Examination of Witnesses (Questions 140-159)
UK OFFSHORE OPERATORS
ASSOCIATION
25 JANUARY 2005
Q140 Mr Clapham: You were not aware that
it was significant?
Mr Webb: Not significantly different
from the usual cycle.
Q141 Mr Clapham: My note suggests that
it may well have been in 2003. Given what you have said about
the need to effect maintenance, is there an understanding that
companies should schedule this rather than all tackle their maintenance
at the same time?
Mr Odling: Maybe I can come in
there. The first thing is they do schedule it, and that is one
of the categories of information which is now being published
through the Transco website. I think the second thing is that
sometimes there are technical reasons why they all come together.
For example, if a trunk pipeline is itself undergoing maintenance
then all the facilities which use it cannot produce at that time
so it is completely logical that if all of them plan their maintenance
at that time when the pipeline is not going to be useable. That
is a feature of offshore operations everywhere.
Q142 Sir Robert Smith: On the transparency
issue, we heard earlier witnesses expressing a concern to be reassured
that what was happening out of their knowledge was not in any
way unfairly impinging upon them. Quite a few of them suggested
that if Ofgem carries on offshore to the point of production in
terms of gas that this would provide them with reassurance. What
is your reaction to that?
Mr Webb: Can I say, what worries
me is the spectre of layered and complex bureaucracy in the offshore
which is what this mature oil province just does not need now.
It is completely unclear to me what is being suggested. I think
what the UKCS needs going forward is a single point/one-stop expert
regulation. Who conducts that—and maybe they are here from
the DTI—I do not care very much but it does need to be focused,
expert, professional and one stop, please, and not layered either
from Europe or layered within the UK so that we have an incremental
bureaucratic burden upon this oil and gas field.
Mr Peacock: Whoever it is, you
would hope that the remit is similar. Yes, they would have a role
in making sure that we are complying with codes of practice, that
we are providing things like information properly and also that
we are establishing the right business environment for continued
investment.
Mr Webb: I think as well there
has been some tremendous work being done through what I would
call light and informed regulatory approach with the DTI and through
the Pilot mechanism which you may know about. Some of these things
which have been achieved through mutual agreement such as improved
access to offshore infrastructure, improved codes of practice,
both commercial and contractual offshore, and some groundbreaking
work in fallow discoveries, fallow blocks and just new work coming
out now upon what one might call fallow fields—the `stewardship'
proposal—that is all to the very good. There is an awful
lot of good work going on there behind the scenes.
Q143 Chairman: One of the questions which
has arisen—and we will come on to windfall tax in a minute
so I do not want to go into that—is that it has been suggested
there has been a slowness of response by Government, by the DTI
in particular, because it has a conflict of interest. That on
the one hand it has a responsibility for the promotion of the
industry and the exploitation of the UKCS as a UK national asset
and, on the other hand, it has a regulatory responsibility as
well. When one thinks of the foot and mouth disease and one thinks
of food quality, we go back to the conflict of loyalties which
existed within the Department of Agriculture, where it was responsible
both for regulation and for the promotion of the industry. Do
you see this potential conflict as being a source either of Government
inertia in the face of the price rises which took place last year,
or do you see it as a useful method whereby the Government is
able to keep an eye on both things at the one time?
Mr Webb: My personal view is that
I would tend towards the latter.
Q144 Chairman: I thought you would.
Mr Webb: I think it is good to
have an informed regulator of that nature. I do not think there
is much confusion in the industry's view. We have a regulator
there with powers which can be exercised and will be exercised
as appropriate, but I do not think that stops us having a constructive
engagement with Government through that regulator as well.
Mr Peacock: I would agree. There
are certainly two distinct roles, whether there is conflict or
it just needs some co-ordination or recognition that they are
two distinct roles. One of the dangers of two bodies doing that
would be that it leads to permanent tension and gives completely
different signals.
Q145 Chairman: Why should we treat the
North Sea any differently from water or electricity or postal
services? What makes you lot so different that you have to get
this special treatment, this kid gloves approach? Is it because
you are multinational companies which are bigger than governments?
Mr Peacock: I did not intend to
imply that we were different in the sense of demanding special
treatment, but recognising there are two different roles and it
is clearly up to you how to discharge that through the bodies.
There are two different roles and they can be fulfilled by one
or two bodies.
Q146 Chairman: I think the jury is out
on this, in our minds perhaps. We have not got an idea of how
competitive you are, how transparent you are, how accountable
you are, when you are operating in a competitive sense. Some people
say you are not competitive. You say you are, and obviously would
say that because if you do not other people would be chasing you.
We have been trying to work this one out because it may be that
if you get the degree of market dysfunction as evidenced by the
volatility of last year's prices, and that could become a permanent
feature, it would be irresponsible of Government to allow it to
continue and if that were the case there might be an argument
for regulation. All I am trying to do is flag up at this point
that if the degree of transparency, if the amount of information
you make available, does not measure up to the kind of standards,
for example, we see in electricity trading at the present moment,
which is a related industry, then I think there might well be
a quite considerable chorus calling for more intrusive regulation
of your industry. Even if you are mature, even if you are dying
on your feet, if you are still making profits which are considered
to be excessive then, regardless of whether there is a claw-back
or not, there may well be a degree of public scrutiny and public
intervention required of the kind we have in other industries.
Do you see that as a problem?
Mr Webb: I hope you were not reading
my comments as saying I am against regulation. I am not against
regulation. I am not against appropriate and strong regulation
where it is to good effect, yes.
Q147 Chairman: We are talking here about
economic regulation, not health and safety or matters of that
nature. We are talking about economic regulation which is rather
more specific and of a different character from a lot of the regulations
you currently have to face.
Mr Webb: I understand what you
are saying.
Q148 Judy Mallaber: Can I ask UKOOA,
in your evidence—and we will return to the question of kid
gloves in a moment—you flagged up a disagreement with Ofgem
about the significance of legacy contracts in reducing the availability
of gas supplies, but your concern seems to centre on inconsistencies
in Ofgem's assessment of the amount of gas held in that way, and
that is what you are asking to be clarified?
Mr Webb: Yes, that is right.
Q149 Judy Mallaber: Does that mean you
accept legacy contracts do reduce the amount of gas supplied to
the market?
Mr Webb: No, I do not think that
is what we were seeking to imply at all. What we saw in the Ofgem
report was an assertion that the market had been denied gas in
respect of certain legacy contracts, and we saw a conflict on
the amount of that gas which had been denied to the market within
the report itself—I think 5% and 6% in one place and 1%
in another.
Q150 Judy Mallaber: So are you saying
you do not think gas is withheld as a result of these contracts?
Mr Webb: No, and maybe it is worth
talking about how these legacy contracts typically operate. They
are not supplier-led, they are actually nominated by the purchaser.
It is the purchaser who has control over how much is drawn-down
on these contracts, not the supplier. I think it is an important
point to understand.
Q151 Judy Mallaber: So you disagree with
them on the idea it is being withheld?
Mr Webb: Absolutely.
Q152 Judy Mallaber: Can I return to the
kid gloves question. In view of the concern there has been and
the furore about what is happening on the prices, would your members
not voluntarily demonstrate their social responsibility by offering
up some of your windfall profits to help with anti-fuel poverty
programmes?
Mr Webb: It is not for me to speak
to my members' social programmes. I think a number of them do
have social programmes which engage on such issues.
Q153 Judy Mallaber: Would you like to
expand on that, and the amount of profits which you think might
go towards alleviating those who have suffered from high prices?
Mr Webb: I think it is a matter
for the individual companies. Frankly, the way the consumer in
the UK is going to be best served is by the industry generally
carrying on the extra work it has been doing over the last 35
years in making sure we maximise recoveries from the UKCS. That
is our business and what we should get on with.
Mr Peacock: We do have a corporate
social responsibility programme both globally and locally. For
example, in Scotland it is what we call the three Es—enterprise,
education and environment. There is a huge range of good causes
which the industry could contribute to directly but it is a huge
range and in many ways it is impractical. It is right our role
is to continue investing and continuing to create supply for Britain
and then through the tax revenues which come from that—which
by the way in 2004 our modelling suggests will be about 2½
to 3 billion dollars greater than 2003—the Government is
best placed to distribute those to various causes.
Mr Webb: Can I follow up the comment
on tax. It should not be forgotten this industry is in a special
position as far as tax is concerned. We pay a higher rate of corporation
tax already to add to the changes which were made in 2002—we
pay a third more on our rate of corporation tax which is a third
more than any other industry. Some of the fields of production
in the UKCS have a marginal rate of tax of 70% because PRT still
applies to those fields. So our tax position is not the same as
other industries.
Q154 Judy Mallaber: They have still made
a lot of money from those.
Mr Webb: There is no denying prices
have been high of late, but let's remember last year the price
of oil for a short period touched 50 dollars but in April it was
also 23 dollars. It is a very volatile, pricing oil and gas, and
it would be a huge mistake to make policy decisions on a relatively
short-term view of oil prices. Certainly that is not the way the
oil companies conduct their investment activity.
Q155 Chairman: What is the consensus
amongst your members as to what the price of a barrel of oil should
be in order to make it worthwhile leaving Aberdeen?
Mr Webb: That is an issue for
individual companies to take—
Q156 Chairman: Oh come on! There are
agreed figures.
Mr Webb: I think they are aware
the companies will be testing the robustness of their investment
decisions in the mid-20s and towards 30.
Q157 Chairman: Mid-20s, towards 30; for
how many months in the last 36 has a barrel of oil been less than
30?
Mr Webb: Yes, but even in the
context—
Q158 Chairman: Sorry, just answer that
question.
Mr Webb: It has been above that
for a considerable period of time.
Q159 Chairman: Exactly. There was a period
when you were talking in the teens and people were taking a hit
but you have to be as old as me to remember that. This idea that
the oil price has been low for a long time: it did not stop people
investing. At the moment you can go to bed and you wake up a far
richer person than you were when you went to sleep. That is where
windfall taxes come into play. Some of us are astounded at the
level of profit which is coming out of the North Sea with nothing
being done.
Mr Webb: Maybe I could address
that. It is obviously true that our cash and profits are higher
in terms of higher prices than they are when the prices are low.
It is a cyclical business and it is a volatile business in terms
of prices. It may be in the recent past that prices have stayed
relatively high but that is no guarantee that they are going to
stay high in the future.
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