North Sea Oil and Gas

Lord Soames of Fletching Excerpts

Wednesday 25th January 2012 Commons Chamber

[Nicholas Soames (Mid Sussex) (Con)]

Thank you, Mr Speaker, for allowing this short Adjournment debate on North sea oil and gas taxation. It is a very serious and important matter. It is not one with which I have previously been concerned, but I think the Economic Secretary should know that I was invited to a briefing the other day, given by the oil industry, on the impact of taxation changes in the North sea and it excited my interest. I had always been aware of what a very substantial business it was but had no idea of how very important it is to the United Kingdom economy on the scale of employment and other matters, and I thought it right to bring the matter to the attention of the House. I am therefore, as I said, very grateful to you, Sir, for allowing the debate.

The United Kingdom is indeed fortunate to be endowed with significant resources of oil and gas. Over the years, hundreds of millions of pounds of hard-earned, always risky and sometimes very courageous investment and endeavour have allowed the nation to realise these resources, and for the British people to enjoy the substantial benefits of employment, sophisticated and high-level skills at all levels of the skill chain, tax revenues and balance of payments, and to develop a leading position in the global oil and gas supply chain—all of which has stood this country in good stead down the recent years.

Figures for 2011 show that around £16 billion was spent by the oil and gas industry on exploration, development and operations. This included £8 billion in new capital investment, an increase of 25% over 2010. I know that the Economic Secretary will agree that in anyone’s terms these are massive numbers, and thus once again make the oil and gas sector the single largest investor of all the industrial sectors in the United Kingdom.

The positive benefits of this remarkable industry are not confined to Scotland. They extend throughout the United Kingdom, supporting employment for more than 400,000 people, and those jobs are widely distributed throughout the whole country. Unsurprisingly, of course, a substantial proportion—45% in fact—are in Scotland, but that means that 55% of the jobs, which is the majority, directly benefit employment throughout the rest of the UK.

The taxes forecast to be raised from the industry in 2011-12 include some £6 billion in income tax, national insurance contributions and corporation tax paid by the supply chain companies, with an additional £11 billion from taxes on production itself. That amounts to 25% of all the corporation tax received by the Exchequer. The production of indigenous oil and gas improved the balance of payments by £35 billion in 2011, thus halving the trade deficit, and the supply chain added another £5 billion to £6 billion with exports of oilfield goods and services. Incidentally, that aspect of the industry is doing extremely well here and overseas, and it is flying the flag for Britain effectively.

At a time when Britain above all else needs growth and the energetic encouragement of inward investment, I regret to have to say to the Economic Secretary that all is not well in this crucial sector that is so important to our economy. Production declined by 17% from 2010 to 2011, which was the biggest fall seen by the industry in the past 40 years. As a result, future tax receipts will decrease rapidly without new investment. Receipts for 2011-12 have already suffered a £2.3 billion downgrade due to lower than expected production.

[Jim Shannon (Strangford) (DUP)]

I understand that the reduction in North sea oil production is due to many factors, but one of them is maintenance. There have been many maintenance programmes over the past 12 months. Is the fact that production is down, because maintenance is up, one reason why taxation is down?

[Nicholas Soames]

The hon. Gentleman raises an important point. I am sure that it is germane, but the decrease that I am highlighting is, in my judgment, due to the taxation regime.

The United Kingdom already imports around 10% of its oil and almost 40% of its gas, and such imports will increase rapidly without the benefit of new investment. The Government’s decision in March 2011 to increase tax rates on the industry, which increased the top tax rate to 81% and the corporation tax rate to 62%, is inevitably and regrettably having a chilling effect on the leading indicators of investment.

While total capital investment this year has increased to about £8 billion from £6 billion in 2010, that was largely due to development momentum from previous years. Worryingly, just nine new fields accounted for 40% of the total capital invested and all the development projects were well advanced prior to the tax increase.

The signs of lower investment in the future are already apparent. Indeed, my hon. Friend the Economic Secretary will see from the Department of Energy and Climate Change’s latest energy trends analysis a significant impact on drilling activity, with exploration wells down 50% in 2011.

It is from that exploration drilling that the future large capital investments will flow. The March 2011 tax increase reduced the value of future projects by 25% overnight. My hon. Friend knows that the future development of the North sea depends in large part on clever, technical solutions at the very forefront of what is manageable for marginally economic fields, but the increase in the tax rate has rendered many of those future fields uneconomic to develop. That serious matter for the country must be addressed.

I gather from the estimates of Oil & Gas UK, the industry’s trade body, that investment of at least £12 billion in more than 1 billion barrels of oil and gas resource will not occur without some stimulus. That is 60,000 jobs that will not be created and a loss of a benefit of £15 billion to £20 billion to the budget deficit as a result of the tax increase.

[Sir Robert Smith (West Aberdeenshire and Kincardine) (LD)]

I remind the House of my entries in the Register of Members’ Financial Interests to do with the oil and gas industry. I intervene to reinforce the right hon. Gentleman’s point about the industry’s importance not only to the north-east of Scotland, but to the whole of the United Kingdom. I thank him very much for bringing the spotlight to bear and bringing the message south that it is the whole United Kingdom that would benefit from tax reform.

[Nicholas Soames]

I am grateful to the hon. Gentleman, whose championship and knowledge of the industry are well known. He emphasises the important point that this is a United Kingdom industry, relevant to the whole country, and therefore even more important than might otherwise be the case.

Oil & Gas UK estimates that a further 1.7 billion barrels of the UK’s oil and gas resource would be recovered if the uncertainty about decommissioning reliefs—a very difficult subject—was resolved.

In an industry with highly mobile capital, investment will flow to other, more attractive destinations. We must not let that happen. Further repeated change in the taxation regime of this vital UK industry is causing great uncertainty in the boardrooms of both the international and the home-grown companies involved in all sectors of the industry. That inevitably has a further unhelpful impact on inward investment, at a time when we should be doing all we can to attract that investment, as well as the jobs, the tax receipts and the balance of payments benefits that come with it. I am sure the Economic Secretary agrees that doing that is even more important given the Government’s genuine determination to generate greater growth in the economy, without which many of the difficult problems we face cannot be dealt with.

I am aware that discussions are ongoing between the Treasury, the Department of Energy and Climate Change and the industry to try to find ways to stimulate investment, and I welcome that. I ask the Economic Secretary to confirm that she understands—I know she does—the serious impact on inward investment being caused by the tax increase and other adverse changes in taxation, and the damage to the future tax base and future tax receipts. Further, will she confirm that the Treasury will give serious and detailed consideration to measures to protect future investment through extensions to tax allowances and giving certainty on decommissioning reliefs, and see to it that those measures are enacted or headlined in the Budget, to the greater advantage of the British economy in the years to come?