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
.