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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1326-i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE SCOTTISH AFFAIRS COMMITTEE Council Chamber, Aberdeen Town House, Broad Street, Aberdeen
EFFECTS OF TAX INCREASES ON THE OIL INDUSTRY
Tuesday 20 June 2006 MR MALCOLM WEBB and MR MIKE THOLEN Evidence heard in Public Questions 1 - 90
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Scottish Affairs Committee on Tuesday 20 June 2006 Members present Mr Mohammad Sarwar, in the Chair Danny Alexander Mr Ian Davidson Mr Jim McGovern Mr Angus MacNeil David Mundell ________________
Memorandum submitted by UK Offshore Operators Association Examination of Witnesses
Witnesses: Mr Malcolm Webb, Chief Executive, and Mr Mike Tholen, Economics and Commercial Director, UK Offshore Operators Association, gave evidence. Q1 Chairman: Good morning. We are delighted to be in Aberdeen, the capital of the UK's oil industry. This is our first meeting on our inquiry into the effects of tax increases on the oil industry, and could I thank the staff here in the Town House for helping with today's arrangements. Mr Webb, we know that you were supposed to meet the Minister for Energy today. Mr Webb: I do not think so. I think I am relieved of that today. Q2 Chairman: We thank you and Mr Tholen for coming here this morning. Before we ask our detailed questions do you have any opening remarks you would like to make? Mr Webb: Yes, Chairman, I just have a few and I will not keep you for long, I hope. Today the UK relies on oil and gas for three-quarters of its energy supply. The latest DTI projections show that that will grow to 80 per cent by 2020, even allowing for strong growth in the renewables sector. The UK offshore oil and gas industry has provided this country with a secure supply of oil and gas since the mid 1960s and with full self-sufficiency for the last ten years or so. Today we still supply the country with all its requirements of oil and over 90 per cent of its requirements for gas. The UK, however, is now a mature, high cost oil and gas province in which production and discovery size is falling, technical risk is increasing and cost inflation a significant concern. Given the right moves by industry and Government this industry could still be providing more than 50 per cent of the UK's total requirement for oil and gas in the year 2020. If, however, we make the wrong moves the game could be more or less over by then. UKOOA was and remains very disappointed by the latest tax increase on UK oil and gas announced in the Chancellor's Pre Budget Report. This, the third significant tax hit on our industry in three years, not only clearly demonstrated the fiscal instability of the UK to potential investors but also imposed a tax burden on an industry which at this point of its cycle should be given fiscal encouragement rather than yet more tax increases which at the very best can be described as not encouraging. The current very high oil price is masking the effects of this latest tax increase and the UK offshore oil and gas industry is now dangerously exposed to a downwards price correction. To fail to maximise the potential of the UK offshore would not only be injurious to UK security of energy supply; it would also result in the permanent loss of economic benefit to the nation and foreshorten and possibly kill off parts of the UK oil and gas supply chain. This centre of global engineering excellence, which has grown up on UK oil and gas, now employs well over 100,000 people in Scotland and is one of this country's most remarkable industrial success stories, providing not only high grade employment and technical expertise for this country but also export earnings for Scotland alone of £4 billion per annum and rising. In short, the PBR hike was disappointing because it was inconsistent with the PILOT vision. It seemed to demonstrate that the Treasury was more interested in maximising short term tax receipts than the ultimate recovery of the UK's oil and gas reserve which drives the PILOT vision and we believed was the shared objective of industry and Government and should in our view be a central plank of UK energy policy. Q3 Chairman: Thank you very much. Mr Tholen, would you like to say anything? Mr Tholen: No, that is fine, thanks. Q4 Chairman: As you mentioned in your initial remarks, we are seeking to discover whether tangible damage has been done to the industry by the tax increases recently announced by the Chancellor, and if the more marginal fields have become uneconomic. What effect do you think the tax increases will have on the oil industry specifically and on the Scottish economy generally? Mr Webb: I think the immediate impact of the tax increases is not likely to be particularly significant. The industry was already heavily contracted for this year, plans were set in place and we are enjoying a particularly high oil price at the moment. We are aware that some marginal projects (that were marginal before the tax increase) have become even more marginal afterwards and possibly will not proceed but those tend to be in the smaller range of projects and the immediate impact of this latest tax increase is not likely to be seen right now. As I said in my opening remarks, I think the danger is in the medium to longer term. A very poor signal has been sent to investors about fiscal stability in the UK and, furthermore, this basin at the moment is facing a number of challenges in terms of both technical risk and costs. This tax increase has not helped on that and if we were to see a downward price correction then very fast moves would need to be taken in my view by the Treasury in order to avoid very substantial damage not being done immediately to the industry. Q5 Chairman: I have here a copy of the report from Professor Alexander G Kemp at the University of Aberdeen Business School, and he says in this report that the oil tax change will have only a modest effect if oil prices stay at $40-plus by 2030. What is your view on this? Mr Webb: I think I would disagree with Professor Kemp on that. Forty dollars is a number at which I think this basin could be struggling. Why do I say that? When I came into my current job three years ago I saw the basin, frankly, not performing particularly well when the price was hovering at round about $30. We have had a significant amount of price inflation since then and we also have this latest tax increase, so therefore I would not be so comfortable about $40. I think $40 could be a slightly difficult price for this basin. I do not know if Mike would like to add anything to that. Mr Tholen: No, I think it shows it pretty well. I know the paper you are referring to and it is a good runner on what to perceive for the future but what he has problems trying to capture is the big change in costs we have seen in the last two years. Much of his data predates the rapid changes both in prices and costs and the effects we have seen then on the basin. Q6 Mr MacNeil: Would you say 50? Mr Webb: It is difficult to say what that number would be, frankly. I should avoid predictions on price as well, really, but my view is that at $30-40 this basin is certainly going to be struggling, but that is a personal view. Q7 Chairman: Professor Kemp also mentions in his report that by 2035 another 24-25 billion barrels of oil equivalent can be recovered but the great majority of these fields will be small and this poses a challenge for the industry. Do you have a view on this? Mr Webb: On that I think we would almost entirely agree with Professor Kemp's views. We see the range of potential recoverable reserves from the North Sea as somewhere in the range of 16-27 billion barrels yet to be got and we believe that we can be optimistic and think about the higher end of that range if all goes well. However, what is also very clear is that these reserves that we are finding now are in much smaller accumulations than they were previously. The early fields in the North Sea were elephantine fields with recoverable reserves in the billions of barrels. Today the typical field size is somewhere in the 25-30 million barrels recoverable, so there are many more small fields that will need to be brought on stream in order to achieve the ultimate goal of maximising recovery at something like 25 billion barrels or thereabouts. Q8 Chairman: So there is the possibility that huge oil reserves can be recovered which is very precious to our economy and job opportunities, but what steps do you think the Government should be taking to ensure that potential investors make sure that we will explore those oil fields? Mr Webb: I have said a number of negative things. Maybe I could say a few positive things. Q9 Chairman: I would like to hear those as well. Mr Webb: I think the Government has done an awful lot that is extremely good. I do think that the PILOT initiative and the things that have flowed from that in a co-operative sense of joint venture between Government and all parts of the industry have been tremendously successful. We have had a very encouraging response to the 24th licensing round. In part that has been born out of the strong co-operative work that is going on between industry and the Government and the PILOT initiative, so I think there is an awful lot going on that is good at the moment, a great deal going on that is good, in co-operation between all sides of industry - the supply chain, the operators and Government. My concern is, and I think we expressed this also in our submission to the Energy Policy Review, that we are not entirely convinced that all of Government is joined up on some of these policy initiatives. That is why we have been critical about what the Treasury did and, as I said in my opening remarks, it seemed to me that what the Treasury did was somewhat inconsistent with the PILOT vision, and the PILOT vision is quite clear: it is to maximise recovery from this basin in the national interest for all the reasons that you have listed. We just think that there is a need for a bit more joined-up Government on a number of these issues. However, I would not want to be taken as saying that everything this Government is doing on oil and gas is wrong. It is doing an awful lot of right things, particularly around the PILOT initiatives. Q10 Danny Alexander: You have talked about, and you have talked about this in your written submission as well, the co-operative spirit that there is with DTI in particular. In advance of the tax change that took place was there consultation from the Treasury? Would you say that the Treasury fits into that wider positive consultative spirit that you were describing or is it more removed from the interests and understanding of the oil and gas industry here? Mr Webb: I think it is more removed. We have a regular meeting with the Treasury. Every six months the industry leadership team has had a meeting at senior ministerial level, which has been with the Paymaster General to date; I understand it is going to be John Healey in the future, who has taken over the remit in this area, and we have had a regular dialogue with the Treasury. I am bound to say that to some degree we wonder - and I should be careful here - whether all of our messages have got through. The other point I would make is that we find it rather regrettable that we have to have a series of separate discussions on these issues. We would like to have one discussion with all the parties in the room. We would like to see the Energy Minister and the Treasury Ministers there so that we can discuss these matters together instead of having a series of separate discussions. That is not very efficient and, frankly, I do not think it is very conducive to bringing all the parties together to have these separate discussions. We would rather see that brought together. Q11 Mr MacNeil: It seems you are making a plea for joined-up Government there, which has been a well used phrase over the last seven or eight years. Mr Webb: It is, is it not? Q12 Mr MacNeil: I wanted to return to the maxim in your opening statement about fiscal incentives when you said that the North Sea was perhaps dangerously exposed and you talked about the Treasury moving to maximise the short term tax take as opposed to maximising long term revenue that could be got for the nations in total. What incentives do you think the Treasury should be employing in the North Sea to ensure that there are better fiscal incentives? Mr Webb: I do not think the industry is looking for tax handouts; it is not looking for incentives of that nature. The way to incentivise this industry is to give it fiscal stability and some security in that regard. There are also a number of tax issues in the wings that need to be resolved, and again I would not want to be taken as saying that we are not engaged with the Government on these issues. The Treasury, after the Pre Budget Report, first announced what seemed to us to be a limited consultation on what they call structural issues. Further discussions at one of those meetings at the Treasury has resulted in that consultation being widened quite considerably. As we understand it, we are now about to engage in a consultation with the Treasury on all matters related to the fiscal scene in the UK bar the latest PBR tax increase. I do not think that is up for consultation; that is a done deal. It is important that we have that discussion because there are a number of significant fiscal issues lying out there in the wings which are causing problems for the industry at the moment. Q13 Mr MacNeil: Such as? Mr Webb: One is the future of petroleum revenue tax: what is going to be the position on that? Petroleum revenue tax is a rather cumbersome tax to administer and it will not be too long before it goes negative, frankly, and therefore the industry believes, and the Treasury also probably shares this view, that something needs to be done about petroleum revenue tax. Our concern is that something is done about petroleum revenue tax and ends up loading more cost and expense on the industry rather than resolving the problem. There are also a number of fiscal issues around the decommissioning area. They are linked to some degree to PRT, but not exclusively, and to the whole fiscal relationship on the retirement of the assets in the North Sea. Frankly, that is a process that we do not want to see happen too soon. There is an important point here. If that ring main of offshore infrastructure is taken away too early a number of these small fields will never be produced. That is why I said in my opening remarks that if we get this right we have got a good future; if we get it wrong there will be irrecoverable economic loss because a number of these small fields will never be produced. Q14 Mr MacNeil: You talk about a ring main being taken away. I am not sure what you mean by that. Mr Webb: I am sorry. It is my shorthand for the offshore infrastructure that is out there at the moment, the pipelines and the connecting platforms. Q15 Mr MacNeil: Why will that be taken away? Mr Webb: If those platforms and pipeline systems do not have sufficient volume of production going through them to justify their continued maintenance then they will be required to be taken away. That is the way the system works. If they become redundant they will be taken away. Q16 Danny Alexander: What changes to that system could help? Mr Webb: There are a number of things around the decommissioning issues that could help. There are problems at the moment with carry-back of decommissioning allowances for tax. There are also problems around securitising those abandonment obligations. I do not know if you know it, but the way our tax system works for oil and gas in this country, you cannot make fiscally efficient retirement provision for those assets. Q17 Mr MacNeil: What effect does the £2 billion increase in tax from the Chancellor, the 10-20 per cent, have on what you have mentioned in the pipeline? What effect will that have on the continued maintenance of that infrastructure? Mr Webb: It does not help because, of course, this is not just £2 billion one year; it is potentially £2 billion and more for a number of years that will be taken away and cannot be invested in the North Sea. I should make one thing clear though. This year we are not expecting it to be £2 billion. The latest Treasury estimate is that the incremental tax attributable to the PBR increase is £0.9 billion this year. Why is that? It is in part because the industry is investing so much in the offshore at the moment and therefore that has reduced the effective tax take. Q18 Mr Davidson: Can I follow up one point you made? In your written submission there is a sentence, "There is increasing evidence that high risk exploration is less attractive and marginal developments are not being pursued", yet in the Evening Express that we picked up yesterday it says the offshore oil and gas industry is booming again, according to the figures of yesterday, and applications for new UK oil and gas exploration and production licences are at their highest level for 30 years. It is in the newspaper so it must be true, and it does seem to contradict the point that was made in your written submission which perhaps, in the light of experience, looks as if it was scaremongering. Can you comment on that? Mr Webb: Yes. It was not scaremongering and it was not intended to be scaremongering. It was meant as an honest comment on the fears that we have in our association for the medium to longer term future of the UK offshore oil and gas industry. To take the point about what is happening in the short term, as I have mentioned before, at the moment we have very high oil prices. These are historically high oil prices. That is encouraging an awful lot of short term activity within the oil fields at the moment. I was looking at the UKOOA projections for wells to be drilled this year. The good news is that those look like they are going to be substantially up on last year, and where that increase is most marked is in development wells. There is a big increase in the number of development wells being drilled, so infill and wells designed to capture production now on existing or near existing fields. The exploration number, however, that we are now projecting, and we have to be slightly careful on this because it is based on the first quarter of this year's activity, is a significant decline on last year's number of exploration wells. That is not a good sign. If we are going to recover the maximum from this province we have to keep up our exploration activity and we are currently projecting something around the fifties for the number of exploration and appraisal wells to be drilled this year. That is somewhat low, so not everything is without concern here. As far as the licensing round is concerned, that, as I have said before, is testament to some excellent work that has been done in the Department for Trade and Industry on modernising the licensing system and making it more attractive to a whole range of players, including a lot of small companies, the so-called promote licensees, who come in and can pick up acreage and try and build up a prospect of it for two years and then see if they can get the wherewithal to drill later on. What I did not see (and it would interest me to see) announced in the DTI result was the number of firm exploration wells that were committed in this round of licensing. I do not know what that number is. That would be an interesting signal to see whether also there is an increase in exploration appetite there. Q19 Danny Alexander: Could you explain how the tax changes have led to what has been described as the UK attracting a reputation for fiscal instability within the industry? Some would argue that having a tax rise on a particular industry was an indication of its success and indeed the profits made by it, and therefore it could be seen as a sign of health rather than of insecurity. Mr Webb: I am not sure other industries in the UK would agree with you that they should be rewarded for success with yet more tax. The example I would give for the instability is those three significant tax hikes that I have talked about. We had the introduction of supplementary corporation tax, which moved the corporation tax level payable in the oil and gas industry from 30 per cent to 40 per cent in the 2002 Budget. In the 2005 Budget we had an acceleration of payments of oil taxation, which took another billion out of the industry that year, and then in the 2005 Pre Budget Report - and that was part of my surprise, that such a significant tax increase was announced in the Pre Budget Report; I do not think we have had its like before - we had a doubling of supplementary corporation tax so that we are now paying corporation tax at a rate of 50 per cent, and on top of that we have petroleum revenue tax at 50 per cent on the older fields, giving us a highest marginal rate of 75 per cent. Frankly, I do not think that encourages success. I think it slightly penalises it. Q20 Danny Alexander: What impact does that sense of instability have, because what you are saying is that it is not just the level of taxes but also the fact that there is uncertainty about what is going to happen to tax next. Mr Webb: Quite. Q21 Danny Alexander: What impact has that had on future investment decisions, given the importance that you have outlined for investment decisions that are being taken now? Mr Webb: I think the answer is that investors are more cautious. We know that some companies now are testing projects against tax hurdles in the UK that are higher than the current rate of tax here in the UK, so they are judging the projects, not against today's tax rate but, cautiously and prudently, I would say, in view of the recent track record, against higher tax rates than that, so it induces people to put in a sort of risk premium on tax when considering their investment in the North Sea. Q22 Danny Alexander: Could you estimate the scale of that risk premium? Mr Webb: I do not know whether Mike has a feel for what risk premium they are loading at the moment. Mr Tholen: I imagine some companies are taking the previous increase and saying that might happen again simply because they base their experience on what they have seen in the recent past. Q23 Danny Alexander: So they might be assuming a further rise of ten per cent as a basis for judging whether or not it is a viable project? Mr Tholen: They will certainly test against a range of things, against costs and tax uncertainty. That will certainly be priced in, not least on much of what we are looking at in exploration in the future. Q24 Danny Alexander: In your submission you talk about the fact that oil and gas activity in the UK is now 16 per cent less attractive as a result of the last increase, so that would be an assumption of, as it were, 32 per cent less attractive overall? Mr Tholen: That could be the assumption, yes. Q25 Mr Davidson: Can I follow up that point? Are you saying to us that industry is pricing in a further ten per cent increase in its estimates for future investment, from which I take it that we could levy a further ten per cent tax increase and not scupper any of the projects? Mr Webb: No, because I think that that increase will be scuppering some of the projects. There is a limit to how much this can go on. I heard that, for the company that was applying this extra hurdle, as a result of that the minimum size of development it would look at had also increased quite significantly. Q26 Mr Davidson: Given that the oil price has shot upwards, clearly that has been financially beneficial to a substantial amount of the industry and it is essentially windfall gains. Do you not think it is reasonable for the Government to seek to have an element of that windfall gain come to Government rather than simply remain with the companies, and that therefore some form of tax increase, perhaps not this form but some form, was entirely appropriate and indeed was popular? Mr Webb: In our view what the Government had done previously in the Budget of 2002 was having that effect. We could perhaps show you some workings on this that we have done. Post all taxes, we see the rate of return in the North Sea, and this is before the last tax increase, falling, not rising. In other words, the Government was getting an increased share of the benefits from the North Sea before this latest tax increase came in. Q27 Mr Davidson: When you say the Government's share was rising, not falling, are you saying that the industry's share was falling? Mr Webb: Post tax. Q28 Mr Davidson: As a result of the oil price increase the industry was worse off than it was before? I find that difficult to believe. Mr Webb: We have got very significant cost inflation going on in this industry at the moment. The cost of rigs, for example, has at least quadrupled over the last two or three years. Some rigs have gone up six-fold over that period. There is very significant cost inflation, some of this borne out of the problems with Katrina, of course, in the Gulf of Mexico which decides the global position on oil supply, so not everything has been moving positively along with oil prices here for the industry, and the tax take has gone up. Would it be helpful if we showed you a graph we have? Q29 Mr Davidson: While that is being distributed can I clarify one point? You talk about inflation in terms of rig rates and so on. Rigs are part of the industry and presumably the fact that rigs are attracting higher costs or higher prices is a bonus for that part of the industry. This is rent that they are receiving which is at a much higher level than it was before, so presumably those prices are being driven up by scarcity, but they are not in turn being driven up by the costs of the rigs themselves. It is just that the rigs themselves are able to extract a much higher price than they were before, so that is additional money going into the industry. Therefore, if you are looking at the industry as a whole, the fact that one section is charging more than another section is not an indication that the money is going out of the industry overall. Mr Webb: One could say that, but if you look at it in a UK sense that can be happening, because what is happening is that we are in international competition for these scarce resources, so some of those resources are moving outside the UK, and the costs with them, it is true, but they are then not available to us in the UK to use, which increases the scarcity here which pushes the price up and certainly reduces the oil companies' margins. Would it help if Mike explained this graph to you? Mr Tholen: What you see here is work that refers to the ONS statistics on rate of return and it is stuff that the Chancellor has quoted and is well known within Treasury; we have discussed this with them. The blue line at the top shows the pre-tax rate of return which, as you see, ranges from about 15 per cent in 1995 through to 35 per cent in 2005. The data is straight off the ONS website. What you see in the red line is the post-tax rate of return because the numbers at the top exclude PRT, corporation tax and the supplementary charge. Clearly, pre-tax rates of return have pretty much followed the oil price, albeit they have not risen as fast, because costs have gone up a lot in the last few years. Post-tax, when you look at the impact of both costs and tax, we see that, particularly since 2002, the rate of return within the industry has declined. These numbers we have discussed with Treasury, they are aware of them. We discussed them first with the Paymaster General in November and have presented them again to Treasury several times since. It shows that underneath the industry is undoubtedly a healthy one but one that is having to fight to remain as attractive as it was even three or four years ago despite the current high increases in oil and gas prices. Mr Webb: I am bound to say as well that another element of disappointment with the Pre Budget Report was when the Chancellor referred to 40 per cent rates of return in the industry but we are still not sure where the 40 per cent number comes from. The ONS number is somewhat lower than that, but also, very significantly, return on capital employed is a calculation that is done before tax, and this industry is unlike any other industry in that it pays significant amounts of special tax. As I say, our marginal rate on the older fields is 75 per cent. There is no other part of British industry that is paying tax at that level. Therefore, to compare pre-tax rates of return of this industry against any other is a meaningless exercise. Q30 David Mundell: In the context of stability, what I have picked up is that, whilst we may have a superficial view that other parts of the world are politically more unstable, is it not the case that in recent times they have had a more stable tax regime than here in the UK in terms of the predictions that are made in the context of investment? Mr Webb: That is a recurrent comment I have heard from my members, yes, that if you go into other parts of the world the risk inherent in retrospective change to the deal that has been done is very low indeed, much lower than it would seem to be in this country now. I was speaking to somebody the other day who was talking about, for example, Egypt, and they were mentioning that their production chain contract in Egypt has not been changed on terms of Government and industry take since it was signed and they have great confidence that it will not be. I have heard that in various other comments on other parts of the world, so it would be a mistake to believe that the industry does not take rather seriously fiscal instability that we do now seem to have vested on us here. The Chancellor, in all fairness, did say in his Pre Budget Report that he would not change the tax rates on this industry again for the life of this Parliament, but that again demonstrated a slight lack of awareness of this industry. This is an industry where projects take normally two to three years to bring on stream, so that comment, as one of my members said wryly to me, just means, "I am not going to be taxed whilst I am doing all the investment but all bets are off once I start production". That much security, however, I suppose was welcome. What we would like to see is that extended somewhat beyond a period of just a few years. Q31 Mr MacNeil: Mr Tholen, you mentioned testing against a higher tax rate by companies and, listening to Mr Webb's earlier comments about maximising the long term revenue, between you both what effect do you think this is going to have on maximising the long term revenue, the amount of money we can get out of the North Sea, given that there seems to be a finite time due to the infrastructure difficulties of rusting pipelines and whatever? The reason I ask this is that any responsible finance minister has to look for the maximising of the revenue as opposed to short term gain and filling a real black hole in his economic sums? Mr Tholen: The best example I can give you is, again, going back, you perhaps heard people mention last night the "Tale of Two Futures" and the vision of how industry can look if we keep investing at appropriate rates, basically maxing out, compared with what happens if we just look at what the current plans will deliver, or if we look at what happens if investment dries up. There are three scenarios: fast depletion, the current plans and what we can deliver based on the potential in the basin. When you look at that, and again this is work we have presented to Government, you see a tax capacity that is close to three times as big as if you look at what happens if you keep investing at the current rates compared with what happens if we see investment drying up. That gives a good example of the future opportunities, both for Government and for industry, if we see the right level of activity delivering that right result. Mr Webb: I do not think that is something that the Government disagrees with because they put that very graph in their Energy Policy Review document. If you look at the document that launched the Energy Policy Review that Tale of Two Futures graph was in there. Q32 Mr MacNeil: Do you think the tax increase helps maximise the revenue for the country or are we jeopardising gains to future generations as a result of that? Mr Webb: I believe that maximising short term tax revenues risks damaging long term returns, and not just financial returns. I do actually think that this precious gift that we have of the UK offshore is of huge benefit to us in terms of security of energy supply. Yes, we are not self-sufficient in gas now but we are still a significant producer. Remember, the UK is a larger oil and gas producer than Kuwait; it is a larger oil and gas producer than Indonesia and Nigeria. It is still a significant player on the world scene and can continue to be so for years to come. We will still be self-sufficient in oil until about 2010. After that, yes, again, we will be importing some of our requirements but we can still be a significant producer and that is very important in my mind in terms of energy security of supply. To have that in the mix is very important, and that is not to say anything about the jobs that this industry supports, both in our companies but also in the supply chain. Q33 Mr MacNeil: If you have a fear of it drying up in any way because of what the Chancellor has done, how much will we not extract as a result? Is that possible to quantify? Mr Webb: It is. Maybe we could come back to you with a quantification of that but I can give you a feel for it in the terms of that Tale of Two Futures. What we showed there was that if we could maintain investment at the current level going forward then in 2020 we could be producing round about two million barrels of oil and gas equivalent a day. If, however, we went on the scenario that the investment dries up, then we could be down to producing something like half a million or so barrels a day at that point. Then the basin gets into very difficult territory because at those levels of production we will see a lot of that infrastructure going away, never to be put back again, and that will leave the smaller puddles of gas and oil, if you like, that are around probably never to be recovered because they are too small to justify the investment in the delivery infrastructure. Q34 Mr McGovern: Can I ask a question on this graph here? The post-tax rate of return in my opinion, and I am not an economise, still looks pretty healthy to me. It is not as high as it has been but it is certainly not as low as it has been. Could you comment on that? I know that these figures are probably as recent as you can provide but could you say how you feel the most recent increase would affect that? Also, in answer to one of Angus's first 20 questions, you said that you felt that it was a short term gain and there would be possible damage to long term returns. Do you mean long term returns for people investing in that industry? Mr Webb: I mean long term returns into the country as a result of that, what we could produce from the whole basin. That is the potential damage. Who is to say a significant price increase will not happen - and, by the way, we are not predicting it and we will give no predictions on oil and gas prices? I do not know if you saw it yesterday but I was struck by, in the Financial Times, a comment about refining capacity but it linked into oil and gas supply and I will just give you two quotes: "Merrill Lynch expects global oil production to rise by 2.6 million barrels a day next year, which would lead to further increases in the global stockpiles", and then at the end, "Oil inventories in countries of the OECD are even higher than the very high levels seen in 1998 which triggered an oil price collapse to $10 and demand started to slow". Please, I am not suggesting that we are going to have any oil price collapse. What I am saying though is that the oil market is a market and prices can go down and we know that. It is a very volatile market. If there is a price reduction now then very sharp action is going to have to be taken by the Government to make sure that the offshore does not go into meltdown. I do not think that answers all of your questions. Can you remind me what they were? Q35 Mr McGovern: It was on the graph. Mr Webb: I will hand over to Mike to explain the technicals of that but maybe I will just say that yes, let us not pretend this is not a profitable industry and, frankly, a very successful industry. This is an oil and gas industry that has invested £215 billion in the offshore so far; that is capital investment, and has spent another over £100 billion on operations in the offshore. To attract those sums of money you need to be a successful and profitable going concern and we have certainly got those, I am pleased to say, in the North Sea and they are still coming here. Yes, it is a profitable industry but I do not think it is a wildly profitable industry at those sorts of return. Mr Tholen: I do not know if I can add much to that. The post-tax rate of return is on a par with certain other sectors - pharmaceuticals, banking, which also seem to be profitable industries and, as we all know, deliver very good benefits to both society and to the economy in terms of employment, tax paid and wealth creation for the nation. That is what the industry seeks to do. Q36 Mr McGovern: We have heard a lot about fiscal stability. Could you clarify for me more precisely just how a stable fiscal regime would help to promote maximising production from the UK Continental Shelf? Mr Webb: There are many risks involved in this industry and most of those are not controllable by Government. They are the significant technical risks that there are in these hostile waters offshore the UK and bringing back these more complex reservoirs. There is a significant price risk. One only has to look back at the record of prices in oil and gas in the world to see how volatile those markets are. These are the risks that the industry has to accommodate and take on board, let alone the engineering risk in some of these projects, which is also quite significant. Those are risks that the industry has to take on board and it can deal with those, but it is made much worse if there is another wild card in the pack, which is the fiscal rate changing with some rapidity over time and giving rise to concerns of real fear of that happening again. That is a risk that Government can control and if they control that for us correctly it helps us greatly get on and manage the other very significant risks that our companies have to manage. That is the core of it. Q37 Danny Alexander: Mr Webb, can I follow up what you meant in response to Mr McGovern's previous question, which was in relation to - and I am not asking you to make predictions - the impact of a fall in the oil price? As a result of the tax change that has been made and also the instability of us building in an extra premium in those investment decisions, roughly to what level would the oil price have to fall before you started seeing a marked impact on investment decisions on the UK Continental Shelf and how does that differ from what the situation would have been last year or three or four years ago? Mr Webb: That is a prediction though, is it not, that you are asking me to make? I think I have to be very careful. I think I have said it before, actually. I think that the area of risk lies somewhere between $30 and $40. Q38 Mr Davidson: Can I come on to the question of opportunities for growth? If you had not had to find this £0.9 billion oil tax what would it have been spent on? Would it have just gone to lining the pockets of shareholders or were there any particular projects that you can identify as having been missed? Mr Webb: As you rightly say, this year it is £0.9 billion. If the industry had had that £0.9 billion what would it have done with it? I think it would have invested a very significant amount of it. Part of the reason that it is not £2 billion but £0.9 billion is that the industry is investing so hard in the North Sea at the moment, so I think some of it would have gone there and some of it would have gone to pay returns to shareholders, no doubt. Q39 Mr Davidson: What would the balance have been? Given that the industry, from what you are indicating, would appear not to have been deterred from investing by this tax increase, are there any projects that you can identify that were foregone as a result of the increase? Mr Webb: No. Q40 Mr Davidson: So there is no evidence that investment has been affected by the tax increase, just assertion? Mr Webb: Yes, I cannot point you to a list of projects that have been cancelled as a result of that, but I do know from my conversations with my members that projects are not going forward that might otherwise have gone forward. Q41 Mr Davidson: But it is undoubtedly the case that had the tax increase not gone ahead there would have been much more money going into shareholders' pockets? That is clear. Mr Webb: There would have been much more money available to companies to spend as they saw fit, yes. Some of that, I think, would have gone into investment as well and the growth of these companies. Q42 Mr Davidson: Yes, but growth where? Would this just have been in growth abroad? Mr Webb: No, I think it would have been growth here as well. Q43 David Mundell: There have been reports that some parts of the industry have indicated to workers already in the industry that there would be no further exploration as a result of these tax changes. Are those reports accurate, that the impression has been given within the industry that this will end production? Mr Webb: Not that I am aware of, no. I hope UKOOA, for example, has been consistent in its message here. We never believed that this latest tax increase was going to have a short term impact. Most of the activity, as I said before, was already contracted before this happened and we are in an area of very high oil price at the moment and scarcity of resource, so we did not see anything happening in the short term. Long term commitments have been taken on contracts before the tax rise happened. The central danger here is what happens if we have a downward price correction from these high oil prices? If that happens I think we are in a very uncomfortable position at that point. If that were to happen you could see a tailing off of all sorts of activities, both exploration and development, rather rapidly. At the moment we are not predicting that anything like that is happening. It is that risk that we think we have been exposed to. Q44 David Mundell: Perhaps you would say a bit more about this issue around the oil price recovery, which is currently, as I understand it, at round about $70 a barrel, how the differential price affects investment decisions and at what point, regardless of the tax regime, the exploration becomes unattractive. Mr Webb: We are enjoying high oil prices at the moment. That is helping in a basin such as the UK and it is another thing I do not think we should lose sight of. In cost terms this is a somewhat uncompetitive basin, even against some of our near competitors. If you take Norway, for example, finding costs in the UK are five times as high as they are in Norway. The reasoning for that is that when you find it in Norway you still tend to find it big. Here you find it quite small, so there is cost pressure on this basin and this basin is helped by higher oil prices. This basin was last in very serious crisis at the end of the 1990s when the price fell shortly to $10 and languished at round about $12 or $13 for some time At that level of price this industry frankly was in crisis. It was out of that actually that the very good arrangements where industry/Government co-operation and PILOT were born. I think that the danger point, as I have said before, is much higher than $12 or $13, and I can only say I think it is somewhere in the region of $30 to $40, when we would begin to see the basin struggle and there would be a need for corrective action. The most obvious corrective action, because there is not much we can do about the physical issues here, would be an adjustment in the tax take. Q45 David Mundell: So you would favour some form of almost index-linking of the tax take? Mr Webb: No, I am not sure that I do favour index-linking. What I favour is a fair and stable tax regime going forward that we can all plan on. What indexation misses, and it is quite an important point, is that all the risk in the type of regime under which we work in the UK is with the company. There is no Government money at risk, there is no taxpayers' money at risk. The entire risk is taken by the companies. Having taken that risk, if, every time the oil price bubbles up, the Government comes along and peak-shaves something off the top that in my view is unbalancing the game. That should not happen. What we should do is agree what a fair fiscal regime is and employ that, recognising that this we have peaks and troughs in this industry. Yes, today we are at $70 dollars. In 1998, 1999 we were at $10, and that is the sort of planning cycle that we live with in this industry. The fields can take two or three years in the planning. They can then have a life of ten, 15 years. It is across that cycle that the industry plans and it is across cycle that it seeks to get its return on its investment. If the Government keeps on coming in at every peak and gobbling up the goodies, if I can put it that way, and does nothing in the troughs when the price falls, then we are in a serious problem. Q46 Mr MacNeil: Just to follow up the point that Ian was making earlier, you corrected me when I said it was £2 billion and it seems the Chancellor has put another £1.1 billion in a black hole, so it is actually £0.9 billion. Mr Webb: Yes, it has not a black hole because the Chancellor - and this would happen in any event and maybe it is a sad reflection upon what has happened - is enjoying increased tax revenues from the increased price, so he is going to get about £12.5 billion, we think, this year from the offshore oil account. Q47 Mr MacNeil: With regard to the question of the £0.9 billion being otherwise used for shareholders or for exploration in the North Sea, what percentage roughly of that £0.9 billion that is now in the Treasury would you have expected would have gone to shareholders or on exploration in the North Sea? Secondly, Ian asked about evidence and he said there was no evidence at all. Do you collect evidence of non-activity? How do you know things are not happening? It is easier to say when things are happening than when they are not happening. Mr Webb: It is a very good point. No, we do not collect evidence of non-activity. It is very difficult to obtain. Also, companies are somewhat loath to advertise that they are not doing something. They are happy to advertise what they are doing but they are not particularly keen on wasting their time talking about what is not going to happen. We do not collect data on lack of activity in that way. What I am aware of is various conversations with people in the industry who are telling me that the hurdle on size of prospect to look for has gone up, that they are testing things at different tax rates now and that they are being generally more cautious in their approach to that. Having said that, the oil price at the moment is approaching $70 a barrel and that is stimulating quite a lot of in-field development work, as we can see. As I was saying before, we have got this big increase in the development wells but not an increase in the exploration activity, so you can see where the activity is going. It is going into those shorter term plays at the moment. Q48 Mr MacNeil: Do you know what percentage that is? Mr Webb: No, I am not sure I can give you that. Can we reflect on that and maybe come back to you? I cannot give you a division as to how that £0.9 billion is falling between returns to shareholders and investment. I am not sure I am ever going to be able to give you an answer but I promise you that we will reflect on it. The other point I would make is that it is not just tax that is the issue here. It is not just the tax cost that has gone up but the other costs in the industry are also causing pressures at the moment, and that, of course, is showing its way into more expenditure because the same is costing more these days owing to the significant price inflation that we have in the industry. Q49 Mr Davidson: It is this point about the same costing more. That is, though, increased rent, as it were, accruing to other players in the industry, not necessarily the major developers but other parts of the industry are benefiting quite considerably from the increased rent that they can draw from the majors as a result of oil scarcity, and therefore overall that means that some sections of the industry will undoubtedly be financially much better off than other ones. That correction in a sense is a redistribution of resources within the industry rather than any loss. Mr Webb: Yes, I think you have a fair point to a significant degree there but not all of these extra costs are within the industry. You will be aware, for example, that most commodity prices have increased significantly, including the price of steel. That is a cost increase that is not, if you like, being kept within the family, so there definitely is leakage to other parts of industry, if I can put it that way. Q50 Chairman: If any information is available can you please write to the Clerk? That would be very helpful. Mr Webb: We will be pleased to do that. Q51 Chairman: It is obvious that the drop in the price is a bigger threat to the industry than this tax increase of £0.9 billion. I cannot understand: if a company is selling their goods at $30 a barrel and the price goes up to $70 a barrel, then why should the Government not take a share of the huge profits that the company will be making? Mr Webb: First, can I come back? I think there is one thing I would like to underline. This tax take is not £0.9 billion. It was an increase in corporation tax rate, a doubling of the supplementary corporation tax rate, which this year might result in an extra £0.9 billion but, depending on your price assumption, is going to take tax next year and the year after and the year after, so it is a very significant tax hike. If you put it in money terms it is greater than £0.9 billion. On the second point, why not tax when the price is high, I can only go back to what I said before: the price is not always this high. It is high at the moment but this is a very volatile market. I will not make a prediction on oil and gas prices but I will tell you one thing: I am sure that they will not be where they are today next year. Whether that is down or up I do not know. Q52 Chairman: But it depends what the costs are. Professor Alexander G Kemp says here that if the price falls below $30 there will be a need to review the tax rate. There is a huge gap between $70 a barrel and $30 a barrel. Would you agree with that? Mr Webb: As I said, I think I would take a more conservative approach to that. I am worried about a range of higher than $30. I would be concerned more towards a level of $40. Q53 Chairman: At what level would you be concerned? Mr Webb: As I have said, between $30 and $40, and I think I would be starting to get concerned at about $40. Q54 Danny Alexander: I suppose some people would say that if some of the major oil companies are put off by the instability of the fiscal regime, there are plenty of smaller companies which are keen to come in, and so if a major pulled out there would be plenty of minnows to come in behind them, or is it the case that if the majors pulled out you would no longer get the investment in the infrastructure which the smaller companies rely on to carry out their work? Mr Webb: I think the answer is that we need all the clubs in the bag. Going forward from here, we need the continued dedication of the majors; we certainly need the contribution from the new players. Thirty-five per cent of the capital investment last year was made by companies that had come into the North Sea since 1999, so these new players are having a very significant impact and it is very good. I go back to what the DTI has done in very good measure in making this an interesting and attractive place for smaller companies to come and get involved in, and we can also see that in the latest 24th licensing round with the very large number of people there. That is all good, but if we are going to make a success of the North Sea in its second half, and we are into its second half now, we are going to need all of the players to play their part. You are quite right: the major companies have a significant part to play. They are owners of a significant proportion of the infrastructure. It is important that that is maintained and kept in place and that it is there and available for these new players and these smaller fields as they go forward. I think there is a role for everybody and I think all parts of the industry are playing their part and doing a good job at the moment. Q55 Mr McGovern: If I can go back to Angus's question about how, if the money had remained with the companies, it might have been divided. I thought you said in response to his original question that the money would have been spent as the companies saw fit, and so, given that you have got over 30 members in UKOOA, it would be wild speculation to try and say how would they have divided it into 30 different companies, so I do not know if that helps to answer his earlier question. Do you think that the changes to the tax regime will mean that there will be less money available for training? Mr Webb: No. I think the industry is putting in a significant effort on training and will continue to put in a significant effort on training and I do not see that there will be a deficit on that. In fact, I think there are some very encouraging things going on at the moment, again, some of them linked into that PILOT process as well, on training. The industry is doing good work there. I do not see any signs of slackening back on the training side. In fact, I see an increase in the training spend because the industry is somewhat resource constrained. The most important resource we have definitely is our human resource and we are doing what we can to improve supply into the industry and there have been some very encouraging initiatives launched here in Aberdeen recently by OPITO, the industry's training body, which has sought to bring more people into the industry and make the industry more available to people in this country. Q56 Mr McGovern: Thanks, Mr Webb, I am delighted to hear that. There had been a fear in some quarters, and perhaps it has been a bit too simplistic, that because of the changes there would be an impact on training and that impact would lead to one of two scenarios: one, that the same amount of people would be trained but to a lesser skill level, with all the implications that would have for employment levels, and the second scenario would be that fewer people would be trained and there would also be implications for health and safety. Has that view been too simplistic and can you confirm that that is not the case? Mr Webb: Yes, I can, unequivocally. I think the industry is doing more and it is committed to do yet more on the training front. The industry leadership team under PILOT launched a project last year called the "pinch-points" project because there was a lot of apocryphal news out there that the industry was being constrained by a labour shortage, so a study was done and some particular pinch points were indeed discovered and projects have been put in place to cope with that. Some of these pinch points were very interesting. For example, riggers and scaffolders were seen as particular pinch points. Now I am pleased to say that projects are going ahead to train more people in those skills and bring them into the industry and also projects to bring more mature technicians from other industries into our industry. We also run one of the most successful modern apprenticeship schemes in the country. The Young Technician Training Programme is delivering 100 highly qualified young technicians into the industry every year, so the industry has got a good track record there but it is not resting on its laurels and is continuing to invest on that side and I have seen no evidence of cutback on training. Q57 Mr McGovern: Thanks again, and again I am delighted to hear that, in particular about the apprenticeship schemes. Last night I was told that there is a massive skills gap in the industry currently, so it is great to see people being trained up and there is possibly a bigger training budget than there has been previously. Given all of these things would that not support the contention in the local press that business is booming? Mr Webb: I would not wish to deny that right now this town is booming and I am very pleased to see it booming and the industry is going full pelt at the job ahead of it. There is no doubt about that. That is going on right now. I come back to the point that the concern I have is do we have a fiscal and regulatory regime that is fit for purpose for the second half of the North Sea and can take the knocks that I think will come when we get price adjustments? Q58 Mr Davidson: I want to follow up one point from Jim's comments. You said there would be no adverse impact on training. Do I take it there is no possibility of adverse impact on health and safety? Mr Webb: Oh no. Mr Davidson: Thank you. I just wanted to have that on the record. Q59 Mr MacNeil: In your memorandum you say the Government cannot presume that the UK will remain the preferred location for investment but do you think there could be other preferred locations for investment? Mr Webb: I suppose we could look at that around the North Sea and then globally around the North Sea. There is Norway, of course; that is right on our doorstep, Holland to a lesser degree. They are in the same period of maturity as we are but the tax take in Holland now is nowhere near what it is in the UK. The tax take in Norway at the top end is roughly the same as it is in the UK but, as I said, they are still finding elephants and we are finding much smaller game here now, so you have got competition there. Then you look elsewhere. The UK is now uncompetitive, I would say, in terms of tax and probably cost compared to the Gulf of Mexico, both shallow and deep, so those areas are also strong competitors. Then you have got the whole of the west coast of Africa, those African developments, as well. There is lots of stuff around the globe that people can invest in as opposed to coming here. Q60 Mr MacNeil: And yet when you look to Norway, in particular, do you ever envy Norway's wisdom in setting up an oil fund as was advocated initially by Tony Benn and certainly by my party, the SNP, and that Norway are now getting more money for the nation each year from the oil fund than they are getting from the oil? Does UKOOA have a view on that or do you just work from day to day? Mr Webb: UKOOA does not have a particular view on that. That is one that we will leave to you politicians and the electorate to work out. I do not think that is something upon which oil companies should presume to dictate. Q61 Danny Alexander: Following up alternative locations for investment, can you think of another area that might attract investment which has a more unstable tax regime than the way the UK is at the moment? Mr Webb: Off the top of my head, no. Mike, can you think of any? Mr Tholen: I cannot say I can. Mr Webb: I cannot think of anywhere else that has put through three major tax increases in three years, no. Again, let me reflect upon that and I will tell you if we can find somewhere else. I will come back to you, Chairman, on that point. Q62 Chairman: In other countries I believe some governments take a share of the profits as well which the UK does not. Mr Webb: That is right. Q63 Chairman: How would you explain that? Mr Webb: You can say that the special taxation that we have in this country is the way that the Government takes its share of profits. I think we have to be careful in comparing different regimes. As I said, this is an equity based regime here where the equity investor takes all of the risk and the Government is exposed to none of the risk. If you go into other areas where the government is taking profit share the government shares in some of the risk as well; it certainly shares in, for example, the price risk, and that is not the case in this country. The entire risk is borne by the investor. Q64 Mr Davidson: Can I just follow up this question of alternative locations for investment, and particularly you mentioned the west coast of Africa, and recently off Nigeria there were kidnappings, were there not? Can I ask how you balance political instability as distinct from fiscal instability? I would have thought that by and large Nigeria is not necessarily the safest place to invest and a whole number of west African states are potentially failed states. How does the industry do that sort of trade-off? Mr Webb: I am bound to say it is largely all in the same pot when you are looking at political risk. Forgive me: my focus is really very much on the UK so I am not current with those sorts of decisions that are being taken in companies at the moment, but the industry is very well versed in looking at political risk of all sorts and is used to operating around the world under various types of regime. It just is that the risk comes down in the end to the economics of the situation and extreme fiscal risk can be just as bad as other sorts of political risk. Q65 Mr Davidson: Would you characterise this as extreme fiscal risk? Mr Webb: No, that was probably an overstatement on my part. We have got high risk here. High risk has been demonstrated. Instability has been demonstrated over the last three years. Q66 Mr Davidson: The sort of Bennism that was being lauded a moment ago is perhaps extreme political risk and was even at the time when that was fashionable but maybe we should move on from that. Mr Webb: I should maybe point out that at one stage I worked for the British National Oil Corporation, so I have some experience of that as well. Q67 Mr Davidson: It does not make you a bad person. Mr Webb: No. It was a very interesting period in my life, I must say. Q68 David Mundell: Can I ask you a question about the wider energy policy in the context of the memorandum that you have provided? The Committee has already in its past life done a major report on energy issues within Scotland and, of course, the Energy Review which you referred to is ongoing. You have asserted in your document that by 2020 energy generated from oil and gas could account for 83 per cent of the UK's requirements. Given the indication that the Government appears to be poised to announce a new generation of nuclear stations do you think that is still a credible statement? Mr Webb: Yes. The 83 per cent comes out of the DTI scenario which is favourable to gas. They run another one which is favourable to coal and which I think comes out at 78 per cent, and that is why in my remarks I was talking about 80 per cent. We are talking about 2020 and the real point here is, when is this nuclear build going to come in? There is another point before that, if I may say so. People often confuse - and I am not suggesting that the Committee is doing this - electricity generation and primary energy supply. Electricity generation accounts for about a third of primary energy used in this country. About 21 per cent of that third is attributable to nuclear at the moment. The impact of nuclear on the primary energy supply is somewhat muted. By the time you have taken it through that it is today about seven or eight per cent of primary energy supply. Furthermore, even if - and who knows what is going to happen with this Energy Policy Review? - the firing gun is started now and the building of new reactors is facilitated, it is unlikely that those are going to come on stream much before 2020. Over that period I do not see the nuclear equation having a dramatic impact on that forecast that is contained in the DTI document. I still think in the medium to near term this country is going to be very significantly reliant upon oil and gas for its primary energy supply and that is why we need to do all that we can to maximise our own indigenous production. Can I say that there is something else here as well? I think I may have slightly overlooked this. There is another reason for maximising indigenous production. It does not just relate to the oil and gas and security of supply and the fiscal contribution that that can make, but also to what has grown up around this industry of ours, this magnificent supply chain that we have, which is largely a Scottish story. This is a world-beating engineering success story we have got here. The global sub-sea fleet is controlled from Aberdeen. The UK is without doubt, and Scotland is really at the core of this, the global leader in sub-sea engineering and is certainly a world leader in offshore engineering. This is an entirely remarkable success story. It is another reason why we need to go on and maintain the health of this domestic industry we have got because that supply chain relies to some degree upon that home base. It is now growing into international markets and this number of £4 billion of export earnings for Scottish-based firms that the SCDI have discovered - and that is the 2004 number, by the way, which is the latest one that is available and we know it is growing - is very significant. Therefore, that half of the story should not be overlooked. Where it puts Scotland frankly is in leading edge technology and industry and its potential for export earnings after we have finished the second half of the North Sea. When we do ultimately take the last barrels out of the North Sea one would hope that still working in the world will be this tremendous supply chain capability that has been built up along with the indigenous production. Q69 David Mundell: I think that is a very important point. How will that sustainability of the supply chain, controlled and based here in Scotland, be maintained? What factors are going to influence that? In our informal discussions last night somebody indicated to me that one or two companies had re-headquartered, or whatever the phrase is, again because fiscal arrangements might have been more favourable elsewhere. Mr Webb: Yes. The supply chain, thank goodness, is not treated in a different fiscal way from the rest of British industry, so they are not enjoying these special taxes that we enjoy, which I think is a plus and I hope that always remains, no matter how successful they become. I think the best way they can be helped in the short term is to maintain the strong base here that they have got and from which they can develop and grow. Going back to the Tale of Two Futures picture, if, over the next five or ten years we saw a sudden decline in the domestic base then that would not bode very well for the long term sustainability of the supply chain industry that has grown up taking on the world from Scotland, but if we can keep this industry going for another few decades yet I think that is the best thing we can do to help them assure that long term future. Q70 David Mundell: It is a credible proposition that, even if the focus in 30 or 40 years' time was on west Africa or other even unconsidered parts of the world at the moment this North Sea basin was completed, it is a realistic proposition to say that there could still be a vibrant supply chain industry based here in Aberdeen. Mr Webb: Oh, yes, based on the strong technical expertise in this industry, which is superb. This is really leading edge stuff. This is one of Britain's great engineering success stories. To some degree, unfortunately, it is one of Britain's best kept secrets as well. I think it is entirely credible and the market out there is huge. The market is not just the private oil companies; it is also state oil companies around the world. They contract. Q71 Danny Alexander: Can I follow up one of the points that David was asking about in relation to broader energy issues? I wonder to what extent you think the possibility of carbon capture and storage and the use of disused oil fields for that purpose can help, particularly to sustain the infrastructure within the UK. Mr Webb: It is a difficult issue. I am not sure that it really helps on the infrastructure point because, remember, you would be taking the flow a different way. The infrastructure is used to take production from the fields to shore. If you are going to engage in using offshore fields for carbon capture and sequestration then you are going to be moving the CO2 in the opposite direction. The second thing is that much of the infrastructure offshore needs very significant re-engineering because of the particular requirements of CO2; it is a very corrosive gas, so there is that as well. Having said that, CO2 capture and sequestration must present us with a very interesting opportunity. There are hurdles that need to be overcome, some of them illegal. At the moment I think, under EU statutes, it is illegal to dump CO2 in depleted reservoirs offshore, but there must be some potential there. It is a very interesting project which society could use in order to overcome some of the environmental issues around the burning of fossil fuels, be they hydrocarbons or coal. It is very interesting and you are right; sorry, I was being negative when I talked about the infrastructure. There is a potential use here for depleted oil and gas reservoirs, certainly. I am bound to say the economics of it at the moment are not proven but it certainly does present some very interesting opportunities. Q72 Mr Davidson: I want to follow up David's point by saying that I think that you are absolutely right on the question of the future of the export expertise and so on and the strength of the supply chain and many of us who have travelled to other oil producing countries recognise the role that Scotland can and ought to play in developing all that. Unfortunately, our remit today is dealing with the taxation issue and therefore we have not delved into those issues to the same extent, but in one of the paragraphs in your submission you mention that maximising the economic recovery of oil and gas reserves has been hindered by too much red tape from the EU and from Britain. Would you expand a little bit on that and clarify which regulations you have in mind, bearing in mind the perspective that in a sense if it was not for regulations some employers in my constituency would have small boys climbing chimneys? Your burdensome regulation is health and safety protection for some of my constituents and it is a question of striking that balance. I am not quite sure which regulations you would refer to as being unduly burdensome. Mr Webb: Can I give you an example? I will give you a concrete example because it shows two things: the good work that PILOT can do and the sort of regulation that I am talking about. The stewardship initiative is one of a series of really significant initiatives that the PILOT has launched, and they run from Fallow acreage, Fallow discoveries, to the industry code of practice on access to infrastructure. There is a lot we could talk about there, but one of them is the stewardship initiative, which some people have dubbed "the Fallow fields initiative", which was designed to look at the stewardship of the fields in the North Sea and to make sure that all that could be done was being done to maximise the opportunities around those fields. As part of that exercise what was unearthed was that the industry was doing something called a field production report every year. Every field that was in production did this big, statistically weighted review upon what would happen, sent it off to the Department of Trade and Industry, where, frankly, it gathered dust. Nothing happened to it. It was quite expensive for the industry to produce and it was more or less no use at the other end but it was still being produced under this regulatory arrangement. As a result of the stewardship initiative it was agreed that that should be dispensed with and in its place should be put a much more focused inquiry on issues which relate not just to the productive capacity of the installations but to safety as well, which go to the heart of stewardship, and the annual field report was done away with. That is the sort of better regulation move that we want to see. We want to see the time-honoured old regulations questioned and where they are no use to get rid of them and put something else stronger and better and better for purpose in their place. No, we are not saying deregulate the North Sea. Q73 Mr Davidson: What your story in a sense indicates to me is that there are existing mechanisms in place which are working, which are removing unnecessary, burdensome regulations at the moment. I am not clear from putting together what you have said now and in your submission that these unnecessarily burdensome regulations are not already being tackled. Mr Webb: In our view they are not being tackled speedily enough and we want to see more action on that. That is the substance of that point. We have had discussions with the Better Regulation Task Force on this as well. We are seeking to stimulate those discussions in PILOT. There is a range of things that we think could be done more efficiently and more effectively and, yes, you can be assured that we are engaged with Government on that and we will continue to press on those issues. Q74 Mr Davidson: Do you accept that it is reasonable for us to have some anxieties about the point you made, that it failed to recognise the objective of maximising the economic recovery of UK oil and gas reserves? I think that there will be some balances to be struck between potential environmental damage and maximum recovery and there are some elements within your industry that I do not think it would be entirely reasonable for us to be expected to trust completely to protect the environment when there are clearly enormous financial incentives to cut corners. Mr Webb: I do not think that there are financial incentives to cut corners if environmental safety is put at risk, frankly. I do not think that pays ultimately, and I do not think the industry sees it that way. However, I agree with you, and I am not saying that we want a regulation-free offshore oil and gas industry. What we want to see is a regulatory regime that is fit for purpose for the second half of the North Sea. I cannot overstate the fact that the second half is different from the first half and it needs a lighter, different touch on a number of these regulatory issues but we are not saying take away environmental protection, take away this, take away that and just let us rip at that. That is not what we are saying, but let us get it more fit for purpose than it is today. Q75 Mr Davidson: Can I just clarify that when people say "lighter touch" they generally mean "less of"? Mr Webb: Yes. Q76 Mr Davidson: Which generally means laxer. I hope you understand my meaning. Mr Webb: And I understand your concern as well, but if you go back to the example I gave, I think that is the way of doing these things, lighter, much more effective, and there is a gain on both sides there. I think the Government is much better informed through this new stewardship process than it ever was under the other process. Q77 Mr Davidson: So things are getting better? Things can only get better? Mr Webb: I do not just believe that things only get better. I would not want you to believe that there is not a lot of good that is going on within the industry and between Government and industry at the moment. There is a lot of good work going on. Specifically on your inquiry today, I have to say that the PBR was not one of those good things. We do not regard it as the right move right now, but that is not to deny that there is a lot of other good stuff going on. I could give you a list of these regulations; there are a number of them. Some of them we are making progress on. Others I think we need to do a bit more pushing on before we get there. I hope through the PILOT and other mechanisms we can achieve that but we are talking on these issues. Q78 Mr MacNeil: You were talking earlier about the burdens of identification. The example you brought forward was the paper exercise. I used to be a teacher and I know, speaking to teachers, that teaching is almost a by-product of what they do now because of the regulations and the growth of bureaucracy. Have you identified the particular burdens and categories and if there are any costings on producing that again and a loss of taxation revenues? Mr Webb: I am not sure I have them all costed. I can give you some other examples. We are concerned about both the fiscal and the regulatory regime around decommissioning at the moment, which is putting quite a significant burden particularly upon new entrants into the North Sea. Q79 Mr MacNeil: Have these been systematically categorised? Mr Webb: They are well understood within the industry and they are the subject of debate at the moment between the industry and Government. Q80 Mr MacNeil: The reason I ask if there is systematic categorisation is that it helps those outwith the industry maybe understand the issues with industry that you are talking about because otherwise we are just getting a series of anecdotes rather than anything else. Mr Webb: This is a slightly difficult concept. One of the issues around decommissioning is the fact that the Government has adopted what it sees as a particularly risk-averse approach on decommissioning and has put very significant burdens in terms of continuing liability on ex-licensees. As a result of that, when licence transfers occur both the Government and to some degree industry look for the incoming companies to give guarantees or assurances with regard to the decommissioning liabilities. Those guarantees are tending to take the form of bankers' letters of credit, which are both expensive and also burden the balance sheets of smaller companies. I would not deny this is not a very difficult and complex area but it is an area where we have got to move from where we are if we are going to have the right regime for the second half of the North Sea. There is discussion going on at the moment within the industry leadership team and PILOT on the whole decommissioning issue and that issue includes the securitisation of these obligations and how we can best go about that in a way that does not overburden new entrants coming in. That is another example of what we are doing. Q81 Mr MacNeil: Last June in their report on fuel prices colleagues on the Trade and Industry Committee were critical of UKOOA for your perceived reluctance to continue the easing of fuel poverty. Given your members' charitable support for organisations in Aberdeen such as Aberdeen Foyer, do you consider the criticism of UKOOA to be unwarranted? Mr Webb: No, I do not. I think fuel poverty is a serious issue. Poverty is a serious issue. I think they are, however, matters that need to be dealt with by governments, not individual industries. I would say as an aside that one of the things that has probably taken more people in this country out of fuel poverty than any other thing in the last 40 years has been the availability of piped natural gas to communities throughout the length and breadth of this country. That has been very significant as the easer of fuel poverty. Indeed, I have had discussions with the fuel poverty lobby and I was struck by the number of ideas that they had to extend the reach of the natural gas main to more people in this country as a significant way of easing fuel poverty. I do not think that the industry's record as a whole in this regard is at all bad, but I do think that the issue of poverty, be it fuel poverty or any other form of poverty within society, is essentially an issue for you, the politicians, to decide and act upon as opposed to individual industries. Q82 Mr MacNeil: You said in the earlier part of your evidence that the Chancellor shows a lack of awareness of the industry. What sort of questions do you think a committee such as ours should be asking the Chancellor in the light of his increasing taxation? Mr Webb: It is probably not for me to tutor you as a committee on that but one of the things I would be interested in, and I think we are interested in, is that we still do not quite understand where the 40 per cent rate of return that the Chancellor spoke about came from. I suppose one would be interested to know his views upon the medium to long term position on the UK oil and gas reserves and how the Treasury could act with other parts of Government to ensure that we maximise the ultimate recovery and how that can be best achieved. Q83 Mr Davidson: Mr Webb, how do you think a single Department for Energy would be able to do a better job within the current disparate arrangement where several Government departments have separate areas of responsibility? Mr Webb: It might not. It depends upon how that department is staffed, run and focused, I suppose is the answer to that. What we are saying here, and it has been said already, is that we are looking for more joined-up government on energy policy. We do think that energy policy at the moment is in danger of being created in various parts of Government by creating a new Department for Energy under a Secretary of State. We think that there would then be a sharp focus within Government and hopefully that individual would be able to drive a consistent energy policy right across Government. That is really what we are looking for here. Q84 Mr McGovern: In your opening remarks and your answer you admit that that might not be the solution, that it would depend how it was staffed and how it was run, but you think that it would be a step in the right direction? Mr Webb: Yes. I personally think, and it is in our submission, that that would be the right step forward, but just an organisational move of itself is not enough. We need to create, and I hope it is going to come out of this later stage of the Energy Policy Review, a very clear energy policy which covers all aspects of energy in this country. It would be good if we could have one consistent dialogue with Government on those issues instead of, as I have said before, these several dialogues that we are having. Q85 Mr MacNeil: Do you think there is a feeling within the industry that the Chancellor looks at you as a cash cow, whereas we see other countries in Europe that have no oil and they are running more successful economies? Mr Webb: All I can say is that at this point the industry is somewhat concerned and driven by the fact that we have had three significant tax increases in three years, and that is not a positive thing for the industry and the industry is concerned about that, both for the effects that it has had and also for the effects that it could have in the future. Q86 Mr MacNeil: Would it help if these three tax increases had been one? Mr Webb: Maybe not. Q87 Chairman: Mr Webb, you were not very sure how much of the taxation of £0.9 billion would have gone to the shareholders and how much would have gone into investment in exploration. Would you have any idea what percentage would have gone probably to tackle fuel poverty or any charitable causes? Mr Webb: No, because I do not keep any tag upon the charitable activities of my membership. That is a private matter for them. It is not something that a trade association would ever concern itself with. Q88 Chairman: The Trade and Industry Committee tried very hard with the high oil prices to get the industry to give an undertaking to contribute money to fuel poverty, which they refused, and the Committee in turn said, "If you don't hand over at least some money voluntarily, we will quite understand if the Chancellor takes it by force". How do you comment on that? Mr Webb: I disagree with the comment. If we look back to fuel poverty and the responsibilities of industry and the Government, I think the responsibilities of my members are to provide this country with the best oil and gas industry in the world, and I think we are almost there, also one of the safest oil and gas industries in the world. We know we are not there yet and we are determined to get there and we have strong plans in respect of that, and it is also to work with the Government to maximise recovery from the profits and to pay our taxes, and we are paying taxes. We are paying significant taxes, £12.5 billion or thereabouts this year. If you take the product that we produce and take it downstream, you will find that the £12.5 billion that we pay is a pale reflection almost of the £30 billion that then comes at the petrol pump from oil and gas, so from the oil and gas stream one can see that the Government is enjoying a revenue of somewhere round about £40-45 billion each year. That is about ten per cent of Government revenue and that is a fair pot, I would have said, to tackle fuel poverty. Q89 Chairman: I can understand, Mr Webb, that it is the Government's responsibility to deal with fuel poverty and social issues and so on, but of course, when we are living in the world we have huge corporate companies whose budgets probably are more than some of the countries have available to them, and so do you not think those companies should be encouraged to participate in charitable causes where they can help people who are in need and that they have some obligations to society? Mr Webb: I think companies do, through their corporate social responsibility programmes in this country and abroad, undertake various charitable works. I do not have an aggregation of that because we do not check those statistics, but I still do think that our primary obligation is to run a first-class industry for the benefit of this nation, to make sure that our employees are properly trained, that they are safe at their work and that we are doing all that we can to maximise recovery from the North Sea oil and gas reserves. What I do not think we should be involved in, and I think it is a very dangerous route for industry or Government to go down, is subsidising fuel to the end consumer. I think that is a very dangerous route to go down. Q90 Chairman: Thank you, Mr Webb and Mr Tholen. That concludes our questions. Before I declare the meeting closed do you wish to say anything on any areas which we have not covered in our questions? Mr Webb: No. I think you have raised a very comprehensive set of questions and I thank you and the members of the Committee for giving us the opportunity to put the case for UK oil and gas to you today. Thank you very much indeed. Chairman: Thank you once again, Mr Webb and Mr Tholen. Your evidence, I am sure, will be very helpful to this Committee when we finally report and we will make sure that your concerns are expressed in our report. |