UK Deepwater Drilling - Implications of the Gulf of Mexico Oil Spill - Energy and Climate Change Contents

Examination of Witnesses (Questions 269-336)

Mr Charles Hendry, Mr Simon Toole, Mr Jim Campbell and Mr Hugh Shaw

Q268 Chair: Good morning, Minister. Welcome to the Committee. Would you like to introduce your officials, please?

Mr Hendry: Good morning, Chairman. Thank you very much indeed. I'm joined by Jim Campbell, who is the Director of the Energy Development Unit, by Simon Toole, who is the Director of the Oil and Gas Licensing Exploration and Development Section of the EDU, the Energy Development Unit, and by Hugh Shaw, who is the SOSREP.

Q269 Chair: Thank you. The Secretary of State announced in the Annual Energy Statement that the UK would undertake a full review of the oil and gas environmental regulatory regime following the outcome of investigations into the causes of the Gulf of Mexico incident. Would you like to tell us how you're getting on with that?

Mr Hendry: Well, what we initially did was to do an interim assessment and to establish that we should have a larger number of inspectors and more inspections. We've therefore increased by half the number of inspectors and doubled the number of inspections, particularly focusing on the drilling operations. We have looked at the evidence in the BP internal report and have largely concluded that the measures that they have identified are things we're already doing, but we're now waiting for the further US investigations to decide whether there are any recommendations that come out of that that we should take into account. So, the full scale of the report will be done, we would expect, in the early part of next year when we have the American evidence.

Q270 Chair: Right. When is the American evidence going to be published, do you know?

Mr Hendry: We're hoping the presidential report should be out in the very early part of 2011.

Q271 Chair: Right. So, how long after that will you want before you conclude what you're doing?

Mr Hendry: We will deal with it very urgently because I think once we have the full analysis of what they believe happened in the United States people will want to know extremely quickly what steps we would plan to take here. As we've said before, we do believe the regime we have in place in the North Sea is one of the most robust in the world, and we think that we've looked carefully at that again since the Gulf of Mexico incident. So I think we would expect to be in a position to respond very quickly to the final reports in the States.

Q272 Chair: You said that our regulatory regime is fit for purpose. Do you believe that extends to the liability regime?

Mr Hendry: Yes, I do. I think if you look at the liability regime here, we have almost a unique relationship in the world. The liabilities regime means that by being involved in OPOL people have a guaranteed cover of up to $250 million. That was $120 million and has been increased to $250 million. If companies fall short in terms of their own cover, then others in the industry will step forward to make sure that that cover is in place. And I think we've also looked very carefully at the nature of the situation here. There are new containment facilities that would be available, which we believe in the event of a catastrophic incident would enable that to be capped or contained more quickly. We believe the location of where these facilities are and the distance they are from shore allows the time to be put in place to stop the oil reaching shore. In addition to that, we look at the economic activity in the north of Scotland compared to the very high levels of fishing, of the tourism industry, right along the whole of the Gulf of Mexico, which have resulted in a greater need there for greater cover.

Q273 Chair: Just on OPOL, is membership voluntary or is it a requirement now of a licence?

Mr Hendry: It is voluntary but in order to satisfy us that people have the cover, they can only have that by being members of OPOL.

Q274 Chair: Right. That's the kind of voluntary approach I can understand. When the oil spill regulations were amended by a statutory instrument, do you think they identified clearly who the liable party would be?

Mr Hendry: I think what we tried to do was provide greater clarity and I think what we recognised through that SI was that there was a potential loophole and we have moved to address that. The liability is quite clearly with the operator. The whole way in which the liability is established is that the operator has full liability for what goes on in their operations.

Chair: Laura?

Q275 Laura Sandys: I'm just interested in the well design approval process, not being an engineer but having been involved in the engineering sector in a distant way. Twenty-one days from somebody submitting a well design to you and them then being able to actually exercise and use that well design, does that seem like an adequate period, particularly when we might be working in areas that are less common and particularly when we're working at such deepwater depth?

Mr Hendry: I'll ask Jim and Simon to come in, but normally what we see is an incremental change rather than a fundamentally different design that comes through. Therefore, we're not looking at something that is absolutely new, which needs to be assessed, and therefore most of the work of assessing a design has already been done historically. The sort of work that is being done and the areas that people are looking to explore and develop, then again that tends to be incremental, so that we are seeing around the world a significant amount of deep sea drilling: 14,000 wells have been drilled in deep sea water around the world and so there is significant experience in dealing with this. But let me ask Jim and Simon to comment further.

Mr Toole: It's the HSE that do the well assessment and the 21 days is just a period where people have to give that much notice. I think if the HSE found they had any difficulty with the well design or if the independent assessor had any difficulty with the well design, then the period would extend until such time it was resolved. So I think that is just a sort of administrative time step. It doesn't mean that everything has to be completed within that period.

Q276 Laura Sandys: In addition to that, there is also the issue of the independent assessor who is employed to look at well design and to support in many ways the company. They're both employed by the company although they're independent, but also I suppose their business is based on good relationships with the oil and gas business. Do we feel that that distance is distant enough; do we feel that that independence is institutionalised enough, or is the relationship a little bit too intimate and close?

Mr Toole: Well, these are arrangements put in place by the HSE, not by DECC, so I can't really respond for them.

Laura Sandys: But as the regulatory authority?

Mr Toole: I can only imagine that if the HSE felt that there was too close a relationship they would do something about it.

Q277 Laura Sandys: But as the regulatory authority, do you feel that that is a distant enough relationship to ensure that the assessor is truly independent and can assess risk or highlight issues of concern?

Mr Campbell: Yes. I think if you look at HSE's track record here and you look at what happens in terms of an independent assessor's report, you'd feel quite comfortable with the fact that there's quite a bit of challenge in that process. I think the independent assessor is only as good as they are independent in this process, and if HSE felt they weren't doing that job they certainly wouldn't be using them. So, I think we are very comfortable with that kind of approach and, indeed, it's one the Americans seem to be heading towards in terms of their revision of their system. So, I think we can be quite confident. It has worked very well over recent years. There's been 10,000 wells drilled in UKCS and fortunately we haven't had the kind of incident they had in the Gulf of Mexico.

Laura Sandys: Thank you.

Mr Hendry: I think one of the major lessons that we have seen from the United States' experience is that the robustness of our regime significantly depends on the separation of powers and that the health and safety is not done by the licensor. So, as a result of that, there is no commercial conflict but, more importantly, the HSE can bring together experience it has in other sectors. So, it is not purely looking at the oil and gas; it's looking at nuclear plant and a whole range of other areas. If it identifies risks and new ways of handling risk that it can adapt to other areas, it can bring that experience to bear elsewhere. I think that's one of the reasons why the Americans are now actively looking at the separation of powers that we have here.

Chair: Dan?

Q278 Dan Byles: Thank you, Chairman. I'm interested in the tax relief available under the field allowance. It could be said that the UK is incentivising the drilling of wells that are potentially more difficult to control than the Macondo through our tax regime. I'm interested in your thoughts on that.

Mr Hendry: We believe it's absolutely in Britain's interests to get the best resource that we can out of the UKCS. We know that for the foreseeable future we're going to be using oil and gas and we're either going to be using our own oil or gas or we're going to be importing it. Therefore, it's in the national interest to develop those facilities as best that we can.

Looking at how one stimulates that, we're looking at companies that generally have an opportunity to go anywhere they want in the world, and the UK regime has to be sufficiently attractive in order to bring them here. The tax regime is not a tax break; it is simply reducing the level of tax payable. So they're not getting a tax giveaway; they are actually just paying slightly less in tax than they would otherwise be paying. We think that's important to stimulate the investment in the sector. As I say, the nature of the fields here is that they're quite often more marginal; they're more difficult to work in in terms of the extent to which they've already been exploited; and, therefore, trying to attract that investment has to have the right tax signals. While it's a matter for the Treasury primarily, we broadly believe that we've got the balance right.

Q279 Dan Byles: Why is it that the temperature and pressure threshold for that allowance was reduced this year?

Mr Campbell: Sorry, I didn't catch that.

Dan Byles: The temperature and pressure thresholds were reduced for that allowance this year. I was wondering why that was.

Mr Campbell: In terms of it's simply to make them applicable to a bigger catchment of fields.

Q280 Dan Byles: So you're simply tweaking them in order to try and bring more of the available fields in the North Sea into this allowance?

Mr Campbell: Yes, to exploit them.

Dan Byles: And how would this—

Mr Campbell: Sorry, do you want to—

Mr Toole: I think the intention behind the measure is to make fields that are more costly and more difficult to develop—whether it's small fields, whether it's HPHT fields, whether it's heavy oil fields—ensure that when they're economic to develop they become commercial to develop. Therefore, we need to make sure that the catchment of fields are those that in some way the tax is holding back from development. So we don't tweak it to include as many fields as we can; we look with the Treasury—and indeed it's the Treasury that does it—at the economics of fields, we look at their commerciality, and where those two come out of balance we look at the tax system to see if it's the tax system that is causing that.

Q281 Dan Byles: Is there a danger that on the one hand we're trying to incentivise low carbon technologies and then, on the other hand, because perhaps the market is getting out of kilter and suddenly more investment resources are going to low carbon, you start to incentivise oil and gas to redress the balance, and that it is a juggling act?

Mr Hendry: It is a juggling act, you're absolutely right, but I think what we're looking at here is a real desire to decarbonise our society but recognising that that can only go at a certain pace. The nuclear power plants that we would hope to see built will only, for the first few years, be replacing old nuclear plants, they won't be adding to capacity. The huge rollout of renewables will be towards the end of this decade and beyond that before they can really fulfil their potential. The development of carbon capture and storage is very much in its infancy. So, in all of the terms of the options then we still see a very strong continuing role for oil and gas for some years to come. Now, we want to decarbonise that. We'll be looking at whether it's appropriate to apply CCS to gas, as we were discussing in our previous evidence session. But in the meantime we recognise that the world will significantly rely on hydrocarbons and, therefore, if we have a huge resource we should be looking to see how best we can develop that. So, we don't see a conflict between those two but we do understand that overall over time we must be decarbonising.

Q282 Dan Byles: Wouldn't a better approach be to reduce the level of incentives on low carbon rather than increase the incentives for oil and gas?

Mr Hendry: I think what we're trying to do is separately we need to get people to invest in the UKCS. If they're going to do that they've got to find it as a regime that is attractive to them. Sir Ian Wood, who heads up one of the major support industries in Aberdeen, said that the difference between continuing on existing policies, where he reckons there is perhaps 11 billion barrels that are retrievable, or if we had policies in place to maximise returns would be 24 billion barrels. Well, that 13 billion barrels at current prices is a trillion pounds worth of income for the United Kingdom. So this is a huge contributor to our national wealth and, as I say, the choice is do we wish to import this or do we wish to develop our own resources. We think it's absolutely in our national interest, given the safety regime that we have in place, to continue to develop that.

Chair: Robert?

Q283 Sir Robert Smith: I must declare my interest on the Register of Members' Interests as a shareholder in Shell. Isn't it, rather than anything, the important point that the oil and gas industry is not competing with the UK renewables, it's competing with the world oil and gas industry and, therefore, the price of oil won't be changed whether we produce much in the North Sea or not, but the jobs that come from it and the tax revenues that come from it will be lost to this country if it's imported rather than produced locally?

Mr Hendry: I wish I'd put it quite so eloquently.

Q284 Sir Robert Smith: I was just also remembering, wasn't the reason that the original incentive for high pressure high temperature was actually only going to likely incentivise one well in the whole of the North Sea?

Mr Toole: There were representations made by industry that the original definition did not properly reflect or did not properly target those fields that had this disconnect between commerciality and economic liability, and there was a change made as you have suggested.

Q285 Sir Robert Smith: Just one last thing, just to make sure it's understood: I think the Minister made the point that it's not that we're taking a great incentive compared with the rest of industry; they still pay a higher corporation tax even after the incentive. The incentive is only against some of the earlier costs until the allowance is used up and then they go and pay the supplemental corporation tax as well.

Mr Hendry: That's right. They typically pay 50% to 70% tax rate on the resources that they recover. So, it's a high level of tax that is already payable.

Chair: Christopher?

Q286 Christopher Pincher: Thanks, Chair. Can I just step back briefly to the regulatory regime and the relative relationship between the drilling contractor and the licence holder, the operator? This description I think comes from the HSE but it says, "The safety case duty holder and the well operator must demonstrate how their safety management systems will operate together, who has primacy in an emergency and who has overall responsibility." I just wonder why that might differ from case to case. Why is it not the drilling contractor who has primary responsibility in an emergency or the operator?

Mr Hendry: I think it depends to some extent on the nature of the emergency. We do have an escalation process that is in hand, and it might be worth bringing in SOSREP at a point to talk about his role in this respect as well. In terms of how an escalation takes place, that first of all it's noted to—well, I have it down here, sorry. The Coastguard Marine Rescue Co­ordination Centre is alerted to any spill. If it's greater than one tonne then it is alerted to the counter pollution and salvage officer and to DECC and then SOSREP is involved in setting up an offshore control unit. Then there are other elements that come into play according to if it's coming towards the coast as well.

In terms of the safety mechanisms involved, then the person in charge of the rig is in charge of safety mechanisms and operational aspects. And also, before anybody can start operating they have to satisfy us that they have an environmental management system in place and it has to be there before they start operations, and in doing that we have to have third party audit of that process. We have to be absolutely satisfied that that is appropriate. They also now, as part of changes that we've made, have to look at worst case scenarios and so to have satisfied us that in the event of something going catastrophically wrong they have appropriate measures in place for handling that. Simon?

Mr Toole: Can I just say that there is always one person who is responsible ultimately for safety on the rig: the OIM, the duty holder. That is usually the drilling contractor. Clearly, where you have a situation where a well has been designed by the operator and there are changes to the well design, then it is for the operator to take those through the safety process. But that's at a different level than if there is something happening on the rig that is giving the OIM cause for concern. It is his responsibility to make sure his rig is safe and under that situation he is paramount.

Chair: Phillip?

Q287 Dr Lee: Thank you, Chairman. Moving on to environmental regulation inspection and potential environmental impact of an oil spill specifically in West Shetland, firstly, with regards to environmental inspectors you have 10 overseeing 289 oil and gas installations on UKCS. How do you justify such a small number in relation to, say, the HSE numbers?

Mr Hendry: They're doing fundamentally different roles. Ours are looking at the environmental implications and the time when that is at greatest risk is during the drilling process. The HSE are responsible for every aspect of safety on those operations for the whole of their lifetime. So, even in terms of the kitchen and the accommodation facilities and aspects like that, HSE has a role in all of those. So they have a much more substantial role compared to the very narrow role that our own inspectors have. If you look in terms of the number of wells that are being drilled at any particular one time, in a typical year we might see 24 being drilled from mobile platforms. Of those, a quarter, perhaps, are gas and of the remaining three quarters only a minority would be deep sea. So, we are going to focus attention on the deep sea drilling to make sure that there is annual inspections of those, that all of the deep sea ones have been inspected this year since the Gulf of Mexico. So we believe that in terms of the very narrow focus of the environmental work that comes under my Department we have in place an inspection regime that covers it, but the HSE responsibilities are very much wider.

Q288 Dr Lee: How does DECC ensure that you have competent environmental inspectors? Presumably anybody half decent is employed by the operator, not the regulator.

Mr Hendry: I think for many people they see this as a very important part of their career development. What we're looking for is somebody with an appropriate degree and five years' experience in the industry. So we have got people who have very strong practical experience of working in the industry, because it is both involving paper assessment work and then a visual inspection. So, the skills that they need to bring to that are very specialist indeed. I think absolutely many people see this as an important part of their career development. They may not necessarily believe they're going to spend the rest of their lives doing it, but it makes them better in terms of returning to the industry in due course if they've actually spent a—

Q289 Dr Lee: Are there figures on retention? Do people stay for two years and then get snapped up by the operators?

Mr Campbell: Well, can I say one thing? First of all, we have a very competent bunch of inspectors in Aberdeen who are all the way decent and I'm very proud of them, actually. Yes, we do occasionally get some people leaving; indeed, I think the last one left to join HSE. So we do get a bit of interchange there. We haven't had a huge turnover of staff over the last 10 years. We have employed, as you're aware, an extra additional three inspectors at the present time, so we'll have 10 altogether, taking the chief inspector into account.

The other thing I should add that is of interest is that you shouldn't just see it as inspectors alone because we have over 50 people in Aberdeen that are all involved in environmental regulation in one way or another, through environmental permits, through analysis of the documents and so on. So it's slightly distorting just to see it in terms of numbers of inspectors. We do have quite a number of people looking at the environmental issues out of Aberdeen. If indeed we need some more, I'm sure we wouldn't hesitate to employ more inspectors if indeed the amount of activity and the types of activity would justify that as being the case.

Q290 Dr Lee: All right. Just moving on to the oil pollution emergency plans, can I draw your attention to paragraph 72 on page 16 of your memorandum, "The plans are reviewed by DECC, MCA and relevant environmental consultees, such as the Marine Management Organisation or relevant Devolved Authority" and so on. Are we happy about how good the plans are? I draw your attention to the Macondo oil spill response plan, which I've trawled through. It's a weighty document; it's big. There are some errors in it. There is an air of cut and paste about it. Are we happy with the quality of the plans that have been submitted to us?

Mr Hendry: What we have required, as I was saying just now as well, was that they must now look at worst case scenarios, and historically they haven't been required to do that. We think that does make them more robust. So, in the event that there was a very large leak, how would that be managed over a period and what would the response be? We're also making that retrospective, so it's not just for new applications, this is for historic ones as well and for existing operations. I think that has, therefore, broadened the nature of this. I do come back to the fact that we do believe that we have one of the most robust regimes in the world, probably with the Norwegians. It has meant that over 40-plus years of North Sea operations we haven't had a serious drilling incident which has resulted in a large oil spill. We take nothing for granted; we're not complacent about it, but we do believe we have a very robust mechanism in place that allows the development of this sector but does it in a way that does the most to reassure the public about safety and environmental protection.

Q291 Dr Lee: Just one final question: paragraph 74, "Pollution incident assessment and dispersant and aerial surveillance requirements. OPEPs focus on the worst case scenario." The Macondo oil spill response plan made no mention of the use of dispersant sub-sea, none at all. Last week, the managing director of Chevron strongly indicated that if there was a spill in West Shetland they would use sub-sea dispersant. Have any conversations taken place between DECC and Chevron? On what basis has a decision been made, if one has been made? What's the evidence? Is it in the public domain?

Mr Hendry: Before issuing the licence to Chevron they had to satisfy us on a whole range of fronts, which we then went back to them in the light of the Gulf of Mexico and the BP report and asked for further answers to a range of additional questions. So, all of that will be in the public domain. But in terms of the specific question, Simon, on dispersants, or Jim?

Mr Campbell: What we would do in conjunction with MCA, who are actually responsible for the oil spill clean­up and so on, is we would look at the individual case and determine what would be the best response in that circumstance. I would be able to say there is no initial view that we would use sub-sea dispersants at all and it would be through some kind of permitting process that we would allow that to happen if it was thought to be the case that that was actually beneficial. So what we would look at is what's the oil like, where is it, what are the weather conditions and so on, in conjunction with MCA, and we would use dispersants if the overall outcome was better than the oil alone. A judgement is made as to whether that's the best thing to do.

Q292 Dr Lee: Yes. My point is how do you make a judgement when it has never been done before and we don't know where that oil is now in the Gulf of Mexico? BP turn up saying, "We've got hundreds of scientists doing this." I'd like to know where they're looking. You've got this huge water column. It could be dispersed everywhere. I'm hearing reports from friends that dolphins and whales are swimming off Barbados for the first time in history. I'm just wondering, it's an anecdotal report but how does one make a judgement when one hasn't—

Mr Campbell: Well, I think it's accepted that it's very much at the leading edge, if you like, of how you would use dispersant. We certainly wouldn't be going there as an initial look. It's not something that we, as a permitting body along with MCA, would be using as a chosen method to do that. The MCA, along with ourselves, would be in a position to make the decisions about how a clean­up would actually be handled.

Chair: Robert?

Q293 Sir Robert Smith: I just wondered two things. How goal-setting is the approach to environmental pollution? Is it a similar regime as to the HSE one?

Mr Campbell: It's a bit different. You appreciate HSE have the safety case where they're looking at a very clear outcome focus, where you've got a very clear outcome the well should be safe in terms of how it's used. In terms of environmental, the outcome we hope is never going to happen. They're not going to spill oil—it's not going to happen—so it's much more preventative, if you like, than the HSE approach. I think that's by its nature how it has to be because what we're trying to do is stop this ever happening in the first place in terms of the procedures, the bridging documents, the co­ordination mechanisms and so on and so forth. So we're in a different place. It's not really applicable to use the same kind of philosophical approach, I don't think.

Q294 Sir Robert Smith: What have the inspectors found over the years? Have they found anything frightening or have they basically got there and found that things are looking pretty good?

Mr Campbell: I'm slightly unsure how to answer that. We've had two prosecutions over the last seven or eight years, and I would think that probably a prosecution amounts to something that is quite concerning for us. But two prosecutions over the number of inspections we'll have conducted during that time I would suggest to you is not evidence of a system that is in disrepair or where something causes us a huge amount of worry over the overall process.

We pick up small things from time to time and, indeed, if they were major things we would either prosecute or we would put in place prohibition notices and stop people operating immediately, and we don't do that terribly often. Usually what we do is we write people a letter around the things that we have found and then we check that they've addressed them, following that up. So that's the kind of place we're at in terms of environmental regulation. If you look at the number of oil spills over the last several years, then the number of oil spills are going down and the actual quantities have gone down year on year. So, we're an environment where historically we're an improving situation and I would have to say one where we feel quite comfortable in terms of the regulatory oversight.

Chair: Laura?

Q295 Laura Sandys: Just following on from that, in your report you say there has been an increase, about a 20% increase, in hydrocarbon releases last year as opposed to years before. The issue there is what are you learning from that and what are you ensuring that HSE and also any remedial environmental impacts—what assessment are you doing of that increase and why is it happening?

Mr Campbell: Well, we should avoid confusion here. I was talking about oil.

Laura Sandys: Spills, yes.

Mr Campbell: HSE look at hydrocarbon releases on the platform. If I can just say, regarding spills—and I'll come on to your question specifically just in a second—in 2009 there were 56 spills and six tonnes of oil altogether; in 2008, 83 spills and 20 tonnes. So you can see we're in small numbers here in terms of actual spills to the water. You're talking about HSE's hydrocarbon releases and that can be small releases of gas or whatever. It doesn't involve oil in the water. It's quite a different kind of release.

Now, HSE generally take the line—and I'm not speaking for them—that that is indicative of the overall, if you like, philosophy on a platform or the overall philosophy within the basin in terms of releases, but they themselves would say that this past year has been slightly out of trend. If you look at the trending over several years then it has been going down and down and down, and this is a bit of a blip. I'm sure they themselves would say you shouldn't look at just one year. It's a very unfortunate instance and it's something that I know they're going to be looking at quite carefully but I don't think you would say from that one yearly figure that there's something here is worrying in terms of the overall approach.

Q296 Laura Sandys: But the point is are you and HSE learning something from this increase and is there any trend? One of the things that was a bit concerning when we were talking to BP was they said that, first of all, the well design and the operations in the Gulf of Mexico, they believed they didn't need to look at it as a potential risk because what they decided was, "We've done this thousands of times before; there is no risk." The problem is that where we think we've got either the engineering safe, we've got the HSE inspection appropriately organised, and then suddenly within that framework we've not looked at that risk and suddenly there is some major incident. It's about revisiting some of these risks that we've actually put aside and said, "They're no longer risks." That is my concern overall throughout the whole regulatory and HSE aspects.

Mr Hendry: I think there are two aspects here, one of which is what are we doing to prevent accidents happening. I think that the steps that we have taken we believe does address that. So, increasing the number of inspections, focusing on the drilling operations we believe does address that issue.

The second issue is what happens if there is an accident. And what has happened since the Gulf of Mexico, we now have two containment facilities that are based in the United Kingdom in Southampton. We've got a Chevron facility that will be a capping device. So containment would reduce the flow but not completely stop it; a capping one would actually stop it completely. The Chevron facility, which is being developed for their Lagavulin development, will be a capping facility and OSPRAG is developing our own UK capping facility. So we've made very, very significant progress since Gulf of Mexico in ensuring that should an accident happen it can be contained and capped much more quickly.

Chair: Christopher?

Q297 Christopher Pincher: Following on from Laura's point, my question is around licensing. Back in July the Secretary of State said that in issuing deepwater licences close regard will be paid to the Bly Report. Now, the Bly Report is somewhat controversial insofar as BP and Tony Hayward have said that well design played no part in the Macondo disaster. Transocean take a somewhat different view. They say that well design was fatally flawed. We had Total and Chevron representatives in front of us last week and they made it clear that they would have designed the well differently in deep water. So, how is it possible, if this report is so flawed, that we are taking account of it in issuing licences?

Mr Hendry: What we've always made clear is we would take account of all the reports. So, the first one to come out was the BP, the Bly Report, the internal report. Then we had the presidential commission and we also had the marine board's report. There may be lessons from all of those that we can learn. In terms of the licensing that we have allowed since the Gulf of Mexico incident, it is our view that this is an important national resource, we should be continuing to develop it, and therefore the issuing of licences is something that we can do and we can do that safely. We're satisfied that the measures we have in place respond adequately to the information that we have, and we have obviously said that if there is further evidence that comes through that requires any greater tightening of those then we will take account of that and respond very quickly. Simon, you were going to make a point.

Mr Toole: Can I just add that there is a lot of evidence in the public domain through the hearings and, as the Minister said, through the Salazar Report, which was the earliest one, and BP's own report. We are closely monitoring all the evidence that comes out and the picture that is emerging is there are a group of things that could have caused that problem. There is some debate about which actually caused the problem, but I think it is fairly clear what the entire group of things that could have caused the problem are and we are paying close attention to all of those in approving wells and in looking at our licensing.

Q298 Christopher Pincher: And there are things such as there was one blind shear ram; there might have been more; there was no relief well. Are those the sort of things that—

Mr Toole: Yes, and down to the fact whether or not the battery was charged up in the BOP. Up to the other end of it is how the drilling contractor relates to the cementing contractor who relates to the operator. There is this big picture of what could have contributed to the accident, and I think we are keeping pretty much on top of all of those features. I don't think there's a huge amount of dispute about what could have caused the accident. What is going on at the moment is a process of finding out what actually caused the accident, but we are aware of that entire class of things that could have caused the accident.

Q299 Christopher Pincher: So are you considering additional precautionary measures to be put into place for deepwater wells, such as having additional blind shear rams or having a relief well drilled?

Mr Hendry: We're not considering them at this stage. In response to the information that we have, we believe that we have a robust system in place and if there is new evidence that comes forward that requires us to reconsider the approach that we take here or to have additional inspectors, of course we will do that.

Q300 Christopher Pincher: One last question, then. The same Department is responsible for licensing operators and also promoting the industry. Do you think it's possible in the thoughts that you have about how you can improve safety and regulation that the licensing might be split off from the promotion of the industry?

Mr Hendry: I think that essentially our job is more to do with licensing than promoting the industry. It's the industry's own job to promote itself. But we do believe that within DECC we have the greatest body of expertise anywhere in government in terms of understanding the issues facing this industry and having that reporting into the Secretary of State responsible for those issues I think is the right way forward. The critical difference has been the separation of licensing from health and safety and I think that has been an integral part of the British system since Piper Alpha. It's one of the reasons why I think we have such a robust system in place in the United Kingdom and I think one of the reasons why we understand the Americans are looking at a similar separation as well.

Chair: Robert?

Q301 Sir Robert Smith: I suppose you always remember from the Gulf of Mexico incident the first thing that happened was the loss of life and the safety failure before the environmental impact. If you can have a safe operation it shouldn't really be impacting on the environment. Can I just turn to the role of SOSREP and maybe you could explain for us your roles and power?

Mr Shaw: Good morning. The SOSREP post was introduced in 1999 and it was government's response to Lord Donaldson's investigation into the Sea Empress incident. It was felt at that time there should be a clearer management or emergency management structure in place for the UK for dealing with shipping incidents, which it addressed at that time. A SOSREP was appointed to act on behalf of the Secretary of State for Transport at that time, and in 2002 we saw that being extended into DTI, as they were then.

Basically, as the SOSREP, I represent both Secretaries of State. If we're talking offshore today, I'm representing the Secretary of State for Energy and Climate Change. I'm triggered into an incident once it has occurred and that would normally be triggered by one of the DECC environmental inspectors. So I'm triggered in at the onset of the incident. My role is to monitor on behalf of the UK Government. My intervention powers, which come with the job, are triggered automatically as soon as I receive the first call. So there are no delays from that point of view. And, really, the powers give me the ability to monitor what the operator is doing by means of responding to the accident and I have the powers there to intervene. In extremis, the powers would go as far as allowing me to take overall control of the incident. Basically, the remit is to either minimise, if there has already been a loss to the environment, to try and prevent further loss on that side and stem the flow of any oil on that side where we're looking at significant pollution.

Q302 Sir Robert Smith: But your involvement is after the fact. Do you have any roles in preventing the incidents before they happen?

Mr Shaw: My role on the prevention side is working closely with all the operators within the UK Continental Shelf. We have a stringent exercise regime we have with operators. We have a national exercise that in the past we've been carrying out on a five yearly basis. We've now brought that forward to a three-year basis. The last exercise was in 2008 and we're intending holding the next national offshore exercise in May next year. In addition to the national exercises, we have more local exercises with each of the operators. Going back to the introduction of the Offshore Installations Regulations in 2002, at that time DTI put forward a requirement that each operator would have to carry out an exercise, at least one exercise, with the SOSREP at least every five years. So, we've been working through that process. Probably that works out on average about 15 exercises with myself a year and that has taken us a long way since the process started back in 2002. It gives us the ability to look at the level of preparedness of the operator, to recommend any changes on their side, and it has also helped us from the regulatory side. It has made our operation a lot slicker over the years in dealing with an incident.

If I have an incident, I set up what we call an operations control unit and, again, as part of the exercising regime we also bring other participants into that group. So I have representatives from the Maritime and Coastguard Agency, representatives from the Environment Group. We have a liaison officer from there, so it also gives them the ability to enhance their skills and to get their staff through a training regime looking at a wide variety of scenarios.

One thing I would just like to add, I think the question was covered earlier on about trends and that. We introduced the SOSREP system to the oil and gas side in 2002 and that gave the SOSREP the ability, if we had an incident, to set up an OCU on that side. Since that time there has only been a need to set up one OCU and that was actually in relation to a capsized anchor handler out West of Shetland but not for the sort of incident we're dealing with. I can give you a comparison. With the shipping side, probably on average we're probably looking at three to four equivalent salvs each year since we introduced the system in 1999. So the bias for my role is certainly towards the shipping, and I think the figures for last year for the triggers for bringing myself in on the oil and gas side was probably just on or just less than 5% of the actual incidents I have to deal with.

Q303 Sir Robert Smith: On the practice runs, though, have you got a feel of whether the UK is capable of responding to a blowout in a deepwater well?

Mr Shaw: Yes. We're looking at the worst case scenario that has now come from the Gulf of Mexico. I don't think it has changed what we already had in place. I think we run a very tight centre. If we are unfortunate enough to have an exercise of any magnitude then the operator has to present its plans or its recovery plans back to myself and the team. The final decision rests with myself whether we think it is appropriate, whether more needs to be done on that side, and again I can use the intervention powers if I think they need to either take other action or they need to bring more resources in or they need to bring resources quicker to the scene if I don't feel that's happening soon enough. So I don't think the powers on my side could be any more wide-ranging than were already given to the SOSREP back in 2002 for the oil and gas. In fact, I think it is the envy of many countries around the world that the UK, back in 1999, put this system in place and I think all credit to the late Lord Donaldson to put a system in back then and it has still to this day held up to the test of time.

Q304 Sir Robert Smith: One of the other things that came out of the incident was the emergency towing vessels. Does their withdrawal alter how you would be able to respond to an incident?

Mr Shaw: No. I think from the emergency towing vessel it would simply have been another vessel that may have been available or not to come in and possibly help, but not with respect to looking at oil response. It was one of the secondary duties for the emergency towing vessels in the past, but we've never built it into any of the oil spill plans because there was never likely to be a guarantee of one of the ETVs being available. So it would have been an additional facility that may have been of some use but it certainly would not have any impact if we had an incident similar to the Gulf of Mexico.

Chair: Phillip?

Q305 Dr Lee: Can we just pop back to the offshore licensing and specifically the use of the Bly Report as a basis for assessing new well licences? The Bly Report doesn't include a proper root cause analysis. Are we happy to use it as a basis for making the assessments that you're doing for new well licences as a consequence?

Mr Hendry: It has not been the basis. We have based the licensing granting based on the evidence that we have used over a significant period of time in response to the very detailed responses that the company has to provide to the department. We said we will take account of the Bly Report but that was not the building block of it. We've got a whole wide range of other issues that are absolutely instrumental to doing it. As I say, we believe that this has reinforced our view that we have a fit for purpose regime that is among the toughest in the world and should be the type of licensing and safety regime that others should be aspiring to.

Q306 Dr Lee: I've been told it's impossible that BP haven't done one and they just haven't published it. In view of that, are BP applying for new well licences at the moment?

Mr Hendry: BP have been issued with new licences under our licensing round last week.

Q307 Dr Lee: So, it just begs the question should we perhaps say, "Publish the information you've got before you get a new well licence."? What I'm trying to get at is you're in a position of being able to try to extract information that might lead to a safer, in terms of environmental terms, regime in West of Shetland because you can force BP's hand by saying, "Well, before you get a licence let's see the info, please."

Mr Hendry: Well, there's a separation, and granting the licence, which is what we did last week, is one stage in that process. They then have to come to us with a plan for how they're actually going to manage the drilling operation. That is an extremely extensive programme. It involves an enormous amount of us asking them questions, and if we're not satisfied on any of those areas we can withhold the permission to take that forward. So, that is just one stage of the process. But we're not looking at a particular set of issues for BP. Everybody has to meet the same standards for any development anywhere in the UKCS.

Q308 Dr Lee: The other thing with regards to the licensing, each oil company that has come here, the boards of the companies have no environmentally trained individuals on their boards: Chevron, Total, BP. Do you think DECC might have a role in saying, "Look, guys, it's about time you at least appeared to take this seriously by having somebody on the boards of your companies that actually have the environment at the top of their list of priorities," and that you might use your licensing regime to try and influence that change?

Mr Hendry: I don't think it needs to be a prescriptive approach. Sir Robert was saying earlier in terms of that it started off as a health and safety issue rather than environmental issue, and some of the most senior people in any of these companies are the people in charge of health and safety issues. They would report in directly to the chief executive and, therefore, in terms of the person who is most accountable and can most drive through relevant decisions then there is no separation of powers between them. They report directly into them. Now, I think it's for each company to decide whether they want that person to be board level or somebody who doesn't have the other board responsibilities and purely focuses on that but is accountable to the chief executive and the board. I think what every company in this sector is doing since Gulf of Mexico is reviewing their procedures to make sure that they are fit for purpose.

Q309 Dr Lee: Finally, on a typical rig everybody on the rig is employed by the operator; am I right?

Mr Hendry: No, nothing like that.

Q310 Dr Lee: No? Who isn't?

Mr Hendry: It would probably be a small minority who actually are employed directly by the operator, but everybody on that rig is accountable, responsible and managed by the installation manager. But you'd have—

Q311 Dr Lee: Are they all under contract ultimately to the—

Mr Hendry: You'd have many contractors. On a typical rig you would have perhaps 200 people working on it. Some of those would be employed by the operator but many others would be a drilling contractor or a contractor—

Q312 Dr Lee: Yes, paid for by the operator?

Mr Hendry: Yes.

Q313 Dr Lee: So, ultimately, the person at the top of the tree is BP, Chevron, Total, is my point. Is there anybody on there who is totally and utterly independent of the oil company?

Mr Toole: Everybody on a drilling rig is paid for by the licensees, the operator, but under HSE law there is someone on there who has ultimate and sole responsibility for the safety and—

Q314 Dr Lee: Who is paid for by the operator?

Mr Toole: Well, yes, he'll be part of the rig—

Q315 Dr Lee: I'm being pedantic because in Macondo that was the case and the rumour is that there wasn't somebody on there with the authority to switch it off.

Mr Toole: But that was a different system. I wouldn't like to comment on how it was. Over here there is one man sitting on the rig who has ultimate responsibility to overrule any other person, whether it be operator or not.

Q316 Dr Lee: Yes, but there is a culture potentially on a well. It's like the National Health Service—and I'm a doctor—that if there's one employer being a whistleblower is difficult; the anaesthetist in the Bristol case is now working in Australia, for example. In this sort of scenario—I know that there has been a controversy in recent months in Norway with Statoil—are we confident that there is a culture, a system whereby if somebody has a concern about a well operation that we have a system in place that they will feel confident to be able to say something without fear of never being employed in the industry again in the future?

Mr Hendry: Before I last went offshore and watching the safety video that was produced by Apache, the global chairman or chief executive of Apache was saying, "If you have any concerns about anything on this rig, I don't just want you to say that there's a problem; it is your duty; it's your responsibility to say it. The crime is not reporting it rather than reporting it." That is, I think, an attitude that runs across the industry now, a real determination that health and safety comes first, their global reputation depends on how they handle these issues, and a real desire that everybody working on that installation is part of that process. I've never been involved in any other sector where safety is the absolute overriding priority in the same way as I've seen it offshore. I think that the steps that they have taken, which I think were present here already in the UKCS but certainly have been extended since Gulf of Mexico, makes it absolutely clear that anybody who sees anything that is not working as it should has a duty to report it.

Mr Campbell: Can I just add I'm sure HSE must have said that they believe the culture is very different here from the culture in the States. We have safety reps; we have worker engagement all the time, and they certainly see it as quite a different environment from the environment elsewhere. People are involved.

Q317 Chair: Can we move on to security of supply issues? Given that there are sharing arrangements under the IEA and the EU rules in the event of an emergency, any oil that we do discover at depth, say, West of Shetland, it will enhance collective security; it doesn't enhance Britain's security of supply?

Mr Hendry: It depends to some extent who the operator is going to be, but I think that our view is exactly the point that Sir Robert was making earlier that either this is going to have to be imported from elsewhere around the world into the United Kingdom or we develop our own facilities. We think it's in our national interest to do that. Nevertheless, we are net importers of oil and gas and that is a trend that we expect to continue.

Q318 Chair: But just to clarify the point, it clearly seems desirable if we've got oil in our waters that we should find it and exploit that, but in the event of an emergency we would still be required to share this resource with our partners?

Mr Hendry: Under EU rules there are sharing rules, yes.

Q319 Chair: Do you think that it's the aim to encourage and to incentivise drilling at greater depth? Is the Treasury here looking to a new source of revenue from corporation tax rather than anything else?

Mr Hendry: I think we have a collective national interest in making this happen and that the Treasury has its interest in seeing this happen too. About 20% of our remaining oil and gas reserves are West of Shetland, so it's a very significant part of the resource that we have available to us. Based on the fact this is import substitution, it has an important role to play and also, in terms of revenue, it will generate for the Treasury, they too have an interest in this.

Q320 Chair: The decline of gas production, of course, has been quite sharp, much sharper than oil. Does that mean we're going to be relying very heavily on LNG imports in the future?

Mr Hendry: I think we'll be more heavily dependent on imports. That's absolutely clear. Some of that may be LNG; some of it is also pipeline infrastructure. The development of the Langaled pipeline opened probably about three years ago. It has been a very significant contributor to that additional pipeline infrastructure. It has been looked at both with Scandinavia and mainland Europe, so we see this as being an important part of the mix. We are looking at measures to enhance the security further because I think if we are becoming increasingly dependent on it then greater storage has an important role to play in that. I was pleased last week to issue a licence to the Deborah facility, which would, if developed, by 2015 double our gas storage capability.

Chair: Robert?

Q321 Sir Robert Smith: Isn't one of the other advantages of incentivising domestic production the extra bonus we've now got from what has grown up in the North Sea, which is the expertise that is now exported and the skills that are used around the world from the north-east of Scotland and the rest of the UK from what we've learnt in the North Sea? By continuing to keep a home base going, we maximise the location here while increasing the potential to earn more from our exports.

Mr Hendry: We undoubtedly have one of the world's leading energy sectors in Aberdeen. An enormous proportion of the global contracts for deep sea work, for remote work under water, are coming back to companies based in the Aberdeen area, north-east of Scotland. This is a huge national resource and having a domestic market as well for them to be working in is a key part of keeping them there.

Chair: Laura?

Q322 Laura Sandys: I'm interested in you've said to us at previous sessions that we're looking at £200 billion investment in the whole overall energy investment over the next 20 to 30 years. As we're in a global market, what is going to happen when the US enforce, as one expects, in some ways some very radical regulatory changes? Possibly very similar to the UK in our response to Piper Alpha is that they will become in some ways the gold standard for regulation and environmental certainly assessments of liabilities. Are we going to then move to meet that gold standard or are we still going to stay in our existing regulatory framework and not learn lessons or take remedial action that the US will probably no doubt adopt?

Mr Hendry: We will learn from any evidence anywhere in the world. We don't believe that you actually maintain your standards by just saying, "Look, that's what we've got and we're keeping it come what may". This is a constantly evolving process and if there are new things that can be learned, we will certainly do that. So, we believe that it's to Britain's great advantage that actually we do have the toughest regime, with the Norwegians. We think that if countries elsewhere decide to come up towards that level that is desirable globally. If they decide to go beyond that level then we would need to see what we need to do to respond to that. But at the moment I think we are in a position where others are looking to catch up with our gold standard rather than setting a higher gold standard.

Q323 Laura Sandys: Also the European Commission have issued some very clear statements about the liability and the ability of companies to meet their environmental liabilities over a period after a disaster. Today or yesterday BP announced good profits but also, due to the liabilities that they have in the Gulf of Mexico, they're having to sell a whole series of assets. Are we absolutely sure that we have done enough financial assessment of each company that they will be able to meet those particular liabilities and do you welcome the European Commission's announcement?

Mr Hendry: On OPOL, I think that does put in place the regime that we think is appropriate because each company is required to have its own cover. In the event that that company was to fail, then the others would collectively take up that liability. So we believe that does give us, uniquely in the world, an extremely high standard of protection. In terms of the role of the EU within this, we believe that these are matters that are retained, that individual nation states are best setting their own levels, because by doing that we have been able to set these at an extremely high level. The concern that we would have about global setting of standards is that that could easily lead towards being the lowest common denominator rather than being moved upwards towards the highest level of environmental and safety protection. I think as we believe that ours is a very robust and secure mechanism then we want to encourage others to come up to that level rather than see any watering down. There is certainly a role that the EU can play in helping people understand the technologies and the approaches that are being used, but we would be very reluctant to lose control of being able to set our own standards at the level that we think are appropriate.

Q324 Laura Sandys: Are you comfortable with the idea that oil and gas companies self­insure? Do you feel that that's an effective enough cushion from our perspective if there was a major environmental disaster?

Mr Hendry: It depends on the size of the company. Clearly, a company like BP has shown that through self-insurance it has been able to cover the degree of the liabilities. For smaller companies involved, and particularly those that are looking at the UKCS, then they would need to look more to the market in order to get their cover. But at the same time we believe that the cost of catastrophic disaster would be more constrained here than it has been in the Gulf of Mexico. That is because now there is the capping availability and the containment availability, which is much greater than it was at the time of Gulf of Mexico, and in terms of the loss of livelihoods on the Gulf of Mexico, where many more livelihoods were affected by that than would be the case here. So, in terms of the cover, we believe the $250 million limit on that is sufficient, but that is within recognition that there is an unlimited liability for compensation and for liabilities. So the $250 million is simply a threshold, and bear in mind that most companies would then have additional insurance cover on top, which would add many tens of millions on top of that as well.

Q325 Chair: When the commissioner suggested there should be a moratorium on deepwater drilling, the British Government said, "Get lost."

Mr Hendry: Well, we'd never say that, but we did explain that this is a retained area. We explained the fact that this is a matter that nation states should be absolutely driving forward in that respect. We looked at the regime and in discussions that I have had with Commissioner Oettinger he recognises that the Norwegians and the British have, as I say, some of the most robust safety regimes anywhere in the world and we are the level to which others should be aspiring to move to. So, we do believe that the case for a moratorium was never established. We believe that it is legitimate to go on developing a resource of national importance and to do it in a way that is subject to the highest safety and environmental standards. So I think what we had done was to, as we discussed earlier, look at whether additional steps were necessary, and we identified some that we thought were appropriate, but within that framework it was permissible to go on permitting deep sea drilling to take place.

Q326 Chair: Well, I'm sure that was a very charming and diplomatic way of saying, "Get lost." Is it the case that what we fear in Britain is if the EU starts poking its nose into all this standards will go down rather than up?

Mr Hendry: That I think is always a risk with international standard setting, that when countries are themselves responsible for their own protection then they will drive standards higher than perhaps if it's being driven to a lowest common denominator level. So, I think our concern in this area is when you do have what you regard to be among the best in the world you don't want that to be undermined by any international co­ordination. You want others to be working towards that same level.

Chair: Robert?

Q327 Sir Robert Smith: Isn't it also the lesson from the Common Fisheries Policy that if you have the North Sea managed by a union that has a lot of countries that have no interest in the North Sea there are trade­offs in the way that is managed? Obviously, it makes sense for those that share the North Sea to share best practice and to inform each other of incidents and so on, but to have the bureaucracy of an overarching management by an organisation that isn't directly interested—

Mr Hendry: We do work very closely with other countries that have a shared interest in the North Sea so that we are looking and so that I would imagine that the OSPRAG solution of a containment facility or a capping facility is something that would be shared with other countries if the need was there. I think you're absolutely right that we should be looking at how those countries that have a direct collective interest in this can move jointly, but involving countries that perhaps don't have any shoreline, for example, in setting those standards is something that could become more bureaucratic than helpful.

Q328 Chair: Across the world, countries whose GDP increases tend also to increase their oil consumption. Do you think that's a sustainable trend?

Mr Hendry: Ultimately not. We do know that there will be a peak oil point at some point. I suspect we won't know until well after it has happened when it was, but nevertheless we know for certain that there will be a point when the global oil availability will be in decline. I think that the International Energy Agency and Dr Tanaka has done some very useful work in this respect of saying the challenge for us is to get the consumption of oil, the demand, to start coming down before the peak and then the consumer gains the benefit. If the peak in demand is after peak production then for ever the oil companies would have the benefit. So, I think that is why we are leading, and I think many other countries are obviously working in the same respect, to try and take us towards a decarbonised society.

Q329 Chair: Do you think we're moving fast enough in that direction?

Mr Hendry: No, I don't. I think there's much more that we can be doing and I think we are now putting that in place. So, the £1 billion that was committed in the spending review to taking forward carbon capture and storage is part of that process. The nearly £1 billion renewable heat incentive to deal with the huge consumption of gas and oil in our homes and encourage people to look at renewable heat, the £1 billion committed to the Green Investment Bank to support investment in low carbon technologies, all of those I think are things that will contribute towards this process. So, I think historically we haven't been but I think we are now addressing those issues.

Q330 Chair: The CCS is primarily going to be used for coal and to some extent for gas. We don't use much oil to generate electricity in this country. Oil is absolutely critical for transport fuels, though. Are we doing enough to wean off our dependence on oil for transport?

Mr Hendry: I think it's a gradual process and so I think again it's an area where we can do and will do more. The move towards electric vehicles is something that to some extent is constrained by base load capacity. If the country switched overnight to electric vehicles, it wouldn't have the base load for being able to charge that network and operate it. So there is a natural speed at which this can happen but I don't think we're working at the limits of what that process can deliver. In terms of transportation, we're also looking clearly at things like the high-speed rail link as a Government as a way of trying to eliminate the need for so many domestic flights. I think that is an important part of that process as well.

Q331 Chair: Do you think that encouraging or at least certainly allowing drilling in more and more extreme and deepwater conditions is compatible with the efforts we're making to try and increase our proportion of energy from renewable sources?

Mr Hendry: I think it absolutely is. I think on the one side we want to move towards that decarbonised society but we know it's going to take time to get there. So, realistically, picking up Sir Robert's point earlier, we will either meet that with domestic supply or we'll meet it with imported oil and gas. So, given that 17% of our remaining oil and gas reserves are in the deeper waters West of Shetland, that is an entirely proper area for us to be issuing licences. It is an important part of our national resource and we are keen to see that developed.

Chair: Phillip?

Q332 Dr Lee: In terms of the sourcing of where our oil and gas comes from, on a recent trip to Norway, I was told that the Russians flare more gas per year than Norway produces. Can we buy our gas from Norway and not from Russia as a consequence? By definition, we are reducing our carbon impact release as a country, aren't we?

Mr Hendry: We do buy from Norway, and Qatar, being the primary suppliers. We get perhaps 1% or 2% of our gas from Russia.

Q333 Dr Lee: In the future, it's more likely that that's going to go up from Russia, and if Iran comes on stream their infrastructure is similarly pretty antiquated. I just wonder whether we're going to end up endeavouring to have lots of wind farms but actually importing oil and gas from countries that are pumping CO2 into the environment.

Mr Hendry: After you raised this at the last evidence session that I appeared at, I asked some questions in the Department on whether we can do work through OPEC on this, but, in fact, what I've established is that there is an international organisation there to try and reduce the role of flaring. Britain is playing a very active role in that work. The Russians are very actively looking to work with us to have help in reducing that. Very often it arises not because of the gas that they can't be bothered to bring it to market, but it's being produced as a by-product to the development of oil and, therefore, the infrastructure isn't in place in those locations to deal with it. But there is international co­ordination, which Britain is playing a very active role in, to try and reduce flaring globally, in Russia and elsewhere.

Q334 Dr Lee: I guess my point is we will spend a lot of money on CCS; we've committed £1 billion. The danger is that we will get to a point where our oil and gas is produced as efficiently as possible. The Norwegians have. But there's absolutely no financial—because the price of gas and price of oil is set internationally. I am wondering whether on the international stage there is an argument for saying gas from Russia is more expensive than gas from Norway; it is costing more because in the longer term we've got climate change costs to deal with.

Mr Hendry: The problem in many countries is knowing the exact source of where the gas has come from. There will be some fields in Russia and elsewhere in the world that are absolutely capturing the gas and avoiding flaring, but to impose some sort of levy on them equally, simply because it goes into a pipeline and one doesn't know where it has come from, it's quite difficult to see how one could implement that. So I think that's why we believe it's right to put the focus of effort on reducing flaring. I've seen a figure also that Russia flares more gas than it exports in gas to Germany, so this is a huge potential market for Russia and they are actively looking for international partners. British companies are playing a key role in trying to help them reduce that flaring.

Q335 Chair: There is a report in the Financial Times today suggesting that investors in offshore wind may now be deterred by the risk that if an oil company wishes to start looking for oil in an area where they have a wind farm they may not be compensated.

Mr Hendry: I think this started from a story in the weekend press that Oil & Gas UK were looking at taking legal action over their concerns in this area. They have issued a press statement categorically saying that they are not looking at taking legal action, that they're looking at working in partnership. We absolutely believe that partnership is the best way forward. We think that there is scope there for oil and gas to be developed. We also believe there is scope for a major rollout in development of offshore wind. What we would look for in these areas is to make sure that the oil companies are also looking at the interests of the offshore wind companies. I chair the Offshore Wind Developers Forum. We've had a very valuable meeting this week. There's a lot of interest in developing this in the United Kingdom and this issue was not raised at all.

Q336 Sir Robert Smith: We've touched on all the incentives for production. Have you got any assessment or concerns about the current projections for production from the North Sea, whether we're further down the slope than we expected to be at this stage?

Mr Hendry: I think that the response to the last two licensing rounds has been extremely encouraging. These have been two of the largest rounds we've had. The expressions of interest this year was the highest it has been for, I think, about 30 years. So we are seeing a very significant amount of interest of companies coming in, although what is very clearly changing is that these tend to be medium-size companies, which are still huge internationally but compared to the international oil giants they're the medium-size companies. I think that reflects the nature of the resources that are there. Quite often we've got people coming into largely depleted fields but who reckon they can get another 10 or 20 years of life out of that through their drilling technologies and the approaches that they will bring to it. We've got a number of new entrants; I think five new entrants have come through in the licensing round issued last week. So we've got a lot of new players who are coming in to this market on a continuing basis. So I think the level of interest that is there in the UKCS is extremely positive.

Chair: Do any colleagues have any further points? Minister, thank you very much indeed, and to your officials as well. It has been a very helpful session from our point of view.

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