Clause 77 - Decommissioning relief agreements

Finance Bill – in a Public Bill Committee am 3:45 pm ar 11 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of David Crausby David Crausby Llafur, Bolton North East

With this it will be convenient to discuss the following:

Clauses 78 to 86 stand part.

That schedule 29 be the Twenty-ninth schedule to the Bill.

Clauses 87 to 90 stand part.

That schedule 30 be the Thirtieth schedule to the Bill.

I remind Members that they should raise any points they have about part 2 of the Bill during this debate.

Hon. Members:

Hear, hear!

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

Thank you, Mr Crausby. If only it were always that straightforward to get that kind of acclamation at this point in a long consideration of a Bill. It is sensible and helpful to take these clauses as a group; otherwise, given the technical nature of some of the clauses, we might have been tempted to stand up and repeat different parts of the explanatory notes and so on. It makes much more sense to take them together.

I will refer to the general issues surrounding this part of the Bill, focusing in particular on clauses 77, 78 and 79. Because the other clauses are so technical, I will not go into every dot and comma and will consider them together. Although the Minister will speak for himself, it is worth commenting first on what the Government say they are seeking to do, which is to provide greater certainty around the decommissioning tax relief and to make it easier to transfer licences to try to increase investment.

We should remember that there are some 470 installations, including up to 4,000 active wells, sidetracks, and 10,000 km of pipeline on the UK continental shelf, and in the coming years there will be increasing expenditure on decommissioning. We already know that about 6,000 wells and sidetracks have been plugged and are therefore abandoned, but the peak period of decommissioning would appear to be between 2015 and 2030, so essentially we are planning the regime for that time. Thereafter, there will be a reducing number of facilities and therefore less decommissioning activity.

It was helpful to receive information from the Government on the model decommissioning deed, which I am sure every member of the Committee has printed off and read from start to end, leading to many questions to the Minister. It is fair to say that the measures in this part of the Bill and the model decommissioning relief deed have generally been much more welcomed by the oil industry than previous announcements—not from this particular Minister—about the tax regime for the industry. At the time, people described such announcements as causing a “sharp intake of breath”—that is the polite version; some of the comments thereafter were less polite. To be fair, this announcement has largely been welcomed by the industry.

I was in Aberdeen fairly recently and met representatives of Oil & Gas UK and spoke to several companies in various parts of the supply chain. They were all keen to put across to me the importance of a tax regime that incentivises safe and economical extraction from the remaining brownfield sites. I will return to safety in a moment, but first I will focus on costs and the most efficient way of extracting from such sites. All of the companies, whether the oil companies themselves or ones forming part of the supply chain, stressed the importance of the industry to the overall UK economy. Crucially, they also discussed in some detail the value of the experience and technical knowledge of the UK industry, in particular when looking to the future, when the brownfield sites have been exhausted and decommissioned, and what will happen to the oil sector not only in Aberdeen and north-east Scotland, but right across the UK. They were keen to ensure that sufficient support is given to ongoing training, for example, to encourage people to come into the industry and ensure that the UK remains a centre of excellence, able to provide support, training and expertise to newer oilfields elsewhere—there was particular discussion of exploration opportunities off the coast of Africa.

As I said, the industry generally welcomes the consultation with the Government on the draft decommissioning deeds, which we will have the chance to consider in more detail by order, but the importance that the industry attaches to the stability of the regime for planning and investment cannot be overstated. The industry was clear that that is particularly important at this stage in the process, because the cost per barrel to extract from brownfield sites is so much higher than from new fields. It feels that decommissioning deeds are central to that ability to plan, because it also gives certainty to companies taking over the brownfield sites. The key issue is ensuring that licences can be transferred and that companies know what the regime will be.

Photo of Fiona O'Donnell Fiona O'Donnell Llafur, East Lothian 4:00, 11 Mehefin 2013

My hon. Friend is making an excellent speech about a sector that is vital to Scotland’s economy. Does she agree that stability must actually mean stability this time? The Government’s record on the oil industry is not unblemished.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I thank my hon. Friend for that point. People have indeed been critical in the past. She also brings me neatly on to the position of the Scottish Government on decommissioning, about which the Minister will perhaps be able to say something, because he was recently in Scotland—I hope he enjoyed his visit and I am sure that he will tell us all about it.

The positions of the Scottish Government and the SNP on decommissioning seem to be rather confused. Back in April 2012, Fergus Ewing, the Scottish Energy Minister, stated that

“in principle, given that the UK has received substantial revenue from these rigs, it seems correct that the UK has a moral and certainly a legal obligation to be responsible for the decommissioning”.

That was stated in relation to any North sea oil and gas rigs that were in operation before Scottish independence. That statement seemed to be contradicted some time later by the First Minister, who, in response to a question about whether a separate Scotland would pay for decommissioning costs, stated:

“That’s against an expected revenue return of £400 billion over the same period of time. So it’s about 5 per cent of the government revenue. So if you’re asking will we take the decommissioning costs, we’ll take 5 per cent cost of a 95 per cent benefit, then the answer is yes.”

Once again—perhaps unsurprisingly—we seem to have contradictory positions within the Scottish Government.

Photo of Fiona O'Donnell Fiona O'Donnell Llafur, East Lothian

Will my hon. Friend press the Minister to find out whether there has been any communication with the Treasury on this matter? It will be vital to Scotland’s economic success should it vote yes next year, which I am very confident it will not.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I am sure that the Minister heard my hon. Friend’s question. Whether Scotland separates from the UK is pertinent to this debate: it would make no sense at all were a future UK without Scotland to be left with the responsibility of providing tax reliefs for that decommissioning. Other countries would perhaps not provide tax relief for the decommissioning of a nuclear power station outwith their borders. I know that my hon. Friend the Member for East Lothian has an interest in that industry as well. I do not want to dwell on that issue too much.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

My hon. Friend could tempt me, but I suspect that the good progress we have made today would be derailed should we go into the question of the nuclear industry, rather than focusing strictly on what we are here to discuss with regard to decommissioning.

The clause is important because it allows for Parliament to make payments to assist in the decommissioning of oil and gas installations on the UK continental shelf. It also provides some exemptions to the duty imposed by section 18(1) of the Commissioners for Revenue and Customs Act 2005, which I am sure hon. Members will have found as absorbing as the draft decommissioning relief deed. Clause 78 goes on to describe the meaning  of “decommissioning expenditure”, which is important as it provides the basis for the implementation of the decommissioning reliefs.

I very much welcome clause 79. If hon. Members look closely, they will see that it makes provision for an annual report. Specifically, it introduces a requirement on HM Treasury to lay before Parliament an annual report on the Government’s liabilities under decommissioning relief agreements; it states that the report must be provided for each financial year and defines the information that the report must contain. It also provides that:

“The report for a financial year must be laid before the House of Commons as soon as is reasonably practicable” and ensures that the measures have effect

“in relation to financial years ending on or after 31 March 2014.”

The Committee has discussed several times the provision of annual reports, reporting to Parliament and laying information before Parliament in the interests of transparency, so I will take this opportunity to thank the Minister and to congratulate the Government on getting such measures into the Bill without the Opposition having to table an amendment. Had we had to do that, I would hope that Government Members would have supported it to ensure that there was an annual report.

I said that I would not go through each of the very technical clauses at this stage. If, when the Minister is responding, he raises any further issues I may want to ask particular questions. However, I want to come back briefly to the point that I made at the beginning in relation to safety. The Government are keen to ensure that that is part of the regime, and I know that the UK oil and gas industry, and indeed the trade unions, are taking a particular interest as we approach the 25th anniversary of the Piper Alpha disaster. It is worth noting that there is going to be a major event next week—Piper 25—organised by Oil & Gas UK. It will reflect on the lessons learned as a result of the inquiries that followed that disaster. It will review offshore safety and try to refine the industry commitment to safety as a response to the disaster. It will also look at subsequent learning opportunities, if I may describe them as such, given that so many people lost their lives.

Has the Minister had any representations on the issue? Did he have the opportunity when he was in Scotland to meet concerned representatives? If he has not had the opportunity, will he commit to speak to some of his colleagues who are currently working on health and safety? The point that was strongly made to me by the industry sector and by the appropriate trade unions was that, as it becomes more and more difficult to extract from brownfield sites, people are looking at different technologies and perhaps pushing things that bit further than they had to in the past in order to extract every barrel as economically as possible. It is of course vital that health and safety is not compromised in any way.

A particular concern was raised with me. If the Minister has not had the opportunity to speak to colleagues about it, I implore him to do so. Since Lord Cullen reported, people who have been around for as long as I have in the political scene, although not in this Parliament, will recall that a distinct division of the Health and Safety Executive looked after the offshore industry.  Serious concerns have been raised about proposals to change that regime to include responsibility for health and safety generally in the offshore sector within a broader energy division within HSE. That has raised concerns because of the nature of the work that is done offshore.

Of course the taxation regime is extremely important to ensure that we are able to continue with the work on brownfield sites, but I am sure the Minister will understand that safety must also be paramount. If he has not had any representations, will he commit to discuss the matter further with his colleagues and perhaps report back to us?

We have had a lot of talk about “skedules” and “schedules”, so I hope I get my pronunciation right. If we ever needed a reminder of the importance of implementing legislation in dangerous industries, we need only to walk out into Upper Waiting Hall to learn about theSenghenydd pit disaster—I am looking at my hon. Friend the Member for Cardiff South and Penarth to make sure I got my pronunciation correct—to see what happened there. Lessons were learned, legislation was put in place but not implemented, and a further disaster occurred. As we approach the 25th anniversary of Piper Alpha, I am sure that everyone wants to see all the lessons learned. We must ensure that we not only learn those lessons but implement a regime that continues to look ahead and proactively ensure safety in the offshore sector. That is what people are looking for.

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

First, I thank the hon. Lady for her comments, which I take to be welcoming and broadly supportive of the Government’s initiative in clauses 77 to 90.

Clauses 77 to 90 and schedules 29 and 30 relate to the introduction of decommissioning relief deeds. The legislation will enable the Government to meet their liabilities under decommissioning relief deeds and makes changes to the tax regime to support the introduction of such deeds.

At Budget 2012, the Government announced their intention to introduce a package of measures to secure billions of pounds of additional investment in the UK’s continental shelf, otherwise known as the UKCS. One part of that was the introduction of a new contractual approach to offer long-term certainty on decommissioning tax relief. Companies operating in the UKCS are legally required to decommission the equipment and other assets at the end of a field’s life. The total cost of decommissioning over the lifetime of the basin is currently estimated by the industry to be £35 billion.

Tax legislation currently provides relief on such costs, but uncertainty regarding the future availability of such tax relief is deterring investment and making it difficult for new players to enter the market.

Such uncertainty is limiting investment in the UKCS in three ways. First, it is creating a barrier to the transfer of licence interests. Vendors of such interests currently require purchasers to provide security for decommissioning costs on a pre-tax basis. That increased capital requirement could prevent sales that would have led to additional investment activity in the North sea basin. Secondly, as some of a company’s capital is often tied up as collateral for the full, pre-tax decommissioning costs, the uncertainty  limits the capacity for additional investment. Thirdly, uncertainty deters incremental investment. A company may not wish to prolong the life of an asset if it perceives a risk of losing decommissioning tax relief. Providing fiscal certainty will remove that concern and encourage companies to invest to extend the life of such assets.

To provide certainty over decommissioning tax relief and unlock the potential further investment, the Government will enter into agreements known as decommissioning relief deeds with industry. Such deeds provide a mechanism for calculating the amount of tax relief a company can expect to receive when decommissioning assets in the future. If a company receives less relief than the amount provided for by the deed, the Government will make good the shortfall. That approach should enable companies to provide for decommissioning costs on a post-tax rather than a pre-tax basis. It will remove barriers to the transfer of licence interests and increase the capacity for additional investment in the UKCS.

As the hon. Lady rightly pointed out, the industry has warmly welcomed these changes. For example, the CEO of Oil and Gas UK, said that, for the first time ever, the changes would

“give companies the certainty they need over the tax treatment of decommissioning. At no cost to the Government, it will enable more asset sales to take place and free up capital for companies to use for investment, extending the productive life of the UK continental shelf.”

The novel approach is all about providing the fiscal certainty needed to promote and prolong the life of the UKCS. It is worth noting that if no changes are made to the legislative regime for decommissioning tax relief, the contract itself should never be called upon, other than in the unlikely case of a company carrying out decommissioning because of the default of another company.

The changes made by the clauses will support the introduction of decommissioning relief deeds. They will enable the Government to make difference payments under the deed and so give effect to the contracts. They will also require the Treasury to provide an annual report to Parliament—something warmly welcomed by the hon. Lady—containing information in respect of the deeds, to provide accountability to the House and to ensure transparency. The remainder of the changes relate to technical provisions to ensure that the policy can operate as intended.

Taken together, these changes will support the introduction of decommissioning relief deeds, enable companies to provide security for decommissioning costs on a post-tax basis and remove barriers to the transfer of interests in oil licences.

Before I conclude, I would like directly to address some of the hon. Lady’s points. She will know—she talked about this herself—that the certainty provided by the changes will encourage investment in the industry. The industry’s estimate is that that will unlock at least £13 billion of additional investment over the next few years. Clearly, that is hugely welcome from the point of view of economic growth and the jobs it will help generate.

The hon. Lady mentioned the potential costs. As she knows, it is not intended that the Government will pay out on these deeds. When the Treasury looks at costs, it will also look at potential benefits—we will look at the  net result. This is an opportune moment to remind the Committee that, as the Government set out in Budget 2013, we expect these contracts to lead to positive Exchequer impacts as a result of the increased investment that will be brought into the UKCS and the extra tax that the Exchequer will earn. That will start with additional revenue of £140 million in 2013-14, rising to £425 million by 2014-15 and reaching £480 million by 2017-18. All Members will welcome that.

The hon. Lady mentioned Scotland. I have had no discussions with the Scottish Government on this issue. That is simply because it is subject to a reserved power, and there is no need for me to have any discussions. Of course, as we progress and produce information for public consumption, we will share that with the Scottish Government. The hon. Lady described the SNP as “confused”, and she is being generous—I would not be so restrained. On my recent visit to Edinburgh, which she mentioned, I actually dealt with another matter for which I have responsibility: the potentially very negative impact on the Scottish financial services industry if the Scottish people chose independence.

On the subject of independence, which came up in the debate, the UK Government are making no plans for the break-up of the UK. They are fully prepared to provide certainty over tax relief to facilitate the transfer of assets, increase the capacity for additional investment on the UK continental shelf and ensure maximum economic production from that basin.

The hon. Lady rightly raised the question of safety. She highlighted the fact that it is the 25th anniversary of the Piper Alpha disaster, in which many good people lost their lives. That was a lesson in terms of the Government’s approach to the industry. Since the disaster, successive Governments have made many changes to reflect safety and health concerns, as the hon. Lady rightly said. She will know, however, that the Treasury is not directly responsible for setting health and safety rules for the North sea, although we work closely with other Departments—particularly the Department of Energy and Climate Change—and with officials at the Health and Safety Commission. I can assure her that we will, of course, always take this issue very seriously. The Treasury will continue to work with Ministers in other Departments and with officials in any way it can to make sure our standards in the North sea remain among the highest in the industry worldwide.

Let me conclude by saying that decommissioning relief deeds will provide certainty over tax relief. That will facilitate the transfer of assets, increase the capacity for additional investment in the UKCS and ensure maximum economic production from the basin. These changes to legislation will support the introduction of that policy.

Question put and agreed to.

Clause 77 accordingly ordered to stand part of the Bill.

Clauses 78 to 86 ordered to stand part of the Bill.

Schedule 29 agreed to.

Clauses 87 to 90 ordered to stand part of the Bill.

Schedule 30 agreed to.

Ordered, That further consideration be now adjourned.— (Greg Hands.)

Adjourned till Thursday 13 June at half-past Eleven o’clock.