Examination of Witnesses (Questions 60-79)
MR MALCOLM
WEBB AND
MR MIKE
THOLEN
20 JUNE 2006
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.[8]
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 is just 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% 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% 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%, and that is why in my remarks I was talking about 80%. 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% 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 7
or 8% 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 10 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.
8 UKOOA confirms it is not aware of a country which
has seen greater tax changes on oil and gas production over the
last three years than the UK. Back
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