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Session 2009 - 10
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Delegated Legislation Committee Debates



The Committee consisted of the following Members:

Chairman: Mr. Peter Atkinson
Ancram, Mr. Michael (Devizes) (Con)
Bailey, Mr. Adrian (West Bromwich, West) (Lab/Co-op)
Breed, Mr. Colin (South-East Cornwall) (LD)
Buck, Ms Karen (Regent's Park and Kensington, North) (Lab)
Burgon, Colin (Elmet) (Lab)
Cable, Dr. Vincent (Twickenham) (LD)
Clapham, Mr. Michael (Barnsley, West and Penistone) (Lab)
Clwyd, Ann (Cynon Valley) (Lab)
Duddridge, James (Rochford and Southend, East) (Con)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Heyes, David (Ashton-under-Lyne) (Lab)
Kennedy, Jane (Liverpool, Wavertree) (Lab)
McCarthy-Fry, Sarah (Exchequer Secretary to the Treasury)
Mudie, Mr. George (Leeds, East) (Lab)
Pritchard, Mark (The Wrekin) (Con)
Taylor, Mr. Ian (Esher and Walton) (Con)
Eliot Barrass, Committee Clerk
† attended the Committee

Second Delegated Legislation Committee

Monday 1 March 2010

[Mr. Peter Atkinson in the Chair]

Draft Field Allowance for New Oil Fields Order 2010
4.30 pm
The Exchequer Secretary to the Treasury (Sarah McCarthy-Fry): I beg to move,
That the Committee has considered the draft Field Allowance for New Oil Fields Order 2010.
May I say what a pleasure it is to serve under your chairmanship this afternoon, Mr. Atkinson. The order introduces a new category of field allowance for remote deep water gas fields as part of the North sea fiscal regime. The allowance will help to ensure that we maximise economic production of the UK’s oil and gas reserves.
I shall explain briefly what the field allowance is and how it works. We introduced it in the Finance Act 2009, after announcing it in the 2009 Budget. It is designed to target certain challenging oil and gas reserves which, because of their small size or technical difficulty, while economically viable, are commercially marginal and not currently being developed. Without this support, those reserves could be left unexploited in the ground.
In addition to corporation tax at 30 per cent., there is an additional tax of 20 per cent.—the supplementary charge—on profits from North sea oil and gas production. The field allowance is set against a company’s profits for supplementary charge purposes, reducing the amount of supplementary charge that a company pays. It is created when plans to develop a field that meets certain qualifying criteria are first authorised by the Secretary of State for Energy and Climate Change or, in the case of onshore fields in Northern Ireland, by the Department for Enterprise Trade and Investment.
The total allowance available is dependent on the type of qualifying field, and its availability is spread over a minimum of five years. It is also limited by the value of production income that is generated by the qualifying field. If the field does not produce sufficient income in a year, the available allowance for the year is reduced. The overall effect is that the allowance will make some of the production income from a qualifying field free from supplementary charge. I must make it clear that all profits generated by the qualifying field would still be subject to ring fence corporation tax, and supplementary charge would still be payable on profits that exceed the available field allowance.
When the field allowance legislation was introduced in the Finance Act 2009, there were three classes of field targeted by the allowance: small fields, challenging ultra high pressure/high temperature fields and ultra heavy oil fields. When the legislation was introduced, it was recognised that there could be other classes that may be deserving. To address the possible emergence of such classes, the Commissioners of Her Majesty’s Revenue and Customs were given the power to add other classes of qualifying fields by order, subject to approval by resolution of the House. This order is the result of consultation with industry stakeholders who made a compelling case, which has been accepted.
In recognition of the case put forward, the order extends the field allowance legislation to a new category of field—remote deep water gas fields—to encourage their development. Such fields are found in the area of the United Kingdom continental shelf to the west of the Shetland islands. We recognise the challenges in that region, which is the last major area of the UK continental shelf to be developed. This extension of the scope of the legislation will address the unique logistical challenges present in that region from the harsh operating environment, and the current lack of appropriate gas infrastructure.
The results of encouraging investment through the order could be substantial because that area is thought to contain around 20 per cent. of the UK’s remaining oil and gas reserves. The order provides that the maximum allowance available for a new deep water gas field is £800 million. At current tax rates, that would reduce the overall tax liability of the field owner or owners by up to £160 million spread over a minimum of five years from the year of first production from the field.
That level of allowance reflects the result of careful analysis by Her Majesty’s Treasury and Her Majesty’s Revenue and Customs officials, following close engagement with the oil and gas industry. It strikes a careful balance. It is considered to be sufficient to incentivise effectively the development of remote gas fields in the west Shetland area, while not forgoing tax revenue on projects that do not need the incentive because they would have gone ahead anyway.
To avoid the potential unnecessary Exchequer cost that could arise if numerous fields were planned to be developed in concert with shared infrastructure, the maximum allowance is reduced when the development of more than two such qualifying fields are authorised together. In such a case, the maximum allowance for each field is equal to £1,600 million divided by the number authorised. The very design of the allowance means that it is not money lost to the Exchequer, as it provides for a reduction in tax that could not be counted upon if the incentive were not put in place.
As I mentioned, all profits generated by a field that qualifies for the allowance would still be subject to ring fence corporation tax, which is currently set at 30 per cent., and supplementary charge would still be payable on profits exceeding the available field allowance. Therefore, by bringing forward the development of production that would not otherwise occur, we expect the field allowance to lead to an increase in UK tax receipts over the coming years.
To ensure that only deserving fields receive the allowance, the qualifying criteria have been set carefully. The criteria for fields being in deep water and comprising mainly gas are self-explanatory, although the distance from relevant infrastructure criterion is perhaps less so. The condition that the field must be remote is based on the distance that gas produced from the field is to be transported along the planned export route until it reaches infrastructure—another pipeline or a gas processing facility—that is already being used by another field or is planned to be used by another whose development has already been authorised.
Measuring the distance that the gas is to be transported only as far as existing or already planned infrastructure ensures that pipelines that are already planned or committed to be installed, regardless of whether the field in question is authorised for development, do not contribute to the assessment of whether that field is sufficiently remote to qualify for the allowance. That condition also serves to ensure that the same length of pipeline cannot contribute to other fields receiving that allowance, except those other fields that are to be developed in concert that also receive development authorisation on the same day. The total allowance a qualifying deep water gas field will receive is tapered from the maximum allowance available, where the distance the gas has to travel along the planned route is 120 km or more, down to nothing when the distance covered is 60 km or less.
The announcement has been widely welcomed by the industry. Oil and Gas UK, the industry body, has said that the new allowance
“could result in early investment of over £2bn and another £12bn over the next eight years, ultimately bringing almost two billion barrels of oil and gas into production”.
It has described that as “a potential basin-opener”.
We have already extracted the equivalent of around 40 billion barrels of oil from the UK continental shelf, and the Government estimate that there could be around 20 billion barrels left, but those remaining reserves are found in smaller and increasingly difficult reservoirs.
If we are to achieve the UK’s full potential as an oil and gas producer, those more challenging deposits will need to be exploited by companies and a significant amount of additional investment must be made. The order supports such investment and so has been widely welcomed by stakeholders. I urge members of the Committee to follow suit and I commend the order to them.
4.37 pm
Mr. David Gauke (South-West Hertfordshire) (Con): It is a pleasure to serve under your chairmanship, Mr. Atkinson, and I thank the Minister for her explanation of the order. We welcome the order and do not anticipate dividing the Committee on it, but I have a few questions for the Minister none the less.
My first question relates to the process we are undergoing and the legislative method by which the new category for obtaining the field allowance applies. As the Minister mentioned, we discussed that matter in detail when debating schedule 44 to the Finance Act 2009. I cannot remember whether you chaired that sitting, Mr. Atkinson, but my hon. Friend the Member for Hammersmith and Fulham (Mr. Hands) spoke for the Opposition on that occasion. As the Minister said, certain categories were identified in which the new field allowance would apply, but it did not apply in the circumstances now covered by the order. The explanatory notes state why the Government have chosen not to amend schedule 44 and instead to introduce a new order, but I would be grateful for further details on what consideration was given to amending schedule 44. In essence, the argument is that this is all being addressed in the Corporation Tax Act 2009 as part of the tax law rewrite process, which I understand will be debated in the other place tomorrow. Was any consideration given to addressing this particular point within that Act? Are there any plans to amend that legislation, so that the various categories are set out clearly in one piece of legislation?
As I mentioned, the matter was debated last year during proceedings on the Finance Bill, during which my hon. Friend the Member for Hammersmith and Fulham raised his concerns that the Government were failing to do anything to make exploitation of the area west of Shetland more likely. The Economic Secretary, who I think responded to those concerns, discussed Total’s exploration of the Laggan field. Will the Minister explain why these proposals were not brought forward then?
The issue came up again in the Energy and Climate Change Committee report. The Government response to that report in October stated that they believed that they had struck the correct balance on the field allowance as it applied to the west of Shetland area. Will the Minister explain what changed between October, when the Government made their response, and January, when the order was published?
Will the Minister admit that the field allowance proposed in the Finance Act 2009 was too narrowly defined to make much of a difference, as my hon. Friend the Member for Hammersmith and Fulham argued last year and others predicted? Given the Government’s action on deep water gas fields, could other areas be added so that they benefit from the new field categories? For example, last year my hon. Friend raised the high pressure/high temperature criteria. Have the Government looked at that area and is there any prospect of the field allowance regime being extended to it?
Finally, to assist our understanding of the Government’s approach, will the Minister summarise any recent activity of the west of Shetland taskforce so that we can see what future developments may be in store?
Subject to those questions being answered, we welcome the order and will support it.
4.43 pm
Mr. Colin Breed (South-East Cornwall) (LD): We, too, welcome the order, although it has come later than many of us had hoped. I think it will give a terrific morale boost to an industry that has been looking to the Government for something for a while. It should definitely incentivise the investments. We know all about the problems of extracting the small amounts of oil and gas from the fields we are discussing and it is right that that should be incentivised.
As a spin-off, we do not often praise the industry as much as we should. The technology, skill, experience and enormous industry that have built up over the past two or three decades have contributed not only to this country, but to technology in the oil and gas industry worldwide. We all ought to be very proud of that. This measure will enhance the industry’s ability to extract the more difficult pockets of oil and gas.
The order is late, but nevertheless welcome. The sooner we get the industry to plan its investment, the sooner it will get on with extracting the oil. That will enhance the credibility and technology base of this important industry.
4.44 pm
Sarah McCarthy-Fry: I thank the Committee members who have contributed to this debate.
The hon. Member for South-West Hertfordshire asked a couple of questions. The first was what has changed since October. This allowance must be significant to have a meaningful impact. We had to be sure that there was a sufficiently compelling case for acting. We had to undertake substantial due diligence and to ensure that it was a targeted allowance that provided support only for projects that would not have proceeded otherwise. Since October, we have carried out that due diligence. That is why the order is being brought forward now.
Secondly, the hon. Gentleman asked why the allowances have not all been set up in one place. The order introduces a new category of allowance, meaning that no change to primary legislation is needed. Changes will be made to the Corporation Tax Act, but we cannot do that until that is in force. We know that companies are looking to develop opportunities and we want to give them some certainty by bringing this measure in through secondary legislation, which we are legally able to do.
Mr. Gauke: I am grateful to the Minister for that helpful explanation. Is she saying that there is an intention to amend primary legislation in the next Finance Bill, once the Corporation Tax Act comes into force, so that it is easy to identify the various categories in one place? Alternatively, will that process be unnecessary? Will we leave it with this order?
Sarah McCarthy-Fry: I do not think that it is legally necessary to amend primary legislation, but we might want to do so to give clarity within the industry.
On the original allowance being too narrow, we addressed areas where we thought the position was clear, but knew that there were other areas that had to be considered. The hon. Gentleman mentioned HP/HT. At the pre-Budget report, we announced a measure to lower the criteria so that more fields benefited. We also announced a taper to lower the cliff-edge on that. If a sufficiently compelling case is made in other areas, we will of course consider it.
I think that I have covered all the points that were made. It only remains for me to say again that the measure has been widely welcomed by stakeholders and I welcome the support from the Opposition parties. I commend the order to the Committee.
Question put and agreed to.
4.47 pm
Committee rose.
 
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