Finance Bill (Third sitting)

Philip Boswell Excerpts

Tuesday 5th July 2016 Public Bill Committees

[Philip Boswell (Coatbridge, Chryston and Bellshill) (SNP)]

It is a pleasure to serve under your chairmanship once again, Mr Howarth. As the Minister has spoken to both new clause 3 and new clause 6, I seek clarification that I may attend to both at the same time.

[The Chair]

Yes.

[Philip Boswell]

Thank you. In relation to new clause 3, the cut to the supplementary charge set out in clause 54 is of course welcome. It will assist in encouraging business investment, and I commend this initiative. However, the UK Government’s support for the oil and gas industry, as it pertains to the cut in the supplementary charge and in a more general sense, does not go far enough. The alterations made to the financing of the oil and gas sector fall significantly short of the fiscal and regulatory reforms necessary to ensuring a steady recovery in the ongoing North sea crisis. Despite the oil price continuing to rise—it is currently around $50 for Brent crude—instead of the extensive regulatory changes experienced over the past 15 years, stability and certainty are required to increase and retain investment as well as some incentivisation. I must admit to being further encouraged by the Minister’s statements in this respect.

However, the UK Government must consider all possibilities that could facilitate fresh investment in the oil and gas sector. These possibilities need not be restricted to fiscal support. For example, schemes such as Government guarantees ought to be explored. I would welcome such initiatives from the Minister. Has he considered further the following suggestions, made by the Scottish Government to the Chancellor in February 2016: removing fiscal barriers, specifically for exploration and enhanced oil recovery; implementing fiscal reforms to improve access to decommissioning tax relief and encourage late-life asset transfers—that would reduce costs and help prevent premature cessation of production, which is critical if marginal fields are to be garnered in future—and implementing additional non-fiscal support, such as Government loan guarantees, to sustain investment in the sector? I welcome his commitment to future legislation, especially in relation to cluster allowances, and look forward to its introduction. The industry has called for a comprehensive strategic review of tax rates and investment allowances. Based upon my own experience of working in the sector, I believe that this review would be beneficial, hence my support for new clause 3.

In relation to new clause 6, the UK continental shelf is one of the first large fields in the world to reach super-mature status. This poses both a challenge and an enormous amount of opportunity. While no reservoir on the planet has harvested more than 50% of its reserves, and most of the “sweet oil”—the high-quality, easy-to-reach oil found to date, which requires minimum processing—has gone from the sector, we need to look at improving recovery and the technology required to maximise output through enhanced oil recovery, in order to maximise profits from these fields, marginal or otherwise.

Decommissioning is a key part of the life cycle of UKCS assets. Some have now lasted for over three decades, which in many cases considerably exceeds their original design life. It is advances in technology and additional tie-backs—additional nearby fields that can be tied into the existing infrastructure—which would otherwise be unprofitable if they required a bespoke pipeline, that have made our oil and gas industry so successful.

Oil & Gas UK has estimated that between now and 2040 the total decommissioning spend in the North sea on offshore assets is set to rise by £46 billion. That represents a huge opportunity for domestic supply chains, not to mention extensive finds further west of Shetland and off the west coast of Scotland, which as yet have hardly been touched. The companies that operate on the UK continental shelf are respected all over the world, as it is there, in rough seas with heavy swells, that technology has advanced in conjunction with safety measures to ensure that the North sea, and Scotland in particular, are at the forefront of offshore construction and sub-sea technology, which is something I specialised in at BP, Shell and Premier Oil.

Given our well-deserved status in sub-sea technology and the maturity of some of our fields, there is a real opportunity to become world leaders in well plugging and decommissioning. The UK Government need to incentivise and support the oil and gas industry so that UKCS expertise can be further developed in the North sea and exported around the globe. That begins with ensuring that the oil and gas industry is working in a fiscal regime that is appropriate to the maturity of the field, which is what new clause 6 seeks to do. Although there are always new fields being discovered and technological advances rendering previously unprofitable reservoirs profitable, it is in the management of mature assets, via enhanced oil recovery and further tie-backs, that optimise power output and profitability, a strategy adopted by Statoil, our near neighbours, the Norwegian national oil and gas company, where every barrel counts. That has proved very successful and is a strategy we should copy.

The removal of fiscal and regulatory barriers is imperative to the advancement of an internationally competitive tax regime in the North sea, such as Norway’s incentive to remove taxation on exploration where the contractor or operator drills a duster. The Minister of State, Department of Energy and Climate Change, the hon. Member for South Northamptonshire (Andrea Leadsom), in response to a question from my hon. Friend the Member for Aberdeen South (Callum McCaig) in September 2015, committed to a proactive policy to encourage the development of a capable and competitive UK supply chain. That proactive approach needs to start sooner rather than later.

I welcome the Minister’s announcement on the oil and gas technology centre in Aberdeen, and on the decommissioning focus in Aberdeen and the offshore construction centre in the UK, but what steps have the Government taken to compensate oil and gas companies for exploration in the UKCS where a duster is drilled? For example, in Norway no tax is applied to such exploration. What tax incentives are in place, or are being considered, to encourage or subsidise decommissioning projects by UK companies, where new technologies, techniques or even tried and tested decommissioning methods are utilised on various types of assets?

In September 2015 Wood Mackenzie reported that low oil prices could render marginal fields economically unviable and lead to potential decommissioning of up to 140 fields within the next five years. I reiterate that Brent crude remains at around $50 a barrel. If prices continue to rise to the forecast $70 to $75 dollars a barrel after the summer, what tax incentives has the Minister put in place to identify and retain critical infrastructure across the UKCS?

With that in mind, new clause 6 calls for a review of the ways in which the tax regime could be changed to increase the competitiveness of UK-registered companies in bidding for supply chain contracts associated with the decommissioning of oil and gas infrastructure, with the aim of ensuring that we take advantage of this momentous opportunity.

[Rebecca Long Bailey]

With permission, I will speak to clauses 54 and 128 together before moving on to the remaining clauses and new clauses.

As we have heard, clauses 54 and 128 reduce the rates of the supplementary charge levied on the ring-fenced profits of companies involved in oil and gas production and petroleum revenue tax respectively. Companies involved in the exploration for and production of oil and gas in the UK are charged ring fence corporation tax and a supplementary charge. RFCT is calculated in the same way as corporation tax but with the addition of a ring fence so that losses on the mainland cannot be offset against profits from continental shelf fields. It is important to note that the rates of RFCT differ from those of corporation tax, and that the main rate of RFCT is 30%. The supplementary charge is an additional charge on a company’s ring-fenced profits. Clause 54 would reduce the supplementary charge from 20% to 10% from 1 January 2016.

Petroleum revenue tax, which was introduced in 1975, is a tax on the profits from oil and gas production from fields approved before 16 March 1993. The Finance Act 1993 reduced the rate from 75% to 50%, and it was then reduced to 35% from 1 January 2016. Clause 128 reduces the rate to zero, effectively abolishing the tax, as the Chancellor explained in his Budget speech. These two measures, taken together, are expected to cost the Treasury just over £1 billion between this financial year and 2021. The Government expect the reduction in rates to increase the post-tax profits of affected companies. This will make investment in oil and gas projects on the UK continental shelf more attractive, which will lead to additional production of oil and gas.

According to the tax information and impact note, and as the Minister confirmed today, there are around 200 companies extracting oil and gas in the UK. The industry directly supports 30,000 jobs, with another 250,000 in the supply chain. The decrease in the supplementary charge and the petroleum revenue tax will have a positive impact on company post-tax profits and result in lower instalment payments being made. We have already welcomed this support for the UK’s oil and gas industry. The industry trade body, Oil & Gas UK, has broadly welcomed this reduction in the headline rate of tax paid on UK oil and gas production, from a rate of 50% to 67.5% to a rate of 40% across all fields.

However, it is important to note that Oil & Gas UK has stated that the reduction in tax will help only those companies that are actually making a profit. It estimates that fewer than half a dozen companies are paying corporation tax this year. Indeed, the 2016 Budget stated that the tax receipts for these companies in 2015-16 were zero. A reduction in those tax rates is therefore welcome, but it is a long-term benefit.

Frankly, I think that more needs to be done in the short term. Stakeholders have said that they are more concerned about the lack of exploration activity. Only one well was drilled in the first quarter of 2016, so more has to be done to stimulate exploration. Can the Minister confirm whether any plans are in the pipeline—excuse the pun, but we have to get our fun somewhere in the Finance Bill—to stimulate exploration on the UK continental shelf in the short term?

I have also heard concerns from the industry about the late-life asset market. As we have heard today from Scottish Members, decommissioning is a normal part of a production cycle, but it is very expensive. I am aware that a tax relief is available, but it depends on a company’s tax history. If new companies buy older fields, they cannot access the relief, thus blocking late-life asset trade. Essentially, assets are not being sold on as they should be. The policy paper on the 2016 Budget states that the Government are open to exploring

“whether decommissioning tax relief could better encourage transfers of late-life assets”,

if “significant progress” on reducing the cost of decommissioning has been made. I worry that that is rather vague. I would therefore welcome clarification from the Minister on exactly what “significant progress” means.

Clauses 55 to 59 make minor changes to the investment allowance, cluster area allowance and onshore allowance. These three allowances provide relief by reducing the amount of ring-fenced profits on which the supplementary charge is due. Investment and cluster area allowances are given at a rate of 62.5%, and onshore allowance at 75%. Clauses 55 and 58 update the conditions that disqualify expenditure from generating investment allowance and cluster area allowance respectively. They expand the conditions following the extension of the allowance to include some leasing expenditure by secondary legislation not yet enacted. As we have heard from the Minister, this is to ensure that there are no gaps in the legislation that would permit these allowances to be generated twice. This will have effect for expenditure incurred on or after 16 March 2016.

The clauses are technical measures with which I have no issue whatever. However, stakeholders have expressed frustration that it has taken so long to lay before Parliament the regulations extending the allowances. According to Oil & Gas UK, the consultation on the draft statutory instrument concluded in January, and since then things have gone quiet. Could the Minister take this opportunity to confirm exactly when the draft SI will be laid before Parliament?