Draft Additionally-developed Oil Fields Order 2013
The Committee consisted of the following Members:
† Bebb, Guto (Aberconwy) (Con)
† Burt, Alistair (North East Bedfordshire) (Con)
† Dakin, Nic (Scunthorpe) (Lab)
† de Bois, Nick (Enfield North) (Con)
† Doran, Mr Frank (Aberdeen North) (Lab)
† Field, Mark (Cities of London and Westminster) (Con)
† Hemming, John (Birmingham, Yardley) (LD)
Jackson, Glenda (Hampstead and Kilburn) (Lab)
Kaufman, Sir Gerald (Manchester, Gorton) (Lab)
† Leslie, Charlotte (Bristol North West) (Con)
† Lewell-Buck, Mrs Emma (South Shields) (Lab)
† Love, Mr Andrew (Edmonton) (Lab/Co-op)
† Mahmood, Shabana (Birmingham, Ladywood) (Lab)
† Morgan, Nicky (Economic Secretary to the Treasury)
† Rudd, Amber (Hastings and Rye) (Con)
Shannon, Jim (Strangford) (DUP)
† Spelman, Mrs Caroline (Meriden) (Con)
Margaret McKinnon, Committee Clerk
† attended the Committee
Second Delegated Legislation Committee
Wednesday 6 November 2013
[Dr William McCrea in the Chair]
Draft Additionally-developed Oil Fields Order 2013
8.55 am
The Economic Secretary to the Treasury (Nicky Morgan): I beg to move,
That the Committee has considered the draft Additionally-developed Oil Fields Order 2013.
It is a pleasure to serve under your chairmanship, Dr McCrae. I hope I will not detain the Committee for too long, but we shall see when we get to speeches and questions.
The draft order introduces an allowance for additionally developed oil fields, or “brown fields”, through the Corporation Tax Act 2010. The allowance will help to extend the shelf life of our reserves, bringing jobs to our coastlines and growth to our economy, as well as helping us to meet our future energy needs. I want to set out the background to and rationale for the allowance, along with some of the details and practicalities of its delivery.
Field allowances are an important part of the ring-fenced fiscal regime for oil and gas production. They incentivise the development of projects that are economic, but not commercially viable without some reduction in the tax rate. To facilitate investment, field allowances exempt a proportion of a company’s production income from the supplementary charge, reducing the tax rate on that proportion of income from 62% to 30% in the case of new fields, and from 81% to 65% on the older fields that pay petroleum revenue tax. Companies pay ring-fenced corporation tax on all income, in addition to the supplementary charge on income not covered by an allowance.
We have allowances for several categories of commercially and technically challenging fields, including ultra high-pressure, high-temperature fields, small fields, heavy oil fields, deep-water gas and oil fields and large shallow-water gas fields. As our basins mature, the remaining reserves will become more difficult and expensive to extract. Big new discoveries will be rarer and development opportunities will be smaller, technically challenging and reliant on existing infrastructure. Alongside those changes, incremental activity in existing fields is expected to be one of the main sources of future production. It is important that the oil and gas fiscal regime keep pace with the changing nature of the basin to ensure that we maximise the economic production of our remaining reserves. The Government have committed to work with the industry to ensure that we achieve that aim.
As part of that effort, in September last year the Chancellor announced the introduction of a brown field allowance, targeted at companies undertaking new investment in older fields, known as brown fields. By forgoing an initial portion of tax from those projects, we can facilitate marginal investment that would not
otherwise have gone ahead. That is expected to boost production and longer term tax revenues, and, crucially for a maturing basin, to get the most out of our ageing infrastructure. The allowance is expected to encourage companies to continue investing in that infrastructure; by keeping older infrastructure hubs in play with incremental projects and delaying their decommissioning for as long as possible, we can work to ensure that recoverable reserves are not lost for ever.The allowance will shield income of up to £250 million from companies investing in qualifying brown field projects, or £500 million from projects in fields paying petroleum revenue tax, from the 32% supplementary charge. Over time, that will provide tax relief of up to £80 million for newer fields and £160 million for older fields paying petroleum revenue tax. The level of relief available to companies depends on the size and unit costs of the projects they are undertaking. A qualifying project is an incremental project that increases expected production from an offshore oil or gas field, with verified expected capital costs per tonne of incremental reserves in excess of £60. The maximum level of allowance is £50 per tonne, and is available to projects with verified expected costs of £80 per tonne or above.
The allowance was introduced with effect from the date of its announcement, 7 September 2012, to ensure that we did not create perverse incentives for companies to delay investment until the legislation was implemented. Since the September announcement, we have worked closely with industry to get the drafting right and in line with the policy intention. An allowance based on cost is a new and innovative approach, so we needed to take time to get it right and to ensure that it was targeted appropriately, at the projects that would not have gone ahead without it.
The brown field allowance has already started to support incremental projects across the North sea. The Department of Energy and Climate Change has approved 23 projects, which are expected to deliver incremental reserves of more than 26 million tonnes. Those projects have associated investment of nearly £3.7 billion in some of the most mature fields on the UK continental shelf, demonstrating that the allowance is helping UK projects to remain competitive in attracting international capital investment. That investment is creating and sustaining jobs across the UK, both directly and indirectly through the supply chain.
A number of companies have already said that the allowance is making a real difference to their investment decisions. For example, Talisman Sinopec has committed £1.7 billion to the Montrose area redevelopment project, to develop two new fields, extend the life expectancy of five oil fields and produce an additional 100 million barrels of oil equivalent. This project is expected to create or sustain more than 2,000 jobs in construction, fabrication, installation and drilling. Talisman Sinopec was clear that the brown field allowance was crucial in ensuring that this project went ahead. EnQuest, the UK’s largest independent oil producer, has announced a £179 million programme of investment for its Thistle field to deliver a threefold increase in production. This will safeguard nearly 500 existing North sea jobs and create almost 1,000 new ones across the supply chain.
CNR International said the allowance has meant it can invest more than £300 million to extend the life of one of the UK’s oldest fields, which will produce an
additional 27 million barrels of oil equivalent. This investment will safeguard and create hundreds of jobs across the sector. These are just a few examples of the impact the allowance has had already, and there are many more in the pipeline.As one of the most mature offshore basins in the world, the UK continental shelf will face significant challenges, but there are also huge opportunities and maximising brown field recovery is one of them. This allowance will support investment in these incremental projects and help us to get the most from our vital national assets. I hope the Committee will support the order this morning.
9.1 am
Shabana Mahmood (Birmingham, Ladywood) (Lab): It is a pleasure to serve under your chairmanship for the first time, Dr McCrea. I thank the Minister for her detailed introduction to the order. I do not intend to detain the Committee for long, but I do have three questions for her. As she noted, the tax information and impact note suggests that the order will
“lead to additional investment in some fields and projects that are currently economic but commercially marginal, which will support jobs in the economy”.
Given that the order will cost the Exchequer £120 million per year, will the Minister outline how much total additional investment it is expected to result in—I know she said there is more in the pipeline—and, therefore, how many jobs she expects to be created? Will she outline what the order’s net impact will be on the Exchequer? How much additional tax revenue per annum do the Government expect it to stimulate, and what plans do they have to keep its effectiveness under review?
9.2 am
Mr Frank Doran (Aberdeen North) (Lab): I want to raise a number of issues. In principle, what the Minister has said is welcome in the North sea oil and gas industry. As she will know, my constituency has a great interest in the North sea, and it is important to understand why we are discussing field allowances today.
In 2011, the Chancellor made an appalling error in the Budget, increasing the supplementary charge on the corporation tax of all the oil companies, which had a massive impact immediately. There was no warning and no consultation prior to the introduction of the charge, and although it constituted just a 12% increase, it was projected to wipe more than 25% from the post-tax profits of some fields, with the effective tax rate for petroleum revenue tax-paying fields rising to 81%. This increase immediately cut the value of all prospective investments in the UK continental shelf by about 23%, and nearly 60 projects were put at risk. In addition, there was the impact on the Treasury, which it clearly had not examined carefully. The assessment was that direct tax receipts from the UK continental shelf would be cut by between £15 billion and £20 billion if investment was put at risk in the 25 major projects. That would have been a massive hit for the Treasury.
This is not the first time a Conservative Government have done this: they did exactly the same in 1993, when there were massive changes in the tax system without any consultation whatsoever. That affected the industry right across the board, and it took some years to
recover. The recovery has been faster this time, mainly because the Chancellor quickly met with the oil industry and introduced the last round of fuel allowances, which have been very beneficial. I welcome that, and it has opened the door to new companies coming into the North sea.There is no doubt that the industry is now back on track, but it is important to point out that these unheralded tax changes, without any advance consultation whatever with the industry, are quite damaging. Yes, the fuel allowances provide some compensation to the industry, but ultimately the Treasury has to understand that the North sea oil and gas industry spends its money up front. This year, we expect to see some £13.2 billion of investment in the North sea. That is the industry’s forecast. Last year the figure was £11.25 billion, which is a massive amount of money to spend. All of that investment is up front, without tax relief. The changes in the tax system implemented by the Chancellor in 2011, and by a previous Chancellor in 1993, were immensely damaging, and I hope the lesson has been learned.
The fuel allowances will maintain the momentum in the North sea, and we will continue to see new companies coming in. We are probably in the autumn—although it may be the early autumn—of the life of the oil and gas industry. We have had some 40 good years out of the industry, and we hope there is quite a bit of life left in it. Such changes in the tax system will help considerably in that regard.
I recently met with representatives from the offshore fabrication industry to discuss why they are not getting enough British contracts. There is concern that, certainly since the Offshore Supplies Office was done away with following the procurement directive in 1992, the oil and gas industry does not think the offshore fabrication industry can do much for it. Many major projects go off to yards in China, South Korea, Spain and, occasionally, Italy. The offshore fabrication industry is reviving.
I also recently met with representatives of a number of companies. Apache, for instance, is building a new facility at the Offshore Group Newcastle yard on Tyneside, which is a great benefit to that company; but so many others, including the majors, are still going to Asia. One issue is the way in which tax reliefs are provided for fabrication. The major concern in the UK industry is that the projected costs for the average installation—we are talking billions of pounds, rather than hundreds or tens of thousands of pounds—are often not fully worked through, and many of the yards in Asia now have almost a production line.
New topsides or jackets will already be 60% designed, and there is limited opportunity to change that. When there is a change, or when there are difficulties, costs escalate very quickly. The yards have a habit of underbidding, and extra costs then occur. There are all sorts of additional costs, including the massive cost of preparing a jacket or topside for transport to the North sea, sometimes in very difficult circumstances. One particular module has to come past Somalia and, given all the piracy problems, I do not know how it will get through that barrier. All the extra cost loaded on to a platform built in, for example, South Korea or China receives tax relief from the British taxpayer. The Government need to do more: first, encourage British-based operating companies to invest in and use UK yards; and, secondly,
look carefully at the tax system and work out how much the taxpayer loses because of businesses that take construction out of the country.9.10 am
Nicky Morgan: I thank the hon. Lady and the hon. Gentleman for their comments, which I hope to deal with, but if I cannot provide all the details they seek I will happily write to them.
The hon. Lady asked about the additional investment and the total number of jobs. So far, the allowance has generated investment of £3.7 billion and thousands of jobs have been created. It is difficult for any Government to forecast numbers of jobs, nor would we want to.
Earlier, I mentioned the Talisman Sinopec deal, which should create 2,000 jobs in the construction, fabrication, installation and drilling sectors. EnQuest talked about safeguarding 500 existing jobs and creating almost 1,000 new ones, and I also gave the example of CNR. Rather than make forecasts, the point is that confidence is being brought to the sector, which is creating jobs. If we have further, more detailed information, I will write to the hon. Lady with it.
The hon. Lady also asked about additional tax revenues. The Office for Budget Responsibility forecasts revenue from the oil and gas production tax, taking into account the impact of the field allowances. It does not, however, disaggregate the forecast for individual allowances. I am afraid I cannot give her a specific forecast; it is very much the OBR’s job to do that.
The hon. Lady asked about plans to keep the order under review. The Government, through the Department of Energy and Climate Change, Her Majesty’s Revenue and Customs and the Treasury, are working closely with industry to monitor the field allowance proposal’s effectiveness. We are in constant dialogue—a point I shall deal with when responding to the hon. Gentleman’s comments. Any issues are brought quickly to the Government’s attention. I could say, therefore, that there is an ongoing review of the order’s effectiveness. I hope that deals with the hon. Lady’s questions.
I thank the hon. Gentleman for his comments and I appreciate that, for him, this is a live constituency issue, about which he probably knows far more than many other members of the Committee. I look forward to visiting Aberdeen at some point in the next few months —I have been promised a helicopter ride. I thank him
for his broad support for the order and take on board his comments on the 2011 increase in the supplementary charge. In the spirit of consensus, I will not go into the economic legacy that the Government inherited, but the charge was part of dealing with that.Since then, as the hon. Gentleman is probably aware, the Government have worked intensively with industry to support investment and maximise the production of oil and gas from our reserves, which includes work on the field allowances. One of my first tasks as a Minister was to meet a number of oil companies to celebrate the signing of the decommissioning relief deeds, which the industry welcomed.
The hon. Gentleman talked about certainty of investment. That applies across the board to all energy companies. Part of the role of Governments of any persuasion is to create certainty for those whom we need to invest in infrastructure such as our oil and gas reserves. All parties and Governments need to bear that in mind. The work we have done with the oil and gas sector has helped to support record levels of investment of £14 billion this year. Oil and Gas UK expects £6 billion of that investment in fields, with the allowance before the Committee today.
The hon. Gentleman talked about the fabrication industry and the need to buy British and to support British companies. I hear what he says and take his point on board. We all hear that a lot from our constituents. I also heard his point about tax reliefs for fabrication. The Government keep all reliefs, tax and otherwise, under constant review. I will certainly go away and think about that. The field allowances we have discussed this morning have significantly supported investment across the UK. We already have an excellent supply chain. One of the good things about the growing economy is that we are seeing growth in all sectors, including manufacturing, which all Members will welcome.
The Department of Energy and Climate Change and the Department for Business, Innovation and Skills have set up a taskforce to look at how we can further support the supply chain through the oil and gas industrial strategy. The order is good news. As the hon. Gentleman said, there is life left in our oil and gas basins. The order is about prolonging that life and bringing energy, certainty and security to our constituents, and I hope the Committee will support it this morning.