ECONOMICS AND THE CITY
Mr Varley's dear oil
Nicholas Davenport
Time being short I am reserving my criticism of Mr Healey's budget for next week. Today I have chosen a subject which is irrelevant to the well-being of our national economy — the Petroleum and Submarine Pipelines Bill. Perhaps that is the wrong way to put it. The Bill as it stands is really harmful to the health of our economy. It retards the development of our North Sea oil fields and it gives the Government a vested interest in dear oil and dearer petrol.
It was only on March 8 that I was congratulating the Paymaster General, Mr Edmund Dell, and the Chancellor of the Duchy of Lancaster, Mr Harold Lever, on giving the oil companies at long last a real incentive to get on and go all out for the extraction of the North Sea oil, that is by offering them a fair and reasonable Petroleum Revenue Tax. This is to be a 45 per cent tax on profits remaining after paying a royalty of 121/2 per cent. It will not have to be paid until the companies have recovered 175 per cent of their capital expenditures and will be waived if the return on a field before corporation tax is less than 30 per cent on capital expeni ditures measured on a historic basis. This, I thought, would give the companies the financial incentive to get moving which was non-existent before. I have it on very good authority that Labour threats of nationalisation and delay in fixing the terms of the Petroleum Revenue Tax have put back the development of the North Sea fields by at least eighteen months.
Now comes Mr Varley; the Energy Minister, with an amazing 'Bill for whole-hog state intervention in the oil industry which seems calculated to put development back for another twelve months. He is not content for the Government to decide the terms on which oil licences to explore and develop will be granted or to require the disclosure of geological and technical information to enable it to control the rate of depletion of the fields, the lay-out and operation of the submarine pipelines and the location, construction and expansion of the refineries. All such requirements would have been a reasonable request for any national government to make and the oil companies would have been willing to comply and pay the special petroleum tax demanded.
But Mr Varley is not willing to behave in a reasonable social democratic way for the running of a mixed economy. He proposes in the Bill to set up a National Oil Corporation to compete with the oil companies in the production, refining and marketing of oil, including, if he thinks it necessary, a chain of state petrol stations. And of course he takes powers in addition to negotiate for a controlling 51 per cent interest in the existing and future North Sea companies. No doubt he will say that he is merely carrying out the terms of the Labour election manifesto which contained the words: "Take majority participation in all future oil licences and negotiate to achieve majority state participation in existing licences." But he has gone much further than that. He proposes to jump into the refining and marketing of oil as well as into the exploration and production of it in the North Sea. He has dropped his social democrat hat and put on a red socialist one with Marxist feathers.
There are some curious provisions in the Bill which suggest that Mr Varley is not only changing hats but getting a swelled head. Or is it merely a temporary Marxist tumour on the brain? These provisions will give the Minister himself power to issue directions not only to the National Oil Corporation which can in effect do nothing without his consent, but to the operating companies in which he has a controlling 51 per cent interest. I can understand his not trusting the NOC. This new state oil company will be incapable of recruiting sufficiently expert staff to enable it to compete with the highly efficient oil companies. Even the North Sea concessionaires themselves are finding it difficult staffwise to cope with the new technology of deep sea drilling and recovery of underwater oil and gas. But if the NOC will be technically incompetent, why should the Minister, advised by ordinary civil servants, be any better or wiser? He is bound to make a fool of himself ashis ministerial colleagues have already done in the preliminaries of this North Sea oil dialogue.
My first fundamental objection to this submarine Marxist Petroleum Bill is that it gives the Minister — and indeed the whole socialist Government — a vested interest in dear oil and dearer petrol. If the world price of crude oil were to drop substantially, the North Sea oil concessionaires could be ruined, except for those who hold the few prolific fields. It is so costly to lift oil out of these deep and dangerous waters that it needs the recently quadrupled oil price of around $11 a barrel to show them a decent profit. But this price is unlikely to hold when the big world consumers are economising and turning to alternative sources of energy. If Mr Varley's state oil venture buys into the oil business at the top of the market — and puts up the costs of operation as state ventAres always do — it will have a vested interest in keeping up oil prices and denying the British consumer the benefit of cheaper fuel. There is only one way to get cheaper oil and petrol and that is to break up the oil producer m9nopoly. Yet Mr Varley chooses this moment to join the monopoly! It only remains for him to ask to become a member of OPEC.
My second fundamental objection to Mr Varley's rash state enterprise is its attendant costly finance. The Bill allows the NOC to borrow £600 to £900 million. It must be a joke! Oil is the most capital-hungry business in the private enterprise sector. To buy 51 per cent of the North Sea companies alone would require an increase of at least £10,000 million in the Government's borrowing requirement. As this is already reaching the alarming figure of £8,000 million I expect Mr Healey will have a lot to say about it. It is foolish to think that the oil companies will lend Mr Varley the money. Why should they finance their own exiiropriation and decline? In any case, the increase in the borrowing requirement would have to appear in the Treasury accounts, which will not reassure the Arabs who are at present supporting sterling by leaving deposits in London or the foreign bankers who have lent us nearly $10,000 million.
Mr Varley should realise that before any government makes a plunge into an expensive and risky business like oil it should get out of the 'red' on its trading account with the world and on its internal housekeeping account at home. Doesn't he know that our credit abroad at the moment is bad and that sterling is weak? Does he not realise that the non-Communist nations with whom we have to trade and from whom we have to borrow are getting increasingly afraid that spendthrift socialism is driving Britain towards bankruptcy?
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