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29 Oct 2009 : Column 154WH—continued
The significance of a competitive and competent supply chain to the success of an oil basin is often underestimated. Indeed by far the greater part of the 450,000 jobs supported by the UK oil and gas industry is provided by the contracting community, and it is vital that the Government should maintain a close relationship across that sector. DECC, as the Department responsible for delivering energy policies, has a key role to play in
promoting a successful upstream oil and gas supply industry. The fact that many areas of specialist support are provided by other Departments and agencies can create complexity, so it is important that DECC should maintain close links with industry to provide additional guidance when required. That is achieved either directly with companies, or via regional or sector trade associations, many of which it was instrumental in establishing.
A good example is Subsea UK, which was set up five years ago with initial core funding from DECC when, along with industry representatives, it recognised the enormous growth potential in the subsea sector, both in the continental shelf and the broader international market. Subsea UK is now well established and is helping to grow opportunities for its 200-plus member companies and to secure a good share of the rapidly expanding global market, which is set to expand by a further 50 per cent. in the next five years. The current sectoral focus for DECC is now on offshore decommissioning, where funding is being provided to help to create a new trade body to foster UK capability and to assist indigenous companies to win a share of that work, which will be worth billions of pounds over the next few decades.
The UK oil and gas supply sector has been a great success story, from the early days of the industry when American companies and personnel dominated and carried out much of the work to the present day when UK expertise is recognised and sought after in almost every oil-producing province in the world. The challenge will be to anchor that expertise in the UK and to ensure that we still have a significant oil industry well beyond the life of the UKCS. Currently the overseas oil and gas supply market is worth around £5 billion a year, with the potential to grow fourfold in the next 25 years. DECC and its partner UKTI will continue to work closely with the sector to help it to achieve that ambition. I alluded earlier to my being a fairly new Minister in the post. I am about to arrange my first ministerial visit to Aberdeen to see for myself the work that is now going on.
The debate comes at an important point in the development of our offshore oil and gas resources. The industry faces a key challenge to achieve full economic recovery in a phase of inevitable decline in production levels and in the size of the remaining prospects. The financial crisis and the volatility of oil prices have magnified that challenge. The Committee's inquiry into this vital industry has therefore been timely, and we welcome its constructive recommendations. I assure hon. Members that the Government are fully committed to playing their part, through continued close working with the industry, to ensure that offshore oil and gas continue to contribute as much as possible to energy security, investment and employment in the UK, and, not least, to the vital transition to a low-carbon future, which matters so much to us and the whole world.
Sir Nicholas Winterton (in the Chair): I am hoping, subject to time, that we shall be able, with Members' permission, to call the Minister to reply to the points that they raise in the remainder of the debate.
3.25 pm
Sir Robert Smith (West Aberdeenshire and Kincardine) (LD): Perhaps as a member of the Procedure Committee, I should write to myself to see how today's procedure has unfolded, and whether any lessons can be learned for future Westminster Hall debates.
I welcome the fact that the report has come before the House today. The hon. Member for Sherwood (Paddy Tipping), in introducing the report and the Committee's findings, put the case that the Committee had found for the industry's needs. It was the Committee's first inquiry, and it was welcome that it shone the spotlight on such an important industry.
I declare my entries in the Register of Members' Interests, as a shareholder in Shell and as someone who recently visited a carbon capture and storage pilot project in France, funded by Total. Of course, my main interest is a constituency one, however, as my constituency is just outside Aberdeen, in the north-east of Scotland, where the heart of the industry is based-although not the whole of it; it is UK-wide. The jobs that we speak of affect the whole of the UK.
I pay tribute to the history of the industry, and its contribution to our security of supply and balance of payments. It has benefited our climate change agenda. This country met its Kyoto commitments because of the lower carbon outputs from gas generation, and could well meet its future climate change commitments if, as has been talked about, carbon capture and storage is further developed. The industry has made a phenomenal contribution to the country's tax revenues, and I am sure that the Treasury is aware of that, and does not need the Minister to remind it. As we have said, there has also been a massive contribution in the form of jobs. The Minister rightly paid tribute to the sacrifice that has been made, because the industry operates in an extremely hostile and dangerous environment, and lives have been lost over the years in making sure that this country has benefited from the resource.
The nature of the oil and gas industry will always lock Government and the private sector together, because the resource under the ground belongs to the nation and for the nation to benefit from it we need the private sector to use its skills and initiative to get it out of the ground. That inevitably means a far closer link between Government and industry than there is in many other sectors of the economy. I pay tribute to PILOT for its work in bringing together the industry, the Department and the wider Government in dialogue to build a common purpose for the benefit of society.
To deal now with the recommendations of the Committee, I think that the fiscal regime is still at the heart of the effort to unlock that full potential. The Minister may not be a Treasury Minister, but the Department's crucial role is to make sure that the Treasury understands how much it needs to engage, if the Department is to achieve its full objectives on security of supply and promoting the industry in this investment climate. There has been a welcome improvement in that engagement, through the field allowance discussions, but the Treasury still shows too much caution at this time in the life cycle of the North sea. Understandably, the phrase "a dead weight" is brought up. To explain to the layman, if the Treasury gives a tax incentive that encourages an activity that would have happened without the incentive, it will lose out. However, the Treasury needs to recognise that this time, given the maturity of the North sea, the age of its pipelines and platforms, and the costs of investment, if there is a real downturn in the North sea and we lose that core infrastructure, it will not come back.
During past downturns, there have been enough large fields to tempt people back, so the Treasury could err on the side of caution in respect of the dead weight argument: it could afford to be cautious about incentives because it knew that if it got it wrong it could up the incentive and bring people back. However, at this time in the North sea, in the context of the downturn in the world economy, when the North sea is hitting maturity and there is an expensive operating environment and much smaller fields with which to compete for global investment, in the dialogue that the Treasury says it will continue with the industry, it needs to work fairly quickly to ensure that it maximises the incentives. There may be a bit of loss of future tax revenue because the Treasury has incentivised something that was going to happen, but a more important outcome will be if, globally, we still have a sustainable industry and are still maximising recovery from the North sea.
Mr. Weir: Is it not also true that if we are to have a future in carbon capture and storage it is vital that existing infrastructure continues to be invested in, so that it is available for that future work? If it is not, we may not be able to do carbon capture and storage.
Sir Robert Smith: That is a valuable point. The pace of progress that we are making towards carbon capture and storage means that it is important to keep that infrastructure there for some time-there have been several postponements on the route to CCS. The Treasury must recognise that it has a very targeted regime-it is high-temperature and high-pressure. All the experts say that it is going to incentivise just one field in the whole of the UK continental shelf.
Ensuring that the existing platforms-the existing hubs-get incremental development has been mentioned. The enhanced oil recovery talks are welcome, but one of the quickest ways to enhance oil recovery for a platform is to get new wells drilled from that platform. The Treasury needs to consider how it can incentivise that extra development in those platforms. If the big platforms and the pipelines that connect them are decommissioned early, the small fields lying around them will no longer be worth exploiting.
The west of Shetland has already been discussed. What the Minister needs to take away today is the fact that the decision points are coming up on that project, at a time when the gas price for the industry is extremely low. A bold investment decision is required on the gas price going up between the point when the decision is made and when the gas is needed. Every encouragement, therefore, is needed for the west of Shetland. That encouragement is psychological, because if the province were unlocked more fully, that would send a positive message about the vibrancy of the UK continental shelf, and support the supply chain that would still be there for the more incremental developments in the remaining part of the North sea.
One of our recommendations that the Minister did not touch on was the acceleration of payment of tax allowances to try to deal with the bank cash-flow crisis. The hon. Member for Sherwood made the valid point that, although the Government replied that they have a global strategy for dealing with the banking crisis-that is a recognisable part of the strategy-in the car sector,
it was not just left to the banks to sort out the sector's problem. A lever has been identified by the industry, which the Government could use in that industry, which is important both for employment and strategically. The Minister should take back to the Treasury the need to look again at that matter, to ensure that it is doing everything it can to overcome the cash-flow crisis, which is stifling potential developments. He should take back the message to the Treasury, "No shocks in the pre-Budget report this November". Again, stability is the watchword for getting investment into the industry.
We have the pipes and platforms, but if other investors coming into the North sea cannot access them, we are not getting the benefit. It could be said that we might not start from here and that we do not have the regime we need for now. The regime started off all right with big players coming in. People thought that the North sea had a short life cycle, and did not see the need to build in some of that infrastructure. The Gulf of Mexico has a much more effective regime for handling access to infrastructure, and the Department may need to dangle even more tough talk about how it will come back to the issue to incentivise the owners of that infrastructure, so that they see that it is in their interest to unlock it efficiently to small players, rather than have the Government come in and do that for them.
The wider public need to understand that, at this point in the life cycle of the North sea, it is smaller, new companies that are bringing in that investment opportunity, and the innovation and excitement to unlock the smaller finds. However, they will not keep coming here if they keep hearing stories about how the person ahead of them in the queue got everything else lined up, but when it came to getting the stuff ashore could not find a practical way to do it, even though it looked as though there was an obvious solution there. Unless we can unlock the infrastructure and ensure fair and effective access to it, we will lose out again.
We have already touched on the environment, and the recognition of the industry's good work. The Government's response to recommendation 17 was that they had written to the statutory nature conservation bodies to see if there were any concerns. Has the Minister had any replies from those bodies?
We have also touched on carbon capture and storage, and the important contribution the North sea can make in that field. It was frustrating seeing the Miller field project nearly come to fruition, and then see a competition launched to replace that project, with the competition deadlines and rules shifting. Will the Minister assure us emphatically that this competition will meet its deadline, and that people who make the effort to put in tenders will get a positive and quick response? We will not be the world leaders in this industry unless we get started on making the industry possible. As the hon. Member for Sherwood said, we have so much to play for in this country. We have that storage resource in the North sea, the carbon sources in the coal, oil and gas that we can still produce, and the innovation, skills and technology in the industry. A regime to effectively unlock that full potential and deliver that green agenda is needed.
The other welcome part of the report is the spotlight we put in the last recommendation on the export potential of the industry. I look forward to the Minister's visit to Aberdeen, because he will see a physical sign of what we have been talking about. He will see a vibrant, go-ahead,
goal-setting, high-tech industry, which is a major manufacturing base and a major source of new technology and export earnings for the United Kingdom, anchored in the north-east of Scotland, because of what has happened in the North sea. Departments have been restructured, and energy has moved from DTI to DBERR and BIS, and now to DECC. DECC obviously focuses on the environment and climate change, but will the Minister reassure me that it still has just as vibrant a role as spokesman for the industry as a major employer and exporter?
I welcome the Committee's report and the spotlight that it puts on an often unsung hero of the UK economy and a major contributor to our country's well-being. The Government and industry are for ever inevitably locked together in an attempt to make the best of those resources. Any oil and gas left in the ground does not pay tax, does not support jobs and does not contribute to our security of supply. The North sea is a great success story, but a lot remains to be achieved.
3.40 pm
Mr. Mike Weir (Angus) (SNP): I agree about the importance of the oil and gas industry to the economy, particularly in the north-east of Scotland. The House will not be surprised at the fairly strong Scottish input to this debate from me and my parliamentary neighbour, my hon. Friend the Member for West Aberdeenshire and Kincardine (Sir Robert Smith).
The oil and gas industry has been hugely important to the economy of the north-east of Scotland for the last 40 years. As a student who went to Aberdeen university in the early 1970s, I have seen also the social implications of the industry over those years. The oil industry has provided a great deal of money and employment in the area, but that comes with human consequences, as has been noted. That was brought home to me when I attended a memorial service at the Kirk of St. Nicholas in Aberdeen for those who lost their lives in the helicopter crash in the early part of the year. It showed the huge dangers that those employed in offshore oil and gas face in their day-to-day work. Indeed, during the course of our investigations, members of the Committee visited a gas rig off the Humber to see for life there for ourselves.
As we have heard, this is the first report from a new Committee. It is significant that we chose to focus on the oil and gas industry, which is important to all for the reasons already given. We say in the introduction to the report that
"It is vitally important swiftly to decarbonise the UK economy if the country is to meet its obligations to tackle climate change, and clearly the use of fossil fuels must diminish. But within the timescale for these changes to take place, the UK will still need to use the oil and gas resources remaining in the UK continental shelf."
I come at this possibly from a different angle from other Members here today in that I would like to see the word "Scotland" rather than "UK" in there. None the less, the sentiment is the same. We are moving towards decarbonising our economy, but it will take time. We have huge resources, but they must be used to the best advantage.
The Secretary of State appeared before the Committee yesterday, and he too made the point that we are in a state of transition as we work towards a low-carbon
economy. He is perfectly correct. The existence of oil and gas off our shores puts us in an enviable position in some respects, in that we have a cushion during the transition. However, it also presents us with a big challenge. So many people are employed in the oil and gas sector that we need to manage the transition carefully, ensuring that the skills developed in the North sea are retained and transferred into new jobs in that new economy. We have been presented with the real challenge of ensuring that carbon jobs are transferred into green jobs-a subject to which I shall return.
The importance of the oil and gas industry to the economy cannot be overstated. As we note in the report, more than 38 billion barrels of oil equivalent have been produced over the last 40 years, and the UK remains 13th in world rankings for combined oil and gas production-I hope that the Minister is not superstitious. The industry body Oil and Gas UK told us that
"the industry is the most significant contributor to this country's security of energy supply, today providing 70 per cent. of our primary energy needs."
That again illustrates the importance of ensuring that the industry functions properly and that we get the maximum from our oil reserves.
It is also abundantly clear from the Committee's report that a considerable amount of oil and gas remains within our waters. Witnesses estimate that it is anything between 11 billion and 37 billion barrels of oil equivalent. As the hon. Member for Sherwood (Paddy Tipping) said, that is a wide variance. I appreciate that the Department of Energy and Climate Change will take the median figure, but by any account a great deal is still there. Whether it is recoverable will depend on many factors, some of which are detailed in the report. It will also depend on the prevailing price of oil, and whether some of the smaller finds are economic.
The oil and gas industry will clearly remain an important aspect of energy policy and energy security in the years ahead. We said in the report that
"The Government is right to focus on security of energy supply as a key challenge for the UK. Much of the UK's current electricity generating capacity is set to close over the next decade, and there is a continuing risk of disruption to energy supplies internationally as a result of political and economic turbulence. In this context the importance of domestically produced oil and gas is obvious and the case for Government doing all it can to help maximise economic production is compelling."
I do not think that anyone would disagree with that.
The industry is most concerned about the tax aspects. I noted the papal bull read out by the Minister, but it told us next to nothing. I spoke with several representatives of the oil industry at a recent CBI reception. What they most want from the pre-Budget report is no nasty surprises. I hope that the Minister can at least assure us of that. [Interruption.] I take it from the Minister's smile that the answer is no. To be scrupulously fair, however, the CBI representatives said that they had had a good engagement with the Chancellor when he visited Aberdeen recently to speak to the industry.
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