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

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

ENERGY AND CLIMATE CHANGE COMMITTEE

 

 

UK OFFSHORE OIL AND GAS

 

 

Wednesday 25 March 2009

MR MIKE O'BRIEN MP, MR SIMON TOOLE and MR JIM CAMPBELL

Evidence heard in Public Questions 171 - 221

 

 

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Oral Evidence

Taken before the Energy and Climate Change Committee

on Wednesday 25 March 2009

Members present

Mr Elliot Morley, in the Chair

Mr David Anderson

Colin Challen

Charles Hendry

Miss Julie Kirkbride

John Robertson

Sir Robert Smith

Paddy Tipping

Dr Desmond Turner

Mr Mike Weir

Dr Alan Whitehead

________________

Memorandum submitted by Department of Energy and Climate Change

 

Examination of Witnesses

Witnesses: Mr Mike O'Brien MP, Minister of State, Mr Simon Toole, Head of the Energy Development Unit, Licensing, Exploration and Development, and Mr Jim Campbell, Director of the Energy Development Unit, Department of Energy and Climate Change, gave evidence.

Q171 Chairman: Good morning, Minister, and welcome to the committee, yourself and your team. It might be useful for the record if you would like to introduce your officials.

Mr O'Brien: On my right I have got Jim Campbell, who is the Director of Energy Development at DECC (Department for Energy and Climate Change), and on my left, Simon Toole, who is the Head of Oil and Gas; so both of them are greater experts than I am in this field!

Q172 Chairman: Welcome. Perhaps we could start off, Minister, by having a look at what DECC's views are in relation to the current reduction levels on the UK Continental Shelf. They have been falling. We were very interested to hear from the industry, when we were in Aberdeen, that they thought there was a potential on the UK's Continental Shelf to produce 65 per cent of the UK's oil requirements up to 2020, which struck me as quite a significant figure. Of course, that does suggest opening new fields and exploiting new resources, but what is your own analysis of the reserves and the potential?

Mr O'Brien: There is a sort of common view in the media that we passed our peak on oil and gas production on the UK Continental Shelf and that, therefore, it is all downhill from here. We estimate that there is about 20 billion barrels of oil left and very large reserves of gas. In terms of countries in the world with gas reserves, we are probably about the eighth and, therefore, we have a lot of potential. We have used 39 billion barrels of oil, so we have got about a third or so of what we could still exploit there. I think you are right to say that it all depends on the amount of investment. It does, and it depends on a number of issues around accessibility, the science and the extent to which the new frontier licences, particularly to the west of Shetland, will prove beneficial. Quickly running through those, we may come on to it later, but there has been a lot of argument about peak oil, and my view generally on it is the key thing here is investment - how much money is going in, what reserves there are and how accessible they are, how large the reserves are, because we can have oil, but if it is in small reserves that are too expensive, uneconomic to access, then it is not going to do a lot of good. We also have quite large reserves which have been depleted to some extent but which, with new science, pumping in carbon or some changes in the way in which production takes place, could be exploited further. There are a number of factors there and one of the key things for us is how can we identify new potential reserves and also exploit that, and also do it, of course, in the face of the economic problems that we currently have.

Q173 Chairman: It is really in our interests nationally to develop those reserves, because it reduces our dependence on fuel imports, and there is a very clear economic issue of energy security. Does the Department have any kind of strategic approach to this? For example, do you have any kind of indicative targets about what you would like to see coming from our own Continental Shelf?

Mr O'Brien: As far as energy security is concerned, oil and gas is a key component and, as it depletes over the coming two or three decades, probably beyond that, we will still have oil and gas reserves. Energy security will become an increasingly important factor, we will have to increase our imports of gas and, indeed, oil and we will have to make sure we have more gas storage. The way in which we manage our energy security will change substantially, but we have a number of decades to do that - two, three, possibly more - and we need to make sure that we exploit, to the reasonable extent that we can, the reserves and the ability to get at the oil and gas on the UK Continental Shelf. We set some targets back in 1999 for going up to 2010, and those targets were indicative. We were not going to force anyone to do it, but they gave some view to the oil and gas companies as to what we would like to achieve. We have been talking to some of them about whether we ought to go back to that and have further indicative targets. It is fair to say, as with oil and gas companies, each of them have different views, and I think there is an argument for having a target as to what we would like to achieve, but it needs to be clear that in the end there are a number of variables on this, including the ones I have already described around investment and accessibility of reserves, science and the frontier licences. Whether we are going to be able to hit any target, a lot of this is down to investment and the decisions that people are going to take, but the Government does have a view that we want to create the conditions in which we continue to encourage investment in North Sea oil and gas. It is a matter of energy security; it is important to us that we get the maximum benefit as a nation, as a United Kingdom, out of this.

Q174 Paddy Tipping: You have just told us that there are 20 billion barrels in reserve there. Your evidence suggests there are 11 to 37, which is a big range. Why have you put the pitch at 20 today?

Mr O'Brien: Because I am going for the middle measurement. There is a maximum and a minimum, and that is where you have got the diversity. All these things are, in a sense, estimates as to the amount we think is likely to be there. If you talk to someone in the oil and gas industry, they will say 25 billion barrels. We say round about 20 billion, but it is between about 11 and 37, and until, in a sense, we have exploited it, we are not going to definitely know because you may, as I said earlier, have reserves there but if they are not commercially accessible, then they are not going to do a lot of good. Probably 11 is round about what is the pessimistic view as to what is likely to be commercially accessible. The 37 is the maximum view as to what (a) we could potentially find and (b) potentially exploit, if we were very lucky, in terms of being able to access those reserves.

Q175 Paddy Tipping: Forgetting the top end there at the moment and just supposing we are pessimists - I think it was 11 billion - what then are the implications for security of supply? Does the talk of two decades to make adjustment come in closer?

Mr O'Brien: I think it would probably still be two decades. If it were the more pessimistic position, then we would have to import more, so we would be much more dependent on the world market for oil and gas. We have good import facilities, so that in a sense is not going to cause a massive problem. It would be regrettable, because we want to see if we can maximise the extent to which the UK can benefit from its Continental Shelf, but we have created gas and oil import facilities. We have just expanded, for example, a hook in South Wales, Pembrokeshire, where we had a ship come in only last week from Qatar. As the Qatari Minister duly told me when I was over in Vienna at the OPEC Conference: "We have got a ship and it has come in now!" So it was quite a significant event. We would be able to cope with the lower end of the spectrum we have discussed, and it would not massively damage us, but it would be regrettable because we want to see the UK Continental Shelf be of benefit to the UK and if we can maximise that benefit, all the better.

Q176 Paddy Tipping: I wonder if you would tell us a bit more about the indicative targets up to 2010. Are they being met? I think there is a case for indicative targets into the future. How would you go about future indicative targets?

Mr O'Brien: What we would do, what we did last time and what we did this time, and we have not been too far off it, is talk to PILOT. The oil and gas industry is very well served by a national organisation called PILOT, which ministers are members of. We meet with them regularly, it has functioned extremely well now for quite a few years and, when I was Energy Minister last time, I remember attending a number of PILOT meetings. The last one was in February. It is attended by the chief executives and chairmen of the main companies. What we do is basically agree the way in which we will ensure that that level of benefit to the UK comes from the oil and gas industry. So, in terms of determining targets, what we would do is talk to PILOT about what those targets ought to be, what is realistic. I always think it is best to have realistic targets. Aspirational targets are all well and good and have their place, but we need to be reasonably realistic about what we can get. We would then have to agree with them whether that was the best way of going about things - I will come back to what some of the problems are in a minute - and also what those targets should be, and we would probably work through that process in terms of talking to the industry. Some of the issues that we face that we did not quite face in the same way in the past: we have got a lot more smaller companies involved, particularly in exploration of some of the new areas, than we had in the past, some of the small American, Canadian and other companies that have come in, and they are less tuned in, perhaps, to our domestic PILOT mechanisms and the engagement with the Government than was the case five or ten years ago, certainly when we were dealing with larger, often UK-based or international companies that were used to dealing with us. So we have got a lot of smaller companies in. The engagement is actually very good, but reaching agreement is not always quite as easy as perhaps it was in the past.

Q177 Paddy Tipping: The point about the 2010 targets. Were they realistic? Are they being met or are they aspirational?

Mr Toole: There was a series of targets, some on exports, which have been met and exceeded. The one on production, which was three million barrels a day in 2010, looks unlikely to be met. One of the features of targets is that it is very important to make sure that people are responsible for them, and one of the difficulties with overarching targets, such as the three million barrels a day by 2010, is who is actually responsible for that. In fact, the Minister has recently written to the industry on behavioural targets of getting things done within a certain period of time, of doing procedures properly, and those can actually be pinned on managing directors or other people and they are then responsible to do them, and many of the things we need to do in the North Sea are about behaviours rather than about geology. So there is space for those big aspirational targets, but it is difficult to say who is responsible for them, and we are trying to make sure we have at a lower level targets that people can actually be held to account for.

Mr O'Brien: That is, again, particularly difficult given the make-up of the industry as it now is compared to what it was.

Q178 Chairman: I think the committee would find it of interest, Minister, if we could have a note from the department about the target for 2010 and how things are worked out basically. That would be quite interesting.

Mr O'Brien: We can do that.

Chairman: Thank you.

Q179 John Robertson: The way various things have been done is to cut back now to save for later. We have got this crisis coming in the 2015 area of where we are going to be importing all this gas. Should we not be cutting back on our production today for tomorrow so that we are not as dependent on gas imports round about 2015, when we are talking about 70 per cent of our gas needs might come from imports from other places? I would like to know what you think about that. It is like the fish stocks, really. We do not keep fishing, otherwise the fish will disappear; we try to keep it going. In the case of fishing, obviously, they procreate and there is more of them, but in the case of oil we cannot do that, so we have one shot at this.

Mr O'Brien: I think, John, you are right about the fact that we basically have one real shot at making sure that we get the maximum benefit from UKCS. Exploiting gas, in particular, in the North Sea is not like switching taps on and off, it is making sure you have got the rigs and the equipment in place, and they are enormously expensive. In order to have them there and exploiting the benefits of UKCS, the gas in particular, we need to ensure that they are paying for themselves. They do not get put in there over night, and so the idea of leaving the gas in the ground and then suddenly being able, if you had a problem, to restart it very quickly is, as you know, not really something that we can do. We are dependent on making sure that commercially it is going to be worth the while of companies to put those expensive pieces of kit out in the ocean to do the drilling, to do the accessing. What we do know, and we would have to look at the extent to which this was feasible, but there is a lot of talk about it, is that some of the large gas reserves which have been depleted, there is still a lot of gas in them, they have just been depleted to the level at which it is commercially feasible to do so. Could we, by pumping carbon into them, get more out? Would that science become much more deliverable in the longer term? Would we, therefore, be able to get much greater exploitation of UKCS in five, ten years, 20 years than we have now? That is in a sense an open question for (a) the science and (b) the commerciality of that sort of proposition. We do face an increase in imports. A lot of people talk about an energy gap. Actually, there will not be an energy gap in 2015. There would be if we did not do something about it, but we are doing something about it. What we need to do is make sure we have sufficient capacity in 2015 and beyond in order to deliver energy, and we are in the process of doing that, but over the next 20 years we will see a depletion of gas on the UKCS, we will need to import more, that is why we are putting in place the Isle of Grain, and Milford Haven is key, LNG imports. When I was last the Energy Minister I signed the treaty to bring the Langeled Pipeline into the UK from Norway, which brings in about 19 per cent of the gas that we need at the moment. We have also got connections to Europe which we use. What we need to do is make sure that we have a variety of gas sources so that we do not become overly dependent. Thankfully, in terms of the crisis that occurred in February, we only get about two per cent of our gas from Russia, so we certainly do not want to become dependent on that source given the difficulties that arose in the dispute with the Ukraine. In terms of energy security, we are watching that with a great deal of care. I certainly do not deny it is an issue, and I am certainly not complacent about it. I think there is a lot of hard work for government and, indeed, for the industry to do to make sure that we have sufficient gas capacity and gas storage. We have about 20 per cent of gas storage now for the level of imports that we have; about the same as Germany, except Germany imports an awful lot more than we do. We have got about 20 per cent storage capacity compared to the amount of imports they have. We need to ensure that we substantially increase our amount of gas storage so that, if there are problems that arise, as arose in February, and they cause shortages in Europe, we have actually got sufficient storage capacity to be able to at least cushion ourselves in dealing with that.

Q180 Charles Hendry: Can I take you back to the issue of targets. Mr Toole said that for some of the targets it is not clear who is responsible for delivering them. Would you agree that in general a target really only has merit if it has a clear line of responsibility, that there is a method of measuring progress towards that target and, indeed, there is a road map for how that should be reached?

Mr O'Brien: No, I would not agree fully with that. I think if you have targets, they ought to be realistic and they ought to be deliverable, and you have got to know how you are going to deliver them, but what we were talking about here in terms of the oil and gas industry is something slightly different. It is not like an NHS target or an education target, or something like that, where the Government has clear responsibilities, has levers of power, has the ability to intervene and do something about that and is responsible for the funding going in. What we are dealing with here is an industry that says: "Look, Government, we want to work with you, we want to identify what you would like to see us do over the course of the next decade and we would like to agree with you how we would go about achieving that, and in doing that we will agree some targets with you", which was done back in 1999, "but they are not going to be enforceable. You are not going to be able to deliver them, Government, we have got to deliver them." Some of those companies will say, "We agree that we will do something", but then those companies may be only there for five years rather than 14 years and then have withdrawn from the UK Continental Shelf and are working elsewhere; other companies have come in that were not a part of that process. So I think targets have some merit if they are agreed; sometimes they may not be as enforceable and deliverable by government as we might perhaps like or perhaps would have the ability to deliver in other sectors. I think they have got some benefit, as long as we recognise that these are no more than indications to the industry as to what we would like to achieve. I had a discussion, for example, with some people in the industry recently about gas storage, and they said, "Do you want to give us an indication as to what you would like?" It became quite difficult, because, as I pointed out, "This is a Labour minister talking to some people in the private sector and you are asking for more government intervention, are you?", and they said, "What we would like to know is really what you want, because we can then go back to our board and decide what part of that we can deliver", which is perfectly reasonable. So, in terms of indicative targets, I think they have got some merit, but I do not think we need to have all the levers you describe in order to give them that level of merit. We must not put more weight on them in terms of deliverability than they can stand.

Q181 Charles Hendry: Can I broaden that out slightly into the way in which the Government tries to encourage the North Sea development? In the nuclear sector you have established, obviously, nuclear development. A very proactive body looks at where the protected barriers are, looks at how they can remove those barriers. You have also got the New Build Forum. PILOT, perhaps, is relatively similar to the forum because it brings the key figures together, but there is not a similar body to look at where the obstacles to development are and how you can be more proactive in making that happen, so there is no similar equivalent to the Office of Nuclear Development for the oil and gas industry. Do you think there should be? Do you think our Government should have that greater degree of engagement there?

Mr O'Brien: The Government has a very substantial degree of engagement. I do not think we need to create a particular office in order to achieve that. The industry has had, and continues to have, a close and good relationship with government. Indeed, I sometimes think that I wish that some other sectors were so straightforward to deal with, because these are people who are investing long-term, they talk to us regularly and many of them are still involved in UKCS, are big companies who are used to dealing with government and, therefore, in terms of the way in which they deal with government, they are used to dealing with a group of officials that they know. Both Jim and Simon are well-known to the oil and gas industry and so are some of our other officials. I have not come across them suggesting that they necessarily want a new office. If they did, we would be very happy to talk to them on PILOT and see whether there is a way of developing some further institutional relationships with them that help further exploit UKCS. So we are not opposed to the whole idea; I think if they come to us and talk to us about that, we will engage with them, effectively.

Chairman: Can we perhaps explore the potential for maximising new opportunities and, indeed, maximising recovery of what is already available. Mike.

Q182 Mr Weir: You mentioned smaller companies in the North Sea, and in the course of our evidence we have heard from the Independents' Association and others. To what extent do you think the effect of extraction of remaining reserves will be dependent on smaller companies operating in the sector?

Mr O'Brien: We have had a lot of interest in the recent round of licences. Much of that interest has come from smaller companies. I say smaller companies: these are oil companies, so they are a reasonable size anyway.

Q183 Mr Weir: It is a relative term.

Mr O'Brien: It is a relative term. We are not talking about SMEs here. They are not the big Texacos, and so on, although they are all still engaged in various different forms in the UK in exploitation, but it is the case that we have recently seen a lot of interest from the smaller explorers, who say that they want to see if they can identify resources, and some of those will look to go and drill and discover resources, and then, if they find them, they will sell them and somebody else will exploit them. Others will to look to exploit over a longer term. So, yes, it is the case that we will increasingly see these smaller companies become much more important in developing the UK Continental Shelf, and that is why, in terms of engagement with them, it is important that we have officials who can work with them and talk to them, but we still have the big players who play a substantial role in PILOT, and we can see, in terms of the way in which the oil and gas industry is developing, that because there is a strong institutional structure there, the small companies do see it and do get engaged with it, so we can work with them quite successfully.

Q184 Mr Weir: One of the issues that seems to be coming through in the evidence we have heard is the question of the use of existing infrastructure which is basically owned by the larger companies and also the future infrastructure that may be needed, particular west of Shetland. One of the things the smaller companies say is the voluntary infrastructure, the Code of Practice, is not working and they are finding it difficult to access infrastructure. What is your view on that and what is the Government doing to ensure that access to infrastructure is fair?

Mr O'Brien: You are right that there have been concerns expressed by some of the smaller companies that the large companies have the oil pipeline and gas infrastructure, they have already got it out there. The question is, if the smaller companies are exploiting an area, can they get access to that infrastructure and get their oil and gas out? Back in 2001, I think, we had the guidelines, which were agreed with the industry, about accessibility, and essentially the processes is that they are supposed to negotiate. If they do not reach a deal, then they come to the Secretary of State and the Secretary of State can then intervene. We have to look at the issues. It takes about ten weeks to look through the issues, on average, and to identify what the price of access ought to be. So we have agreed that process. Some of the smaller companies get frustrated because they feel that ten weeks is a long time; they want a decision now (I understand that) and they want a decision that is in their favour (I understand that). They are also concerned that some of the larger companies are now putting additional premiums on to the access, premiums around security and whether there will be sufficient material going into the infrastructure, whether it will be done in a particular way, in effect requiring insurance policies from the smaller companies. They are not only paying for access, which may be on the generally agreed rate, but now they are being asked for certain premiums, and they are getting a bit worried about that, so what we are looking to do is to engage with the larger companies who have got the infrastructure and say, "Look, we have got some guidelines going back to 2001. They have actually worked reasonably well, they have solved the worst problems, but they are not perfect, they are still raising issues", and, of course, in any dispute, particularly over price, you will have people with two different views, and if the price does not turn out to be the view that one of them wants, they will be dissatisfied and they will come and complain. I think we have got a situation which works a lot better than it did before 2001, is not perfect - some problems have arisen in recent years which we need to engage with the industry on - but most of the big players want to do this, I think, in a reasonably straightforward way. They want, of course, to maximise their profit, because, after all, they have put this infrastructure in at great cost and they are not going to give it away to the smaller companies and the smaller companies say, "Look, we could do far more if we could do it a lot cheaper." There is always this sort of tension, and there always will be, we are not going to get away from that, but if we can resolve some of those issues around the additional premiums, that would be very helpful.

Q185 Mr Weir: Has the Secretary of State been asked to intervene in terms of the Code of Practice? If so, how often, and what is the outcome of that intervention?

Mr Toole: Has there ever been an actual determination by the Secretary of State? No, there has not. Have there been cases taken towards that direction that have then been settled out of court, so to speak? Yes, there have. Has the guidance that the Secretary of State published as to how he would determine something if it came to him had an impact? It has, because it has set out what the parameters for a second hub would be, and there is no point negotiating in a way too far away from those parameters if you know that the backstop is not going to be where you are negotiating. The Minister has recently set out a letter challenging the industry to be more timely in the discussions, because that is one of the main problems, that things just last too long. There is still a barrier that companies do not really want to get into what is a quasi judicial situation with the Secretary of State, and that is why, as the Minister says, we are trying to work with them at the moment to refine some of the guidance that has been given to make it clearer what the eventual outcome would be so that, again, the negotiations can take place in that area rather than at some area that is simply unreasonable. So the short answer is that there has never been a determination, but that does not mean that that process and the guidelines that have been set up are not influencing what is going on in the day-to-day negotiations.

Q186 Mr Weir: One final point for the Minister. One of the things that was suggested to us about independence was the idea of a common carrier system for the infrastructure to make sure that everybody---

Mr O'Brien: A sort of national grid type of thing?

Q187 Mr Weir: That is right. I believe it works in the Gulf of Mexico, so they told us in any event. That might be difficult with the existing infrastructure, obviously. West of Shetland, for example, new infrastructure will be required because nothing exists at the moment. I just wonder if the Government has given any thought to such a system in our oil and gas fields, or granting access through legislation or regulation if it is not prepared to go that far.

Mr O'Brien: We think that the exploitation of the benefits of this will bring large returns to companies, and if the state were to intervene and fund such a common carrier, it is difficult. Although we would get taxation from it, we think that this is the sort of thing that the private sector really ought to do. The infrastructure system has worked reasonably well, not (as we have just discussed) perfectly but reasonably well, in the North Sea. Moving into west of Shetland, obviously we have an area which is going to be difficult to exploit, it is much more difficult than the North Sea, but the state intervening to tell the companies how we are going to lay the infrastructure out, making decisions for them about it and then, presumably, charging them substantial amounts for access to it, seems to me to be not the way to go. I would suspect it will mean that many of the companies who would otherwise be looking there will say, "Look, if we could go there and decide how we want to do it, we would go, but if you are going to decide, Government, how to do it, we are not going to go."

Q188 Mr Weir: I do not think the idea is necessarily that the state would pay for laying the infrastructure and then charge people for access to it, but to ensure that we do not get into a situation where one company controls the infrastructure and controls subsequent access to it; a form of legislation or regulation that would ensure that whatever way the cost has been put to the company, once the infrastructure is in place, there is no barrier to anyone else who is exploring in that area to get access to bring the oil and gas ashore?

Mr O'Brien: At the moment, west of Shetland we have got a number of companies interested, Total, Chevron, BP. They are all looking at various permutations of putting in infrastructure if they decide to carry out their exploitation there, and there are issues about whether there should be connections from Sullom Voe, whether it would then go down to St Fergus or whether it would go across to the Total pipeline at Frigg. These are all issues which I think, in the end, are commercial ones more than ones that you want to determine by regulation. As far as access to infrastructure is concerned, we have got the guidelines. Those guidelines have worked reasonably well since 2001, not perfectly, but reasonably well. Do we now want to go into a situation where we put in place regulations which oblige larger companies (and it will be by and large them) to put in infrastructure and then oblige them to put particular links in for the smaller companies by law? In which case, they will simply say, "All right, if you want us to do that, we are going to charge for that and those charges will have to go somewhere or we will decide not to carry out that job because it will not be economic any more." I think you are intruding into areas where I do not think the Government necessarily needs to go at the moment. I think we need to monitor it and make sure it is working properly, but I am reluctant to go there at the moment. I would not say it was impossible if things went very wrong, that would mean we would get involved, but we have not got any demand to do it at the moment.

Chairman: Robert, I know you wanted to raise a few issues particularly west of Shetland.

Q189 Sir Robert Smith: Yes. I first remind the committee of my interests on the Register of Members' Interests as a shareholder in Shell and that, as Vice Chair of the All Party Oil and Gas Group, I visited the ONS and Stavanga funded by various oil companies for the exhibition and conference. You have highlighted that for the smaller fields, the hubs are crucial, the infrastructure, you have talked about access, but the most crucial thing at this time for the industry is that unless those hubs remain economic all these small fields will remain undeveloped for ever.

Mr O'Brien: Yes.

Q190 Sir Robert Smith: West of Shetland, because you did engage with the industry to try and get some kind of collective understanding, because there is all this tantalising availability west of Shetland, various gas fields - no one of them really stacks up, but if one of them were willing to take the risk, then the others could tie together?

Mr O'Brien: Total are saying that they are looking at Laggan and Tormore at the moment and that they are thinking about putting a gas hub in at Sullom Voe, and we are looking possibly at a decision on that in the autumn, and then Chevron are looking at Rosebank and Lochnagar and BP at Clair; so we have got a lot of interest. There is a difference between jumping in and regulating and engaging with the industry and saying, "Look, if you are creating hubs here, we want to engage with you about what they are going to be like", and it is not just a planning issue here, it is an infrastructure issue. Are these going to be adequate? Are they going to provide the opportunity for others to come in at a later stage? It is more of a dialogue rather than a diktat, and that is the way we have successfully operated in the North Sea up to now, and I think with west of Shetland, in order to exploit it, that is probably the better way of engaging, unless we have to do it some other way.

Q191 Sir Robert Smith: Do you share Professor Kemp's view to us, or his agreement with us, that west of Shetland is not just about more reserves, but psychologically, if we could unlock the west of Shetland, it would make a material difference to the psychological approach in the market to the investment in the UK Continental Shelf?

Mr O'Brien: I think that must be right. There is a lot of interest, in fact unprecedented interest last November when we had our latest round of licensing So there remains a lot of interest in the UK as an exploration area, but, of course, if we can develop west of Shetland and if we can commercially identify reserves there that we are able to exploit, then that is a really positive message, and that is why there is a west of Scotland taskforce looking to unlock some of the potential there that will enable us to get the interest from international companies, including many of the smaller ones, to go and work west of Shetland. I think Professor Kemp sounds to me to be right. It is both psychologically and economically going to be good news for Britain if we can, as a whole, ensure that we get access to good reserves west of Shetland.

Chairman: Clearly, opening up those reserves depends on the current markets, which, of course, as we know, have changed quite dramatically. Colin.

Q192 Colin Challen: Given the recession, how is the industry managing? Is it getting the borrowing that it requires? Has any state intervention been necessary or been considered?

Mr O'Brien: There are clearly problems. For example, two of the key banks that have invested in the past in the North Sea are RBS and HBOS, and both of them have had problems. That is a good English understatement, so do not laugh. Yes, it is the case that there are some difficulties. So far, because we are dealing with, by and large, the larger oil companies and gas companies, we have not seen any major problems. We have seen OILEXCO get into difficulties - one of the companies - but I am pleased to say that, as of this morning (nothing to do with my appearance before the Select Committee), they have been bought by Premier Oil, so that is very good news. Premier Oil is a company which is well-known to us and will, I am sure, do a very good job and, hopefully, will secure the future of OILEXCO. So we have had that difficulty. What I am concerned to ensure, and we have been engaging with BERR, the Treasury and also with the banks, is that investment remains still available. We do not envisage any serious problems for the large companies. Many of the smaller companies are not UK based and get their finance from elsewhere in any event, but where there are companies that have used RBS and HBOS, we have seen the Bank of England interventions in January, and to some extent in October, and we have also had the work that is being done by UKFI to manage our involvements in those, and it is clear that the North Sea and the UK Continental Shelf more generally has been an area which has brought great profits and benefits, by and large, so they tend to be good investments. The difficulty is they also tend to be long-term investments, and at the moment many of the banks are concerned about their liquidity and are less anxious to tie up money for long periods. Is there likely to be a difficulty round this? Yes, but let us not exaggerate it, in the sense that the bigger oil companies and gas companies will be fine. The smaller ones, by and large, will be the ones that have difficulties, but not all of them are going to be reliant on UK banks. So there is a sort of niche around there where we do have some concerns - OILEXCO is an example - and we have been engaging to ensure that we monitor very carefully what is happening in the industry, who have got problems (some of them are a bit reluctant to tell us whether they have or not) and what the problems are, and we have also been engaging, not ourselves but through the Treasury and BERR, with the banks in order to ensure that the importance of the UK Continental Shelf is at the forefront of the minds of the banks.

Q193 Colin Challen: The recession has had a hand in depressing the oil price because the high costs of the industry do not go down as well. Do you see that in the longer-term that will be a self-correcting thing, that when the recession ends the oil price will rise again? Do you see that as being a suitable way for the self-correcting balance to return to the industry?

Mr O'Brien: We certainly do not want the spike we had last year to return, and that is my main concern at the moment. If you look at the World Energy Report, which came out last November, it says that there is likely to be a long-term shortage of energy. It does not buy the arguments around peak oil or anything like that, but it just says, inevitably, as economies expand there will be constraints. What I said to the Vienna Conference of OPEC last week was that it was enormously important that we sustained, through the recession, the level of investment necessary to put in place the infrastructure that would be needed when economies begin to expand again: because if we get cut-backs on that level of infrastructure investment, we are going to face the problem that there will be greater capacity constraints when the economies expand more than they would otherwise have. Therefore, we are likely to face problems around spikes if we do not get that investment sustained. The OPEC countries said that they recognised the problem, they saw that their investments were long-term, they saw that recession was temporary, they saw that there was going to be substantial demand, that the very low price of oil at the moment was something that was temporary. They did not want to see the spike from last year happen again; they saw it as damaging to the world economy. So I am hopeful that OPEC, and investment more generally, and particularly in the North Sea and UK Continental Shelf, will be able to be sustained during this downturn. If you say, "Am I watching it carefully and am I concerned?", the answer is, yes, I am watching it very carefully and I am concerned. We are not picking up at this point significant or substantial problems, but it would not surprise me if at some point we did start to pick those up.

Q194 Colin Challen: I understood you to say earlier on that gas storage facilities can act as a cushion against market volatilities. You also mentioned that the industry had asked you for some guidance, but you did not tell us what the guidance was. It varies as to the size of our need. We only have 13 days apparently, according to the press. Germany has over 100 days, France has 80 or 90 days - I know the conditions are different, but do we have an indicative target of how many days storage of gas we should have access to when this can be achieved?

Mr O'Brien: By and large, I think that the description of gas storage in terms of days is complete nonsense. The access to gas storage is not---. We have got so much and we just pump it out. Some gas storage is fairly well instantly accessible, some of it is medium-term, some of it is long-term storage. In other words, it takes quite a while to access it; it does not just come out. Therefore, what you have (and I cannot remember the figures off-hand for last week) is about 19 days mid-term storage, I think, and probably 30 days in long-term storage and you have by now, probably, about two or three days in short-term storage. It varies substantially, and at this point in the year we would expect there to be very low stocks in storage. Why? Because we have just got through the winter and we have used it. That is what it is there for. So I have no problem with the level of storage falling at this point because they then stock up during the summer and use it during the winter. That is the way we use storage. What you cannot predict is when a crisis might arise internationally, a Ukraine/Russia dispute. If it arises in July, there are all sorts of implications. Probably less demand for gas is probably one, but it is probably a bad time from Russia's point of view to have a crisis, but it is the case that the level of storage varies considerably at different points of the year. What we need as a nation is to recognise that as we become more dependent on imports, so we need more capacity for storage, and if all the storage that we envisage comes to pass and various companies are saying they are going to bring forward storage in the coming years, then we will have a very substantial amount of storage, and certainly in excess of the 20 per cent of imports by 2020 that we currently have.

Q195 Colin Challen: All these volatilities are not going to go away, even when the recession is over and other circumstances change. Does the Government actually the have concept of a strategic reserve for gas and for oil so that we can weather passing storms? Is that just down to the market to hopefully fill in the gap, or does the Government employ this concept? The Americans do.

Mr O'Brien: They do. I am somewhat sceptical of it, but I would not dismiss it. We have not for several decades now had to have that concern because we have had access to very large quantities on the UK Continental Shelf in any event, so we have not had to have a concern that we needed to keep, as I was talking to John about earlier, large amounts of oil and gas in the ground just in case. I discussed earlier the practicalities or not of that. What the Americans do is they have known reserves which they just do not exploit, and they will then go in to exploit them at some point in the future. During last year there were various calls upon President Bush, as he was then, to release the security reserve that the US has. We were not in that position because, by and large, we have had North Sea oil and gas and, therefore, that has just been there. We are now moving into a new era where that will be depleted. It is not immediate, we will be moving over a number of decades, and therefore there is now a greater level of discussion about whether we should have some sort of concept of a security reserve. Increasing gas storage provides us with some element of a cushion. I would not describe it as a security reserve, for the reasons I have explained, that it goes down at various points of the year. Would you just lock up large amounts of gas in storage? Who is going to pay for that - that is enormously expensive - and who is going to construct the storage, maintain it and adjust it: long-term artificial storage, not underground? How are you going to do that? I think there are a number of issues around that that probably need a greater degree of exploration. At the moment my answer on a security reserve is somewhat sceptical. Certainly that is not what we need now. Whether we need it in the future I think we can talk about, and I want to listen to the arguments on it: I want to know who is going to pay for this and are we going to pay some oil gas companies, pay them as a state, a large amount of money for holding it?

Q196 Miss Kirkbride: Can I take you back to what you were saying about investment and just maybe a little bit more detail. As you will be aware, almost every business is anxious about the banks' ability to lend them money at the moment and it does not help the banks that were involved are the ones that are the most troubled. You said that you had been talking to BERR and others about what help might be available. Can we be clear what that is and whether any has been forthcoming so far?

Mr O'Brien: What we know is that for SMEs, for the smaller companies, there is the Enterprise Finance Scheme (£1.3 billion), for larger companies there is the Working Capital Scheme, and also, not particularly in terms of oil and gas companies but on gas storage, as Colin was raising with me, we have been talking to some of the companies about looking to the European Investment Bank. What we know is that the European Investment Bank has considerable reserves and we have been talking to a number of energy sector companies who have said, "Our bank says normally okay. This is a good project, but at the moment we would like to get some security here." In terms of some of the storage stuff, big enough projects to go to the EIB and engage with them, in terms of, say, renewables and wind projects, not really of sufficient size to go to EIB by themselves, but if we bundle a number of those projects together they will probably go to EIB because EIB only deals with very big projects; and EIB, we are hoping, will give some indication about their receptivity to energy projects because we need to ensure that we get the access to the capital that EIB can provide to ensure that projects which ought to go ahead, which would in normal circumstances go ahead, which would have otherwise have gone ahead, are able to go ahead despite the recession. You have got to be a little bit careful here, because certainly from what I have seen in the market there is a certain amount of delays and game playing, for all sorts of reasons, in terms of prices lowering perhaps on the infrastructure so people will delay for a few months to see whether a project will go ahead. Some of these projects will still go ahead and people are committed to them and the money is there, but there are now delays in terms of people's gaming around infrastructure. So you have just got to be careful about what really is a problem and is a business saying, "Actually, if I delay this three months, prices will go down a bit and I will be better off", and that is a commercial judgment.

Q197 Miss Kirkbride: You said that the big companies were fine.

Mr O'Brien: By and large, yes.

Q198 Miss Kirkbride: Why are they getting access to money more easily?

Mr O'Brien: What happens with the banks, the major investment banks, is if they have got a relationship with a big successful client that they have dealt with over a long period where there is a known relationship, the bank has a large amount of information about what that client does, how it deals with things, how successful it is. That is a strong relationship, a long-term relationship. If, on the other hand, you get a company that you barely know come to you about which you do not know very much, the banks are then less likely to immediately say, "All right here is a bundle of dosh."

Q199 Miss Kirkbride: So you are optimistic that the Government schemes so far that have been announced and hopefully will be producing some goods in the not too distant future. There is enough money in those schemes, given the size and the level of investment we need in the North Sea that the North Sea oil companies, the smaller ones, will be able to access those schemes alongside every other business in the country that also wants to access these schemes at the moment.

Mr O'Brien: I do not say I could say that I could guarantee to you that what we have done so far will be enough. I think what we need to do is monitor the situation. We are, as you know, in a situation now economically which is probably unprecedented, probably the nearest precedent goes back to the 1930s, and that was not even the same in the sense that we have now got a global economy, and certainly in oil and gas it is very global. So we are trying to manage our way through something which is new for leaders and I think the UK have done well. President Obama is trying to encourage other countries to follow the way in which the UK has sought to put more money into the economy and he, obviously, is trying to do the same. You heard his speech yesterday. I think we have got to work our way through what is clearly an economic problem of global and domestic importance. Working our way through this does not mean that we can say, "Well, we've done all we're going to do now and that's it". I do not think we are in that position. We are going to have to keep monitoring this situation and adjust our policy to ensure that we do the things that need to be done to make sure this country gets through these economic problems and out the other side in a good state.

Chairman: I want to turn to the issue of investment levels and the supply chain. There are many thousands of jobs downstream of the oil and gas sector and they are a very important part of our economy.

Q200 Mr Weir: UK Oil and Gas predict that the number of wells drilled for exploration and appraisal will drop from 109 in 2008 to just ten in 2010. Do you consider that to be a crisis in investment?

Mr O'Brien: As far as the numbers of wells are concerned, the issue is the quality of those explorations. You cannot just work it on the numbers like that; that is not a good way of looking at it. What we are aware of is that there has been a slowdown in the extent to which companies are starting to exploit their licences. You are talking about offshore here, are you?

Q201 Mr Weir: Yes.

Mr O'Brien: And the way in which the various licensing rounds have gone. I have just delayed the next licensing round until the start of next year with the agreement of the industry. There was a lot of interest last November, the maximum amount of interest, far more than we had anticipated in the twenty-fifth round. I have delayed the twenty-sixth round to give some opportunity for the licences that we have already dealt with to be absorbed in the industry. I have also indicated that, as far as the twenty-fourth round is concerned, I am prepared to relax some of the licensing conditions on application and to try to ensure that we have companies who plan to do work but who are perhaps delaying it for a while because of maybe finding some issues around finance or who just want to look at their liquidity for a while. They will continue to hold the licences providing we are satisfied that they are companies that will exploit and do intend to exploit it. We have still got a series of initiatives, as I am sure you are aware, such as the Fallow Field initiative, whereby we say "Use it or lose it". You get three years and you lose it if you do not use it unless you can show a good reason. That has worked quite well. We also give particular tailored licences to companies so that if they have got a particular problem, let us say they are going into an area that has not been explored before, we will give them a longer time to do the work needed to analyse the infrastructure, the strata, the geology. We have taken a number of initiatives to try to ensure that people get the sorts of licences that enable them to carry out the work they want. I do not think we are facing a crisis. I do think that we need to watch this with care because it is unquestionably the case that at this stage of development of the UKCS, particularly with the economic situation, problems can and are likely to arise. So this situation needs careful monitoring.

Q202 Mr Weir: Obviously one of the concerns about any downturn is the effect on jobs within the industry and indeed retaining skills within the North Sea. Is there anything the Government can do about this to ensure that jobs are retained and particularly skills are retained in the North Sea area?

Mr O'Brien: You are right that jobs are enormously important. It is 350,000 jobs in the oil and gas industry in the UK, it is very important, plus a further 100,000 jobs in UK companies that work abroad. In total in the oil and gas industry that is 450,000 jobs. That is a lot of employment. There have been concerns about the nature of the skills in the industry. I have looked at this. We have been told there is an aging workforce and so on. Certainly offshore on some of the rigs there are issues around that, but by and large the average age is about 41. If you consider that we are looking at people by and large between 40 and 60, 41 is not a bad average age to have in an industry. I do not think there is a crisis in terms of skills. OPITO, the very good oil industry-based finance training system, which is currently training about 350 young people, not all of them that young, is really a very good skills academy for the industry. So they are carrying out training. They are quite good at it. The issue is whether a downturn will start to reduce the number of jobs. We have got two things happening. One, we have got the economic downturn and at the moment there is not a substantial problem there. We were worried about Oilexco but, as I have already said, Premier have come in and bought that now. There is also the fact that we have got a depleting level of reserves and inevitably that is going to have a long-term impact on the number of jobs.

Q203 Mr Weir: SCDI and Scottish Enterprise did a report recently which showed the supply chain was worth some £14 billion to the Scottish economy. Obviously we need to make sure that that remains robust if there is a downturn in the North Sea. That ties in with what you mentioned before about having a base for companies to use these jobs in other areas. That report only goes up to the end of 2007. It has not taken into account the current recession. Have you any indications of the effect that the current economic situation is having on that supply chain? Is there anything Government can do to ensure that it gets through it?

Mr O'Brien: There are some indications that there are problems in the supply chain but they are variable. They are mostly where we are looking for investment and it is a bit slower coming than we had hoped. I think I would have to say that there are potential problems brewing there but at the moment they are not massive. What I am more concerned about in the longer term is that the Scottish oil and gas industry recognises and adapts, recognises that it can service, as some of it does now, globally the oil and gas industry, and that it provides rigs and equipment and kit that has a global market, not just a UKCS market. So they have to be helped to ensure that they develop that international market as the supply to the North Sea and west of Shetland in due course over a longer period starts to reduce. We are dealing here with an industry which is very self-aware, well-organised and capable of helping itself through difficult times and also is used to dealing with depleting energy sources, so it goes to various parts of the world, exploits it and moves on. We find that they are reasonable to work with.

Mr Campbell: You mentioned targets previously. One of the pilot targets was for a certain amount of exports and that was exceeded two or three years ago in that the UK industry was exporting several billion pounds-worth of kit. A good share of the £14 billion you mentioned now comes from the world market. If we compare what has happened this time with the last time that UKCS went through quite a deep reduction in activity in 1999 in the oil and gas industry, the oil and gas companies in the supply chain chopped jobs very radically in a short period of time. We have not seen that this time round which I think is a very positive sign. That is not to say they are at all complacent about what is happening, but it is a different approach that is being adopted by the industry this time - dare I say, a much more mature approach this time. As the Minister says, we will have to wait and see what happens in the future.

Q204 Sir Robert Smith: I want to reinforce that sense of jobs dispelling in my constituency in the north-east of Scotland. You can see how important the industry is, it has been through previous downturns, and how depressing it is to see the rows of For Sale signs going up across the north-east if it is not handled right. You have said the crucial thing is to sustain investment. You recognise the importance of the hubs. Given that this downturn is in a mature phase of the industry, it is even more important to get that right. The Treasury has honed in on this value allowance to assist the industry. How do you see the value allowance working? Have you had any thoughts about at what sort of rate it should be set to be effective?

Mr O'Brien: Issues around this will be best dealt with by the Chancellor in due course. It is a perfectly legitimate question, Robert. I think our engagement with the Chancellor on these issues needs to be one that happens within government.

Q205 Sir Robert Smith: That goes back to the targets and the failure maybe to meet the pilot target. There was great engagement between government and industry but the Treasury were not necessarily in the loop. Perhaps one of the reasons we did not reach our targets was that the Treasury started to see a short-term cash cow in the North Sea rather than a long-term investment.

Mr O'Brien: There were changes in the tax regime in 2005. The Treasury does not envisage during the course of this Parliament making a substantial increase in the tax rate and the regime is in place, but we have agreed to look at a certain number of adjustments that have been asked to be made by the industry and the Chancellor in due course will no doubt take a view on them.

Q206 Sir Robert Smith: That dialogue was taking place in the maturity of the province and the Government's wish to see security supply maintained in maximising the North Sea in that climate. Since then it has snowballed with the economic crisis. Is there a dialogue that you are part of to encourage the understanding that maybe on the cashflow side there is a thought that the early release of tax credits for exploration to those companies that have not got any profits yet to put them against, so that they could assist their cashflow by the early release of tax credits, and also that recognition that the current value allowance was looking at incentivizing new fields west of Shetland, high temperature, high pressure? Is there not an argument now that any incremental development on the hubs themselves will also need to be incentivized to make sure the investment is there so they are not decommissioned?

Mr O'Brien: There are various ways of incentivizing. As far as the tax regime is concerned, no minister outside of a Treasury minister will discuss it, as you know, and beyond saying what I have said, I do not propose to do so here. However, there are ways in which through non-tax means we can look at the issues around the best exploitation of hubs and the creation of hubs and also making sure that the industry continues to benefit. We are working through pilots to ensure that we develop those methods of helping them and providing the infrastructure that they need and the advice and guidance that they need. In terms of what the Chancellor is going to do, we will have to wait for the Budget!

Q207 Sir Robert Smith: The one key thing you could do then is, if you cannot tell us anything, make sure that the Chancellor hears the evidence we have heard about how crucial these issues are to the North Sea.

Mr O'Brien: I can certainly pass on that evidence to the Chancellor. Not only that, I can reassure you that the industry has talked to us, as you would expect, at some length and with very precise wishes and those have been passed on to the Treasury and they are aware of them, as they are about the demands and wishes that are coming from all sectors of the economy.

Chairman: Another aspect which is crucial to development is the regulatory regime.

Q208 Dr Whitehead: Do you think the DECC Energy Unit is adequately resourced?

Mr O'Brien: By and large, yes. What we are doing at the moment is we are looking at the resource available and we are determining as a new department where that can be best deployed. Have we overall got the right numbers? By and large, yes. Have we got to adjust the deployment of where we best want the staff that we have got? We want to look at that and make sure that we are content. We have come from two different departments. We are anxious to ensure in the new department we do not continue the divisions that previously existed between officials in those two departments and so we are trying to integrate the structures of DECC so that we prioritise the staff where we feel as DECC we most need them. If you are asking if we are just going to perpetuate the number of officials that previously operated in BERR in the same roles, no, because we need to redeploy.

Dr Whitehead: Is there congruence between the money that is raised from licence fees and the money that is allocated to the work of the Energy Unit, or does some of that money disappear elsewhere?

Q209 Chairman: It is £60 million comes in from that.

Mr O'Brien: I do not think the answer is that there is congruence. We get quite a lot of help from the industry.

Mr Toole: The £60 million of licence fees goes into the consolidated fund.

Mr O'Brien: So it then comes back out but not as we know it!

Q210 Dr Whitehead: We could not say it was hypothecated?

Mr O'Brien: No. I was a bit surprised because I had never heard anyone suggest that. As you have just heard from Simon, it goes into the consolidated fund, so it does not have any direct effect on the number of staff we have.

Q211 Dr Whitehead: For example, the Unit might be employed in producing a reliable registry of offshore production licensing holdings, which certainly the industry suggests could be a very good way of making sure that a number of costs and development issues are sorted out, including the title, et cetera. It may be the case that it is simply not within the capacity of the Energy Unit to produce such a thing.

Mr O'Brien: I think it is within the capacity of the industry, if it wants such a registry, to create one and ensure, of course, that it has insurance policies, as the Land Registry does, to cover any errors and ensure that it has got all the administrative capacity. We have got a record of where we have issued licences. As to creating the sort of facility that the industry says would be beneficial to it, I am sure it would. I am very happy to work with the industry if they want to fund the creation of it. What they are saying at the moment is, "Government, will you please go and create this for us just like you did the Land Registry?" to which my reply is, "Yes, and the Land Registry costs an awful lot of money to run". It was created in 1925. I do not think we are in the position where we want to create a new registry. If the industry is prepared to finance it then we are prepared to work with them in creating it. We would also want to ensure that if there were errors, as the Land Registry has to cover itself with insurance, so too that registry would have to do so given that an error in that registry could well have very, very costly implications for somebody who relied on it.

Mr Toole: We do keep our own record of who we have given licences to and we are working hard to make sure that the industry can see that and tell us of any errors that are in it. So we are working with them, but as the Minister says, the liabilities that the Land Registry takes on are very high and very costly and the Minister does not want to accept those.

Q212 Dr Whitehead: As far as the regulatory impact on the offshore sector is concerned, how do you think the emergence of Phase III of EUETS is going to impact on particularly the offshore sector's role in auctioning and the extent to which it could be argued that auctioning may simply drive investment elsewhere?

Mr O'Brien: There is a lot of concern, as you would expect, in the industry, as there is across other industries, about the introduction of ETS. There have been various predictions about big problems, some of which we think are just wrong and some of which we think may have some merit.

Q213 Dr Whitehead: Which ones do you think are wrong?

Mr O'Brien: One example would be that the oil and gas industry says that the carbon price would be around €45. The predicted carbon price for 2013 at the moment is about €20. We would work on an assumption for our predictions that it would be round about €30 at some point during Phase III of the ETS. We are just concerned that some of the doom and gloom messages that have come out from some parts of the industry are based upon statistics that they need to look at very carefully. For example, they have also said that for the small companies this will be very, very damaging. Well, I think they have got to show how. For some companies it will have an implication. It is clear that if they are generating then they are going to be paying for the EUAs, the allowances. If they are not generating then there is an issue about whether, with carbon leakage being one of the key factors round the oil industry and we have still got quite a way to work through in terms of the extent to which particular rigs and the oil industry will be able to show that it has got an element of carbon leakage, that enables them to look for non-generation free allowances. In terms of where it is generating electricity or energy or flaring, then it is clear that they are going to be covered by this and not only covered by the ETS as it currently is, but it depends to some extent what happens out of Copenhagen and where the cap is on the ETS further down the line. There are a lot of issues around this that we are working through with the industry. I am concerned that there are fear levels about dealing with global warming within the industry that are greater than they need to be. I have no doubt there will be an impact. The question is the extent of that impact and I think that needs to be determined. The industry is very concerned at the moment and we are trying to work through those concerns with them. One of the difficulties is that the various rigs generate electricity at different levels. Some of them use their turbines to mechanically work the engineering on the rig. Okay, that is not generating electricity as such and therefore they may qualify for free allowances in relation to that and some of them are generating up to 90 per cent of their effort through generating electricity and that is what is doing a lot of work on the rig and they may end up having to buy carbon allowances for that. There is a distinction between the generating side and the non-generating side which is important to identify. The industry is concerned about both sides, but it is probably more concerned about the generating side than about the non-generating side.

Q214 Dr Whitehead: Bearing in mind you have said that the oil and gas industry is now very much an integrated global concern, do you think that the charge that actually, however effective and benign those regulations may be, the effect of driving exploration and investment into regimes where there is perhaps not that regulation could be a real issue?

Mr O'Brien: Let me be very cautious in the way I answer you because we are obviously having discussions with the Commission about the issues around carbon leakage. Let me say that there is a criterion around the Directive which defines the sectors at risk as those with a trade intensity of around ten per cent, so there is a likelihood that they will just go off. At that point questions then need to be asked about whether they are likely to be part of a big problem of carbon leakage. The industry argues that there is a big problem of carbon leakage. We are investigating the detail of this to see the extent to which we will need to make representations around carbon leakage to the Commission and indeed take a view ourselves about the level of carbon leakage that is likely to occur. There is much more work to be done before I can give you a definitive answer to that. We want to work through with the industry their arguments as to how, both in terms of generation and no generation, they will be able to demonstrate that they are potential victims of carbon leakage and whether individual companies, whether big ones or small ones, can justify us taking a view with regard to allowances or justify the Commission, whether we do or not, taking a view with regard to allowances in the ETS.

Q215 Dr Turner: How does your Department ensure that companies who claim they will follow environmental best practice actually do so once they have got consent for projects?

Mr O'Brien: We have a number of means by which we ensure that we cover the work of these. They are subject to licensing conditions as to how they can carry out their work and we have got control over the terms on which licences are issued. They will normally ensure that they not only comply with those but that they are able to show that they will decommission, because that is where we get many of the problems around environmental issues. We have 40 environmental statements, six appropriate assessments under the Habitats Directive and 40 screening and scoping documents currently reviewed, around 3,000 permits issued around chemical use and oil discharge permits, drilling approvals and permits under the EU Integrated Pollution and Control and Emissions Trading Directives. We investigated and examined problems around 386 oil spill plans, so they plan what they do when there is an oil spill and we have to approve their plans. We conduct inspections and investigations of the various projects both onshore and offshore. There were 55 inspections done last year to check whether the various kit is performing at the standard that environmentally is adequate. We report cases where there have been breaches to the Procurator Fiscal in Scotland. Since 1998 we have reported 11 incidents to the Procurator Fiscal resulting in nine prosecutions. There are issues around spillage. Let me give you some figures. There are about 366 million tonnes of oil which has been produced between 2002 and 2005. During the same period 362 tonnes of oil was spilt. This equates to 0.00009 per cent. That is a pretty good record.

Q216 Dr Turner: Small percentages of a very big amount can be significant.

Mr O'Brien: Yes, 362 tonnes is significant but not given the sheer amount. It does suggest they are doing fairly well.

Q217 Dr Turner: Having said that, the strategy consultees such as the Joint Nature Conservation Council have identified some issues. They tell us that there is "scope for improvement" in operators' compliance with the Environmental Impact Assessment process and that you should consider reviewing the current system. Will you do that?

Mr O'Brien: The compliance level we have just discussed in terms of the level of spillage and so on. There are issues that concern me about west of Shetland and how we would deal with those some quite sensitive environmental areas. There are some areas like St Kilda and so on where there are particular issues around the environment that we need to address, questions about whether there should be no-go areas. I think around that there are issues which we do need to examine and take a view on. Because this is a continuing process of trying to ensure that we have an industry which not only carries out its work of exploitation but also decommissions properly we have just got to ensure that all of this is done in a way in which we keep it under constant review. Am I planning a review beyond the areas that I have already identified? Not a substantial one. Am I conscious that we need to keep watching this all the time? Yes, I am.

Q218 Dr Turner: Your comments about west of Shetland chime very much with the concerns of the RSPB who tell us they feel there is a need for a better, up-to-date survey of seabirds and other wildlife in areas affected by exploration. The knowledge base is not what it might be in terms of that area of marine ecology. Will you be doing anything to support such surveys?

Mr O'Brien: We do look at things when we get applications for particular areas to see what the impact will be. What I think the RSPB want, if I understand their demand correctly, is a general survey. We are looking at all the areas so that we then have a view about what the impact would be across the whole of the potential oil and gas fields. Our view is that we are content to look at the environmental impact on birdlife and crustacea, et cetera, when we have an application. These things are not fixed. You could not just do a survey and say, "Okay, we've done the survey," because migratory patterns and all sorts of things do change over time. The result is that you have to keep the thing constantly rolling. If you had infinite resources you would like to do all sorts of things, but I think the better way of dealing with it with the resources that are available is to carry out clear impact assessments where we have applications to carry out work that is likely to be done.

Q219 Dr Turner: This comes back to a question we have considered before, which is whether you should be doing project-by-project environmental assessments or whether you should have a strategic assessment of a larger area so that you build whole patterns.

Mr O'Brien: We do undertake larger strategic environmental assessments of larger areas, but when you have got a particular project which comes forward it will have a defined impact in a particular area and you need to look in much more detail at what that impact is.

Mr Campbell: It is fair to say that the Department is the single largest funder of bird surveys in the country and since 2005 has spent £3 million on bird surveys, so it is a very significant amount of money. Prior to that we have undertaken over the last seven or eight years strategic environmental surveys which were, when they started off in 1999, world leaders in determining the environmental scene that we have found round about the UK. I think it is fair to say that we are in quite a good position with regard to knowledge of not just the Bentley colonies but also of birds around the UK. Whilst it is understandable RSPB would quite like a bigger survey and they have estimated something like £10 million, we believe if you were to do that across the whole of the UK it would cost considerably more and somebody has got to pay for it ultimately. We think we are in a good position as regards our environmental record and the information we have around the quarters.

Chairman: There is one very important issue which came up in our discussions in Aberdeen in relation to transferable skills and resources and such things as the potential of carbon capture and storage using the infrastructure of the oil and gas industry.

Q220 Mr Anderson: We are all interested in seeing CCS become a success, but we have been advised by those involved in the industry that what they need is a clear licensing regime because at the moment they are not quite sure what they can and cannot do. Can you help them with this? What have you done so far?

Mr O'Brien: We want to ensure that for carbon capture and storage there is a clear licensing regime and that they are able to get a licence to carry out carbon capture and storage. As we develop our commercial capacity to do that that will need to happen. As you know, at the moment we do not have a project here or indeed anywhere in the world which is of a substantial commercial nature involving carbon capture and storage. What we want to do is put in place a regime which will enable carbon capture and storage to take place, issue licences to enable it to take place, ensure that it is properly inspected, that it is safe and that we have a system which will encourage the development of an industry in the future. I believe that in 20 years' time we will see a worldwide industry involving carbon capture and storage. We know the science is good. The commercial potential of it is yet to be assessed. If we can get it right, because it will deal with some of the problems we have around coal, which is important not just in the UK but important in much of the developing world, oil and gas and deal with some of the issues around global warming, the potential for a massive industry to develop 20 years' time from now around carbon capture and storage is great. I am certainly very optimistic that it will happen, but in order to ensure it develops properly in the UK we need to have the legal base and the creation of a licensing system and we want in due course to consult on how we are going to create that.

Q221 Mr Anderson: I am not sure I have understood you correctly. Are you saying we have got to get the demonstration project up and running first or would the licensing regime come first? The advice we are getting is that people could be getting on with the work but the licensing regime is not there to help them.

Mr Toole: There is a licensing regime coming into place later this year, but the Crown Estate is already preparing and will have the power from 6 April to start issuing leases for the areas. If your concern is that people who want to get hold of an area on which to do studies and work on carbon capture and storage are being frustrated by the licensing regime, we have been working very closely with the Crown Estate and very shortly they will be able to get into a dialogue with the Crown Estate to get hold of the territory that they might wish to use.

Chairman: Thank you for your attendance and your evidence. We appreciate the time you have given us.