Clause
72
Model
clauses of petroleum
licences
Question
proposed, That the clause stand part of the
Bill.
1.15
pm
Malcolm
Wicks:
This clause will give effect to the amendment of
the terms of existing petroleum licences, as set out in schedule 3.
Section 4 of the Petroleum Act 1998 allows the Secretary of
State to set out in regulations model clauses, which are incorporated
into petroleum licences. Section 4 requires that any regulations
prescribing model clauses for such licences are made through secondary
legislation. However, new regulations will affect only licences granted
after the regulations come into
force.
As
section 4 powers do not allow the Secretary of State to make
regulations amending the terms of existing licences, we are making
changes to existing licences by way of clause 72 and schedule 3. The
Government have used primary legislation to amend the terms of existing
licences in that way in the past. For example, amendments were made to
existing petroleum licences under the Petroleum and Submarine
Pipe-lines Act 1975, the Petroleum Act 1987, the Offshore Safety Act
1992 and section 5(5) of the Petroleum Act
1998.
Schedule 3 will
amend the model clauses in four ways: first, by requiring licensees to
provide up-to-date contact details to Ministers to ensure that the
Minister can send notices and directions to the licensees; and
secondly, by allowing the Minister to issue a notice requiring
licensees to plug and abandon wells to reduce the risk of a licensee
leaving a well suspended, but not properly plugged and abandoned, for a
number of years and then not having the funds to plug and abandon it
properly at the end of their licence. Without that power, there would
be an increased risk of the liability falling to the
taxpayer.
Thirdly,
such amendments can be made by extending the circumstances in which the
Secretary of State can revoke a licence in the event of a change of
control. The Secretary of State can currently revoke a licence if there
is a change of control or of the person to whom it was originally
granted, the Minister objects to the change of control, and the
licensee does not take the requisite steps to address the
Minister’s
objections.
The
new model clauses will extend the power, so that it can apply to anyone
the licence is assigned to, not just to the person to whom it was
originally granted. That is important because it is always necessary,
at any stage of a licence, to ensure that licensees are
suitable—for example, that they are interested in and capable of
maximising
production on the UK CS. Without that power, if a licence is
transferred to a party that experiences a change of control, the
Minister could not revoke the
licence. Fourthly,
the Minister will be given a power partly to revoke a licence, so that
if one person in a consortium that holds a licence breaches certain
terms—for example, becomes insolvent—the Minister can,
rather than revoking the whole licence, partly revoke the licence
interest of the defaulting person. That is important because, in some
circumstances, it will allow a consortium to continue production,
rather than revoking the licence and forcing the remaining members of
the consortium to wait for the next licensing round to reapply for one
if they want to continue
production.
The clause
will also set some conditions on the operation of those amendments to
the model clauses to ensure that all relevant licences already in
existence before commencement are amended with the new model clauses.
That is important to ensure consistency across the petroleum licensing
regime as far as
possible.
Although all
licences should contain these new model clauses, in certain
circumstances, where things happened before commencement of the Act, it
would be unfair to apply the rules retrospectively. So, for example,
the clause sets it out that, if the drilling of the well started before
commencement, the power to require a licensee to plug and abandon it
will not apply. It also sets it out that, if the event that leads to
the need for partial revocation happens before commencement, the power
will not
apply.
Martin
Horwood (Cheltenham) (LD): On a point of order,
Mr. Amess. I wish to address some of the issues raised by
the Minister, but I had expected to do so under schedule 3, which is
listed as the next item for consideration. I seek your advice on the
appropriate point at which to refer to the detail of schedule 3, which
addresses the same
points.
The
Chairman:
I confirm to the hon. Gentleman that
there will be a stand part debate on schedule 3, and that it will be
perfectly in order for him to make his points
then.
Mr.
Brian Binley (Northampton, South) (Con): The Minister has
confused me a little, although that is not unusual. I am concerned
about capping and abandoning a well in a given set of circumstances. I
assume that that will take place when an unconsented transfer has
happened—that is, one without the Minister’s consent. I
assume that, if the Minister thinks that the person to whom the
transfer is made is unsuitable to carry out the responsibilities, he
will also assume that the transfer has not taken place and the original
licensee will be told that he has to close and cap the well if the
Minister thinks that that is necessary.
Legal matters are
likely to arise in such complicated situations, and I do not understand
what will happen. Will the Minister tell me in what circumstances he
might tell the original licensee to cap and abandon the well, what cost
there would be and whether it would be easy to open the well again
without too much cost? These are valuable resources to the nation, and
capping a well seems a pretty drastic step.
Malcolm
Wicks:
Yes, I agree; we are trying to establish a regime
that will lead to that happening only in extremis. We need a regime
whereby licences can be transferred only in bona fide circumstances.
Much of this part of the Bill will put in place that regulatory system,
so that we can ensure that decommissioning is done effectively, at the
right time and in a way that does not jeopardise the taxpayer’s
interest. That is the burden of this part of the
Bill.
Mr.
Binley:
Can the Minister give me an idea of the cost of
capping and abandoning and then later reopening a well? I want to be
clear in my mind what the cost of the exercise will be for the people
granted the licence in the first instance, because that is where it
will revert, will it
not?
Malcolm
Wicks:
The endeavour will be to ensure that a well is not
capped while it still has economic life. Given the market situation,
there is every chance that another commercial player could be brought
in. However, I am advised that a well cannot be reopened once it has
been plugged and abandoned. We abandon only those wells that have no
economic life remaining. After all, they are valuable assets. I am also
advised that the cost of capping could be £1 million to
£10 million. There is a double jeopardy in the economics, which
is why we try to keep wells open.
Charles
Hendry:
Those comments raise another issue: who decides
that the well is empty? We know from how drilling and extraction are
done that often substantial reserves—20 per cent.
perhaps—are left underground. Will a well be considered empty
because a large concern decides not to go on extracting oil or will it
have to be genuinely depleted before these actions come into
play?
Malcolm
Wicks:
I think that I used the phrase “no economic
life remaining”. That is not the same as saying that there is
not another barrel or so of oil down
there.
We talked
earlier about the importance of enhanced oil recovery and the potential
to associate that with carbon capture and storage, for example. These
are largely commercial decisions, of course. It will be mainly up to
oil companies to make that judgment, albeit within the regulatory
framework. We are talking about a very good industry, whose
professionalism I have seen at first hand. No company is going to
abandon a well if it has commercial life left in it. It will be for the
licensee—the company—to judge, but as a safeguard,
Government will have to agree.
Charles
Hendry:
Some of the larger oil companies leave when a
significant amount of oil is left in the well. Indeed, other companies
have specialised in going into partly depleted oilfields and extracting
what remains. Although the major international companies might say that
it is not economical for them to do that, there is an economic benefit
to be pursued by a smaller company that has developed a niche market in
those areas. I hope that the Minister will not be guided only by what
the larger international companies say, if some smaller companies feel
that they can still go into those fields to extract more than is
currently being taken out.
Malcolm
Wicks:
I understand the point that a time comes when a
large company wants to move on—its geographical priorities may
lie elsewhere—and that provides an opportunity for a smaller
company. However, one would imagine that the larger company would see
some commercial advantage in arranging a transfer to the new player,
because I assume that financing would be involved. I do not think that
it is in anyone’s interest simply to abandon such a
resource.
I think that
I was asked how we obtain the information that a company is no longer
using its well. We know that by a variety of means; largely through the
normal dialogue that takes place between the regulator and the
licensee, and not least because the regular well production reports
would start to fall to zero.
Mr.
Swire:
Is there anything in the legislation, or anything
further envisaged, that would stop companies creating a bank of
drillable wells that still have resources within them, to maximise what
is coming out of the North sea? Is there anything in legislation that
prevents companies from stockpiling assets without exploiting
them?
Malcolm
Wicks:
We have an effective partnership with the industry,
known as the PILOT partnership, which the Secretary of State now
chairs. There are regular meetings, which I normally attend, in which a
range of matters are discussed. I am therefore confident that we have
arrived at an acceptance of a “use it or lose it”
principle. The industry itself has signed up to that. If a large
company—it might not always be a large company—decides
that its priorities lie elsewhere, there is a recognition that the
licensed work should transfer to another company, given the importance
of the UK CS to the British economy. I am satisfied that the regime in
place is truly the envy of the world. Many oil company executives tell
me that they wish other zones had that kind of partnership, so
I think that we have got it
right.
Martin
Horwood:
It is good to serve under your chairmanship
again, Mr. Amess. The Minister said that such decisions
would be essentially commercial, yet the powers in the clause are given
to him and not to the commercial operators. Therefore, the Department
for Business, Enterprise and Regulatory Reform will be evaluating the
commercial considerations. A rather crucial consideration that comes
into play is the future cost of climate change, especially if, as the
Minister says, the wells covered by the clause could be used for carbon
capture and
storage.
The
Stern report recommended that we take the future cost of climate change
into account in making commercial decisions now. That was a key
recommendation, and it suggested a methodology based on a rather
optimistic outlook that may or may not be right. Not all the measures
that the world was trying to put into place to reduce carbon emissions
will succeed. That seems to be a realistic
assumption.
Stern
recommended that methodology as the commercial basis for calculating
the future cost of climate change. That would be important if wells had
a value related to carbon capture and storage. If the
future price of carbon was expected to be high, carbon capture and
storage would probably be more viable in that respect. If the price was
artificially low, it would be less viable. Will the Minister confirm
that, in any commercial calculations that DBERR might make under the
clause, it would follow the methodology advocated by the Stern report
in calculating the future cost of climate
change? 1.30
pm
Malcolm
Wicks:
On the hon. Gentleman’s first point, most of
this is about commercial judgment, commercial decisions, and deals and
partnerships between different commercial entities. However, the state
does not hold its hand. The state intervenes through a regulatory
process. The state intervenes through the PILOT partnership that I have
just described—the use it or lose it, or fallow approach. The
state is actively involved. In these clauses we are trying to do our
utmost to ensure that there is final and effective decommissioning of
this infrastructure in our seas. We want to ensure that if one company
runs into financial difficulties and an associated company is involved,
decommissioning still happens, but not at the expense of the taxpayer.
That is what this is all
about.
The hon.
Gentleman introduces a far wider subject, which is featured in various
parts of the Bill. We have already discussed carbon capture and storage
and I feel confident that we will be able to demonstrate its value and
practicality. Given that the most obvious place in the UK to store
CO2 is under the sea in depleted oil and gas reservoirs, we
need to think this through. We are doing that, but we have some time to
consider the interface between the oil and gas industry and the
reservoirs and pipelines and the kind of infrastructure and regulatory
framework that we might one day need for CCS.
I think that the historian will
look back on this Bill—I hope this will encourage Members during
the more tedious moments of dry explanation—as the first time
that this Parliament looked ahead and sought to begin to put in place a
regulatory framework. Despite the Bill’s excellence it will not
be the end of the story. We will need to make progress to ensure that
the issues raised by the hon. Gentleman are properly
considered.
Martin
Horwood:
Perhaps I can buy the Minister a few more minutes
to glance at the advice that he might have been given. I hope that he
will respond to my substantial point about the future cost of climate
change and the carbon price that it would dictate in any cost benefit
analysis and commercial evaluation when deciding whether to maintain
access to a well or to plug and abandon it. The cost of carbon dictated
by the methodology on calculating the future costs of climate change is
crucial to that. Stern made clear recommendations on what that
methodology should be. I hope that the Minister can respond positively
now and say that DBERR, in making calculations like this, will use the
methodology on the future cost of carbon set out in the Stern
report.
Malcolm
Wicks:
The Stern report is a keynote document for the
century. I am not in a position yet to say the precise methodologies
that we will explore, but
we are certainly seized of the need to relate our
thinking and planning on CCS to that on the UK CS. Where there is a
potential for CO 2 to enhance economic production, for
example, we would want to insist that it happened. I may not entirely
understand where the hon. Gentleman is coming from and perhaps there
will be another arena in which we can discuss this. It is not as if we
are being slow on CCS—we are an active lead
nation.
Martin
Horwood:
I am not suggesting that we are going slow on
CCS, although I might have done so on other occasions. I am trying to
tease out the methodology that DBERR will use in calculating the cost
of carbon and whether it will be based on the methodology for the
future cost of climate change used in the Stern report. It is a fairly
straightforward question, although it may have a slightly complicated
answer, and it is critical to considerations such as this. If DBERR is
going to make essentially commercial evaluations of such projects, it
has to use a cost of carbon in its calculations. I am trying to work
out how it will calculate that cost and whether it will use the
methodology recommended in the Stern
report.
Malcolm
Wicks:
I might need to come back to the hon. Gentleman on
those methodological issues once I have looked at the record and fully
understood his questions. It is not as if we are being relaxed about
CO 2 emissions. If companies in any arena emit large amounts
of CO 2, their activities will be captured by the European
Union’s emissions trading scheme. They will therefore have
either to reduce their emissions—that is what I would
hope—or pay for any additional CO 2 ETS allowances
that they would need to buy. I think that his point is more specific,
although I am not saying it is not important. With his approval, and
possibly without it, I will write to
him.
Mr.
Binley:
I am still concerned about the question of capping
and abandoning wells in the North Sea in relation to carbon capture and
storage and their potential use some considerable period hence after a
well has been abandoned. I think I understood the Minister correctly. I
think he said that, once a well had been capped and abandoned, it could
not be reopened. He also said that wells would only be capped and
abandoned in extremis. I am told by the industry that we could get up
to another 15 per cent. of additional oil using carbon capture and
storage from the North sea wells. The process and the technology for
doing that, however, are some way off. I wonder, therefore, what
“in extremis” means. I would hate the thought of capping
and abandoning a well which in 15, 20 or 25 years’ time could be
used not only for carbon capture and storage but to enhance our oil
energy needs at that time. Therefore, I want to understand what
“in extremis” means in that respect.
The Minister is right to be
proud of the Bill. We are creating an important platform for the
future. Therefore, this is not a knocking process, but we need to
understand the possibilities inherent in additional North Sea
oil.
Malcolm
Wicks:
I have touched on the issue of enhanced oil
recovery and I have said that, in future, where there is potential for
CO 2 to enhance economic
production, we would want that to happen. I am
thinking through the implications of the hon. Gentleman’s
remarks. I agree with his train of thought and, although he was not
suggesting this scenario, it would be ridiculous if we abandoned all
the oil and gas wells, capped them and made it very difficult to reopen
them and then a few years later discovered that we wanted to use them
for CCS. Therefore, I can see where he is coming from.
My
understanding is that, once a well has been capped, it cannot be
reopened. I will check again with some experts to ascertain whether
that is really the case or whether we are talking about reopening at
enormous expense. I will make sure that the record is accurate. We
could be talking about a real difficulty if a well is capped.
There are two stories about the
UK CS. Both are true, but we need to say both of them virtually in the
same breath. We have been very fortunate with the oil and gas in the UK
CS since the mid-1960s. The first truth is that the resource is now in
decline. The last estimate I saw showed that the decline was something
of the order of 8 per cent. per year—it is quite marked.
The
other story is that that oil and gas are still very important to us,
and probably will be for about half a century or more—who knows?
No doubt, people will then re-evaluate. For example, there is the
potentially exciting development of feasibility studies looking at west
of Shetland, which was previously unexplored. Four major companies are
working together to determine the potential in that very difficult
terrain, where connections could be very expensive. The story of the
North sea continues, despite the decline. Why do I say that? Because
there will still be plenty of oil and gas wells as we develop CCS
potential.
As a lay
person, it does not seem to me that there is a problem of the two time
scales being totally out of sync, if hon. Members follow me. We will
have our demonstration project, and I suppose that in six or seven
years we will be in a better position to see the potential of CCS. I
hope—we all hope—that there is real potential. If so, we
will start to see new industries being born around carbon capture, the
transportation of CO2 and its
storage.
One can see
the economic opportunity and the importance of Britain becoming one of
the world leaders on the issue. One can imagine that there is a new
book to be written about the UK CS and the North sea in terms of the
storage, the monitoring and so on of CO2. We are not in a
difficult position time-wise, as far as I can
judge.
Charles
Hendry:
Will the Minister clarify the retrospective nature
of the clause? Subsection (4)
states:
“Where
an amendment made by a paragraph of Schedule 3 confers a power to give
a notice requiring the plugging and abandonment of a well, the power
may not be exercised in relation to a well the drilling of which began
before
commencement.”
Subsection
(8) defines commencement
as
“the time when that
paragraph comes into
force.”
Does that mean
that that cannot be done retrospectively to wells that have already
been sunk and that the measure applies to future wells rather than ones
that have already been constructed?
Malcolm
Wicks:
I think that the answer is yes. I will say one or
two other things on the matter. I did not anticipate such an
interesting debate on what I assumed was a humble clause, but I am
encouraged.
With the
hon. Member for Wealden, I was trying to think about how this area
might develop over the next few decades. In the future, when we think
that a well might be ideal for CO2 storage, it is possible
that we could suspend it rather than abandon it totally. I am advised
that we need to be careful about that option because, apparently, wells
cannot be used after 10 to 20 years as they become unsafe in a number
of ways. Nevertheless, that new information helps us with the scenario
that we are building up. Although I was hedging a bit on the issue of
abandonment, I am now clearly advised that it is permanent. Even if it
was felt that there was potential, it would apparently be cheaper and
safer to drill a new well rather than to open one
up.
On retrospection,
the power cannot be used for wells that have already been drilled or
where drilling has commenced. I think that I said that in my speech,
but I would like to emphasise it to the
Committee.
Question
put and agreed
to.
Clause 72
ordered to stand part of the
Bill.
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