Freesteel Blog » The Parliamentary process for paying for dangerous oil operations

The Parliamentary process for paying for dangerous oil operations

Monday, July 26th, 2010 at 10:29 am Written by:

Three months after the the biggest off-shore oil accident in history, it’s business as usual in Parliament, with more subsidies given for dangerous deepwater drilling in UK waters.

Now, if you believed that the outcome of the free market was always optimal and good, you’d wonder what was going on. Surely if it’s disproportionately expensive to go for oil in certain places, then it should be left there until either advances in technology made exploitation cheaper, or the price rises sufficiently to make it affordable.

As The Economic Secretary to the Treasury, Justine Greening MP, explained to the Delegated Legislation Committee on 20 July 2010:

Above all, we recognise the importance having a stable and fair United Kingdom oil and gas tax regime that provides certainty for business… [The field allowance, introduced under the Finance Act 2009] targets certain types of very challenging oil and gas reserves, which, because of their small size or technical difficulty, are commercially marginal and not currently being developed.

To understand how the field allowance works, it is necessary to bear in mind that, in addition to ring fence corporation tax at a rate of 30%, companies pay a supplementary charge of 20% on their profits from UK oil and gas production. The field allowance is set against a company’s profits for supplementary charge purposes. In other words, it reduces the amount of supplementary charge that the company pays.

An allowance is available for new fields that meet the qualifying criteria for the category of field allowance concerned. It is generated when plans to develop a field are authorised for the first time. The total allowance available is dependent on the type of qualifying field, and its availability is spread over a minimum of five years. The overall effect is that the allowance will act to shelter some of the production income from a qualifying field from the supplementary charge.

What’s the history? Well, as you can see from this 29 April 2009 Deloitte powerpoint presentation:

Obviously, big oil puts in a lot of effort chipping away at these levies with one weaselly excuse after another. Note that they are taxed on their profits, so the differences in production costs are already accounted for in the tax regime.

If we were operating a proper pick-your-own scheme, the charges would be for unit of oil picked and taken out the gate, and it would be up to them to decide which low hanging fruit to go for.

Or alternatively, we could have nationally owned all the oil fields as a sovereign nation and leased in the oil rigs and workers directly — as oil companies appear capable of doing — while managing the exploration and exploitation of this finite, limited and harmful natural resource directly in a controlled manner.

Now, according to the sharp-suited experts provided by the private oil interests, this latter type of straightforward asset management is absolutely out of the question. So instead we have a system where we manage the oil fields through the market by bribing the oil companies to drill in places that aren’t going to make them as much money as drilling in places we don’t want them to be working so hard. You see, even though the business is entirely self-funding year on year and could easily have been funded by the issuing of government bonds, the only thing the UK government is able to find unlimited money for are violent wars — which fundamentally have not returned any revenue at all, owing to the fact that the people we have been massacring for years now do not cooperate as much as hoped with foreigners attempting to export their oil for unreasonably poor terms.

The next day the following motion was put before Parliament and passed without a vote:

That the draft Qualifying Oil Fields Order 2010, which was laid before this House on 23 June, be approved

This was where I began.

Here is an excerpt from the draft Qualifying Fields Order 2010:

Let’s just verify what’s going on.

The Corporation Tax Act 2010 is absolutely infested with useless equations in crappy inappropriate legislative format that confers various impenetrable subsidies to the oil industry. Nobody can tell what its consequences are or what it means.

Here are Section 355 and 356 on the screen:

This is part of an algorithm for working out how much money big oil can take out in profit free of the “supplimental charge”. It should be in a Excel spreadsheet or a javascript web-form, not on a PDF, so that we can actually try out the numbers.

This original version of the Act said if you struck an oil field with a pressure of 1034 atmospheres and a temperature of 176.67 degreesC, then the first £800million of profits (excess money above the cost of production) would be supplimentary tax free.

So what happened? This Act was passed in March. Here we are in July of the same year and suddenly the threshold for “high pressure” drops to 862 atmospheres, and a linear factor is introduced to the temperature requirement. If you work out the sums, a field at a temperature of 166 degreesC gets £500m profit free of supplimentary taxes, going up linearly to the generous offer of £800million for 176.67 degreesC.

Obviously, someone currently has a bunch of cooler and lower pressure fields that they want to use tax free, probably in the range between 862 to 1034 atmospheres pressure, and with a lower temperature. Who’s to say what the temperature and pressure of any oil field is? It depends on what day you measure it and how. There’s all kinds of drilling mud sloshing around, and the temperature will rise if you slow down the flow a bit, and you can drill a bit deeper to get a higher pressure, which you would do if you happened to have tapped it at a mere 1033 atmospheres, wouldn’t you? Look at the tempation.

Not being a petroleum engineer, I don’t know how much you can vary the conditions to get the temperature you need to make more money, but let’s just suppose that instead of simply lying about the conditions, they tinker with them as above, and have a blow out. Wouldn’t that be an amazing piece of maladministration on part of everyone — right down to those dipsticks in Parliament who will have just authorized a ridiculous financial reward for gratuitous dangerous activities.

After all, it’s all in a day’s work. As it says at the end of the Order:

A full regulatory impact assessment has not been produced for this instrument as no impact on the private or voluntary sector is foreseen.

But there’s more. There’s an explanatory memorandum, in which the following boxes were ticked:

Legislative Context
The UK tax code effectively puts a ring fence around profits from oil and gas production to ensure they are not reduced by non-ring fence activity.

Territorial Extent
This instrument applies to all of the United Kingdom including the UK Continental Shelf.

European Convention on Human Rights
“In my view the provisions of the Qualifying Oil Fields Order 2010 are compatible with the Convention rights.” — Economic Secretary, Justine Greening

Policy background
The policy aim of the field allowance is to provide an incentive to increase the economic production of oil and gas by encouraging the development of technically challenging oil and gas fields.

Consultation outcome
No consultation has been undertaken although officials have held meetings with interested parties.

No impact on business, charities or voluntary bodies is foreseen.
No impact on the public sector is foreseen.

Regulating small business
The legislation will not have an impact on small business.

Monitoring & review
This Order will not be subject to specific monitoring or review.

Obviously it does have an impact on business, if you consider big oil as a business, as opposed to, for example, God.

It’s also nice to have it clear that there will be no monitoring or review of these price cuts. Memo to oil companies: “If you make more money than you expected to, then that’s fine. But if the profits get a little tight again, just give us a call and we’ll fiddle the calculations a bit, okay?”

So let’s go back to that useless Delegated Legislation Committee meeting where the only thing the MPs discussed was drilling more oil and making more money. None of the 16 MPs present had a mind to say:

“Hey, you know something happened since we started passing these sorts of laws to help subsidize deep water drilling in UK territorial waters. As we seem to be talking about temperatures and pressures, does anyone have any idea about what pressures and temperatures were the cause of the Deepwater Horizon oil spill?”

But you don’t get these sorts of questions asked among the oil soaked UK political elite.

Searching for some information among the hundreds of Parliamentary Written Questions per day, reveals this one, which is about money:

William Bain (Glasgow North East, Labour): To ask the Chancellor of the Exchequer what estimate he has made of the effects on tax revenues to the Exchequer of liabilities of companies involved in the oil spill in the Gulf of Mexico in (a) 2010-11, (b) 2011-12 and (c) 2012-13.

David Gauke (Exchequer Secretary, HM Treasury; South West Hertfordshire, Conservative): It is not appropriate for the Government to comment on the confidential tax affairs of individual businesses.

The only question ever raised in Parliament about how the events in the Gulf of Mexico could possibly relate to what is on-going government policy concerning UK waters under control of the same oil companies with the same oil rigs and the same oil managers subject to the same laws of physics and pressures of corruption, was by the lone Green MP on the first of July:

Caroline Lucas (Brighton, Pavilion, Green): According to a recent Conservative party report, “Rebuilding Security”, the party advocates “policies designed for hunting” new UK oil reserves as well as offering

“the right incentives to explore for and extract the remaining reserves of oil and gas”

Will the Minister agree that a moratorium on all new deep-sea offshore drilling is essential, at least until a full investigation into the spill in the gulf of Mexico has been completed?

Charles Hendry (Minister of State (Renewable Energy), Energy and Climate Change; Wealden, Conservative): I do not agree with the hon. Lady on this issue. We have in place in the North sea the toughest environmental regime in the world. In the light of the tragedy in the gulf of Mexico, we have doubled the number of inspections and increased by half the number of inspectors. We have a very tough regime and we have a national interest in ensuring that we get the best possible return from the natural resources in the North sea. [link]

Charles Hendry is of course talking bollocks. The UK government has never undertaken a survey of the toughness of environmental regimes around the world, and we already know historically that it was always worse than in Norway. So they’ve doubled the number of inspections. From what? Two? Are these extra inspectors, comprising one third of the force now, qualified? Is the industry self-regulatory? Have they admitted anything? Has there been any corruption, like there was in the US Minerals Management Service?

Funnily enough, the President of the United States ordered a moratorium on deep water drilling in his country, which makes the question pretty damn mainstream. It should not be left to the one fringe-placed Green MP to ask these sorts of questions.

So what was the pressure and temperature of the Macondo oil field? Dr Stephen Rinehart has the answer:

The Moho, or mantle, lies beneath the gabbros layer of ocean crust at depths that vary from about 5-10 km. beneath the ocean floor, to about 40 km. beneath the continents, to as much as 70 km. beneath some mountain ranges. This shows that one could possibly expect to be drilling the earth’s mantle by 18,000 ft+ (BP’s Macondo could have been drilled much deeper than 18,000 feet). The deeper you drill the higher the temperatures and pressures which will be encountered. There are other wells within a 50-mile radius of Macondo may have had reservoir pressures of 14474 psi at temp of 212 F at a depth of 15,000 ft (Ref: JPT (Journal of Petroleum Technology, June 2009,

In real money, that’s 985 atmospheres pressure and 100 degreesC temperature. This means that this well is deemed too cool to justify a subsidy. Over in the UK we’re trying to encourage drilling into fields hotter than 166 degreesC.

And there’s got to be a few of them about, or we wouldn’t have just changed the law to lower the threshold from 176 degreeC, would we?

Of course, none of these wells should be drilled at all, because the world has far too much oil to destroy itself already, without going after the difficult-to-get resources. But UK Plc wants the money and doesn’t even slightly care about the big picture. We are doomed.

1 Comment

  • 1. Freesteel&hellip replies at 27th July 2010, 12:01 pm :

    […] The threshold values of 355(a) and 355(b) were recently altered by the Qualifying Fields Order 2010. […]

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