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North Sea Oil and Gas (Taxation)

The hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith) is absolutely right. If we do not secure continued investment, we will not secure continued tax revenue. Considering the huge benefits that this country acquires from the industry, we must talk about it and take care of it. The Government need to value the industry, and, as the hon. Gentleman has said, we must try to maintain that investment. All the figures that I have used so far come from the United Kingdom Offshore Operators Association and the Department for Trade and Industry’s joint activity survey, which was published in February. If my hon. Friend the Financial Secretary has not read it, I urge him to do so, because it contains some important observations that I shall focus on shortly. Oil and gas investment decisions are by their nature long-term, because it takes many years of big spending on initial exploration through sanction to eventual production before a penny of return materialises, and one cannot forecast the future oil price when one decides to invest. The industry’s thinking is, none the less, short-term, and it responds to oil prices. No one invested when the price was $10 a barrel, but in the past few years, with the price at $50, $60 and even $70 a barrel, there has been a mini boom in North sea investment. The boom occurred despite the Treasury imposing two supplementary corporation tax charges, and the industry leaving itself terribly exposed in the market for drilling rigs and paying ridiculous prices to drilling rig operators. I do not understand why the industry gets itself in such a mess by shooting itself in the foot because it does not have a proper supply of the services that it needs. However, the result is that unit costs per barrel have gone up by 45 per cent. since 2005. That frantic period of activity masked the long-term trend in the UK continental shelf, because the real picture is that, although we are just over halfway through the production of all our oil and gas reserves, the remainder will be different from the first half. The big reservoirs have all been discovered, and the rest amounts to small fields. A typical discovery amounts to about 10 million barrels, and the activity survey forecast that 88 per cent. of future exploration prospects would be less than 20 million barrels. The small reservoirs will be more costly to discover and develop than the previously larger fields, and new developments are possible only because of technical innovation and by tying them to existing infrastructure, which is mostly old. I have made it clear for a long time that for the second half of the North sea oil and gas province’s life, the so-called mature stage, it needs a different fiscal regime from that which it had for the first half. We can argue with the Treasury about the level of overall taxation, and oil price makes a difference, but we cannot and must not ignore the underlying structural situation: in a mature province, the industry has to spend more, to discover and produce less, if we want to extract as much of our reserves as possible, especially when we have to compete with other parts of the world for investment. Notwithstanding oil price, the North sea oil and gas tax must be set at such a level that we can continue to attract and maintain investment. The key messages from the activity survey are that even after 40 years, there is plenty of activity in the North sea. There was capital investment last year of £5.6 billion—the highest since 1998—and exploration and appraisal drilling activity was strong. We will also be self-sufficient in oil this year, 2007-08, although we will probably become a net importer in 2010, at which time, incidentally, the North sea would still be able to supply 60 per cent. of our gas. But—and this is the big but—production fell by 9 per cent. last year and is expected to continue falling. Most worrying of all is the forecast of a reduction of investment in 2007 of between £1 billion and £1.5 billion, down to just £4 billion to £4.5 billion. That would represent the first slowdown in capital investment since 2003. That is worrying evidence that the UK is becoming less able to attract investment in a competitive world market, which is a more challenging perspective than we have seen for some time. If we value the benefits of the oil and gas industry that I have outlined, we need to carefully factor those findings into the kind of work that the Treasury is doing in its consultation, which started with the pre-Budget report of 2005 and has resulted in a further discussion paper today. Before coming to that, however, I should like to raise some points that my hon. Friend the Financial Secretary needs to address. Oil prices may be high, but gas prices are not. The two supplementary charges have sought to match that oil price rise to secure for the nation a fair share of the higher value that the markets now place on our national assets. However, companies that are involved in gas exploration and production have to pay the same taxes as the oil companies, but the economics of gas are not the same. In fact, the overall price of oil and gas in the North sea is the equivalent of about $40 a barrel, which is not quite the windfall price of $60 a barrel for Brent crude with which we are familiar. With the high costs that it now faces, the industry is worried about what would happen if oil prices fell. My second point is about the uncertainty out there about the fiscal treatment of decommissioning, which we are told is beginning to have an impact on asset trading. We need plenty of asset trading for the health of the UK continental shelf. We need therefore some decisions on tax issues concerning decommissioning. With the agreements that were signed to start with, my understanding was that decommissioning would come with quite a big cost to the Treasury, so probably none of us would welcome it. Linked to decommissioning, however, is a window of opportunity. I have said that most new development is linked to the older infrastructure. That older infrastructure has an economic life, and 45 per cent. of it could be closed down by 2020. Without that infrastructure, however, much of our remaining oil and gas recovery would be uneconomical, which would mean reserves being abandoned. That would be a nightmare scenario, because we would lose indigenous energy, investment in jobs and the tax revenues from that. However, if we can sustain current activity, that decommissioning can be avoided. If investor confidence is maintained, decommissioning could be delayed by 10 to 15 years on many of the systems out there, bringing benefits for everybody. Briefly, another issue is the gas reserves in West of Shetland, which really need to be unlocked. There are talks on that, and I urge my hon. Friend the Financial Secretary to take a personal interest in them. West of Shetland could provide 3 per cent. of the whole country’s gas by 2011 and 6 per cent. by 2016, but it must be economic. If we cannot make it economic again, the gas will remain there, and we will get no tax returns from it. Everything that I have said suggests that the Treasury needs to think what the right level of tax is to sustain investment and recover the remaining reserves. We have to watch out for fields and platforms that were invested in many years ago on the basis of oil being $20 a barrel, and which are still pumping away with oil at $60 a barrel. Those kinds of platforms do not need any fiscal incentive, because we cannot guarantee that their profits will continue in the North sea. We need to focus on new investment. I have not yet done the sums on today’s announcement on corporation tax and capital allowances, so I do not know whether the industry is better off being treated differently from the other industries. My initial response was that the choice of capital allowances rather than corporation tax for a reduction may be right, because capital allowances focus more on investment, although I say that guardedly. However, the question we need to consider is whether the total amount of tax still being taken will result in insufficient investment for the future. I should like to draw my hon. Friend the Financial Secretary’s attention to two things in the consultation document. The fourth criteria that he will use to make decisions is that any change should be equitable. I remind him of what I have said about oil and gas: companies focusing on gas are not being treated equitably, because they are paying a supplementary charge, which was levied essentially to deal with the high oil price, the profits from which need to be shared. The initial conclusion is that the Treasury probably wants to keep petroleum revenue tax and not make any changes. I note that the Treasury is quite cool on any incentives targeted at exploration. My general feeling is that my hon. Friend the Financial Secretary is not minded to make any changes. The industry will find that disappointing. However, it will notice that the doors are still open and that things are not closed down. Where are we going with the process and when will it conclude—it started with the pre-Budget report of December 2005? When will the consultation conclude, and should it not involve the industry-Government body? Finally, the activity survey to which I have referred points to two possible futures for our oil and gas province. The better future would mean still being able to supply 40 per cent. of our needs by 2020; alternatively, we could let the existing trends continue and supply only 8 per cent. I am told that the industry is willing to step up to the plate, but we need to attract and sustain the investment. We will need a fiscal regime for the second half of the life of the North sea field that can do that. I hope that when the consultation finally concludes, my hon. Friend the Financial Secretary will come forward with that answer.