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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