UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 341-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

ENERGY AND CLIMATE CHANGE Committee

 

UK OFFSHORE OIL AND GAS

 

 

WEDNESday 11 MARCH 2009

 

MR STEVE JENKINS, MR ALAN BOOTH and MR MARTYN MILLWOOD‑HARGRAVE

MR MARTIN HARPER and DR SHARON THOMPSON

Evidence heard in Public Questions 1- 96

 

USE OF THE TRANSCRIPT

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Oral Evidence

Taken before the Energy and Climate Change Committee

on Wednesday 11 March 2009

Members present

Mr Elliott Morley, in the Chair

Nadine Dorries

Miss Julie Kirkbride

Anne Main

Sir Robert Smith

Paddy Tipping

Dr Desmond Turner

Mr Mike Weir

Dr Alan Whitehead

________________

Memorandum submitted by Oil and Gas Independents' Association

Examination of Witnesses

Witnesses: Mr Steve Jenkins, Chairman, Mr Alan Booth, Chief Executive Officer, Encore Oil, and Mr Martyn Millwood Hargrave, Chief Executive Officer, Ikon Science, Oil and Gas Independents' Association, gave evidence.

Q1 Chairman: Good morning, gentlemen, welcome to the Select Committee for Energy and Climate Change. We are pleased to see you. As you know, we are having an inquiry into oil and gas reserves in the North Sea and west of Shetland, and we very much welcome your evidence. For the benefit of the Committee would you say a word about who you are and your role in the organisation?

Mr Jenkins: I am Chairman of the Oil and Gas Independents' Association. We have got approximately thirty members. It is the smaller companies in the UK, mostly non-producers. We have representatives from foreign companies who have UK subsidiaries operating here. We are mostly interested in the exploration and appraisal. Some of our members are developing hydrocarbons but most are appraising and developing.

Mr Booth: I am Alan Booth, a director of Oil and Gas Independents' Association and also the CEO of a small UK oil and gas exploration company called Encore, which we established in 2005.

Mr Millwood-Hargrave: I am Martyn Millwood-Hargrave. I am a member of the OGIA. I run a company called Ikon Science, which is a technology provider and service provider to the business, so really representing that part of the business.

Q2 Chairman: Thank you very much. If I could kick off, gentlemen, it was very interesting to look at some of the suggestions about what could be available within the Continental Shelf in terms of oil and gas. Presumably, over the years there has been a certain degree of work done on mapping and seismic analysis; how much confidence do you have in terms of what you know is on the Shelf, both in terms of your current reserves and also the potential for the future?

Mr Jenkins: At the minute we have less than 9 billion barrels that have got commercial plans to develop. You probably have heard numbers of up to 25 billion barrels.

Q3 Chairman: Yes, quite significant numbers, yes, in some of the briefings, yes.

Mr Jenkins: They are largely due on discoveries, and also an estimation from the geology and geophysics of what prospects might contain. We risk those prospects, and those are the risk numbers that are being quoted - but really it is less than 10 billion barrels it has got commercial plans to develop.

Q4 Chairman: What are the restraints on those commercial developments? Is it the price of oil; is it the overall costs of the exploration; or is it the technical challenges?

Mr Jenkins: Currently, we are faced with a very high-cost environment. The North Sea is a very high-cost environment to work in. We have got prevailing costs from last year, when oil was $147 a barrel; and those costs as far as drilling is concerned, have not come down yet. We are still looking at perhaps $400,000 a day for a rig. We are seeing some coming down, but most of those are long-term contracts. Companies such as ours rely on taking one or two rig slots to drill, and we are having to pay very high prices for that. As far as development is concerned, it is access to infrastructure - the UKCS infrastructure with EAG. It was not designed to last this long and from a smaller company point of view we have to get access to that infrastructure, to put the oil in to bring it ashore.

Mr Booth: If I could add to some of Steven's comments, the main issue, as you quite rightly point out, is the price of oil, which is a global commodity and is the same pretty much around the world. What is specific to the UK increasingly, in terms of finding these new reserves, is access to capital to explore for them. We have put in our submission that the nature of the companies prepared to explore has changed significantly, simply because of the nature of the basin. We are of course reliant on getting equity from the capital markets now, and when we do find things getting debt, debt markets - and, as you know, that is very difficult at the moment. What all investors like to see is stability and predictability in any regime in which they invest. The UK has not always been an area where they have had a great degree of comfort. The oil price is obviously very important, but it is about access to infrastructure when you do find hydrocarbons. Your investors want to know that if you find them you can develop them, and they are going to get a return for the risk they take. Those are the principal issues that drive activity here.

Q5 Sir Robert Smith: I must first declare my interest: as a shareholder in Shell, which is in the Register of Members' Interests; and Vice Chair of the All-Party Group for the Offshore Oil and Gas Industry. In that role, we went on an offshore northern seas visit, and accommodation was sponsored by various oil companies. On access to infrastructure, is there a crucial message that if we are going to see the rosy picture, then whatever happens that infrastructure has to be seen to be worth maintaining so that it is still there; because you could not from scratch - the finds you are now finding would not be much use without that infrastructure?

Mr Booth: It is vitally important that infrastructure is there. Increasingly, we are finding smaller accumulations in the North Sea, and they cannot support their own dedicated infrastructure, so we 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. It is vitally important that it stays there. I guess you have touched upon the issue of the infrastructure code of practice, which came out in 2003 or 2004. As we put in our submission, we are not convinced that is working effectively. We would like to see changes in that regard.

Q6 Sir Robert Smith: More intervention by the Government?

Mr Booth: The Government does have the ability to intervene on tariff arrangements; however, it needs to be invited to do so, and certainly the infrastructure code, which was introduced a few years ago, requires all companies to issue an invitation to the Government to participate. I can tell you from first-hand experience that that is perhaps not happening as often as it should do, or at the time it should do.

Q7 Sir Robert Smith: So what should change?

Mr Booth: It is difficult. It is still a voluntary arrangement, and until the industry decides it wants to apply those voluntary arrangements, it is really not going to happen. I have always had a bee in my bonnet about this issue, and it is still there. My own company is in the middle of trying to get access to infrastructure, and without naming names -----

Q8 Paddy Tipping: Go on!

Mr Booth: We only have one development under consideration, so it is very easy to find out! The issue is that the companies concerned did not want to issue the automatic referral notice, which is the invitation to Government, because our operator told us, "we didn't want to upset the other side and we want to agree the terms before we put it in". That is not really why it was put in place, but that is the nature of - a direct example of what is happening right now.

Q9 Chairman: If there were going to be some changes to this code, what would be your priority?

Mr Booth: I think you have to understand before you start exploring for hydrocarbons and wanting to develop and appraise hydrocarbon accumulations, what the terms and conditions will be to go across that infrastructure. What you do not want to do is find your hydrocarbons and then you find someone who owns the infrastructure wants to take what they might regard as a fair share, and what I might regard for my shareholders as a disproportionate share of the risk I have taken. My view is that that happens quite a lot.

Q10 Paddy Tipping: We have a Government that is becoming increasingly interventionist; is this an area in which it ought to be more involved?

Mr Booth: I think they should seriously consider that. I am not a great fan of intervention myself, but we have an extensive infrastructure in the North Sea and we do need to make sure that it is made available for those who wish to produce hydrocarbons that still need to be found and still need to be produced, and there is a role there for Government.

Q11 Mr Weir: Perhaps I should mention my interest as another vice chair of the Oil and Gas Group, but you say in your submissions that there should be a common carrier status for infrastructure. Can you explain to us what you mean by that?

Mr Booth: It means that there is effectively guaranteed access to major infrastructure. It is something that is quite common in the Gulf of Mexico. The US is not known particularly for interventionist policies, but it is the way you ensure you get access to that infrastructure, and you pretty much understand the terms under which you do.

Q12 Mr Weir: But who imposes the common carrier status? Is it a -----

Mr Booth: I believe it has to be a regulatory event. It is quite clear from the North Sea that there is one pipeline system that effectively has a monopoly over large parts of the North Sea.

Q13 Sir Robert Smith: On the role of the Department, have you got views on how effective the Department has been in the past in general towards the industry, and have you noticed any impact of the merger of the new Department yet in a positive or negative way on resources?

Mr Jenkins: It has been in a positive way. It is nice to see the word "energy" being mentioned. It is good to have a Secretary of State for Energy because we believe it is very important to the UK, sustainability of energy. We from the OGIA and smaller companies' point of view have been able to engage directly with ministers now, and we find them very approachable and very interested in what we are doing. Recently, with the PBR, we have had opportunities to submit suggestions to the Treasury, reacting to their request for comments, and that has had various receptions. We can speak to the MPs involved and also the members of the Department, so we are engaging probably at a higher level. How it was set out previously on a day-to-day business, it worked very well, but now we are feeling that we can engage at a higher level in government.

Mr Booth: One of the important things that should come out of this, and I think we are starting to see it working, is that obviously a lot of North Sea assets and structures could be used for carbon sequestration, and it is nice to have a department where that communication is more effective than it was in the past.

Q14 Chairman: Has your industry given some thought to that potential?

Mr Booth: My company is examining that particular issue. We have identified a structure that we believe is very suitable for carbon storage. The issue we have at the moment, which I talked to the Department about yesterday, is how we get a licence to use that structure for carbon storage. All I can be offered at the moment is a hydrocarbon licence, but I do not want to extract the minimal amount of remaining hydrocarbons in there; I simply want to examine its use for storage of carbon. That is where we need to progress. How do I do that?

Mr Jenkins: It is worth mentioning too, if you like, the full cycle approach to reservoirs, right the way from exploration through to storage. The information increases as you learn more and more about a reservoir, so you are instantly high-grading the things that can be used, and be very useful for storage. That is a factor. That is something you get for free, if you like, from doing hydrocarbon exploration, the knowledge of how things may work. There are quite a number of studies, both in academia and some semi-commercial, building up now and giving us a shape of where this next stage will come. As Alan says, the big unknown is the regulatory environment that will create this new business. In this country we have a tremendous academic and technical infrastructure in the universities - naming a few names, obviously Imperial, Cambridge, Durham, Edinburgh. There is a fantastic skill base there - probably world-class - and we ought to start making use of this. Currently, there is a blockage right at the sharp end, which is, "how do you do it?" There is a lot of knowledge about how we might do it, but turning it into some kind of commercial arrangement, however the industry is structured and whether there are subsidies or whatever, needs to be thought about.

Q15 Chairman: There are opportunities there at some point.

Mr Booth: Yes.

Q16 Dr Whitehead: On the subject of the relationship between carbon capture and storage, licensing and further exploitation of reserves, the suggestion is that carbon capture and storage, as a by-product, enables further reserves to be recovered. What analysis have you been able to do of that in relation to activities that may be proposed by you on carbon capture and storage? For example, is the structure you have identified one that might be viable as far as that sort of process is concerned?

Mr Booth: One of the issues around injection of CO₂ into reservoirs is that primarily it enhances recovery of oil - the carbon, the CO₂ does come out and has to be re-injected, so there is a limited amount you can put in on a long-term basis. However, in large parts of the world it is an effective way of recovering more hydrocarbons and dispersing of CO₂. The issue we have in the UK is that once you move that project offshore, it is increasingly expensive to do so. The stretch we are looking at is an old depleted gas field, which has the characteristics necessary to inject, we and our partner believe, large amounts of CO₂ so there is no hydrocarbon recovery going to come from it, it is just a way of sequestering that CO₂ into a long-term structure that should remain there in geological time.

Q17 Dr Whitehead: You mentioned that you had no clear idea about how a licence might be obtained for that infrastructure. Are you therefore not satisfied with the early moves that have been made, for example in the Energy Act, to establish a licensing regime, and do you think a lot more needs to be done in terms of clarifying who is the first mover and how a licence might work over a period of time?

Mr Booth: A little more clarity would be useful, and a timescale would certainly be useful. My particular issue at the moment is that there appears to be some European funding available, and I need fairly quickly to understand how I can acquire - my company used to own this licence under a hydrocarbon licence, because we thought maybe we could exploit the remaining gas, but as it turned out there was not sufficient gas to exploit. We then considered its use as gas storage, but the work we did suggested that this particular stretch was not suitable for that. However, it was eminently suitable for storage of CO₂ because you need certain specific conditions to make it worthwhile. However, I could not retain the licence because it was a hydrocarbon extraction licence, and I did not want to extract hydrocarbons from it because it was not worthwhile. This is the dilemma I am in at the moment: I have had to give it back to DECC because I told them, "I do not want to exploit for hydrocarbons; I would like to use it for CO₂" and we are at a bit of a loss to know how -----

Dr Whitehead: So you think the break arrangement is the present difficulty of the fact that you have to -----

Q18 Sir Robert Smith: There is no regime!

Mr Booth: There is no regime effectively, yes. I would happily take it as a hydrocarbon licence. We have spent nearly a million pounds on choosing a brand new site for this structure, principally with a view to gas storage. As it turned out, it was not suitable, but perhaps now for CO₂ sequestration. I have invested significant capital in this, and I do not know how I can progress it further. I requested DECC yesterday - I am not saying they are not helping because they are trying to help me, but I am sure there is not a regime that allows me to.

Chairman: Tell us a little more about the current market conditions that you are operating in. Anne will ask questions on this.

Q19 Anne Main: You have touched on it in your opening remarks. I would like to explore further about what the dramatic decline in oil prices is having on your industry.

Mr Jenkins: The decline in oil prices is making some fields uneconomic to produce. We have a cost-base that has increased with the oil price, and as I said previously it has not decreased. A lot of these contracts are very long-term, so the break-even in some UKCS fields is $40 a barrel. Some of the older fields - yes, they can be produced for a lot less, and they are making good profits, but new fields - $40 or $50 is the oil price that is needed in this current pricing regime to develop the field. The fact is that it is not economic to develop.

Q20 Anne Main: Surely, you expect prices to rise significantly once the global economy comes out of recession, so can you not build in an allowance for these fluctuations?

Mr Jenkins: It is a long-term plan. You decide, when you are going to develop a field, that it could be four or five fields until that field comes on-stream. Contracts are awarded at that time. Economically-wise there are a lot of oil companies that - the submissions we put in to this Committee and the Treasury are based on $50 oil, so even above where we are at the minute.

Mr Booth: Perhaps I can give you an actual example of how costs have moved. In 2004 in my previous company, we were drilling exploration wells in the North Sea, and a suitable rig cost $60-70,000 a day. That same rig now costs upwards from $350,000 a day. Now that the oil price is back to where it was in 2004, we cannot afford to pay $350-400,000 a day for a rig. It is not economically viable.

Q21 Anne Main: The balance sheet you are describing - is this all contributing to why you are having trouble accessing funds?

Mr Booth: It is definitely a part of it, yes. The cost of exploring - the risk that you put into drilling a well, is too high, given the cost environment we are in - the ability to make returns.

Q22 Anne Main: Why are your drilling rates for rigs so much?

Mr Booth: These are not our rigs; these are rigs owned by drilling contractors.

Q23 Anne Main: Why have the drilling rig rates not reduced?

Mr Booth: Because there has been a lot of demand for them.

Q24 Anne Main: So you feel that you are over the proverbial barrel!

Mr Booth: Prices will fall. There is obviously a reluctance from drilling contractors to see those rates fall, and at the moment that is where we are in the industry. The drilling contractors quite like charging $300-400,000 a day for a rig rather than $70,000, but the industry does not want to use rigs at £300-400,000 a day, so it will correct. The costs related to drilling rigs, or steel, whatever, will necessarily fall. The issue has been that as an industry there has been a shortage of people. Now the cost of people has risen significantly, and it is extremely difficult, if not impossible, to see those costs come back significantly.

Q25 Anne Main: You are painting rather a depressing picture, if I might say so! You have the inability to access the necessary infrastructure; you are disadvantaged in drill rig prices; you appear to have lack of access to funding, and possibly because you are smaller even more so: what is the point?

Mr Booth: Of?

Q26 Anne Main: You being in the market.

Mr Booth: Well, we are not in the market at the moment. As an example, for the last 15 my company, which is a small listed British company, drilled seven wells. Next year we will not be drilling any wells.

Q27 Anne Main: A small British company being brought down by the economic recession or just by the big boys crowding you out?

Mr Jenkins: It is not the big boys. It is - okay, contractors. It is the fact that usually there is a six-month lag in cost. If you have oil at $140 a barrel and it has fallen down to $45, there is usually a six-month lag until costs catch up. We have not seen that happening. A lot of these rigs are on long-term contracts, so therefore they are not coming back on to the market until summer time or in the autumn time.

Q28 Anne Main: What can be done to help? What are you asking for in terms of financial support or intervention or alteration?

Mr Booth: I do not think we are asking for support. In our submission we have the example of my own company. We have ₤25 million tax pools, which are costs we have sunk into the North Sea. If we were a producer we could claim those back straight away, offset against our income; however, I cannot get into a cash-flow producing situation because I cannot either borrow money or get more equity to develop the fields I have found.

Q29 Chairman: We are going to look at the fiscal regime.

Mr Booth: It is a fiscal regime issue. I guess I am just asking for those funds to be brought back to me so that I can reinvest them in the North Sea.

Q30 Anne Main: If there was some sort of conversion, like a planning conversion, for change of use for the field that you found to go to carbon capture storage, something like that would be -----

Mr Booth: That is certainly one issue, yes.

Q31 Anne Main: Change of use for the licence.

Mr Booth: Yes. The other one that I mentioned is that I have money tied up effectively with the Government, which if I were a producer would come straight back to me, as an offset against my tax bill. I cannot achieve those funds because I cannot get into a position to produce cash, because the banks do not want to lend me money to develop the fields I have found. So my equity investors can see that investing in smaller companies like this is not efficient, because half the money - we are on a 50 per cent tax regime - gets stuck until I can get the cash flow, but I cannot get the cash flow because the banks will not lend me money to develop the field that we found. That is exactly where I am right now.

Chairman: I know that Mike wants to touch on this and also the investment strategy.

Q32 Mr Weir: You say in your submission that the Royal Bank of Scotland has pulled out completely, and that was one of the main lenders in the North Sea. How many banks are now lending in the North Sea?

Mr Booth: One.

Q33 Mr Weir: That is a monopoly of lending. You say you cannot get lending. What impact is that having, and what can be done to alleviate that?

Mr Jenkins: We would like more banks to lend. At the minute the only one lending in the North Sea at the minute is the merged Lloyds/HBOS. It has a very good oil and gas franchise. It built it up. I represent a small company, and we have relationships with HBOS which we built up. We have a facility with them, which we are just going to roll over, which is going okay at the minute, but if we came in as a new borrower the door would be closed. We would like more banks to lend in the North Sea - we have one, and there may be a few French banks - but really banks that have large businesses here lending to small oil companies to develop the fields.

Q34 Mr Weir: One of the complaints that onshore businesses make is that even when they can get credit it is now dearer than it used to be. Is that something you are finding as well?

Mr Jenkins: First of all, you have to get the banks' interest that they are going to lend you any money whatsoever; then you are finding that the up-front fees and the known drawing fees are higher than we have experienced. The cost of lending has not really come down because of the up-front fees. Banks are tending to make their money now on the fees, rather than -----

Q35 Mr Weir: It is happening offshore and happening onshore.

Mr Jenkins: Yes.

Q36 Mr Weir: Does that mean the companies have started to scale back their investments, and how do you see that trend over the next couple of years?

Mr Jenkins: Alan has already quoted that his company is probably not going to drill any wells this year. We have plans to drill wells because we farm out - are you familiar with that term? We get companies in to share our fiscal and technical risk, and they will pay a premium to get into the well; so we have been fortunate enough to farm this out, so our exposure as a company is quite low. Quoting from Oil and Gas UK, there were 110 wells drilled last year in the North Sea; this year there are thirty something wells that have got rigs; next year it is ten. So we are seeing a drop-off of activity. We have not had very many field development plan submissions; in fact I cannot think, after Dawn and West Dawn if we have had any; so therefore no new fields are being developed.

Mr Millwood-Hargrave: It is this small, entrepreneurial end of the market, if you like, that has provided a lot of the "get up and go" that has changed the business over the last five or six years, and they are disproportionately hit by this lack of either equity or -----

Q37 Mr Weir: There is going to be a significant downturn in the amount of exploration and work in the North Sea if this continues: is that fair comment?

Mr Booth: Absolutely fair comment, yes.

Q38 Mr Weir: Scottish Enterprise last week published a report on the supply chain for the North Sea, which showed a rosy picture of the last few years of an increasing supply chain and business. What impact will the downturn have on that and the number of jobs in the North Sea? Is that going to be significant?

Mr Jenkins: We have already seen contractors laying off staff. As Alan previously said, there was a great skills shortage, and now we are heading towards a skills surplus. The oil industry is an integrated business - okay, the oil companies provide the money to drill the wells and develop the fields, but we need a robust supply chain to help us do that. You are going to find links are being broken or weakened. It usually takes the oil industry in the North Sea something like four years to recover from a price-down.

Q39 Mr Weir: Obviously, there is a problem with the banks lending; and the Government and the taxpayer is in the driving seat of most of these banks now. What do you think is the one thing the government should be doing to facilitate investment in the North Sea and ensure that development continues?

Mr Jenkins: It is to make the North Sea an attractive place to do business. At the minute, you can spend your dollars in any basin in the world. Oil is priced relatively the same throughout the world, so therefore the UKCS has to be competitive, so that when companies are looking where to spend their dollars they are going to choose the North Sea.

Q40 Mr Weir: You are talking about changes - and we can talk about tax decisions later - but is it investments or the tax regime?

Mr Jenkins: It is the tax regime.

Mr Booth: It also comes down to this issue of access to infrastructure. Your investors want to know that if you do find something you can economically and effectively develop it - you are not being held "hostage" is the wrong word, but you do not need that degree of uncertainty as to how much of that are you economically going to keep.

Q41 Mr Weir: Regulation of the infrastructure is already there.

Mr Booth: Absolutely, yes. That would attract more investment because you have greater certainty. It is all about certainty, or certainly predictability, that you need to encourage investment.

Mr Jenkins: And transparency, the costs of accessing that infrastructure.

Chairman: Paddy, perhaps you can draw out what the fiscal regime can do in relation to encouraging investment.

Q42 Paddy Tipping: When oil prices were really high last summer, the Prime Minister and the Chancellor came to Aberdeen to see you, but you are telling us a really depressing picture now because oil prices are relatively low but security of supply remains an issue for the UK. If the Prime Minister came back to see you, what is the message?

Mr Jenkins: The message is, again, Oil and Gas UK in 2020 - we could either, at current levels of investment, say 5 billion a year, be producing 9 million barrels of oil a day; if things go on the way they are going, it could be 0.5. Taking into account renewables, we could either be providing 65 per cent of the UK's oil needs, 40 per cent or a lot less than that; and we would be beholden to non-UK sources of energy. It is serious. It is going to get a very big problem.

Q43 Paddy Tipping: We have focused on oil so far, but gas prices follow oil prices. There was some discussion in the press that the gas market and the oil market are becoming disengaged. Will it always be the case that gas prices follow oil prices?

Mr Jenkins: My company does not produce gas, so maybe Alan can answer.

Mr Booth: Historically, there has nearly always been a general link between the two. From time to time it does detach, and it is because gas generally is a local commodity. You do not take it out of the North Sea and send it to South East Asia, which you could do with oil. There are more local market influences upon it. The current cost of gas is $30 a barrel equivalent cost, so this is quite low. We do have a lot of gas resources in the North Sea that need to be developed. My own company has made a fairly significant discovery, and myself and my co-venturers, to be frank, cannot in its current state develop that, because we do not have access to funds to develop something of that size, so we obviously have to look at how we move that forward. The UK is particularly reliant on gas. It particularly needs gas storage, because that helps us in times when gas supply, in the broader European market, is disrupted. There are two things we need to do: make sure we extract the maximum amount of gas we can from the gas basin. There is significant gas west of Shetlands, but that is not something our members are particularly addressing. We need to have an effective view of how we are going to fund and develop gas storage in the UK, because we are woefully short of it.

Q44 Paddy Tipping: You told us at the beginning of your evidence that you had been to see the Treasury recently. The Budget is on 22 April. What are you looking for in the Budget?

Mr Jenkins: We would look for the value allowance that has been mentioned, and that has to be significant.

Q45 Paddy Tipping: Some of us are amateurs, so explain that to us!

Mr Jenkins: I think it is probably going to take all three of us to explain it. The value allowance will be targeted. We have echoed the Treasury's paper on that. It is small fields, because the average field size in the North Sea is 50 million barrels or less now, so we have taken 25 million barrels, say. Heavy oil and high pressure, high temperature: heavy oil can contribute probably another billion barrels; HPHT, 1.5 billion barrels. We are asking for is an allowance of £10 per barrel, on which the oil companies will pay corporation tax not SCT; so they will pay 30 per cent not 50 per cent.

Mr Booth: I think the detail of how it may work is subject to some further discussion, but effectively it is an allowance that you can offset against your supplementary corporation tax allowance, not your corporation tax allowance.

Mr Jenkins: It will encourage the development of fields that are undeveloped - they do not pay tax and they do not create jobs; the oil is just sitting in there. They will be a catalyst for field development, and again contributing to the supply in the UK.

Q46 Paddy Tipping: So there are a lot of people knocking on the Treasury door just now! What is the compelling case? Why should the Chancellor help you out rather than other sectors?

Mr Booth: I do not think we see it as being helped out. If we developed a field -----

Q47 Paddy Tipping: I think the Chancellor might!

Mr Booth: I am sure he would! If we develop a field that is not otherwise economic to develop, then we get income and the Government gets tax they would not otherwise have had; it is a win/win - so I do not think we are asking for a bail-out or a subsidy; we are just asking that we be allowed to effectively produce the nation's resources when we both get a return. We are not asking for repositioning of taxes on existing production.

Q48 Sir Robert Smith: The other interest I have to declare is that I am an MP for the North East of Scotland, and when you see the downturn - if you look back to the eighties and the rows of "for sale" times when the big downturn comes - maybe the measure for the Treasury - Steve Jenkins talked about the four years it takes the North Sea to recover from previous experience, but that was before we peaked. Is not the very important message now that the Government has to join in with nurturing the industry through this trough so that it is still there when the price comes back, because this time round there are not necessarily the attractive big prospects to pull people back in on their own merits?

Mr Booth: It is fascinating - in my career this is probably the third cycle I have seen, and what is different about this one is the speed at which it came along, and the nature of who is exploring in the basin. The big companies do invest significant amounts of money in the basin - and that is absolutely the case on existing facilities. The danger of this one is that if this is a prolonged cycle and some thought is not given to what will happen when we come out of it, the smaller companies simply will not be there to re-start that exploration and appraisal campaign, which they have been doing over the last three years. Oil and Gas's own figures are that up to 80 per cent of all exploration appraisal wells are drilled by these smaller,

new entrant companies. If they are not there, it is a bit difficult to re-start.

Q49 Sir Robert Smith: So you want a good-value allowance decision from the Treasury; and you would add that something that has come up since the consultation is the credit crunch and the shortage of cash flow. The Treasury could perhaps assist the cash flow by giving you early access to your tax-relief funds.

Mr Booth: Absolutely. Certainly, our submission from my own company was: "Do not just give us the money back to invest somewhere else in the world; the condition is that it has to be reinvested within a certain time frame within the UK.

Q50 Sir Robert Smith: Going back to the issue of maintaining these big platforms that you are tying back to, is there an argument for extending the value allowance to incremental developments within the platform, because at the moment it has to be a new well tied back?

Mr Booth: I think there almost certainly is. However, if I were the regulator - which fortunately I am not - I would make that allowance, albeit difficult to apply because of the nature of the field, conditional on suitable infrastructure access rules. If you are prepared to grant access, then maybe you could have a value allowance or tax credit for incremental investment in your field. There has to be a quid pro quo for that.

Q51 Chairman: Is there an arbitration process on the access charges?

Mr Booth: As I said, there is not an arbitration process per se. The Secretary of State, as was ‑‑‑‑‑

Q52 Chairman: You would have to appeal to the Secretary of State, would you?

Mr Booth: Has to be invited to arbitrate. There is, I think it is fair to say, a reluctance on behalf of the Secretary of State to want to do that, and obviously a reluctance by many of the players in the North Sea to go into that regime.

Q53 Sir Robert Smith: It is the country's oil and gas that is in the ground, and without your skills and activity, it will stay in the ground and we won't pay any tax, and we won't get the jobs, and we won't get the security of supply.

Mr Booth: That is absolutely the case.

Chairman: Perhaps we could ask your opinions on the "wild west frontier" of the west of Shetland, which is a greater unknown. I know that it may not be a very high priority in relation to a lot of the independents at the moment, but Alan wanted to raise something on this.

Q54 Dr Whitehead: The key initial question is: what are the barriers, in your view, to exploitation west of Shetland? You mentioned the existence of fair reserves of gas, presumably known reserves of gas, but because of what we all understand in terms of the general conditions, they are very difficult to exploit; but what are the other issues as far as west of Shetland is concerned?

Mr Booth: The main issue is that it is a very hostile environment, being on the Atlantic seaboard. The geology is not as simple as the rest of the North Sea, and it is very expensive to drill. It is often deep water. It does remain the remit of the larger companies that can afford the costs, the risks associated with developing reserves out there. There is very little infrastructure there, and of course one of the most recent debates is: what size should that infrastructure be? Do you size it for a particular field or do you size it for the greater good of the basin? It is not something we get closely involved in, but I am aware that that is a significant issue. Do you size a pipeline just to suit a field at the end of it, or other fields that may be found in the future? In that case, who provides the capital to over-size it?

Q55 Dr Whitehead: Is it suggested that the reserves west of Shetland are at the larger end of numbers per field? You have mentioned the reduction from larger fields of 500 million barrels to the 15 or 20 there are at the moment. What sort of size are we talking about?

Mr Millwood-Hargrave: From what I have seen - and you have to make comparisons and analogies with similar provinces in what is called the Atlantic Province. A good example would be north-eastern Canada. If you look at the scale and size of fields that have been found there, I think there is a very good chance there may be some billion barrel fields out there, which is the kind of scale you need to start this infrastructure going. There are existing billion barrel fields out there - BP's Clair field, for example, which has not been developed for various reasons over the last twenty years or thereabouts. It needs these kernels, or centres, to start going. From what I have seen, the major companies that have the technical capabilities to operate in those hostile environments are looking elsewhere in the world at where they can put that capital and get similar returns, or get returns. It is the options that the larger companies have, where they work in a more international sphere, which persuades them that maybe west of Shetlands does not stack up against Angola or Brazil or Nigeria or West Africa or the other parts of the Atlantic Province. A lot of that may be down to things like tax, again.

Q56 Dr Whitehead: Is there a critical mass that needs to be developed before further things follow? You mentioned not just common access to pipelines, but also landing infrastructure, difficulty of working the terrain. Is there a point at which the critical mass of infrastructure allows those various things to be overcome, and do you see, for example, the value allowance being of relevance in development that critical mass, or are there a number of other factors over and above financial stimuli?

Mr Jenkins: It is very risky. That part of the world is very risky. To drill a well west of Shetland takes, because of the weather down-time, a great deal more time than a well, say, in the Viking Graben in the north of the North Sea. As we said, the geology is more difficult, and trying to see reservoirs underneath and within basalt is very difficult from a seismic point of view. We are in the same situation that we were in the North Sea. There are discoveries out there, and they need to come on stream at about the same time. Maybe the oil is there and it just has to be exploited in parallel rather than one hub being established, then other fields being added in. There needs to be a concerted effort to develop the fields that already exist. I think that has been mooted in regard to the gas out there, and as small companies, as I say, are not really involved in that part of the world because of the cost.

Q57 Dr Whitehead: In addition you have a number of potential question marks concerning the marine environment, the Hebrides and St Kilda and possibly exclusion areas that may follow around those environments. What effects might they have on the kind of development arrangements you have been hinting at?

Mr Jenkins: We are not familiar - we would be just echoing what has been written in the press and the journals about that. We would refer you perhaps to Oil and Gas UK for that.

Q58 Chairman: There are some very sensitive habitats in the North Sea generally.

Mr Jenkins: Yes.

Chairman: You will be aware of the debates in the Marine Bill and the potential for designating protected areas. I know that Anne wanted to come in on this.

Q59 Anne Main: It is quite interesting that Scotland is not participating in the same way as England on the Marine Bill, so there is a particular issue of sensitivity. What have you learnt from the Sakhalin Island situation where there was much concern over migratory whales and breeding whales on the impact of cetaceans and the disturbance you could cause if you start making multiple explorations in smaller fields?

Mr Booth: At the end of the day, oil and gas companies follow the regulator's advice or direction on where we should or should not be exploring. We would like to see that if areas are established that are "no go" that they are "no go", and then we can move on. Some of the issues that have arisen recently include people applying for licences and then they are told that they cannot be awarded because they may or may not have some environmental sensitivity around them. It would be nice to know if there are "no go" areas but please tell us where they are going to be and we will stay clear of them.

Anne Main: I think that is part of the problem. Someone who was on the Marine Bill was a little concerned that it was very hard if there was going to be a "no go" area around Scotland, because Scotland is doing its own thing on that one.

Q60 Sir Robert Smith: To clarify, that is only up to the 12-mile limit; beyond the 12 miles it is UK where most of your operations are.

Mr Booth: Yes.

Q61 Anne Main: It is a migratory path. Best practice is sometimes questionable, in terms of leading the industry to follow best practice, surely! Are you happy that there are enough guidelines on this?

Mr Booth: Absolutely. When we get awarded a licence we get a document this thick to say what the environmental rules are around that specific licence, and we have to follow them, otherwise we do not get permission to drill. We do not make the rules up ourselves; we follow the guidelines given to us. The UK is one of the most heavily environmentally regulated hydrocarbon provinces in the world.

Q62 Chairman: In some of the submissions there was a claim that some of the promises, particularly on environmental monitoring, made by the companies, have not been kept to. Is that a fair criticism?

Mr Jenkins: I do not think it is. As Alan said, it is very highly regulated. We have to make reports on any activity whatsoever. From a small company point of view, we tend to employ experts to represent us, specific Health and Safety Executive experts - and that is all they do. When we apply for a licence, they would carry out our environmental assessment of the wildlife and flora and fauna in that licence, and help us monitor. We will not get permission to drill if, for instance, our Health and Safety Executive policies are found lacking by, say, Lloyds, who endorsed and approved them. We not only stick to the letter of the law but we probably exceed that. The oil industry operates within the guidelines, and in fact is very careful when it comes to any operations.

Q63 Dr Turner: To what extent are the environmental constraints placed on companies a factor in deciding where to invest? Does it happen that requirements in the UK are so stringent that companies move elsewhere?

Mr Booth: No, I do not think so, because once you know the rules you know what your operating environment is so it will not put off companies, because it is very straightforward to operate within those guidelines - it is being a responsible citizen.

Q64 Dr Turner: What are the challenges facing the industry when it comes to decommissioning in terms of satisfying environmental requirements?

Mr Jenkins: Decommissioning is not something that our members are really familiar with.

Q65 Chairman: There would be a cost, presumably, that you have to factor in!

Mr Booth: There is clearly the issue of the cost and what we are supposed to do. As I say, it is not something we are deeply familiar with, and perhaps it is more a question for Oil and Gas UK. There are a couple of things here: tell us what the rules are; tell us what the playing-field looks like, and we will live within it. As the North Sea is changing its make-up we need to better understand a predictable, transparent environment in which to work. That comes down to decommissioning or funding our share of decommissioning. What is it we are supposed to fund? Is it the entire cost or the after-tax cost, because of course the pre-tax cost in the current regime is at least twice what it is actually going to cost, so we have to put up security for the whole lot.

Q66 Dr Turner: You have to carry out an environmental impact assessment specific to any project that you are seeking consent for; but it has been put to us by the RSPB that there should be a strategic environmental assessment over the whole area. How would this affect you?

Mr Booth: I think the SEAs have already been done. We have had a number of years, five or seven years, where each area has been out of bounds until that strategic environmental assessment has been done, and each area has been released through time. I would be interested to know what they mean by that.

Q67 Dr Turner: That is my understanding.

Mr Booth: SEAs have been done for each area. In addition, once we have a licence we then have to demonstrate that what we want to do is acceptable. In certain areas, because there is not any data they tend to assume the worse, and then we have to go and demonstrate that either it is like that, or perhaps it is not quite as bad as they envisaged. That gets fed back in to the system.

Q68 Dr Turner: What would you wish to see the Government do to make it easier for your industry to invest in CO₂ storage, in your hydrocarbon reservoirs or your saline aquifers? What does Government need to do to facilitate it?

Mr Booth: It needs to have a regime that is in place. How do I get a licence? I do not know. Hydrocarbon or gas storage is difficult to fund at the moment. I do not think there is much the Government can do about that - it is just the nature of the market.

Q69 Sir Robert Smith: On the gas storage, could they not charge you tax on the cushion gas?

Mr Booth: Thank you, Sir Robert! Absolutely, yes. That was not pre-ordained! Our company has also tried to develop gas storage, and the issue is that you have to put gas into the reservoir to maintain a pressure, which you never produce, except we are expected to pay tax on that. It could be helpful that because the gas has come from somewhere it has paid tax when it is produced so why have to pay tax again when it is put in the ground? It is effectively a piece of the infrastructure. That would be extremely helpful.

Q70 Dr Turner: If the Government is serious about exploiting CCS, it has got to put a proper regime in place and it has not done so.

Mr Booth: And quickly, or at least get us a bridge to when that is in place.

Mr Millwood-Hargrave: That is a very good point. There are some pilot schemes going on, as the Committee will know, but no-one has done this - is it a commercial business? To what level is it commercial and to what level is it public service? What is the interrelationship between the two? That is not clear at the moment. Probably the first number of times this will be done in the UK, there will inevitably - and there is certainly talk among the academic community of large amounts of money around there, but it is just not clear what the rules are and the focus. Getting a focus and policy would be extremely useful.

Chairman: Thank you very much. There are certainly some issues there we would like to give some thought to.

Memorandum submitted by Royal Society for the Protection of Birds

Examination of Witnesses

Witnesses: Mr Martin Harper, Head of Sustainable Development, and Dr Sharon Thompson, Senior Marine Policy Officer, Royal society for the Protection of Birds, gave evidence.

Q71 Chairman: Welcome, Dr Thompson and Mr Harper. We are very pleased to see you here from the RSPB. We certainly welcome your input into the Committee's inquiry. I should start by saying I am a long-standing member of the RSPB myself, and also a former member of the governing council of the RSPB. I wonder whether you would like to introduce yourselves and say a word about what areas you cover.

Mr Harper: My job is that I am Head of Sustainable Development at the RSPB, and my responsibilities cover our policy and advocacy in relation to climate change, marine and land-use planning, and also houses our economics team.

Dr Thompson: I work in Martin's department in the marine team. I am the Senior Marine Policy Officer. I tend to focus on areas such as the Marine Coastal Access Bill, international marine policy such as the Marine Strategy Framework Directive; but I also provide advice on issues such as the strategic environmental assessments of offshore energy, so oil and gas and renewables.

Q72 Chairman: You will be aware that the Government is very strongly committed to tackling climate change and reducing emissions, and then of course moving towards a low-carbon economy. However, realistically we have to accept there is going to be demand for oil and gas for some time, and there are issues of security of supply and the economy. Do you feel there can be a balance between the extraction of oil and gas, and particularly the development of new oil and gas fields, and nature conservation in what is a very important area with a number of globally protected species in our waters?

Mr Harper: If I may, it might be helpful to provide a bit of context on where we are coming from with our evidence. From the RSPB's point of view, climate change does risk a mass extinction event which threatens millions of species across the road, and the survival of our own species is under threat. To a certain extent therefore, that is why we are so concerned about reducing emissions as quickly as possible. Our particular concerns in regard to the marine environment, particularly off the UK, partly emanates from the fact that, as you rightly say, we have particular international importance for many populations of seabirds. Over 50 per cent of the European population is four species, and indeed we are already experiencing the impact of climate change on green eco-systems. It is now unfortunately becoming an annual seasonal event that we are having very poor breeding seasons for many of our seabirds, particularly in Scotland, home to over 3 million sea birds, and houses over 80 per cent of the UK's breeding sea birds. The context for our engagement in the climate change debate is that we absolutely do want to see climate change mitigation as quickly as possible, while at the same time we want to make sure that we are intervening to support nature conservation measures in the green environment. If I may say a word about where we are coming with regard to the energy debate, the research that we undertook a year ago with WWF and then the IPPR looked at how we would get 80 per cent reduction of emissions by 2050, while at the same time putting in place some environmental safeguards and not resorting to nuclear power. We ran the Government's own models, the MARKAL-Macro model and the Anderson Model, which are cost minimisation models, and we found that it was possible to meet those targets; but what was critical was that we massively reduced the amount of energy we used; we ended our dependency on fuel stations such as coal and we stabilised emissions from aviation. When it comes to oil and gas, I suppose what DECC is looking at now is its twin objectives of trying to guarantee and introduce security, while at the same time reducing emissions. What we hope is that the Department for Energy and Climate Change looks at how it can reduce emissions while keeping the lights on, without relying on foreign imports, and at the same time safeguarding the natural environment. That, in a sense, is the context for today's conversation.

Dr Thompson: It might be worth adding that many of the comments we have made here in relation to oil and gas are equally applicable to renewables and other activities in the marine environment.

Q73 Sir Robert Smith: Some renewable schemes might take up even more marine space.

Dr Thompson: Yes, and the issue in this context is that the impacts of oil and gas are now known because we have been doing it for thirty or forty years, whereas we are charting new territory with renewables, because we are not clear what the impacts are; hence why we are saying we need to find more about it. Perhaps CCS would fall into the second category, being a new activity.

Q74 Chairman: It is an important point that oil and gas developments in the North Sea are long-standing and have been therefore decades, and therefore there has been an opportunity to monitor their impact on the marine eco systems. Apart from oil spills - and, of course, there is no argument about the effect of oil spills - in terms of infrastructure has it been very detrimental?

Dr Thompson: At this stage in development of oil and gas, particularly in the North Sea, as I said many of the regulations have taken into account the environmental impact; so discharges of oily waters and oily muds are being reduced or done away with; so those impacts have been recognised, regulated and dealt with. On the whole, the impact on birds, which would be our primary interest, is not great, and tends to be limited to the potential risks from oil spills. I would say in the context of looking west of Shetland, because that comes under this conversation, we are chatting about areas where we know less about the environment and, as you pointed out, there are sensitive environments that we would like to see avoided. Perhaps in the wider context of marine biodiversity, there are other groups of flora and fauna that could be more susceptible to oil and gas exploration, such as cetaceans, so whales and dolphins, so the issue of marine noise. This is not obviously an area that we focus on, but we would hope that you are speaking to NGOs such as the Whale and Dolphin Conservation Society that are greatly concerned about this issue.

Q75 Dr Turner: Can you summarise what you see as the main environmental impacts of North Sea oil and gas extraction, and can you add to that, because you have referred to the question of marine renewables? What impacts do you anticipate from marine renewables?

Mr Harper: Just picking up a question you asked the previous witnesses, there is currently an offshore SEA being carried out for energy, offshore oil and gas and indeed offshore renewables, which we welcome. We argued in previous rounds of offshore renewables that there should be an SEA, and in round 2, belatedly the DTI did undertake an SEA. We now know, through discussions with officials, that they are pleased that they can now explore the alternatives, because that informs good decision-making. Obviously, from a wind farm point of view, there are specific impacts in relation to the direct impact of wind farms on migrating birds, displacement from habitat and cumulative effects of various developments at sea. I should say that we are, particularly as we enter into round 3 of offshore renewables, more confident that the measures that have been put in place by Government will enable them to be able to find the areas that are at least risk 4 sensitive for species of birds we are concerned about. We are of course hampered by a lack of data in the marine environment, which is one of the major things I wanted to talk to you about today, but we are reassured that the zones that Government is likely to come forward with in regard to offshore renewables - and there will be flexibility within those zones to be able to put what we probably expect, about 7,000 wind farms, in places that will not cause direct damage to internationally important populations of wildlife. Our own experience, for example, in engagement with the London Array project, the biggest offshore wind farm in the UK, is that when you have developers who are prepared, as is the case with the London Array guys, when they identify internationally important populations, in this case the red-throated diver, to adapt their wind farm to be able to deliver significant elements of wind - 1 gigawatt in the case of London Array - and at the same time minimising the risk to that internationally important population of diver.

Q76 Dr Turner: It is an expensive business, gathering data on the marine ecology; and, as you say, it is in very short supply. Does the oil and gas industry make a fair contribution to funding that work?

Dr Thompson: It has in the past. There was a programme - I probably will not be able to remember what the acronym stands for - called AFEN - I think it was Atlantic Frontier Environmental Network, where the oil industry helped supplement data collection. Let us call it Frontier - it has provided a lot of the historic data we have for these areas, so we refer in our submission to what is known as the European sea birds at sea data. A lot of the offshore sea bird data was collected opportunistically by observers on industry vessels doing the sightings there. It is great that we have that, but it is limited in age - it is at least ten years since any of these surveys were carried out in this way. They are not systematic surveys in a scientific approach; they are opportunistic focusing on areas of interest to the industry, plus there are gaps because people tend not to go out into the Atlantic in the winter, so there are gaps as well. We have this data, but it is a bit holey and we would like to see it filled in. One of the figures we have is from the impact assessment on the draft Marine Bill, where the Government proposed that to collect data for the new system of marine conservation zones could cost between £9-10 million. On the Marine and Coastal Access Bill that is currently in Parliament, they are saying, "we do not think we need to go and collect that data"; but in the grand scheme of things, £10 million is not really a great deal of money if you consider the benefits that it would deliver in our current climate; so this information would be used for not only oil and gas but renewables, designating marine protected areas of various sorts, and helping marine planning. These are all things we think need to be put in place, to remove any of the barriers not only to the oil and gas industry but other developments that are happening offshore. It kind of echoes what was said by the previous evidence, where it would be better to know where the important sites are and have that certainty, rather than this current system where we are all kind of working in the dark. It is not a system that we favour either.

Q77 Dr Turner: You are very concerned about strategic assessments. How satisfied are you with the progress being made on those assessments, and do you feel there is any likelihood that it is going to take too long and be too expensive, and not only hold up and be a barrier to sorting out where marine protected areas should be, but will inhibit reasonable exploitation of marine resources?

Mr Harper: I think the principle of SEA is that you essentially try to explore the options and at the same time you understand the impact, direct or cumulative and you are prepared to take precautionary measures as appropriate. It is fair to say that DTI and DECC, in its various SEAs which it has been conducting over the years - it has two live at the moment, offshore energy and tidal power in the Severn, and it will have another on wave and tidal soon - each time they appear to be learning as they go. They do some things well and they do some things less well. We are pleased, for example, that they have through the offshore energy SEA, accepted our recommendation that they should now be taking aerial surveys. We think that is an important improvement. We would prefer there to be more opportunities for stakeholder involvement through the process. In terms of this being deemed to be an overhead in terms of time and cost, we would say that that is patently not true. It is an appropriate investment to understand the nature of impact, particularly to safeguard and satisfy the Government's other aspirations for looking after the natural environment and its own public service agreement target on the natural environment; and at the same time it is much better from an industry point of view that they know the likely impact of any development before they start. Going back to the London Array example, if there was data made available about the red-throated diver population in the North Sea, it may well have been that they would have circumnavigated some of the negotiation they had to do with ourselves and the agencies to relocate that wind farm. It does provide certainty. One can determine the relative importance of different populations at sea, and that in turn can determine the pace at which energy projects are rolled out.

Q78 Dr Turner: Would you like to comment on the progress towards defining marine protected areas, and do you see any opportunities, in fact, for synergy between marine protected areas and energy exploitation of the North Sea, because both in the marine protected area and in, say, an off-shore wind farm or a tide farm you are not going to be allowed fishing, so there is a great conservation opportunity there?

Dr Thompson: Starting at your last point there, our primary focus is looking for marine protected areas to be designated, where the primary concern is the biodiversity issue, but that is not to say that areas that are closed to activities because something else is happening there do not have an additional biodiversity or conservation benefit. The reason I am making a distinction between the two is that if something changed within the wind farm or around the oil or gas platform for reasons of industry development, the biodiversity benefit could be lost because it is not the primary concern. So that is why I am making the distinction between the two. The stage we are at with marine protected areas is that there are two pieces of legislation that will be important, and one is the international legislation that will designate what are known as the Natura 2000 sites for habitats and species and seabirds offshore and the other that we hope will come through is the Marine Coastal Access Bill, sooner rather than later, for the nationally important marine conservation zones. We are at the stage where government is proposing a process of stakeholder workshops around the country, so that it has divided the UK seas into four areas and it is going to have stakeholder projects running to determine networks of marine protected areas and, running parallel to that, the statutory agencies are designating the European sites because there are more specific rules that have to be met in that process. So we are probably at the beginning of the process of designating our network of marine protected areas.

Q79 Paddy Tipping: You have mentioned the Marine and Coastal Access Bill, and you have been fundamentally involved in that.

Dr Thompson: Yes.

Q80 Paddy Tipping: How helpful is it really going to be that the oil and gas licensing regime remains outwith the provisions of the Bill?

Dr Thompson: This is one of the areas where it is good to be completely clear, in that, although the licensing consent and regulation process is outwith the reform of other marine licensing regimes, oil and gas licensing will still be subject to the new planning system and the new marine policy statements and all the other elements within it, the same as any other industry or regulated activity, and that the Secretary of State for DECC will also be subject to the duty to protect marine conservation zones, so they are not completely outwith. Our favoured view in an ideal world would be that, if you are going to reform the licensing regime, you should reform all of it, but in a system where bits are staying as they are, as long as everybody is subject to the same planning system, I think that gives us a good strategic overview to the whole process. I think, on the whole, we would say we are positive about the processes that are coming through the Marine Coastal Access Bill; I think they are long awaited and long needed. We, obviously, have some tweaks that we would like to see to make it much better, but we are working on those as best we can.

Chairman: Maybe one of your objectives is to protect and monitor the effects on wildlife, and Julie wants to ask a question on this.

Q81 Miss Kirkbride: Obviously our inquiry is about oil and gas, but I just wonder what you think the environmental impact of energy production is: because it would seem from what you are saying that oil and gas is not quite so damaging except for the fact that it is a fossil fuel that burns and does climate change, but the impact of wind farms and other renewable energies have, potentially, a bigger impact on the environment in the production of it, albeit with, obviously, much less impact on climate change. I just wonder how you assess those two things.

Mr Harper: I think that is a fair assessment, but not neglecting Sharon's point about sestation impacts, on which, of course, we are not competent to really comment, I think, because there is a real deficit of knowledge about what is going on in the marine environment. On land we have 30 years of records. For example, looking at the Breeding Birds Study, thanks to entitled members of the BTO 30 or 40 years ago we now have trend data looking at how populations of birds on land are faring, and there has been a huge investment by government in things like the Countryside Survey, which, again, has allowed us to look at the changes in biodiversity over time, and, I think, in a sense for any activity in the marine environment, I suppose there are some building blocks which we hope will be in place. We want good data collection to be able to inform the identification of protected areas, outside of those protected areas we want a good planning system, again, to be guided by data that we have at our disposal, and at the same time we want to be able to understand the impacts of various forms of development. For example, in the case of wind farms we have argued for two years pre and two years post construction monitoring to determine impacts, and that feels appropriate to us because as a new sector, a new form of development, we are trying to understand what the impacts are and we think that is the right to proceed. So in a sense in the marine environment where there is a shortage of data, we think there is a strong argument for sustained investment in research and, unfortunately, at the moment we have some concerns that that data collection strategy is being held and not necessarily joined up between two bits of government, obviously, DECC on the one hand keen to determine what the data is to guide the roll-out of energy development and on the other hand Defra to inform the development of marine protected areas. We would like to see a joined up strategy which delivers the possible wins that Sharon referred to earlier in the evidence.

Q82 Miss Kirkbride: You are happy that the information is being collected; it is just not joined up. Who is collecting? Who is paying for it?

Mr Harper: At the moment there is data being collected through the off-shore SEAs.

Q83 Miss Kirkbride: Who is paying for that?

Mr Harper: That is being paid for by DECC. There is also, we hope, more investment in survey to determine the selection of marine protected areas. We think that there has been some progress made in the sort of data being collected to inform this round through off-shore renewable consents and indeed for oil and gas. What we do not yet see is a long-term strategy for data collation.

Q84 Miss Kirkbride: It will not be on-going?

Mr Harper: Indeed, it should be. In the same way it is on land, to underpin decisions that we make about activities on land, we should be looking to do the same off-shore.

Dr Thompson: It is probably worth just clarifying that the surveys that DECC are currently undertaking for the off-shore renewables do not cover the whole of the UK Continental Shelf, they are specific to the areas of search, so it is the long-term data collection and full coverage.

Q85 Miss Kirkbride: How long do the present searches take? Over what time period have they taken place, the present data collection? What time periods are we looking at for that - a year, two years or six months?

Mr Harper: The interesting thing in this area is we sit on a number of research groups which is set up by DECC to inform roll-out and he have obviously engaged with the SEA process, and we have read the environment report which has been produced by the SEA and we have produced a long list of eight or nine research requirements which we have been talking to DECC about, and they range from the comprehensive survey of requirements that we have just talked about through to the mixture of aerial and ship-based surveys to guide the round three collection over a two-year period. We have argued for two years worth of data collection, both in terms of winter and summer season, to determine the likely importance of sites for breeding and wintering sea birds. The issue for us in a way is it has been quite difficult to critique the search plan because it is not in any way published, so it is very difficult for us to actually see exactly what is being proposed, and so that for us makes it quite had to pick up the information in a piecemeal fashion.

Q86 Miss Kirkbride: They do not tend to publish it? Why not?

Mr Harper: I am not aware that they are intending to publish a research plan, no. We would argue that would be beneficial, because then, in a sense, we could all look to see that research plan.

Q87 Mr Weir: Perhaps just on that point, the last witnesses from the industry made it clear what they wanted for certainty to know where they could go and develop, where the marine protected areas were, where there were areas of particular importance perhaps for migrating birds, or whatever. From what you are saying, it seems research is going on. It seems a little piecemeal and it seems to be taking quite a long time. What sort of time scale are we talking about before the industry can be certain as to where it can go and explore, which areas are off limits for marine wildlife or birds? This is especially important in the West of Shetland, where you are getting into some very important areas for seabirds.

Dr Thompson: I suppose that is very much the question that we are asking and have been asking since the first Strategic Environment Assessment for oil and gas, which was in 1999, when we highlighted specifically the gaps in seabird data information. So it is not that we turned up yesterday and said, "Oh, by the way, we would like you to start doing seabird surveys." We have been saying this since 1999. We have known about these gaps in the seabird data, but it took a desk study that was finally published in 2006, which, yes, was sponsored and paid for by the then DTI, to confirm what we already knew. So we took seven years to get to the point where we were, like, "Yes, we know that. We have been telling you that. Now what are we actually going to do to fill those gaps?" So we are asking the same question as you, because I think this does come back to the point that, although we have some data and we have some information, it is that lack of data and the uncertainty that is the barrier rather than knowing where the important sites are. We would love to be in the situation where we had all the information and we knew not to be worried about certain developments in certain places. That would be great for us too.

Q88 Mr Weir: Have I picked up correctly, it would be at least a two-year study for two seasons of birds, is that correct, to do it?

Dr Thompson: Yes.

Q89 Mr Weir: Who would you be looking to pay for such a survey to fill in the gaps?

Dr Thompson: I think we are going to say the same. We are canvassing government. This needs a strategic approach, because, as you say, there are bits and pieces going on funded by different departments, different bodies and different places and it would be great if there was a strategic approach to collect this data once and use many times.

Q90 Chairman: Who do you think should give the lead on that data collection? Should it be the JNCC, should it be the new marine organisation, should it be another body?

Mr Harper: It probably does make sense for it to be the JNCC. They have in the past done a number of these surveys and I think they ought to have responsibility for co-ordinating data across the UK environment. I think they have long argued for greater resources coming their way. Of course there are other nature conservation organisations - Natural England and others - but, I think, in order for us to have this co-ordinated UK research effort, there is logic for JNCC to be at the heart of that effort.

Dr Thompson: Particularly when the MMO is unlikely to be up and running until 2012, which is also our target date for the network of marine protected areas. I think it should be JNCC for now anyway.

Chairman: The industry were telling us that the UK off-shore oil and gas sector is one of the most heavily regulated in the world, and part of that, of course, is to reduce the environmental impacts. Robert may have a few questions.

Q91 Sir Robert Smith: I just wondered if you accepted that premise, that the UK is one of the most heavily regulated in terms of environmental hydrocarbons.

Dr Thompson: I am afraid I honestly do not know. I think, from our point of view, it is not how much regulation as long as it is appropriate and effective regulation, and that is just the same for new activities coming online such as CCS, and there are probably many activities out there that need to be more heavily regulated that are not oil and gas. I cannot give you any more opinion than that.

Mr Harper: Can I add, I was partly assured by that answer to that question actually, Sir Robert. They did say that the regulation was not going to discourage them from exploration. In a sense, what they want is clarity and I think most businesses we speak to want clarity and they want certainty and they want a level playing field - that old adage. We would encourage a race to the top in terms of environmental standards rather than the other way round, but I was quite encouraged by their response to that earlier question.

Q92 Sir Robert Smith: Going back to the earlier questions, the clarity requires the Government to have clear priorities, but, of course, it has competing priorities in the end - it has the security of supply, it has the carbon. Carbon sequestration and renewables are two parts of trying to tackle the global impacts on the environment, but nothing is without a price, in a sense. I suppose at times you could have an area designated as a no-go area and then say, "Hang on a minute, the balances in society that we have to weigh up in terms of our competing goals". Can it be that certain that you draw a line and that is it?

Mr Harper: I think we would say, and we would say this, would we not, that too often the environmental impacts are an after-thought and they are not thought earlier on in the process, and I think particularly a lot of policy measures coming out of DECC at the moment, I suppose we remain unconvinced, for example, they are linking their energy security concerns with their CO₂ reduction targets, and we would then add that we would want to make sure that the natural environment does not become collateral damage in pursuit of those two public policy objectives. I suppose that is where we are coming from.

Q93 Sir Robert Smith: One other thing that was related specifically. Each development has its own impact assessment and its commitments as to how it is going to mitigate or avoid damage to the environment. How well after those have been accepted do you think they are actually implemented?

Dr Thompson: Again, I would say that we do not have any empirical data. You do hear the rumours, and I am not being specific to oil and gas here, about activities that are licensed for certain conditions and those conditions not being fulfilled. I think, from our point of view, if there are conditions put on licences and they mitigate environmental damage, somebody should be monitoring that to make sure that they are fulfilled and that there are consequences if those conditions are not being met, and, hopefully, maybe some of the enforcement elements that are being proposed in the new Marine Coastal Access Bill will help improve that situation, if it needs improving, but, as I say, again, I have no empirical evidence.

Sir Robert Smith: Thank you very much.

Q94 Chairman: The issue of west of Shetland, of course, is bound to be of environmental concern because it is potentially a new development area, there are some very sensitive areas out there, and I notice that in your submission you suggest that there be a protected zone around St Kilda. Is that because of the importance of breeding seabirds on St Kilda or are there seabed issues there as well?

Dr Thompson: From our point of view, it is particularly in relation to the breeding seabirds, and the same with the Hebrides. From our point of view, a traditional stance has been that, if oil spill modelling shows that the oil would reach shore within 24 hours, because west of Shetland that is a very short period of time to be able to react and deal with the oil spill at sea, that would be a concern for us. West of Shetland our concerns would be in relation to the breeding and feeding seabirds in that area, but there are other sensitive seabed areas that have been found in surveys. I think we would be concerned about the footprint on those of new infrastructure.

Mr Harper: May I add, we have got some reserves out in that part of the world and one of those at Sumburgh Head. Many of the guillemots have had a very had breeding season. I think the nine out of the ten guillemots that did actually manage to breed, only one of them managed to successfully breed a chick, and I think one of the difficulties that we have got in the lack of investment in data collection has meant that new information, in terms of the impacts that we are seeing happen on our seabird populations, is not being brought to bear to inform some of the decision-making. So it is another justification for sustained and regular collection of data, particularly in some of these most sensitive parts of the United Kingdom.

Q95 Chairman: The breeding values of seabirds are well-known and are linked with the sand eel stocks in particular law, but how much is this associated with the oil and gas industry?

Dr Thompson: I suppose it is more that it is associated with climate change, so, therefore, the output the CO₂. We are coming back to why is it we want oil and gas? It is because we want to burn it. It is a fossil fuel. So that is the connection there.

Mr Harper: There is circumstantial evidence that warming seas, plus a crash in zero plankton populations, plus a crash in forest fish such as sand eels, those complex interactions are causing significant problems for our marine life, and seabirds in particular, and the data that is coming through at the moment is extremely worrying from that point of view.

Q96 Sir Robert Smith: On the CO₂ thing, I suppose from this country's point of view the impact of global CO₂ emissions was greatly reduced by the North Sea, because, of course, the gas replaced coal and, therefore, a quick fix in the early stages of CO₂, and, obviously, the next stage would be the sequestration of CO_2, and, of course, the oil and gas is just for burning, it is for chemical feed stocks?

Mr Harper: I am sure that the gas will play an important role in terms of those really highly efficient CHB power stations which, hopefully, will be rolled out at a local and industrial level in the future. Adair Turner, quite rightly, has argued that we need to decarbonise the electricity sector by 2030. There will be a desire to move towards low-carbon transport networks and we want stable heat sources. In a sense, that is the policy content of any fossil fuel development that will be taking place.

Chairman: Thank you very much for your contribution, it is very helpful to us, and thank you for your evidence.