Clause 184 - Reduction of supplementary charge for certain oil fields

Part of Finance Bill – in a Public Bill Committee am 5:15 pm ar 19 Mehefin 2012.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury 5:15, 19 Mehefin 2012

I wonder whether at the outset I ought to decline the hon. Lady’s kind invitation to provide a full update on a consultation that has not yet taken place. I happily undertake, however, to come back as appropriate  as the work progresses, to keep Members updated. What I will say about clause 184 might frustrate Members with its technicality, but not, I hope, its length. There are, however, a number of important concepts to explain.

The field allowance is another important element of the ring-fence fiscal regime for oil and gas production. Under the previous clause, we spoke about how the Government are setting out a contractual approach, which will provide certainty to industry on the relief available in decommissioning expenditure. In that debate, I said that I was not sure whether one could ensure certainty. I was, of course, being light-hearted; a mathematical moment took me about whether one could ensure certainty in life. I want to make it absolutely clear that the Government are consulting on taking a contractual approach to providing the type of certainty that industry has asked us for; it has worked carefully with us on its design.

Industry has also been engaged with extensively, and it has been extremely constructive in discussing field allowances, which are the second important element, alongside decommissioning certainty, in our fiscal regime for oil and gas production. Field allowances facilitate investment in projects that are economic but which might not be sufficiently commercial to be developed without some reduction in the level of tax. A field allowance would achieve that by shielding an initial portion of income in a qualifying field from supplementary charge, and reducing the overall tax liability of the company or companies developing the field.

To date, the field allowance has applied only to new fields—those that were first given development authorisation on or after 22 April 2009. Before Budget 2012, four categories of field qualified for the allowance: small fields, heavy oilfields, deep-water gas fields, and high-pressure, high-temperature fields. At Budget 2012, the Government announced a range of new measures to support investment in the UK continental shelf, including a package of changes to the field allowance regime, which were focused on increasing the development of commercially marginal fields. Companies that develop such fields may often—although not always—be the smaller firms that the hon. Lady has spoken about. We think that our work on field allowances and decommissioning certainty will help companies across the basin, including smaller ones; indeed, the Budget 2012 announcements included changes to a new small-field allowance. I shall run through a few more aspects of that package before returning closely to what clause 184 does.

The announcements follow close discussions between Government and industry since the 2011 Budget. They include changes to the amount and scope of the small-field allowance and the introduction of a new category of qualifying fields targeted at particularly deep fields with sizeable reserves, as are found in the west of Shetland region. The Government also announced that we would introduce legislation to enable the field allowance regime to be extended to development projects in fields that have already been approved—so-called brownfields. That is the issue that clause 184 and schedule 22 address.

In previous debates, we covered how important it is that the tax regime in the North sea continues to provide the right framework for the development of the continental shelf—not only existing fields, for which we wish to continue to encourage economic production,  but also the possible development of new fields. As Committee members know, as fields develop, there are often opportunities for incremental investment. Those are referred to as brownfield opportunities, and that kind of additional investment can bring significant benefits. It can result in greater overall reserve recovery and therefore tax take. It can also prolong the life of infrastructure, and it is vital to exploit that opportunity.

A strong message we heard in our work with industry is that it wants the Government to address flexibility in the tax system to cover the kind of investment that we are discussing. There are examples of incremental projects that companies are considering, where further reserve recovery would be economic, but where the tax regime makes the decision to take forward additional development commercially marginal. Not going ahead could have an adverse impact on our economy.

The clause and schedule extend the existing field allowance legislation. They enable the allowance to be extended to fields that have already been developed and are to undergo a programme of additional development authorised by the Department of Energy and Climate Change. As with existing legislation applying to new fields, the clause and schedule give the Government powers to determine the structure and amount of any such allowance, including any relevant qualifying criteria, through subsequent secondary legislation. They also give the Government the ability to provide a field allowance retrospectively, provided that they do so for wholly relieving purposes. The implementation of any such allowance through secondary legislation would of course be subject to the affirmative procedure, which I am sure gratifies you, Mr Bone.

On timing, a feature of brownfield projects is that they can extend the life of assets that are otherwise ready to be decommissioned. It is important to note that any remaining reserves reliant on the associated infrastructure could be permanently lost at that point, including reserves in other nearby fields. That is not in the UK’s interest. Some companies are likely to decide whether to decommission some assets this year. Some of those decisions could be affected by the availability of a field allowance for brownfields. By legislating now, the Government are therefore ensuring that we have enough flexibility to make any such allowance operational within a short time frame.

With a legislative framework in place, we will continue to engage with industry on how an allowance could be structured to facilitate investment in commercially marginal fields while protecting Exchequer revenues. As hon. Members may know, industry has firmly welcomed clause 184, which follows the months of engagement I mentioned. It is a positive clause, which means that the UK oil and gas fiscal regime can continue to develop in a way that not only recognises investment in new fields, but allows the possibility of making the most of existing assets in the continental shelf as the basin matures.