options on encouraging investment in the North sea in the
run-up to the Budget. Industry stakeholders gave their views on many of
the options. In our view, a satisfactory case has not been made to date
for an incentive that could be introduced to encourage investments in
existing fields while providing value for money for the UK taxpayer.
However, we recognise the importance of existing fields to the future
of the North sea, which he mentioned. We are happy to have further
discussions with stakeholders on how support could be given to
investment in existing fields. Today’s proposals do not cover
existing
fields. I
hope that I have answered the hon. Gentleman’s questions and
that he will not press his amendment to a vote.
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