North Sea Oil and Gas

Debate between Lord Soames of Fletching and Robert Smith

Wednesday 25th January 2012 Commons Chamber

[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?