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29 Oct 2009 : Column 160WH—continued
The Minister has made it clear that he cannot say too much about taxation. Frustrating though that is, we all understand why. However, he spoke of the difficulties in respect of development west of Shetland. New thinking may be necessary if development is to go ahead on a major scale. It became clear during the course of our investigations that there are serious concerns, and not only about taxation. We say in the report that the
current field allowance is inadequate, especially when trying to encourage development in the difficult terrain west of Shetland. I urge the Minister to consider with his departmental colleagues and the Treasury what more can be done to ensure proper fiscal incentives, so that the industry can continue to develop west of Shetland.
The Committee also pointed out the twin difficulty that many in the industry are finding in arranging finance. The hon. Member for Sherwood said that few banks were operating in that area. However, I recall being told that only one of the major banks-Lloyds HBOS, or Lloyds banking group as it now is-operated in the North sea, but that it was not keen on making new investments. The result is that companies already operating in the North sea can obtain finance, but that new entrants to the market are finding it extremely difficult. Indeed, the Oil and Gas Independents Association has said that the bank was not lending to new operators. We also noted that many of the major companies were reviewing budgets in light of the recession and that they were taking a most conservative approach.
The then Minister of State said in evidence that the major oil companies were unlikely to be affected. That may be true, but as has been pointed out, many of the companies operating west of Shetland and in the more marginal parts of the existing North sea fields are smaller companies, and they are feeling the chill winds of the credit crisis and finding it difficult to obtain the necessary finance. Indeed, at least one small company went bankrupt as we were starting our report. I recall receiving a massive number of e-mails on the reasons for that, but it was linked to the difficulty of getting credit to allow the company to continue working in the North sea.
Finance is very important, and I again urge the Minister to push his colleagues to take up the matter with the banks. The matter was addressed, to some extent, in the Government's response. It states:
"The Government has introduced a range of general measures to support the financial sector and encourage lending to businesses, including the recapitalisation of the banks and the introduction of the Asset Protection Scheme. These measures are supporting access to finance for all sectors of the economy, including the oil and gas sector. To date, the difficulties reported by oil and gas companies do not seem to differ significantly from those encountered by other sectors, but the situation is kept under review and the Government will consider the case for more specific measures in the light of emerging information."
To be blunt, that strikes me as slightly complacent. There is ample evidence from those we spoke to in our report that there is a serious difficulty here. The BPs and Shells of this world probably do not have a finance problem to the same extent, but the small companies do, and it is the small companies that hold the key to development not only west of Shetland but in the more marginal parts of the existing mature basin of the North sea. Many of the companies find that, along with difficulties in finance, they face steadily rising costs. Much of the reason for that is outwith Government control; it is about the availability of particular rigs and the difficulties after hurricanes in the Gulf of Mexico with rigs being sent there and such like. We were told that someone was paying £400,000 a day for a drilling rig, which, by any calculation, is a fantastic sum of money to operate in the North sea.
Sir Robert Smith: What is causing consternation is that people are still being quoted the same price even in the downturn. It may be that the rig market needs looking at to see how it operates and whether it feeds through the benefits of the downturn, by which I mean the cost structure.
Mr. Weir: That is a very good point. From the evidence, it seems that much of the difficulty stemmed from hurricane Katrina and other hurricanes in the Gulf of Mexico. Huge damage was done to the infrastructure, which will take a long time to rebuild. None the less, it is fair to say that there is a serious difficulty with cost.
The Minister and others have already spoken about infrastructure, but we questioned many witnesses about the infrastructure difficulties with regard to exploitation, particularly for smaller companies. There is a great deal of infrastructure in the North sea, most of which is owned by the major oil companies. If we are to have any chance of maximising extraction from the more marginal fields within the area, we need to have a system that allows smaller operators access to that infrastructure. That was an issue on which there was some agreement between the independents and the large suppliers. The Oil and Gas Independents Association told us that
"increasingly, we are finding smaller accumulations in the North Sea, and they cannot support their own dedicated infrastructure, so they have to be able to tie them back to existing infrastructure, which has to be there. Ultimately, it drives exploration. If you are expecting to find relatively modest pools, you have to know there is an efficient way of getting it to the shore."
"The Association has serious concerns about the operation of the industry's Code of Practice relating to infrastructure access, which they believe is hampering their ability to operate."
It is fair to say that there is a difference of opinion on that point between the independents and the large operators. Even the majors conceded in evidence to us that that part of the code had not been working particularly well.
As I pointed out in an intervention, that issue comes into sharp relief when considering the future exploitation of the resources west of Shetland. We are told that there is considerable potential there, but many were very cautious about the viability of much of that. Clearly, the hostile and difficult environment was an important factor, but one of the principal factors was the high cost of production and the lack of infrastructure and the cost of providing it.
We took a great deal of evidence on infrastructure. Again, there were clear differences between the smaller players and the major companies. Oil and Gas UK made the fair point that it was difficult to see how a common carrier system could be funded because it would be a disincentive to the first in the field if that company had to meet the upfront costs with no guarantee of payback, and it was unlikely that the Government would want to fund the system. Inevitably, it suggested that the Government might have to look at the fiscal incentives.
In the Gulf of Mexico, there is a common carrier arrangement, which shows that such arrangements can work in a basin such as that, so the Government must look more closely at the idea. Although I appreciate that there are enormous difficulties with this issue, it is a nettle that we need to grasp. We are all agreed that exploitation of the resources west of Shetland is important
for our energy security, and it should not be put at risk by a lack of agreement on the infrastructure necessary to exploit it. Again, I urge the Minister to consider that issue and engage with both the major and smaller companies to establish a system that will ensure that we can exploit those important resources.
I listened carefully to what the Minister said about infrastructure, but I am afraid that I struggled to understand the difference between what is now being done and what has been done in the recent past. It seems to me that there has been discussion between everybody, but no real movement forward.
Again, as I mentioned in an intervention, if we are considering carbon capture and storage, it is vital that we sort out the problem of infrastructure. Much of the infrastructure in the North sea is now fairly old. It needs to be maintained, which is expensive. There is a real danger that, unless there is agreement about how the infrastructure will be used in the future and how it will be used for carbon capture and storage, it will simply no longer be maintained or it will be decommissioned. That will undermine our efforts to capture carbon and store it for our own climate change reasons and to create many new jobs in north-east Scotland.
As I said earlier, I represent a constituency in the north-east of Scotland, which, in the past, has benefited from the presence of North sea oil-not perhaps to the extent of my parliamentary neighbour, the hon. Member for West Aberdeenshire and Kincardine. None the less, it has had a significant influence. Many of my constituents have worked, and continue to work, in the oil industry. Their employment illustrates how the industry has evolved and changed over the years. Many of them had originally worked in the North sea, but now they could just as easily work in any area of the world. Indeed, I have recently met constituents who work in Ivory Coast, Nigeria, Kazakhstan, Norway and many other countries. The skills developed in the North sea have allowed an industry to develop that can export skills to other areas of the world, and that bodes well for employment in north-east Scotland, as oil and gas reserves inevitably wind down. We must look to the export of skills in the industry in the future.
Another point we touched on was the future, as we move away from oil and gas. We must consider diversification because, however much we may regret it, oil and gas are, inevitably, finite resources, and they will go down over the years.
We have touched on carbon capture and storage, which is obviously very important. I do not want to go over the whole story of the Peterhead project yet again, but that was a missed opportunity for the Government. The project, which was ready to go, linked our power station with an offshore installation. It was a great tragedy that, due to dithering on the part of the Government, it did not go ahead. I understand that it is now going ahead in Abu Dhabi. The project could have given us a world lead in this technology. However, there are other projects, particularly Scottish Power's proposal to link into the Longannet power station in Fife, which could then link into the North sea.
As others have stated, the continuing delays on the carbon capture and storage competition are causing a great deal of concern. The hon. Member for Sherwood put it very well when he said that it was a contest
without a finishing line. Far from being world leaders in carbon capture and storage, we could end up lagging behind everyone else.
Along with the hon. Member for West Aberdeenshire and Kincardine, I visited the Total plant in the south of France. I suppose that I should declare that in the Register of Members' Interests and I should also declare an interest as vice-president of the all-party oil and gas group within the House. That visit demonstrated to us that others are now pushing forward and developing carbon capture and storage. There are various different types of CCS. The ones concerning the North sea are particularly interesting for Scotland and the UK, but there are others coming up, and we have to ensure that we are not left behind in that important technology. It is not just about carbon capture and storage. Other renewables are now being placed offshore, in particular wind farms. The Crown Estate recently announced the grant of exclusive rights for the development of wind farms around the coast, including two off the coast of my own constituency, at Inchcape and Bell Rock. That offers a huge potential for green jobs and for those skills that have been developed in the North sea oil and gas industries. Many wind farms will be built in areas where the oil and gas industry has operated for the last 40 years, and many of those skills will be needed.
In previous years, the port of Montrose in my constituency had a considerable oil and gas business, although that has wound down to some extent. It is looking to take advantage of the potential for the construction and subsequent maintenance of the wind farms. That is good for the future. There is a future for oil and gas, both immediately and through diversification in the long term. However, Government action is needed to ensure that the fiscal regime is correct, that continuing development is encouraged and, crucially, that the infrastructure remains for the new industries and that a new infrastructure is developed. We must ensure that we get the maximum possible from west of Shetland.
4.1 pm
Simon Hughes (North Southwark and Bermondsey) (LD): Like other colleagues, I welcome this significant report. It is the first report from the Committee on Energy and Climate Change, and I thank the hon. Member for Sherwood (Paddy Tipping) and his colleagues for the work that they have done. It is a solid piece of work. We have not yet heard from the hon. Member for Wealden (Charles Hendry), who speaks for the Conservative party, but as he also served on the Select Committee, I doubt whether he will have changed his views.
There is a consensus: we sing from the same song sheet about what the priorities for the offshore oil and gas industry are in the UK. I hope that those who take an interest or work within the industry are aware of the attention that the House gives to these matters. We salute the contribution that those people have made to the UK economy, not only now but over the past decades. We salute their vision and innovation, and the bravery that they have shown-and continue to show-in doing work that is often very difficult.
As a London MP, I can say not only that the industry is significant in places such as Aberdeenshire or Angus, but that there are probably people in all our constituencies who work within it in one way or another. Last year, I
was on a Thameslink platform at Blackfriars station very early one morning. I was going on a sad mission to the funeral of our late lamented colleague, Russell Johnston, in Inverness cathedral. The Thameslink train was delayed, which made the chance of catching the plane to get to Inverness slightly more precarious-as it happened, it just arrived in time to make the connection. On the platform, people were talking to each other, even though it was early in the morning. I was talking to and sharing my concern with someone who commuted once a week from the east end of London to Aberdeenshire to work in the industry. He came from London but was of Asian extraction, and he had made that journey for years. Even though he and his family were based in London, he had just as much of a commitment to the industry as people in the north-east of Scotland. This is a UK enterprise and we should recognise that.
I pay tribute to my hon. Friends who, as one would expect, have taken a huge interest in and greatly supported the industry over the years. My hon. Friend the Member for West Aberdeenshire and Kincardine (Sir Robert Smith) is an eminent member of the Energy and Climate Change Committee, and he has often engaged with the industry. My right hon. Friend the Member for Gordon (Malcolm Bruce) has previously spoken for the Liberal Democrat party on such matters and has served on Select Committees in many guises and incarnations. He continues to sustain his interest.
I acknowledge the expertise and interest of the hon. Member for Angus (Mr. Weir). Owing not only to his place of birth and university education, but to his constituency, he rightly takes a deep interest in the oil and gas industry that is valued and appreciated. Whatever the differences between parties in Scotland, from what I have heard and read today, I do not think that there is a significant difference in the general thrust of what we say.
I have two other points, one of which is relevant to the debate and has already been mentioned. The issue is to do with Shetland. Both my hon. Friend the Member for Orkney and Shetland (Mr. Carmichael), and his predecessor, now Lord Wallace of Tankerness, have ensured that the rest of us understand these issues. In the past, I have been to both Orkney and Shetland in somewhat inclement conditions, and I have realised how precarious life is onshore, let alone offshore. It is important that we remember that it is not all about comfortable, modern technology and flying people out in a helicopter and bringing them back again. The Liberal Democrats also have the great guru, my hon. Friend the Member for Twickenham (Dr. Cable), who is our shadow Chancellor. He was the chief economist for Shell and has ensured that we all understand these issues. I shall return to him in a moment.
I will not repeat the points that have been raised, but I want to put this debate in context. The Liberal Democrats take an interest in these issues. There was a debate in the House a fortnight ago, precipitated by the hon. Member for Aberdeen, North (Mr. Doran). It was mostly about the health and safety issues in the industry. We have taken an interest in the UK industry, but as the hon. Member for Sherwood rightly reminded us, the issue needs to be looked at in the context of Europe and the world. The security of energy supplies is an absolute
precondition, not only for economic success but for peace in the world. If there are two issues that could lead to the risk of conflict now and in the future, they are disputes over energy and water supplies.
I have just returned from a second visit to Ukraine and a conference about freedom and democracy. The hon. Member for Sherwood hinted at this issue, and it will not surprise anyone to hear that one of the issues uppermost in the minds of everyone in Ukraine-where they are starting a presidential election campaign-is the future of energy security. Ukraine had a precarious time both earlier this year and three years ago when Russia effectively turned off the tap.
As the Select Committee report says, in 2007, thanks to the UK oil and gas industries, we were self-sufficient in oil and we produced three quarters of our gas. However, with declining supplies, both Britain and, more importantly, Europe have and will need to look outside the continent. We believe that it is central to the security of UK and European energy supplies that we continue to exploit what nature has given us with the UK oil and gas industries, as well as building a secure European energy policy. I will not be diverted far down that road, but I make a plea to the Minister and his colleagues that, during the remaining period of this Government and Administration, at both ministerial and prime ministerial Council meetings, we must work towards an energy policy that is part of an European energy policy.
I am always nervous about the fact that the Conservative party has never seemed as willing to see a UK energy policy that is part of a wider European energy policy. If we are to ensure that we can not only export materials such as oil or gas, but import them, we must have a European super-grid. As well as the east-west supply, we need secure supply pipelines that run from north to south throughout Europe, not only for fossil fuels but for renewable energy sources. That is the great debate to do with Gazprom and the pipelines that come from the former Soviet states. Unless we have that context for our energy security, we are all in trouble.
Russia, which is now the world's largest producer of natural gas and the second largest oil producer after Saudi Arabia, is a hugely dominant supplier. Its state-owned companies are dominant suppliers, and that is a dangerous and precarious position for the rest of the world. That is why what we do at home is so important.
The other part of the backdrop to the issue is topical. Just the other day, on 14 October, the eminent report by Lord Turner of the Committee on Climate Change was published. The report included predictions of what might happen to oil and gas prices over the years. My hon. Friend the Member for Twickenham has always argued that we need a stable pricing regime to avoid spikes and the peaks and troughs of uncertainty. The hon. Member for Angus said that we do not want any unexpected surprises in the Chancellor's autumn statement. The world cannot easily cope with unexpected or steep variations in the price of oil and gas. If we are to have some sense of energy security, we must ensure that the supply is secure, so that prices can be secure.
It was encouraging that the projections by the Committee on Climate Change show a gradual increase in annual gas prices over the next decade, as that provides hope for security. Projected annual oil prices also show a gradual and not too steep increase. From our constituents'
points of view, any significant increase in gas and oil prices, irrespective of what use the suppliers make of them and whether they add a fair or an unfair amount, will have a huge impact on domestic budgets, particularly for poor people in this country. It is imperative that we have the best security of supply.
My hon. Friend the hon. Member for West Aberdeenshire and Kincardine said that we very much sign up to the Committee's key recommendations that we must decarbonise the UK economy quickly, while keeping our oil and gas supplies and incentivising maximum opportunities from them, and that we need sustained investment. Like the hon. Member for Angus, I am slightly troubled that the Minister, partly as we might have expected, gave us an inscrutable answer about what the Government might do. The Committee was clear about it. Recommendation 5 says:
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