North Sea Oil and Gas

Chloe Smith Excerpts

Wednesday 25th January 2012 Commons Chamber

[The Economic Secretary to the Treasury (Miss Chloe Smith)]

I am extremely pleased to have the opportunity to discuss this subject in the House at perhaps greater length than I did when my hon. Friend the Member for West Aberdeenshire and Kincardine (Sir Robert Smith) asked me on Tuesday for an update on the ongoing work. I thank him, and, of course, my right hon. Friend the Member for Mid Sussex (Nicholas Soames) for calling for this evening’s debate, and for their contributions to it.

My right hon. Friend is absolutely correct: the oil and gas sector makes a huge contribution to the UK economy. He is right to draw out the statistics as he has done this evening. I concur that UK oil and gas provide about two thirds of the UK’s primary energy needs, and even as we move into a less carbon-intensive future, they are set to remain a vital part of our energy system for years to come. The Government recognise the crucial role the sector plays in driving jobs and growth. Together, oil and gas contribute about 2% of the country’s GDP, and the industry supports about 350,000 jobs directly and indirectly across the UK, as well as another 100,000 in exporting goods and services. Of course, as my right hon. Friend said, it is also source of skills, expertise and technology. Finally, as my hon. Friend the Member for West Aberdeenshire and Kincardine said, oil and gas are a UK-wide concern. Indeed, that has an impact close to my constituency around the coast of Norfolk, where there is a North sea gas industry.

It is vital that we do what we can to maximise the economic recovery of our indigenous hydrocarbon reserves. It is for that reason that the Government remain committed to encouraging investment and innovation in the North sea. We recognise that tax plays an important role in helping us to achieve those objectives. The Government’s aim is therefore to shape a tax regime for the North sea that encourages exploration, development and production while ensuring a fair return for the UK taxpayer.

That is not always an easy balance to strike, and at times it can require us to make difficult decisions, to which my right hon. Friend the Member for Mid Sussex has referred. Everyone who listened to the Budget 2011 will understand that. In the Budget the Government sought to soften the impact of record pump prices for car fuel on households and businesses by abolishing the fuel duty escalator and replacing it with a fair fuel stabiliser. We also cut fuel duty by 1p a litre on Budget day. Since then, we took steps in the autumn statement further to ease the burden on motorists to ensure that there will be only one retail prices index increase in fuel duty in 2013. All told, that means that the Government will ease the burden on motorists by approximately £2.5 billion in 2012-13. At a time when businesses and families across the country are coping with extremely difficult economic circumstances it is right that we should support them as best we can through these tough times, including looking at measures that affect the cost of living such as fuel pricing.

Given the economic situation and the state of the public finances, that support must be funded. In the Budget, at a time of exceptionally high oil prices, the Government felt that it was fair that the oil and gas industry should make an additional contribution through an increase in the supplementary charge. Indeed, that increase was voted on in the House.

At the time of the Budget the Government made it clear that although they accepted that some marginal projects might be affected, they did not expect a significant impact on investment or production over the forecast period. To answer the points that my right hon. Friend raised about receipts, investment and the state of the industry, our assessment of the impact on production was supported by the independent Office for Budget Responsibility. Moreover, while the oil price remains well over $100 a barrel, the fair fuel stabiliser means that taxes on oil and gas production will reduce if the oil price falls below a certain threshold.

Indeed, there have been announcements of further significant investment in the basin over the past few months. For example, BP has said that with its partners it will invest almost £10 billion in North sea oil and gas over the next five years. That investment will provide an extra 3,000 jobs across the oil and gas supply chain. 2012 could be a prosperous year for the North sea. We expect a substantial increase in offshore field approvals over last year’s figure, and many other discoveries are being worked up for the years ahead.

None the less, I recognise that those tax changes have not been welcomed by the sector. I understand that, and I acknowledge the recent news suggesting that there were lower levels of exploration and drilling than expected last year. I believe a range of factors contributed to that, and tax is only one part of what my right hon. Friend will accept is a complex situation for businesses seeking to operate in and around the basin.

Tonight’s debate gives me an opportunity to tell the House a little more about the way in which we have engaged closely with the industry since the Budget last year to ensure that we fully understand its views on a range of fiscal issues related to investment. Only last week, as my hon. Friend the Member for West Aberdeenshire and Kincardine noted, I chaired the first meeting of a new oil and gas industry fiscal forum. It was attended by the Minister of State, Department of Energy and Climate Change, my hon. Friend the Member for Wealden (Charles Hendry) and representatives from more than 15 companies across the sector. We had an extremely productive discussion covering the points that my right hon. Friend the Member for Mid Sussex has noted, including decommissioning and field allowances. I believe that the fiscal forum will continue to provide a structured basis for further dialogue between industry and Government on oil and gas tax issues.

We hope this will complement the excellent work already being taken forward by the industry and Government task force, known as PILOT. This group seeks to contribute to the long-term future of the UK continental shelf through initiatives focusing on reducing costs, eliminating barriers and maximising the effectiveness of resources.

In addition to these wider discussions, the Government have been engaging closely with industry to consider changes to specific elements of the tax regime that could unlock additional investment in the basin. For example, in line with our commitment at last year’s Budget, we have been working closely with industry with a view to making a further announcement on greater long-term certainty about decommissioning tax relief at Budget 2012. We have also been considering the case for improved or new types of field allowance to act as a further incentive to investment in marginal fields.

Hon. Members here today following the debate will know the range of detail encompassed in the representations made to me and my colleagues by industry, and they will be aware of the number of different proposals put forward under those headings of decommissioning tax relief and field allowances. Following such detailed discussions with industry, we have already increased the rate of the ring-fence expenditure supplement from 6% to 10%, which helps to ensure that existing field allowances work more effectively and equitably.

I am very encouraged by the positive engagement that we have had with industry on these issues. I believe that this sort of constructive dialogue can only be helpful as the UK continental shelf matures and the tax regime has to evolve accordingly. We remain committed to supporting the sector in realising its ambition of fully maximising the growth and jobs potential from our oil and gas industry. Ultimately it is in everyone’s interest that we foster a regime that continues to promote investment and harness our mineral wealth effectively, while also ensuring a fair return for the UK taxpayer from this valuable national resource.

Once again, I am very grateful to my right hon. Friend for having brought this debate here tonight and for giving me a short opportunity to expand on some of the valuable work that we have been endeavouring to undertake to support the industry and meet the aims that I know he shares.

Question put and agreed to.