Draft Qualifying Oil Fields Order 2010

The Committee consisted of the following Members:

Chair: Mr James Gray 

Buck, Ms Karen (Westminster North) (Lab) 

†Burden, Richard (Birmingham, Northfield) (Lab) 

Connarty, Michael (Linlithgow and East Falkirk) (Lab) 

†Donaldson, Mr Jeffrey M. (Lagan Valley) (DUP) 

†Doyle-Price, Jackie (Thurrock) (Con) 

†Ellis, Michael (Northampton North) (Con) 

†Ellison, Jane (Battersea) (Con) 

†Gilmore, Sheila (Edinburgh East) (Lab) 

†Goodwill, Mr Robert (Scarborough and Whitby) (Con) 

†Greening, Justine (Economic Secretary to the Treasury)  

†Hands, Greg (Chelsea and Fulham) (Con) 

†James, Margot (Stourbridge) (Con) 

Kendall, Liz (Leicester West) (Lab) 

†Mudie, Mr George (Leeds East) (Lab) 

†Swales, Ian (Redcar) (LD) 

†Timms, Stephen (East Ham) (Lab) 

†Whittaker, Craig (Calder Valley) (Con) 

†Williams, Stephen (Bristol West) (LD) 

Sarah Davies, Committee Clerk

† attended the Committee

Third Delegated Legislation Committee 

Tuesday 20 July 2010  

[Mr James Gray in the Chair] 

Draft Qualifying Oil Fields Order 2010 

10.30 am 

The Economic Secretary to the Treasury (Justine Greening):  I beg to move, 

That the Committee has considered the draft Qualifying Oil Fields Order 2010. 

It is a pleasure to serve on my first Statutory Instrument Committee under your chairmanship, Mr Gray. By way of introduction, I shall set out the broad thinking of the Government and why we have brought forward the order, which relates partly to the work of the previous Government in the area. Above all, we recognise the importance having a stable and fair United Kingdom oil and gas tax regime that provides certainty for business. As part of ensuring stability, the Government committed in the June emergency Budget to legislate for various changes to the regime to improve the existing allowances and reliefs that aim to support investment announced by the previous Administration in the pre-Budget report 2009 and Budget 2010. 

The order introduces an important measure that was announced in the 2009 pre-Budget report. It amends the field allowance qualification criteria and the amount of allowance for ultra-high-pressure, high-temperature fields. Our amendments will help to ensure that the regime encourages continuing investment and the exploitation of remaining resources. 

I shall explain briefly what the field allowance is, and how it works. It was introduced under the Finance Act 2009. It targets certain types of very challenging oil and gas reserves, which, because of their small size or technical difficulty, are commercially marginal and not currently being developed. To understand how the field allowance works, it is necessary to bear in mind that, in addition to ring fence corporation tax at a rate of 30%, companies pay a supplementary charge of 20% on their profits from UK oil and gas production. The field allowance is set against a company’s profits for supplementary charge purposes. In other words, it reduces the amount of supplementary charge that the company pays. 

An allowance is available for new fields that meet the qualifying criteria for the category of field allowance concerned. It is generated when plans to develop a field are authorised for the first time. The total allowance available is dependent on the type of qualifying field, and its availability is spread over a minimum of five years. The overall effect is that the allowance will act to shelter some of the production income from a qualifying field from the supplementary charge. However, all profits generated by the qualifying field will still be subject to ring fence corporation tax, and a supplementary charge will still be payable on profits when production income exceeds the available field allowance. 

When the field allowance legislation was introduced, it was recognised that there might be a need to add other classes of field, or to change the qualification criteria or the amount of allowance for existing classes. Accordingly, Her Majesty’s Revenue and Customs commissioners were given powers to add classes by order or to amend any of the qualification criteria and amounts of existing classes, subject to approval by resolution of the House of Commons. 

The revised criteria and changes to the amount of the ultra-high-pressure, high-temperature field allowance for which the order provides are the result of extensive consultation with industry stakeholders. The previous Administration announced the changes in the 2009 pre-Budget report, and I accept that the case for change is compelling. In fact, without the changes, the allowance would not be as effective as it could be in bringing forward investment in such challenging types of field in the UK North sea. 

Specifically, the order amends the definition of an ultra-high-pressure, high-temperature oil field and specifies the amount of allowance that can be received by that type of qualifying field. The first change to the definition is that the pressure criterion is satisfied if, in the reservoir formation, the oil is at a pressure in excess of 862 bar, rather than 1,034 bar as it was previously. The second change is that the temperature criterion is satisfied if, in the reservoir formation, the oil is at a temperature of 166° C, rather than 176.67o C as it was previously. 

In addition to lowering the thresholds, the order introduces a taper for the amount of allowance that is available. The taper provides that, for oil temperatures of more than 166° C and no more than 176.67° C, the maximum total allowance is calculated on the basis of a straight line increase from £500 million to £800 million. For fields with temperatures above 176.67° C, the maximum allowance remains at £800 million. At current tax rates, that will reduce the overall tax liability of the field owner or owners by up to £160 million, spread over a minimum of five years. The changes and tapering of the allowance reflect the result of careful analysis by HM Treasury and HMRC officials in conjunction with officials from the Department of Energy and Climate Change, following their particularly close engagement with the oil and gas industry. 

The reduced temperature and pressure thresholds, and the amount of allowance available, necessarily strike a careful balance. The allowance is considered to be sufficient effectively to incentivise the development of ultra-high-pressure, high-temperature fields while not forgoing tax revenue on projects that do not need the incentive, because they would go ahead anyway. The very design of the field allowance and the setting of the revised criteria mean that money is not lost to the Exchequer as the allowance provides for a reduction in tax that could not be counted on if the incentive were not put in place. 

To conclude, the changes are aimed at ensuring the ultra-high-pressure, high-temperature field allowance is successful in encouraging investment. The changes strike a careful balance between targeting a meaningful allowance at the most technically challenging and difficult-to-develop high-pressure, high-temperature projects, while managing the risk that the allowance could be provided to projects that would be likely to proceed in any event. The Government consider that, with the changes made by

the order, the allowance could now encourage half a dozen or more known discoveries to be developed. Together, those known discoveries have central reserve estimates of the equivalent of about 300 million barrels of oil. 

The industry has widely welcomed the changes made by the order. In particular, the industry body, Oil & Gas UK, said: 

“We therefore welcome the announcement that there has been a…relaxation of the rules targeted at an additional eight ultra HPHT fields and look forward to this measure bolstering investment in these challenging projects”. 

The coalition Government are committed to ensuring that we achieve the UK’s full potential as an oil and gas producer. It is clear that, for this to happen, more and more challenging deposits will need to be exploited by companies, and that a significant amount of additional investment must be made. The order supports investment and the exploitation of the UK’s remaining natural resources. I therefore commend the order to the Committee. 

10.37 am 

Stephen Timms (East Ham) (Lab):  Thank you, Mr Gray. It is also my first opportunity to serve under your chairmanship and I am delighted to do so. Indeed, it is my first opportunity to view the room from this particular position. 

I welcome the order and I am grateful to the Minister for the explanation that she has provided. As she said, the changes were announced by my right hon. Friend the Member for Edinburgh South West (Mr Darling) in the pre-Budget report at the end of last year. In making that announcement, he rightly made the point that it was important for the affordability and the security of UK energy supplies, with the specific target—as the Minister has explained—of ultra-high-pressure, high-temperature fields. 

North sea oil and gas has been a mainstay of the UK economy for three decades, making an enormous contribution to the Exchequer during that time, and also supporting the development of a world-leading offshore industry from Lowestoft to Aberdeen that continues to thrive around the world. Of course, a pretty large proportion of our resources has now been extracted, and fields that have not yet been developed are on the whole difficult ones in the inhospitable waters west of Shetland or, as in the case of fields whose development will be encouraged by the order, those in which the temperature and pressure are very high. We all hope that the development of those fields—the Minister suggested half a dozen and Oil & Gas UK said eight—will not only realise oil and gas resources that would never otherwise have been harnessed but provide opportunities for the UK to develop further world-leading technology that can then be applied to other challenging fields around the world. 

Will the Minister tell us more about the location of the fields likely to benefit from the order? Are the half dozen or eight fields in one particular sector of the UK continental shelf, or are they widely scattered? The Minister indicated that the six fields in question might yield 300 million additional barrels. Will she tell us more about the basis for that estimate? In particular, I gather that there might be at least one field in which development is expected to proceed as soon as the order

takes effect. Is the Minister able to tell us the location and identity of that field, or of any field in which she expects development to follow quickly as a result of the order? 

How confident is the Minister that the new relief will unlock the potential of those high-temperature, high-pressure fields? Will that matter be kept under review? Is there a possibility of further change if it is needed, or is the Minister confident that the order will do the trick? If the matter is to be kept under review, how will that happen? What sort of discussions will take place? 

The Minister rightly made the point that the change was welcome, but it would be fair to say that the announcement did not receive a euphoric response from the industry—in fact, it was pretty muted. The industry took it as an opportunity to call for more generous reliefs, and in particular for up-front credit for exploration drilling of the kind already provided in the Norwegian section of the North sea. Will the Minister indicate how she and her colleagues plan to respond to lobbying of that kind from the oil and gas industry, which is perfectly appropriate and will no doubt continue? How does she expect the Government to deal with the industry in organisational terms? For example, in what forums will the discussions take place? And, given the fiscal position, what stance does she expect to adopt towards calls for further reliefs? 

Will the Minister tell us whether the development of any high-temperature, high-pressure fields proceeded on the basis of the field allowance as it was originally drafted? Or is any development of that kind going to be dependent on the agreement of this order? Will she tell us the rough extent of the corporation tax notionally being forgone as a result of the order? In regard to the half dozen or eight fields expected to benefit from it, what is the difference between the tax that would have been payable if they had been developed without the order and the lower amount to be paid with the order in place? Will she confirm that a total of perhaps £100 million of tax could be at play across all the fields in question? Will she also tell us when HMRC expects to publish the guidance referred to in the explanatory memorandum and what she expects that guidance to cover? 

In the past, one would have looked forward at this stage to hearing the perspective of Liberal Democrat Members. Sadly, I fear we might be deprived of that this morning, although perhaps the right hon. Member for Lagan Valley might feel inclined to contribute a contrasting perspective. I do not expect to divide the Committee, but I would welcome any further clarification that the Minister is able to provide. 

10.44 am 

Justine Greening:  I am grateful to the right hon. Member for East Ham for those comments. I will do my best to answer his questions and address the issues he has raised. Most of the fields are found in the central North sea and there are also some in the southern parts of the northern North sea. There could be other fields in other parts of the UK continental shelf. Ultimately, wherever these fields are, we hope the order will help to ensure that they have a better chance of being developed. 

The right hon. Gentleman asked about our approximate figure of 300 million barrels that could be extracted as result of the order. The figure comes from discussions

with Oil & Gas UK, and is its estimate of how much it feels can be extracted. He asked about one field that was potentially ready to go. For commercial reasons, it is obviously not possible to go into which those fields are. Ultimately, we only really know which they are when developers come forward with their proposals to the Department of Energy and Climate Change. We have made an estimate, but we will know the specific details only once the order has come into force. 

The right hon. Gentleman asked whether we thought the order would unlock more investment in the North sea. We think that it will. We have had positive discussions with the industry. Ultimately he is right: we need to continue to review how these orders are working. Clearly, today we have amended an existing class definition and the qualification criteria in order to ensure that our intention of unlocking more investment into the North sea is fulfilled. We estimate that the order could unlock about £1 billion of extra investment per field. We will continue to discuss with the industry how we can all work together to ensure that this natural resource is extracted and unlocked for the benefit not just of the oil and gas industry but of the UK taxpayer who gets the revenues when we are more successful in encouraging exploitation of these oil fields. We will continue those discussions. 

The right hon. Gentleman also asked whether corporation tax had been notionally forgone. I do not believe that it has, because if we did not amend the order and make it work in practice, none of these fields would be likely to be developed. This is not about forgoing corporation tax. We hope that the order will enable us to get the benefit for the taxpayer of greater investment in the North sea. 

Stephen Timms:  I am grateful to the Minister for her response. I used the term “notionally” forgone because I entirely accept that if these fields were not developed, no tax would be paid. This is therefore a rather theoretical calculation. If, as she has indicated, there will be £1 billion of investment per field, by how much, notionally, is the

amount of corporation tax per field being reduced as a result of the order? We all expect that there will now be investment when previously there would have been none. In a theoretical sense, it would be useful to understand what the impact on the economics of each field will be as a result of the order. 

Justine Greening:  We hope that it will transform the economics from being negative to positive, in terms of the marginality. The corporation tax aspect will depend on where the field is in relation to the taper and to its temperature. That will depend on the individual circumstances of the field. We have tried to set a framework that will enable more fields to come into the remit of being developed. Finally, I hope that the HRMC guidance will be published some time in the autumn. The order clearly sets out the framework for those oil and gas companies considering investment, and we hope that today will represent a big step forward in enabling them to understand what their investment planning can be. 

The order relaxes the pressure and temperature qualification criteria for the ultra-high-pressure, high-temperature field allowance. It introduces a temperature-dependent taper for the amount of allowances available. The changes are aimed at ensuring that the allowance successfully encourages investment, and they strike a careful balance between targeting a meaningful allowance at the most technically challenging high-pressure, high-temperature projects and managing the risk that the allowance might be provided to projects that would have been likely to proceed in any event. With the changes, the Government consider that the allowance could encourage the development of half a dozen or more known discoveries. Together, those discoveries have a central reserve estimate of about 300 million barrels of oil. The measure is widely welcomed by stakeholders, and it supports investment and the exploitation of the UK’s remaining natural resources. I therefore commend the order to the Committee. 

Question put and agreed to.  

10.50 am 

Committee rose .