Finance (No. 3) Bill

Frank Doran Excerpts

Tuesday 26th April 2011 Commons Chamber

[Mr Frank Doran (Aberdeen North) (Lab)]

I shall speak about the oil and gas industry, to which the Chief Secretary gave prominence in his contribution. I am sorry that he has gone. He claimed the credit for the policy, but he may in future regret that rather naive political claim. He has produced a system that is too clever by half and does not pay much attention to the reality of the oil and gas industry.

The oil and gas industry is probably the single most important industrial investor in the UK. Some £6 billion was invested last year alone, with anticipated increased investment this year, led by the high oil price. The industry supports nearly half a million jobs throughout the UK, either directly or in the supply chain. A substantial proportion of those jobs are located in just four constituencies around the city of Aberdeen—my own constituency, Aberdeen North, and Aberdeen South, Gordon, and West Aberdeenshire and Kincardine, where we have a grand total of just over 132,000 oil and gas-related jobs. That has a huge impact on our local economy.

Oil jobs exist in other parts of the country too. There are, for example, 14,250 such jobs in the City of London, where many of the major companies have their headquarters, nearly 8,000 in Reading East, and over 8,000 in Poplar and Limehouse. Uxbridge has 2,170 oil and gas-related jobs, and Stockton North has 2,270. Even the Prime Minister in rural Witney has about 1,000 such jobs, according to figures produced last year by Oil and Gas UK. So it is not just a regional issue or one that involves only East Anglia or the north-east of Scotland. The last time such a survey was done—this one was carried out about a year ago—the Economic Secretary to the Treasury would have been able to claim several thousand jobs in her constituency, but Kellogg Brown and Root, which used to be located in Putney, has moved on. The industry affects the whole country.

Last year, the industry paid £8.8 billion in corporation tax and the estimates show that £13.4 billion is likely to be paid in 2011-12. Of that, £3 billion to £4 billion in revenue is linked directly to the oil price, so the Government are already benefiting from the spike in oil prices. Before the Budget the industry was already the most heavily taxed sector in the UK economy, with 50% to 75% of all UK continental shelf profits going to the Government. Given that we own the oil after all, since it was nationalised under the Petroleum (Production) Act 1934, such a split does not look excessive on either side.

However, exploiting our oil and gas resources is a dangerous and expensive operation that requires high levels of commitment and investment. Investment decisions in the UK industry are not all made in the UK. It is a genuinely global industry and UK sector decisions are made in Houston, Dallas, San Diego, Paris and Vancouver as well as in London and the middle east. Competition for investment is fierce. UK management has to fight against bids from other oil provinces, such as Brazil, Australia and India, and from emerging oil provinces such as west and east Africa and from a host of other foreign company headquarters.

The managers who make those decisions consider a number of factors in addition to the most prominent one—the likely return on investment. The key factors are a stable political background and a stable financial background. Above all, for long-term investment the oil industry needs certainty in the tax regime, and I am sure that the Economic Secretary had that message hammered home very seriously by the industry when she visited Aberdeen not so long ago.

Ever since the 1960s, when oil exploration started in the North sea, we have done very well on investment, mainly because we have had a stable political system and a more or less stable tax system, but it is getting much harder. The UK continental shelf is a declining province and the Government’s aim should always be to ensure that that decline is managed and is as shallow as possible. That means keeping the tax regime attractive enough to encourage investment while ensuring that the public purse gets its fair share. The Chancellor’s decision, which the Chief Secretary apparently claimed was his idea, will accelerate that decline rather than slow it down.

Professor Alex Kemp and Linda Stephen from Aberdeen university recently produced an authoritative study on the impact of the tax changes. The report looks at the impact of the Budget on a range of oil and gas price scenarios. It finds that at a $50 a barrel oil price and 30p per therm of gas, over the 30-year period to 2041, there could be a reduction of 23 new field developments and substantial incremental developments undertaken. There would be a cumulative reduction in production of 920 million barrels of oil equivalent and a reduction in field investment of £19.2 billion, at 2010 prices. Total field expenditure would be reduced by £34.9 billion and tax revenues would be reduced by £12.8 billion.

Under a $70 a barrel scenario, with 50p per therm of gas, there would 62 fewer new field developments, loss of production of 1.7 billion barrels and a total field expenditure loss of £33.2 billion, but for the Government the tax revenues would increase by £23.3 billion. The analysis for the $90 a barrel scenario, with 70p per therm of gas, shows that even at the top of oil and gas price scenarios damage is done—79 fewer fields, 22.54 million barrels of oil equivalent lost and total field expenditure of £52.2 billion—but, again, tax revenues would increase by £51.6 billion. The question we must ask in these scenarios, which have come from a very authoritative source, is whether that is a price worth paying, given the reduction in our oil and gas producing capacity and the importance of the industry to the country. The Government increase their tax take, but at a considerable loss elsewhere.

I have known Alex Kemp for many years. He is the country’s leading expert on oil and gas taxation and many hon. Members in the Chamber with an interest in the oil and gas industry will have had many conversations with him. He has advised many companies, emerging oil countries around the world on their tax systems and various Select Committees in this House. He is completely independent. He and his colleague have produced a damning indictment of the impact of these tax changes.

The approach that the report takes is extremely important. The oil price is volatile and can change dramatically. For example, I remember that in 1985, when I was a young and aspiring parliamentary candidate ploughing my furrow in Aberdeen, the oil price dropped from $32 to $8 a barrel virtually overnight. The oil industry is, if nothing else, extremely focused and unsentimental. If a company is not making the returns it anticipated, it will quickly change direction. In 1985-86, the price we paid was that a huge number of projects were quickly shut down. Estimates showed that around 50,000 oil jobs were lost, mainly in the north-east of Scotland. That is the sort of picture that Professor Kemp and Dr Stephen paint for us in their report.

The House of Commons Library has produced a valuable report on oil prices which shows just how serious that volatility is. For example, the Library’s figures show that in 2008 the minimum price for a barrel of oil was $39.25 and the maximum was $132.40, all in one year. Of course, that was the year when the global banking crisis was at its height. That was a huge shift in extraordinary times, but these are extraordinary times, too. Who can predict the oil price next month, never mind next year?

The average price for 2011 will be higher, mainly because of the crisis in the middle east. Perhaps the price will go as high as it was in 2008, but again, who knows? Will we still have the disruption in the middle east next year? Will the world economy have improved, increasing the demand for oil, or will it still be bumping along the bottom? What new technologies will come along? Shale gas is transforming gas industry economics and new oil provinces may be discovered, along with massive oil fields, as new technology allows us to explore in more difficult areas.

In the meantime, UK oil and gas production continues to decline. It is sustained by investment, much of it coming from new entrants in the North sea introducing new techniques to improve recovery from existing oil fields, many of which are the most heavily taxed under the new proposals. The development of much smaller fields relies on existing infrastructure, much of which is well beyond its expected working life and requires constant investment to maintain it. The report by Professor Kemp and Linda Stephen shows just what the impact of these tax increases on investment will be.

As other Members have said, there is also real concern about the application of the tax increases to gas. Gas projects in the UK are highly marginal and the economics of gas are very different from those of oil. The price of gas is much lower and is likely to stay that way, particularly given the continuing discovery of substantial gas deposits around the world and the growing impact of shale gas on the economics of gas. The current value of gas, as has been mentioned in previous interventions, is the equivalent of $55 a barrel, well below the Government’s proposed threshold for the tax increase, but there is no sign that gas revenue will be excluded from the increase. To pick up on the point made by the Chief Secretary to the Treasury in response to interventions, I do not think that tinkering with the field allowance will have much of an impact on the gas industry. It needs a lot more than that and a recognition of the different economics.

The west of Shetland area is estimated to hold around 17% of the UK’s remaining resources, and much of it is natural gas. Development will be challenging and expensive, but the Laggan and Rosebank developments, for example, would open up other areas west of Shetland and provide a lifeline for the Sullom Voe terminal on Shetland. By the way, roughly 1,100 jobs on Shetland and Orkney are sustained by the oil and gas industry. Development in this area is crucial to the national interest, but these are just the sorts of projects that are threatened by the tax increases and the lack of any differentiation between oil and gas as products for the application of the increase, which makes the threat much more serious to all future gas projects in the UK.

It is worth adding that those consumers who are saving a penny on their petrol bills may well end up paying it back in other ways. One major gas producer gave me figures showing that the extra cost of importing gas into the UK from abroad to replace gas which would otherwise have been produced before the introduction of the tax increase could be as high as £100 per household per year, which is a significant potential increase. There would obviously be other major effects on the economy because of the loss of an indigenous resource and the need to import gas to replace it.

Of course, this is not the first time a Government have increased oil taxation. The previous Conservative Government did it in 1993. The reception then was as bad as this one, as it came out of the blue without prior consultation, and a number of companies were hit hard. In 1998, the Labour Government proposed an increase in taxation on the industry, started a formal review and consultation process and flagged up the possibility of a supplementary charge. For the record, I have never been opposed in principle to taxing the profits of multinational companies, but on that occasion I opposed the measure. At the time it seemed the wrong thing to do, even by my own Government, because we were going through a sustained period of low oil and gas prices. It was the wrong time to apply a tax increase, and the review concluded with exactly the view that I take: the industry was suffering a sustained period of low prices, and it was not the time to increase taxation. The then Chancellor accepted that view, and no increase was imposed in that Parliament. He also made it clear that the decision would stand for the life of that Parliament.

In 2002, things in the industry had changed and the supplementary charge was introduced. It was increased in 2006, and just for the record I did not oppose those measures, because I thought that the industry could afford them at the time. On each occasion, in 2002 and 2006, as in 1998, however, the Chancellor made it clear that the tax decisions would be for the duration of the Parliament, and that was a crucial reassurance to the industry: nothing would happen in the following year’s Budget or the one after that; the decisions were sustained for the Parliament.

When Labour took office in 1997, it quickly understood the importance of the oil and gas industry to the economy—and how little it was understood by government and civil servants. The Oil and Gas Industry Task Force was created as a regular forum for discussion between the industry and government, and relations between both sides improved considerably. Treasury officials were not initially involved, but in the past few years they have attended as observers, and there was a strong feeling that right across Whitehall, and particularly in the Treasury, government understood the oil industry much better than it had in the past.

In 2006, the Labour Government, again, started a review of the offshore oil tax regime, and it has been clear for a long time that the regime, which developed for a growing industry, has to be changed to take account of the decline in the industry and, particularly, the needs of decommissioning. That review survived the change in Government, and all the feedback that I have had from industry and from some Ministers is that the process was being dealt with constructively on both sides, and that good progress was being made, particularly on some of the more difficult issues, such as decommissioning.

All that work has been undermined by the unexpected decision to increase the tax rate. The Chancellor, with the increases, has taken UK into the top three in the world league of high oil and gas tax payers. I think that we were No. 2 in the league table that I saw, a long way from the mid-point where we used to be. He is playing a dangerous game with a crucial but declining industry that will continue to need foreign investment to survive. At a stroke, he has destabilised the industry and prejudiced the view of potential investors. All new developments offshore have long lead-in times, and many can take as much as 10 years to plan, design and construct, with expenditure in the billions of pounds before a single barrel of oil is produced or a penny earned. The oil and gas industry wins big rewards, but it takes big risks.

[Malcolm Wicks (Croydon North) (Lab)]

I am enjoying my hon. Friend’s remarks on what remains one of Britain’s greatest industries, but does he agree that there is a national security and geopolitical dimension to the issue? As events in northern Africa and in the middle east show, much of the gas and oil in the world is in areas that are unstable and not readily associated with democracy or human rights, so the more energy we can produce ourselves in Britain or offshore, the better for our national security. That is a crucial defence reason why we should cherish the industry.

[Mr Doran]

My right hon. Friend is absolutely right, and he makes his point with the authority of having been Energy Minister for many years in the previous Government. The security that our indigenous oil and gas industry gives us is one of its most important benefits. We have never had full energy security, but the industry gives us a considerable edge in the current climate.

I mentioned the volatility of oil prices and the tax system in the UK, and the risks to future investment are real. The Chancellor has introduced even more uncertainty into the system with his proposal to link oil tax with fuel prices. We have a volatile system, and most predictions for oil prices in the medium to long term are wrong. We have not seen the Chancellor’s scheme for the new tax system, but it seems clear that it will add to more uncertainty about the tax rate.

The Government are absolutely right to express their concern about rising fuel costs, particularly given the impact on taxation, but I cringe a little when I hear Ministers talk, as the Chief Secretary did, about the Labour Government’s escalator. The escalator was introduced by the previous Tory Government, and during the Labour Government, particularly after the fuel crisis at the turn of the century, it was dropped. In 11 out of our 13 years in power, the escalator was suspended. That is the reality.

The current Government could have dealt with the problems faced by motorists in another way, without introducing all this complexity and the confusion that it will cause—particularly if the crisis in the middle east recedes and the oil price declines again. They have made a serious error by linking fuel costs to the taxation of the oil and gas industry.

Importantly, the oil industry has reacted very badly to the increases, with one senior figure describing them as a “drive-by shooting”. The industry relates to government in a very sophisticated way, and it probably has more contact than any other industry with government, but there is clearly genuine shock and concern about this Government’s decisions.

I have had many years of contact with leading figures and companies in the industry, and in the past I have seen the industry cry wolf more times than I care to remember. At the end of the day, it makes whatever adjustments necessary and gets on with it. This time, however, it seems very different. The sense is that there has been no proper consideration of the needs of the industry, as an industry in decline but one that will make a major contribution to our economy with the right support and management from government.

The sense is that Treasury Ministers in particular do not understand the industry and simply see it as a cow to be milked. They have taken a short-term decision, and the sense is that the cow has been milked for short-term political reasons—to throw some crumbs to the motorists and to accelerate the reduction of the deficit. Both are perfectly respectable aims, but not at the cost of causing the severe damage that Alex Kemp’s report envisages to our indigenous oil and gas industry.