Examination of Witnesses (Question Numbers
140-159)
MR MALCOLM
WEBB AND
MR PAUL
DYMOND
19 MARCH 2009
Q140 Mr Weir: One other point we
have not covered in this is as well as the problem with credit
there is the rising cost to the industry. You say that last year
the cost of developing and producing a barrel of oil or gas rose
by 12% compared with 2007. Why have costs risen so dramatically
over the last few years and do you expect them to start falling?
Mr Webb: With regard to the second
point, yes, I do expect them to start falling and there are signs
that they will fall. We need to be careful about not believing
that is going to happen overnight, it will be a slowish process
and that is what history tells us, that when we have been through
these periods of recession before it will take some time for the
costs to come down, and we are working on that. The whole of the
industry is taking a responsible attitude towards that. Why did
they go up? They went up because there was a global pressure on
the system to find and bring more oil on to production. Furthermore,
you will recall a few years ago particularly for the offshore
oil and gas industry we had some particular events in the Gulf
of Mexico with hurricanes taking out an awful lot of capacity
there as well. It was a mixture of global pressures and a need
to go and find oil and gas combined with some physical problems
that happened that took out an awful lot of capacity. Those two
things combined gave rise to inflationary pressures on the industry
and that was where we saw a great increase in the costs, particularly
in the costs of mobile drilling vessels, for example, supply boats
and support vessels which were in short supply.
Q141 Mr Weir: That takes us on to
future investment particularly in the North Sea. Have the companies
you represent begun to scale back investment in view of the current
economic situation and what do you expect the trend to be over
the next couple of years?
Mr Webb: That is a very good question
and it maybe goes to the heart of our discussion today. In some
ways this is quite a simple business. The success of the North
Sea or the UKCS offshore generally comes down to attracting and
spending capital. You will have seen from our report that we believe,
going back to the Chairman's original comment about the 65% of
our oil supplies in 2020, if we can keep capital investment coming
through at the sort of levels that we have been having of late,
round about five billion a year, then that is achievable. That
is the core of it. What is happening at the moment, for the reasons
I explained a moment ago, is across the basin there is a problem
in getting that capital through the system. For the first time
ever, in our activity survey this year we gave a range of possibilities
on the capital expenditure for this year and that reflects the
uncertainty within the industry as to what is going to happen
and on the worst of those range of possibilities we are saying
that over the next two years capital investment could halve to
two and a half billion from the current five billion. We think
the answer, hopefully, is not going to be as bad that, that is
an awful lot of jobs lost if we get there besides the impact it
will have upon the ultimate recovery picture. We hope that can
be mitigated. I am sorry to sound like a chipped record but that
is why we are saying to the Government strongly there are things
that we in the industry need to do but there are things that you,
the Government, desperately need to do and you need to do it urgently
now with the fiscal system and with regard to helping these smaller
companies.
Q142 Mr Weir: Is the pressure on
the oil companies to reduce cost feeding down to the supply chain
and what effect is it having? The SCDI and Scottish Enterprise
produced a report a few weeks ago saying the supply chain was
£14 billion but that was only up to the end of 2007, if memory
serves me correctly. I just wonder what impact the decisions taken
by your members in exploration and development are going to have
on that supply chain within the next couple of years given the
current economic situation.
Mr Webb: There are two issues
there. Is the supply chain reacting to cost? Yes, I think it is
as best it reasonably can. Remember, a number of these rates are
locked in and it would be a noble thing for some people to give
up contractual entitlements on rates, so it will take some time
for some of these rates to come down. I am seeing a lot of responsible
actions within the supply chain on that. You are right, there
is also pressure from the employing companies on costs and everybody
is doing what they can to get that message across within the industry,
that we need to get to a different place on cost, but it will
take us time to get there. On the worst case, if we saw capital
investment fall by two and a half billion over the next two years
we are going to see 50,000 people lose their jobs, that is one
of the impacts on the supply chain that will happen and that will
be very, very serious.
Q143 Mr Weir: I was going to ask
you what the Government could be doing to facilitate investment
but I think you told us that pretty comprehensively earlier on
when you talked about the tax regime.
Mr Webb: Yes. It needs to do three
things and they are all sort of interlinked in some way. It needs
to help these small companies by releasing these exploration pools
that are accruing at 6% cost to the Government, so that should
not be too much of a problem for them I hope. The second thing
it needs to do is really take supplementary corporation tax off
new developments. As you heard from Alex Kemp, we need some very
clear messages on that. It is quite clear that Government recognises
the problem here. This value allowance is not the industry's suggestion,
it is the Government's suggestion, that was where it came from.
It came out of discussions we had at the beginning of this year
when the oil price was in a completely different place, so if
it was valid at that oil price it is doubly valid now and needs
to be much more potent now than it was then to help with these
short-term problems. The third issue is there is a problem around
decommissioning costs and the securitisation of the decommissioning
costs. Because of the way that it has set up the tax regime, the
Government is effectively requiring companies of all sizes, small,
medium and large, to make security provision for 100% of the eventual
decommissioning costs of these fields. That is an unrealistic
number because that is a tax deductible expenditure, therefore
why are companies being asked to make security for 100% of the
cost when actually at least 50, if not 75% of the cost is going
to be a tax deductible event. That is putting strain upon the
industry. By the way, it is also putting strain upon the banking
system right now. As a little aside on that, we have got, and
our Association has been at the forefront of developing this with
then BERR, now DECC, decommissioning arrangements or agreements
and those set out how we can cope with all of these problems and
they rate the securities that can be provided. Bankers' letters
of credit seem to be the instrument of choice of the Government
and also of parts of the industry as well. Unfortunately, the
number of banks that now pass the credit rating for those bankers'
letters of credit has fallen, including the market leaders in
that area, and people are seeing the credit rating of the Royal
Bank of Scotland has fallen and it has taken them out of the banks
that qualify for that. That whole area of security for decommissioning
also needs to be looked at and needs to be looked at urgently.
Chairman: This is clearly all part of
the fiscal and regulatory approach.
Q144 Sir Robert Smith: You have made
a strong case that with extra incentives there is a rosier future,
more jobs sustained, more energy supply and more long-term tax
revenues. Have you thought about what level that value allowance
should be pitched at to make a meaningful difference to future
investment?
Mr Webb: High. As high as possible.
I think it should be set at such a level that it takes supplementary
corporation tax off. There is a problem here as well. You may
have heard some very big numbers being floated around and you
need to be careful about that. You need to set the value allowance
so high to produce an after-tax effect that is quite restrictive
really. I would not want anyone to think that when Professor Kemp
was talking about 100 million or whatever that means there is
100 million of value allowance going to be paid to oil companies,
it does not work that way. I think 100 million produces an after-tax
effect of about ten million. That is another issue. We did say
to the Government that the value allowance is not our preferred
way of dealing with this because we think it adds further complexity
to the taxation system, but they have persuaded us that is the
only game in town and that is why we continue to talk to them
on that and we want to be as constructive about it as we can,
but it should be big.
Q145 Sir Robert Smith: You are engaged
in negotiations on bringing forward the exploration relief to
try and get the cash flow to smaller companies sorted.
Mr Webb: We certainly are, yes.
Q146 Sir Robert Smith: On the narrow
question of whether there should also be incentives for incremental
developments on existing hub platforms, a lot of this tax consultation
discussion started in a different climate where there was a recognition
by Government and industry that there were smaller fields, cost
challenges and so on, but the snowball increased in size as the
credit crunch hit and now we are seeing things that were being
discussed in a calmer environment being needed as tools to rescue
things in a really quite serious situation. Do you think there
needs to be that extra incentive to get those hubs protected by
encouraging incremental investment on them?
Mr Webb: Yes, I think there is
a case for saying all new projects is what we should be stimulating
now. If we go back to that point, we need to be sending a very
clear signal that this mature UK offshore province is a competitive
place to come and invest in and it is active and open for business.
The industry can do its part on that but, frankly, as we said
in our submission, we have a fiscal regime that is no longer fit
for purpose and it needs to be changed rather urgently.
Q147 Sir Robert Smith: We are a new
Committee because there is a new Deprtment and all sides have
welcomed the fact we now have a Secretary of State who is a champion
for energy and climate change and that is bringing together two
departments that should be together.
Mr Webb: We lobbied for it. I
cannot say that we affected the result of it!
Q148 Sir Robert Smith: You have expressed
concern about it being under-resourced and you think the 60 million
from the licence fees should be doing more to give resources to
the Department. What are the problems you are experiencing because
of what you see as under-resourcing?
Mr Webb: I have to be careful
here. We deal with a lot of very dedicated, hardworking civil
servants and I would say we see them working too hard these days
really. The system feels like it is under strain and under stretch.
There are a few people we deal with and we see them having to
deal with everything more or less and I do think there is a problem.
I cannot quote you figures, but I think there are unfilled vacancies
within the oil team and I have concerns as to the resources that
are available to that team. I also have another concern that with
the splitting out of this new Department we are now going to have
another departmental bureaucracy put on top of that Department
and I hope they are not playing the zero sum game and we find
more resource is taken away from the front facing people within
the Deprtment and goes back into the bureaucracy. You mentioned
the 60 million number and I do not know if you saw it but last
year The Guardian produced an excellent chart showing what
total Government expenditure was on a departmental basis, a total
of 586 billion for the year 2007, and when you looked at BERR,
the Department for Business, Enterprise and Regulatory Reform,
which was where energy was before, the total spend was 8.3 billion
but 7.3 billion of that was going to nuclear decommissioning.
When you looked further down you saw that energy supply and clean
energy was a total of 0.068 billion, which is 68 million, which
did not seem to me to be an awful lot. That is why we are interested
in that 60 million number. It looked like the licence fees being
paid for the North Sea were financing the whole of the energy
section of BERR and I do wonder what is happening within DECC.
We support DECC, but DECC has got to be able to deliver and has
got to have the right resources to do that.
Q149 Sir Robert Smith: One other
thing on the new Department and its role. One of the jewels in
the crown of the North Sea has been the huge expertise built up
there that has now earned a worldwide reputation and a big export
market, so there are the jobs that have come on the back of the
North Sea, we get the security of supply and the tax revenues
and the jobs, but do you have any concern that when energy was
in BERR it was in a department that was also thinking of economic
development and jobs? Do you still feel that there is a champion
within Government for that export, skills and jobs side of the
industry and the benefit that brings to the economy?
Mr Webb: That is a very good point
and I am not sure that we have linked up correctly with that yet.
I think it is in BERR, but we have not found it yet and we should
find it. You are right, there could be a diffusion of attention
there as well. I was surprised to see the other day that there
is an energy section still within BERR, I am not quite sure what
it is doing but maybe that is the section we go through and look
for some help on that.
Q150 Chairman: Can I press you on
one point in your submission about the EU ETS? You expressed concern
that the next phase could reduce production, presumably because
of the auctioning?
Mr Webb: Yes.
Q151 Chairman: First of all, do you
not think auctioning is the fairest way? Secondly, do you not
see that there are potential benefits from a rise in carbon prices,
particularly in terms of driving a number of changes in production
methods and also the potential for CCS storage in the future?
Mr Webb: Yes, yes, yes, and yes.
I agree with everything you have said. ETS is a good mechanism
for dealing with this sizeable problem we have and we need a fair
price on carbon. If you do not get a fair price on carbon then
you can forget the CCS because it is only a fair price on carbon
that is going to drive the CCS. We have no problem with that and
as an industry we have never had any problem with ETS. Gas flaring,
for example, is within the ETS system and we have no problem with
that either. We are not anti-ETS. This is a slightly more difficult
industry-specific issue. There is no alternative but to generate
our electricity offshore in these platforms and using the resources
that are at hand, which is the gas and the production on the platform.
It is impossible to think of retrofitting new equipment on to
these old platforms. If the offshore industry is required to buy
all its allowances for that electricity generation then on our
estimation operating costs are going to increase by between 20
and 40% on platforms offshore and that will give rise to the premature
decommissioning of some of those platforms. When those old hub
platforms go then that will take out satellite production from
around them, so we believe up to a billion barrels of oil and
gas are threatened by this. However, there is some good news.
As you may know, the EU has a trade intensity test linked to the
carbon leakage and it is very clear, and we have agreement with
DECC on this, that these offshore installations of the offshore
oil and gas industry qualify for that. That resolves some but
not the entire problem. It resolves half of the problem because
the emissions relate in part to electricity generation but also
to other direct power uses offshore, so we are still left with
half of the problem and we believe we need to find a solution
to that other half too. To use that carbon leakage term, this
is pure carbon leakage. If we do not produce this oil and gas
from areas around our shores we will have to import it from elsewhere
and assuming we achieve all of the Government's renewables targets,
which we hope we do, we know, for example, we will still be reliant
on oil and gas for 70% of our primary energy supply in 2020. The
UK offshore, I am sorry to say, will not be able to meet 100%
of that but it is vital we close that gap as much as we can, both
in terms of energy security and also for the economic benefit
of this country because that is an awful lot of expensive imports.
Q152 Chairman: It certainly is.
Mr Webb: That is the issue there.
We have no problem with ETS, no problem with a sensible cost of
carbon, that is going to be vital to drive some of the environmental
investment that needs to happen, and no problem with CCS, CCS
is an area of opportunity for our industry, particularly the supply
chain, but there is a specific problem around ETS Phase III which
the Government is fully aware of.
Chairman: Can I just touch upon the issue
of environmental impact. The industry is well established and,
generally speaking, its record has been pretty good on environmental
management but, of course, as you push out into the undeveloped
areas, particularly into the west of Shetland, deepwater, extreme
weather, there are concerns about the potential environmental
impact and also in relation to sensitive areas. David wanted to
ask a question on that.
Q153 Mr Anderson: The various environmental
bodies have told us that regulation control is generally good
but sometimes compliance is not, do you accept that?
Mr Webb: I would have said that
levels of compliance within our industry on environmental issues
are pretty sparklingly good, frankly.
Q154 Mr Anderson: What procedures
have you got in place to make sure that they work?
Mr Webb: Do you mean self-policing
it from an industry viewpoint?
Q155 Mr Anderson: Yes.
Mr Webb: We do not double up on
the work of the regulators, we help the regulators who are doing
that, but we do keep an open dialogue with regulators right across
the piece and try and make sure that we are as constructive as
we possibly can be in these areas.
Q156 Mr Anderson: Is complying with
regulations a burden on the industry? Is it driving people away
from investing in the UK?
Mr Webb: Is it a burden? Of course
it is a cost, but I do not think there is anything we would point
to where we would say because we have got these environmental
regulations people are not coming to invest in the North Sea,
no.
Q157 Mr Anderson: In terms of the
decommissioning process, what challenges do you face there?
Mr Webb: The challenge is to try
and postpone it for as long as we possibly can actually and keep
this infrastructure in place so that we can get the 25 billion
barrels recovered. That is the first and foremost challenge. As
to the other challenges, I think we are well up to them. We have
got a magnificent supply chain here and we have the confidence
and capability to do it. Some of this decommissioning is already
going on, by the way, we are not complete novices on this and
I have every confidence that we can deal with the issue. The problem
around decommissioning is the way that—I do not want to
sound like I am kicking the Government all the time on these tax—
Q158 Mr Anderson: We are used to
it!
Mr Webb: —the decommissioning
regime is based upon some false premises. It is relying upon two
things. It is relying upon corporate governance and bankers' letters
of credits. If the banking crisis teaches us anything it is that
is not where we should be and we need a new system whereby we
can have properly established retirement funds for these assets
financed on a post-tax basis.
Q159 Mr Anderson: The RSPB have told
us that they would like a better survey of seabirds and wildlife,
particularly west of Shetland. Is that something the industry
would support and, if it supported it, would it help to fund it?
Mr Webb: The industry has had
a good track record of working with the RSPB upon surveys in the
past. We have got a lot of data and we would be very happy to
share it with them and talk to them about that issue. You did
say support it and not fund it.
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