Oil and Gas Industry

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Mr. Andrew Welsh (Angus): How does the Secretary of State see the balance between the large and small oil companies in future development and investment? In particular, will she tell us what has happened to the Nova Technology Fund project?

Mrs. Liddell: The hon. Gentleman makes several good points, some of which I am about to address. In relation to Nova, which is a venture capital development, I was reshuffled too quickly to the Scotland Office. I was about to hand over the first Nova cheque, but my feet were moving in other directions. Nevertheless, developments are coming in that area. New business and small companies are also important, and I shall discuss them in a moment.

We introduced capital gains rollover relief for oil licences in July 1999. That was welcomed by the industry, which had made representations about the matter, because it helps companies to consolidate their position in the North sea and encourages more efficient exploration of oil and gas fields.

Investment and exports are a twin-pronged strategy. We must encourage companies—especially those in the supply chain—to think globally. In the supply chain we have companies, some of which are small, that are world leaders. The international market for the supply chain is worth about £200 billion a year—although not all that is open to international bidding. Already UK exports are worth roughly £3 billion, with one third of UK supply companies being active overseas. The Government have a substantial team in Trade Partners UK that is trying hard to promote the mutual benefits not only for major oil companies but for UK suppliers.

We have been proactive in pursuing UK interests abroad. The Prime Minister recently announced a major win for AMEC on the Bonga project in Nigeria, which will bring £300 million of fabrication work to the UK. Most of the work will be based in AMEC's yard on the Tyne, but there should be knock-on benefits for the supply chain throughout the UK. We want more export business coming to Scotland, because our oil and gas industry has the skills and technology to be a major force in world markets. We must work hard to reach the task force target of a 50 per cent. increase in orders.

The hon. Member for Angus (Mr. Welsh) asked about new businesses. The world is changing. The heavy platforms used extensively in the North sea in the past are not as much in demand now. Fabrication companies have had to look to different kinds of work to survive and, sadly, not all of them have managed to do so. We remain determined to give what help we can in the quest for new work and diversification. Indeed, the DTI's fabrication support group, under the auspices of Pilot, continues to meet quarterly to co-ordinate activity and to ensure a joined-up response. We have seen some progress in that regard, not least through BARMAC's decision to use its dry dock at Nigg to allow work on drilling rigs.

Last week my hon. Friend the Minister for Energy and Competitiveness in Europe launched a new business CD-ROM detailing the opportunities available to the oil and gas industry in the areas of diversification and the environmental sector. About 6,000 companies will receive that CD-ROM, and a series of events around the United Kingdom, including Aberdeen, will publicise not only the CD-ROM but the findings of the two recent studies that it contains. That is an important and worthwhile step towards encouraging and helping UK companies into new markets. There are a wide range of new markets for waste management, environmental monitoring and instrumentation, oil waste and wastewater management. They are real markets, with real money. In terms of new opportunities, we want companies to look at renewable energy, transport infrastructure and logistics, and downstream gas distribution. Much of that work is important not just for our economy but for our environment. When I was in Inverness last week, I was happy to visit Wavegen, one of the exciting new companies developing wave technology.

Mrs. Ray Michie (Argyll and Bute): The Secretary of State is talking about renewable energy. Does she agree that oil companies are in a good position to develop large-scale renewable energy sources? I think that she opened the Blyth offshore wind farm last year. That is a worthwhile way forward, but I also wonder whether she would support smaller initiatives such as those on the island of Isla, which has been developing wave energy since 1994. It hopes to develop much more and become self-sufficient. I understand that the European Union has also committed itself to finding 100 communities, including islands, in which renewable energy can be developed. I hope that the Secretary of State supports such initiatives.

Mrs. Liddell: The hon. Lady makes a very important point. I know that there are great opportunities in her constituency for renewable energy. The rural parts of Scotland are an excellent test-bed for renewable energy. Indeed, my hon. Friend the Minister of State is visiting Isla tomorrow and will see the renewable energy project there. The hon. Lady is right about the need to encourage large as well as small companies to look at renewable energy, which is why the Government have given electricity suppliers a 10 per cent. renewables obligation—to take the renewable energy industry from the margins into the mainstream. Renewable energy provides significant opportunities.

As well as renewables, we must look at existing oil and gas supplies, to make sure that fallow fields and fields that should have been developed but have not, are taken fully into account. The latest DTI survey of exploration and appraisal drilling shows significantly increased intent to drill wells over the next three years compared with the previous two surveys—which means that the industry has greater confidence in UK potential. Good progress is being made in the undeveloped discoveries work group, which goes back to the hon. Gentleman's point about looking to undeveloped discoveries when we evaluate discoveries, which have greatly increased over the past year. We must do what we can to tap some of the potential 6 billion barrels of oil not in production.

There has been a raft of other initiatives, about which I shall not go into detail. LOGIC—Leading Oil and Gas Industry Competitiveness—is an industry-funded organisation working its way through the supply chain. The small firms sector at the high technology end of the industry is an important sector, which has been given a boost through the industry technology facilitator. Much of the high-tech development in the United Kingdom oil and gas industry relates directly to small firms.

Sir Robert Smith (West Aberdeenshire and Kincardine): At a meeting with constituency businesses last Friday, the Federation of Small Businesses told me that small companies face a challenge in protecting their patented and intellectual property when they go abroad. Is there not a role for the Government to provide some back-up for that protection?

Mrs. Liddell: The industry technology facilitator is considering that. The issue is not so much protecting a patent, but getting through the doors of companies that have traditionally had their own procurement structures and do not allow access for the new technologies. We must work jointly on the patent front and there are proposals for a European Community patent which should help those industries, but we must batter down the doors to provide access to those major companies.

For the future, we have seen an encouraging response to the 19th round of offshore licensing and 13 applications were received before the deadline on 27 February. The industry has looked forward to that. There is now development around the Faroes with real opportunities for companies. The combination of the licensing rounds, the rolling programme of fallow field initiatives, with increased investment intentions, should lead to a significant increase in exploration and development in the near future.

The partnership approach is paying dividends. The oil and gas industry is already producing excellent examples of new ideas and initiatives. We are seeing the sharing of knowledge on new technologies, improving communication throughout the supply chain, facilitation of asset trading technologies and commercial co-operation. That is enabling access to previously undeveloped fields.

We are doing well in maintaining a strong United Kingdom continental shelf production base. That is concrete evidence of progress, but there is no room for complacency. The industry has the opportunity to build on its excellent reputation and gain a strong foothold in new markets both here and all over the world. The Government remain determined to help the industry to maintain and build on its international reputation. However, as I said earlier, promises of production, investment and development are not enough. We want to see the activity on the ground. The United Kingdom continental shelf and the employment generated by it have a significant part to play in the United Kingdom economy and, in partnership, we can make it work.

11.32 am

Sir Robert Smith (West Aberdeenshire and Kincardine): I welcome the Secretary of State to the Scotland Office and her new role. In previous Scottish Grand Committee meetings, we have asked for the appropriate United Kingdom Minister to attend, and in the past we might have asked why the Minister with responsibility for energy was not present for a debate such as this. However, the Secretary of State has recently moved from that job, so she is up to speed, although she did not hand over that last cheque. If the Scottish Grand Committee continues, perhaps the Government will remember our request for the appropriate United Kingdom Minister to attend, as happened with the statement, which was most welcome.

The Secretary of State was praised on Monday when I attended the Shell Livewire awards for entrepreneurs for business start-ups in Aberdeen. Shell's spokesman said that the way in which industry now works together in this country is unique, and he welcomed that development. Some of us see that as a silver lining to a cloud that should not have existed. When the Government first came to power and the Chancellor's understanding of the industry was less than perfect, he was about to hit the industry with a windfall tax, which would have been devastating. Lessons have been learned, but we must keep those lessons alive and not forget them.

I must declare an interest as the vice-chairman of the all-party group on the offshore oil and gas industry, which is a constituency interest because many of my constituents work in the industry or are affected by it. We must not forget that this is a people business, with many people working out of sight offshore as well as onshore in the United Kingdom. The North sea is a hostile environment and is challenging physically, which has led to greater expense but also greater safety demands.

It is some time since the Piper Alpha incident, but we must not forget it. Many safety lessons have been learned, but the concept of a safety culture is to keep that alive. I remember listening to the midnight news that night. The BBC reporter, in that careful BBC way, got it across that there was a major disaster in the North sea before it had been confirmed. He was trying not to scaremonger but it sounded extremely dramatic. I lived on the flight path of the helicopters, and as the airport is normally shut at night, it was clear that a major incident was going on in the North sea because so many helicopters could be heard overhead. We must not forget the challenges that people face.

A lot has been learned in that safety culture and there have been many extremely welcome benefits. Portlethen air training corps held a fundraising event at the weekend, thanks to the hospitality of the Robert Gordon's Institute of Technology survival centre in Aberdeen. I went to hand out certificates, but I also found myself taking the plunge at a practice abandonment from a platform. It was certainly realistic. The lights were turned off, the waves and the wind machine were turned on and there were sounds of raging storms. After putting on a survival suit and life jacket one had to leap off a 10 ft platform and try to get into a life raft.

Such training is important because when it happens for real it is not a complete shock. It is not nearly as dramatic as it would be in real life but at least people get those instincts behind them. A friend who was involved in a helicopter crash in the North sea found the experience crucial when the helicopter turned over. He had to remain belted into his seat while the helicopter went over and under the water and then wait for everything to become still before getting out. Without any practice it would be extremely difficult to remain calm and confident.

The safety issue came to a head in a public way when BP came up with its Jigsaw proposals. Much of it is water under the bridge now, as it has decided to develop those proposals in a more measured way, involving consultation and observation. That is extremely welcome. Concern has been expressed about how the safety regime is carried out case by case, without an overall strategy. The lesson of Piper Alpha is that it is important to maintain safety platform by platform, but we should see where overall support can be given to co-ordinating rescue work, should that be needed.

I was at the AMEC yard some time ago with the all-party group. We saw how the industry had started to import the extremely good offshore safety culture into onshore industries. There is a lot to be learned from what has been done there. Promoting safety offshore is not just a cost and a burden, as it is seen by some. An efficient permit-to-work culture provides a more efficient and productive working environment. There is more control over what is happening and greater understanding of the interface between the different operations offshore. One contractor told me that he was thinking about moving into rail maintenance and taking that safety culture on to the railways. That was an extremely welcome idea.

The unions talked about the pace of implementing the working time directive. Perhaps the Minister could give us some idea of how that is progressing. I spoke to the Offshore Industry Liaison Committee and the Amalgamated Engineering and Electrical Union. The AEEU mentioned that the Transfer of Undertakings (Protection of Employment) Regulations 1981 do not seem to apply offshore. If a contractor with both offshore and onshore employees is transferred to another owner, there is protection for those working onshore but not for those working offshore. I would welcome any advice on that.

As the Minister said, the UK continental shelf has made a major contribution to the UK economy, with about £170 billion of offshore taxes paid since the 1970s. We should pay tribute to that industry's financial contribution to our well-being as a society, not just through taxes, but through all the onshore employment. It took the rest of the country longer to recognise that; in the north-east, we saw jobs for contractors and in business parks on our doorsteps. Those jobs extend throughout the United Kingdom; the Liberal Democrat spokesman on small business worked for a company in the south of England that was involved in coating cables that were destined for the North sea. We must keep at the forefront of our minds the fact that North sea industry underpins much manufacturing activity in our economy.

On Friday, I visited Badentoy industrial estate in my constituency for a networking lunch that was organised by Kincardine and Deeside enterprise trust. Some 2,500 people work on that estate, and, as we drove around it, the owner pointed out a pipe yard that seemed to extend over the horizon. He said, ``They tell me the industry is in a downturn but, if you look at all the piping, you have to recognise that there is still a lot of life left in it''. That is why we must all resist the siren call for a windfall tax. Such a tax is extremely tempting, especially when many constituents who are not involved in the oil industry face rising fuel prices. Obviously, it is also tempting for a Government—who play a big part in increasing those prices through taxation at the pump—to see the industry take some blame, although OPEC is at the root of the underlying commodity price. There is a double-edged sword for our economy: we do not want too low a price for oil, because we would lose all the investment in the North sea, or too high a price, because of the damage that it would do to our non-oil economy.

The smaller, independent companies brought the situation home to me. They are not involved in petrol retail and make all their profits in production and exploration. They defended some of the major companies' profits, because both make profits in production and exploration when the price is high, rather than in the retail end of the sector. That is an important to message to remember when the siren voices propose a windfall tax. The windfall tax would not take money out of the retail sector, which does not make much money; it would take money out of exploration and production. If money were taken from companies by taxation in that hostile and expensive industrial environment, it would make it more attractive for them to take their investment overseas to more welcoming countries. The smaller independents say that they make losses in the bad years and build up capital for investment in the good years. It is a long-term industry, with massive swings and turnover.

The real challenge that we face is recruitment and the skills shortage. If there had not been a collapse in the oil prices, there would have been a barrier to growth in the North sea anyway in terms of finding the skilled work force to provide the next generation to work offshore. We must get the message across at universities and schools that the industry has a long-term future and that it is well worth going into it. I remember a friend at university entering the oil industry because he decided that it had enough time left in it for him not to have to think later about a career move. It is a challenge to name many businesses about which one could still think that. We must get the message across that there is plenty of life left in the North sea.

The Government also have a role to play. Judging from my postbag, the Treasury's idea of the IR35 taxation reform for self-employed people has tempted many people to look abroad for work. I met accountants on Friday who said that many of their clients face a challenge in April to work out which side of the fence they sit on that tax reform. It will bring new bureaucracy into an industry in which we are trying to recruit and encourage innovation.

The industry must take some lessons on board. If it is trying to recruit, it must understand that the way in which it treats people in downturns is important when attracting them to return. Many people who were lost in the downturns have found a different life style and a new way of working, and are not ready to return to the industry. As the Minister said, small developments are crucial to the future of the North sea. I have also been told that the Government need to examine their petroleum revenue tax on tie-backs to traditional platforms, which might be as much as 70 per cent.

As the Minister rightly said, not many—if any—new heavy platforms will be built, but the existing ones are crucial to the North sea. The decommissioning of any major platform in the North sea would wipe out a whole area of small field development, because there would not be the major infrastructure to support smaller fields, and the costs would become prohibitive. It is crucial to maintain the major fields in production, to allow the smaller fields to be developed and encourage the fallow fields to come on line.

As the Minister said, because of the challenges in the North sea, we are at the forefront of developments in new technology and have a worldwide market available to us. Being at the forefront, we have much to offer in respect of exports. I hope that the Minister will examine patents further.

Diversification is important. Part of the peace dividend is that the Ministry of Defence is much less protective of how it gains its contracts and much more willing to buy off the shelf. North sea skills are transferable into Ministry of Defence contracts. Two companies in my constituency have done well out of the Ministry's greater willingness to take commercial off-the-shelf solutions to problems. One aspect of the Minister's current efforts is a CD-ROM to link people with the Ministry of Defence.

Greenpeace raised issues about renewables, particularly offshore wind, which is reliable and benefits from a much more stable generating capacity. It also makes planning easier, as it is often out of sight, so developments do not directly affect constituents. Greenpeace may have neglected to pay tribute to the industry for the switch to gas and electricity generation, which has made a major contribution to CO2 emission reduction.

Greenpeace is right about the need to tackle carbon emissions, but it would be cutting off our nose to spite our face to end our own North sea production in order to buy imports or allow the industry to go elsewhere to produce. That is Greenpeace's mistake. The national grid is one of the main barriers to renewables. The Government must examine the structure of the electricity industry to find ways of improving the grid in order to take renewable energy back to its customers.

The local economy of my constituency and others in the north-east of Scotland is distorted by the oil industry. People who do not work in the industry face much higher housing costs because of the extra rewards of those who do work in it. Traditional industries also face many extra costs in trying to recruit in competition with the oil industry. Although we benefit from this economically vibrant and productive industry on our doorstep, we must nurture other industries in order to secure a diversified economy for the future.

The industry has a long future—a crucial message—with 120 fields potentially available for development. With the right attitude from the Government and co-operation from the industry, north-east Scotland, Scotland as a whole and the rest of the United Kingdom will have a secure long-term future.

11.48 am

 

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Prepared 28 March 2001