UK offshore oil and gas - Energy and Climate Change Contents


Examination of Witnesses (Question Numbers 126-139)

MR MALCOLM WEBB AND MR PAUL DYMOND

19 MARCH 2009

  Q126 Chairman: Good morning, gentlemen, it is very good to see you. You will be aware of the terms of reference of the Committee and the work that we are doing. It might be useful for the record if you say a little word of introduction, who you are and who you represent. If we start with you, Mr Webb, please.

  Mr Webb: I am Malcolm Webb. I am the Chief Executive of Oil & Gas UK. Oil & Gas UK is the trade association that represents the North Sea industry.

  Mr Dymond: I am Paul Dymond. I am the Operations and Supply Chain Director at Oil & Gas UK.

  Q127  Chairman: Thank you very much, gentlemen. As you know, the Committee is looking at the potential future reserves of the North Sea and the wider areas in relation to the Continental Shelf and factors which relate to the industry, including fiscal regimes, training and what the industry needs in relation to encouraging future development and exploration as well as our potential reserves in relation to the Continental Shelf. I was very interested to see there are estimates from Oil & Gas UK that you could provide 65% of the UK's oil requirements by 2020. That seems a very ambitious figure. How confident are you that this is achievable?

  Mr Webb: It depends upon the business climate in which we work.

  Q128  Chairman: I thought you might say that.

  Mr Webb: Given the right political and business climate, of course, we can achieve that. That is not a blue-sky number. That is not something we picked out of the sky but is actually a number that comes from sustained investment of the sorts of levels that we have been seeing over the last few years. It is not an overly ambitious target in that sense. It does, however, depend upon the right business and economic climate and, as you know, at the moment this industry, like all other parts of British industry, is facing some particular challenges. We have the double-whammy of the global recession and the banking crisis and that is causing some problems at the moment. As you heard from Professor Alex Kemp just a moment ago, it is important that some steps are taken rather urgently now to maintain the pace at a reasonable level over the next few years otherwise those targets could become unachievable and that would be disastrous for the country.

  Chairman: We will be coming on to the current market conditions in a moment and exploring what your views are on that.

  Q129  Mr Weir: You heard the discussion we had with Professor Kemp regarding the question of the shared infrastructure and Oil & Gas Independents told us they felt they faced problems accessing infrastructure controlled by the larger companies and the voluntary Code was not working particularly well. Do you have any comments on that? Do you think the voluntary Code is working well? How would you feel about greater government involvement through a common carrier principle?

  Mr Webb: Shall we deal with that in two parts and look at the Code of Practice first. I am lucky to have to my left here one of the authors of that Code of Practice and someone who is very engaged in its development at the moment. If I may, I will hand over on the Code of Practice to Paul who can tell you something of the history and what we are doing at the moment to try and make sure that it does work in a better fashion than it has done in the past.

  Mr Dymond: The Code of Practice was an attempt in 2004 to get the various parties together who recognised that the future of the UKCS very much depends on those smaller fields coming in and making use of the existing infrastructure and all parties are in agreement with that. The Code of Practice has worked well in a number of the parts that we put together, in particular in terms of providing technical information and, indeed, providing commercial information from deals that have already taken place so that people have a benchmark by which to assess what they might get if they should knock on the door. The one piece of the Code that has not been working particularly well, and we all recognise that, as all access to infrastructure is negotiated access between the parties we put in place a mechanism to give a backstop to that negotiation in the event that it did not come to a conclusion on its own. The backstop was effectively for the party wanting access to make use of the existing legislation and ask the Department for a determination from the Secretary of State. It is that piece that is not working particularly well. I think the key issue there was if you were going to ask for that you needed to have confidence that you were going to get an answer that was both workable in the longer term and available to you within a useful timescale and it was comprehensive enough that you could make use of it. There have been question marks over all of those things, which we have been working on. I have to say we were actively looking at this over the course of the back end of last year and still are looking at how we can move this forward. It is very much a work in progress. There is a broad spectrum of companies involved, members of Oil & Gas UK but also OGIA and obviously the Department, looking at how we can make use of the legislation to have a backstop to negotiations that people can have confidence in. That is not just about how does the process work, although it is very much about that, but it is whether we think the legislation is effective and may or may not need amendment. As you are aware, the Energy Act made some amendments to the legislation and tightened up some of the holes that were in there, but whether it needs further amendment, that may come out of the discussions.

  Q130  Mr Weir: Have there been any negotiations that have stalled and are unable to get to a conclusion?

  Mr Dymond: Yes, there are a number. There are a number that have gone forward, deals are being done, but at this current stage in a mature province there are both complex technical issues associated with some access requirements and commercial issues. If there is very little value in the field and you have to provide a service then there is maybe not very much money in terms of whether that is sufficient to make that work well and incentivise people and keep the infrastructure going for the period. There is a commercial issue in terms of where the boundary is in terms of sharing the rent of a new field coming in, but there are also technical issues that have to be addressed as well. It is a very complicated area, which is why it depends on where that negotiation stalled as to how you view it.

  Q131  Mr Weir: Is that not likely to become an increasing problem as the smaller fields that are being developed are trying to use the existing infrastructure? Is that problem not going to increase unless it is sorted out fairly quickly?

  Mr Dymond: Yes, but how do you sort that out. If you look to the Secretary of State to do the determination then you need to be assured that process can happen and will come out with a fair answer at the end of the day for all concerned. As I say, the small independents have been part of the conversation and everybody is in agreement that if somebody is providing a service then there needs to be remuneration for that and coverage of the incremental costs. It is a matter of that balance. In some instances there is no deal to be had and in some instances there is but it is very difficult to get to a conclusion. That is what the Code is meant to do. Another piece that has been working in the Code, and we are working very hard within Oil & Gas UK, is about behaviours, responding when people ask, being responsive in terms of progress. The Code very much talks about behaviours. We created guidance notes on how all the parties can make the Code work best for them and we are running a series of training courses to allow negotiators to get a better feel for that. All of this is making a difference. It certainly made a difference very quickly in 2004 and there are indications that it is making a difference with the extra focus that we have put on it over the last six to nine months.

  Mr Webb: I think it is fair to say that everybody is determined this Code should work and work better than it has done. There is no denying it has not worked as well as we hoped it would when we put it in place in 2004. In part that is because of the sort of regulatory back-up available and a lack of conviction within the industry, frankly, that it would ever be operated. I think these new amendments we are putting through will be to the good and that is the right way forward. You mentioned the common carrier system and retrofitting common carrier arrangements onto these existing pipelines is going to be hugely complicated, hugely expensive and I cannot believe is the right way forward. The best thing to do is for the industry and the Government, and the Government is working determinedly on this too, to work together to make this existing system work better. I think we can do it.

  Q132  Mr Weir: How about the new fields west of Shetland? Has thought been given to the hub system that Professor Kemp mentioned and the common pipeline to allow development of those new fields?

  Mr Webb: Again, it is a complex issue. There are some developments that could go forward there. Do you saddle those developments with the incremental cost of a common carrier pipeline that could sink the economics of those developments? I think the answer to that is no. There is a gap there that needs to be filled if you want to do the common carrier. Who is going to pay for that? I do not think the Government is going to pay for it in the short-term. The best answer for the west of Shetland is to go back to look at some of the fiscal incentives that we can put in place to make sure we get as much as we possibly can on the back of the existing development, which means improving the economics of the development.

  Q133  Chairman: You emphasised the cost of a potential common carrier development west of Shetland, but is there not an advantage if you had some kind of hub system where you may share some of the services those could be shared amongst different companies and the costs could be shared, and also other companies could possibly go into the hub and the costs would fall on them but bring down the overall cost of exploration? Is it all one way? Are there not cost benefits from this?

  Mr Webb: In the long-term you can see the advantages of scale that could come from that, it is a question of how you get there and who is going to finance that capital until those other fields come in because, as Professor Kemp said, there is an awful lot of exploration activity that needs to go on in the west of Shetlands yet, it is still in the frontier areas, so who is going to bridge that gap. If you put the cost of that down on to the first developers past the post they are likely to sink and then we will not get those either. It is a question of who finances that.

  Chairman: Can we look at some of the issues of the current market conditions and explore those for a moment.

  Q134  Judy Mallaber: If we can look in broad terms at market conditions before we then move on and look at the fiscal regime. In broad terms is the price of oil in your view the single most important factor in the current market conditions faced by your companies?

  Mr Webb: I do think it is a very important issue, but it is not the only one. As I said before, right now the industry as we speak is beset by a double-whammy of the recession which is feeding through into this lower oil price and also the banking crisis which is causing problems of finance throughout the industry at all levels. By the way, there is another thing I would like to say in parenthesis, and I hope we get round to it eventually: this industry is not just about producing oil and gas, it also is about a fantastic engineering success story that is based here in the north-east of England that is doing six billion a year in export business across the globe and has got fantastic potential for growth. That is the other side of this industry that we can sometimes forget about and we really must not forget about it. To come back to your question, the price of oil is definitely a very important factor at the moment but so is the seizing up of the banking system and the fact that small companies, for example, find the equity markets closed to them. It is not all about debt, it is about equity as well and they are finding the equity markets closed to them. They are also finding the debt markets closed to them for their development work. That is feeding through into very conservative attitudes necessarily by some of the medium-sized players as well. In previous recessions when there has been a problem on the price you may have been able to look at the banking system as a sort of back-up and support but, unfortunately, it just is not there at the moment it seems and, therefore, people are adopting very conservative attitudes towards their capital investment programmes in that knowledge. If you like, they have to live off their kill, they have to live off their cash flow and have to take a conservative attitude towards that cash flow. The banking crisis is causing this problem and then you have this low oil price which is depressing the cash flows and all of that is repercussive, it interacts with one another, and therefore we have quite a serious situation facing us at the moment on which the Government really needs to act. The final part of the equation is costs. As you heard from Alex Kemp earlier on, over the last four years we have seen an explosion in the costs in our industry and that is a global phenomenon, not something that is just in the UK. It will take some time for those costs to come down but that is the other area we need to work on. I would not want you to think that this industry is looking just to the Government for help on this; the industry is going to do its own stuff with some self-help measures that it definitely needs to pursue in the areas of cost and also needs to make sure it does not make the banking crisis worse, but we do need some help from the Government now as well and rather urgently, frankly.

  Q135  Judy Mallaber: Can we unpick a few of those issues before we move on to what the Government might do? What you are saying reflects very much what the Oil & Gas Independents' Association told us about the problems smaller companies are having in getting access to finance. You also mentioned medium-sized companies. What kind of difference is there in the factors that are affecting larger companies from the smaller and medium-sized companies? Is there a difference again in relation to those companies you are talking about in relation to exports and the supply chain? Are they affected differently or are the factors very similar in relation to access to finance?

  Mr Webb: They are affected differently. In terms of oil companies, and I do not wish to be over-simplistic, we should divide them into three groupings. The first is the super-majors and, frankly, right now I do not see too many of the super-majors that have got a problem on cash flow; they are relatively well financed. At the other end of the scale, however, you have got the small companies that the Government's policies over the last ten years have very laudably brought into this basin and we certainly need them. One little factoid: last year 80% of the exploration expenditure in the North Sea came from small companies. They are part of the important lifeblood of this basin now. Those small companies have real problems in accessing debt and that is all to do with the banking crisis and the fact that equity markets were shut. You do not, by the way, finance exploration wells with debt, you cannot get anybody to lend you the money for that, they would be mad and you would be mad to loan money on that, you have to do that with equity capital, but those markets were closed to these small companies. Also, those small companies are finding it exceptionally difficult to get project financing now from the banking system and we saw, for example, only last month RBS announcing that it had withdrawn from project financing. There is a problem there for those companies and that is access to debt and access to capital. That is where our proposal for those small companies is that the Government can do something, it can release equity capital to them by releasing this pool of exploration reliefs which, by the way, are accruing on the Government's books at 6% per annum which I would have thought is massively in excess of the Government's cost of capital, so the release of this could almost be of benefit to the Government. They could release those exploration reliefs to those small companies, give them some capital to get on and drill some wells and also give them some capital to leverage some debt for the development as well. That is what should happen for them. That is the problem they have got. If you go to the medium-sized companies, they have a different problem. They have a little problem that I would say is lack of confidence that the banking system is there for them. These are well-run, conservative companies so they are not going to take risks with their finance and, therefore, they are living within their cash flows. Their cash flows are constrained because the price of oil and gas, importantly gas as well as we have heard, is down at the moment so they are living conservatively within those cash flows and the result of that is capital expenditure is being cut. There the solution is trying to unfreeze and bring more confidence back into the banking system for those companies and I guess the answer for them is no different from the rest of British industry, it is what large parts of British industry are calling out for. That is their problem. The majors do have a problem and so do some of those medium-sized companies and in typifying these companies in this way there are cross-overs. There are some small companies that have got very strong cash flows and are not so reliant on the banks and there are some medium-sized companies that have got very strong positions as well, but there is a contagion problem. As you know, in the North Sea we work in joint ventures everywhere, that is the way we share risk, so if you have got a party who is a small party, maybe a field development, who cannot get the access to the finance that, if you like, is a contagion to the whole project and the project is slowed down and does not go ahead. Even the projects in the companies that can afford to do things are being slowed down at the moment because of this problem in the capital markets. I am sorry, that is rather complicated.

  Q136  Judy Mallaber: No, that is very helpful. Some of the problems you have described there very graphically, which I understand, are very similar to those that, as you have said, are common to small and medium-sized companies in my constituency, at least one of which is in your own supply chain as it happens. Is there any reason why your industry should be given special treatment as compared to other sectors I have where the equivalent to the fall in the price of oil, which is your additional problem, for them might be a fall in general trade? Overall, is there any reason why your companies should be treated any differently or more favourably than, say, companies in any other sector?

  Mr Webb: I think this sector has got some particular issues around it that do deserve and warrant special attention, yes. Again, it goes back to what you heard from Alex Kemp in his evidence today. Frankly, we are on something of a treadmill in the North Sea. Unless we keep the projects coming through and, as he mentioned, it is about 20 a year that we need to keep coming through as a minimum, that infrastructure which Mr Weir was talking about will become decommissioned because it will not have a useful economic life. If that happens then we have got a major problem in recovering what we think is up to the last 25 billion barrels of oil and gas yet to be got from the North Sea. We have to keep this industry going forward. If there is a sudden and dramatic collapse now that could have an impact upon the infrastructure and it could also have an impact upon the capability of this industry as well. You could well see capacity exported from Aberdeen and once it is gone it might be difficult to get it back here. It is hugely important we keep it going. The other point I would like to make is this industry is not asking for any cash handout, bailout or subsidy from the Government, it is not asking for that at all, but it is asking that the fiscal regime is readjusted, and it does need to be readjusted in any event in our view, for this mature oil province in general terms but there are some specific things that need to be done now and we have made them very clear to the Treasury.

  Q137  Judy Mallaber: We are going to come on to that. The money that the Bank of Scotland was prepared to put into the development of the Norwegian bank, was that just to do with their financial regime or were there other factors as well? Why were they prepared to put money in there when, as I understand it, some of your companies are finding it extremely difficult to get any money?

  Mr Webb: I could not comment on the individual business decisions of the Bank of Scotland but I think you make a very good point here. The issue is international competitiveness. The UK offshore has no God given right to development finance, it has to compete with other basins around the world, including the Norwegian basin. The issue for this basin is to stay competitive and as a mature oil province that presents a number of particular challenges for us. Yes, financiers and investors will look right across the globe for opportunities to invest in oil and gas and what we have to do is make sure that the UK has got a compelling case for them to come and invest here, but at the moment I am not sure that is true.

  Q138  Sir Robert Smith: I should declare my financial interest in the Register of Members' Interests that I am a shareholder in Shell and also as Vice-Chair of the All-Party Oil and Gas Group we visited ONS in Stavanger funded by the oil industry. On that point about the engagement of Government and the industry, perhaps you could confirm the big difference between this industry and many other industries is the product, the oil and gas, belongs to the nation and, therefore, by definition the nation and the Government are going to be tied together because without the industry the nation gets no benefit from the oil and gas and without access to the oil and gas the companies get no benefit. In a sense, when you are calling for assistance to see you through the crisis it is assistance for the benefit of the country and your members, is it not?

  Mr Webb: Absolutely. I do believe that the industry and Government has got a common cause here, we both want the same end, which is the maximum ultimate recovery of reserves for the nation from the UK offshore areas.

  Q139  Sir Robert Smith: You represent the supply chain as well as the actual investors. Are those of your members who are still in a reasonable situation with their cash treating their supply chain in any way to keep them going through the crisis by paying quickly or anything like that?

  Mr Webb: Yes. I am aware of individual cases but I could not go into those now. There is a responsible attitude there. As a trade association we are taking steps to make sure that we do approach this in a responsible way. For example, one way we can make the credit crunch worse is to lengthen credit periods within our industry. We have adopted a Code of Practice for all invoices to be paid within 30 days. It is absolutely vital that people stick to that at the moment. Shortly we will be launching a new helpline to reinforce that point and make sure the industry does stay there. There are a number of self-help measures that we are taking within the industry at the moment to make sure we do not make matters worse, which I am afraid is happening in other parts of the industry.



 
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