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 UKs 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 chargeon profits from
North sea oil and gas production. The field allowance is set against a
companys 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 Majestys 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 fieldremote deep
water gas fieldsto 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 UKs 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
Majestys Treasury and Her Majestys 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 infrastructureanother pipeline or
a gas processing facilitythat 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 UKs 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 Totals 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 Governments 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 Governments 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
industrys 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.