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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