Lord Moynihan
To call attention to the implications of the Deepwater Horizon oil spill in the Gulf of Mexico; and to move for papers.
Lord Moynihan
My Lords, I declare an interest as one of many long-term investors in BP shares as part of a pension fund and, more important for today’s debate, as a director of Rowan Companies. I have had the privilege to sit on Rowan’s board for 12 years and have chaired its health, safety and environment committee since its inception. We are a high-spec jack-up rig company with a manufacturing and land drilling business headquartered in Houston, Texas. I should add, in the context of today’s debate, that Rowan has no involvement in deep-water drilling activity.
The explosion that we are considering, and its consequences, occurred on the Transocean Deepwater Horizon at 10 pm on 20 April this year. It is known that the crew had been fighting circulation issues on the rig, where the weight of the muds and pressure of oil were not matched. The explosion was a horrific human disaster that rapidly turned into one of the worst environmental catastrophes in the history of the energy business.
In 1990, when I was appointed Minister for Energy with responsibility for implementing the Cullen report, a different approach was followed by the British Government from that energetically pursued by the Obama Administration before the mid-term elections. Back then, on 6 July 1988, the Piper Alpha rig, a North Sea oil production platform, was the subject of a tragic explosion and the resulting fire destroyed the rig and killed 167 men, with only 59 survivors. The Government of the day, with the support of the Opposition, responded calmly and worked with the industry on both sides of the Atlantic—indeed, with the US company Conoco leading—to implement a new safety regime, which currently leads the world.
Deep-water drilling is the future of the industry. Such drilling characteristically takes place in hostile conditions and is at the leading edge of drilling technology. Deep water is where the world’s hydrocarbon growth market exists and is the main area for offshore production growth, with deep-water discoveries accounting for 50 per cent of world discoveries over the past three years. The deep-water discoveries are significantly larger in size than the new onshore discoveries, with 150 million barrels of oil equivalent being the average size of a deep-water discovery compared with 25 million barrels onshore. Deep-water production has doubled over the past five years and is expected to double again over the next five years. The reality is that, given the annual discoveries required to meet world demand, in 20 years’ time we will need to discover and produce as much from deep-water drilling as we do in total world wide today. However, as we have seen, deep-water exploration and production are still in their infancy, and the focus has been on exploratory wells. A backlog of needed development drilling may indeed be building.
Against that background, we need to consider not only what is happening in the offshore oil and gas drilling business but the relevance of this morning’s announcement that the US intends to take legal action, as was expected. It would be inappropriate to comment on the legal implications of that, but equally the announcement was part of due process and those who follow the industry recognised it as such. What is relevant is that the decision has formally spread the net much wider; many counterparties have been added, and I anticipate that more will be added. The announcement underlines the fact that Deepwater Horizon was a major industrial accident, but I have to say that the approach being taken is in stark contrast to the total focus on BP by the Obama Administration before the mid-term elections.
That point about BP brings me to my remarks on governance. The British, much more than the Americans, favour the separation of powers between the chairman and the CEO. This is not just for good governance, as the role of the chair is to provide air cover for the CEO. In the case of BP, the chair should have been available to cover while his CEO focused on the operational issues, for the only person who can provide such cover is the chairman. Regrettably, Tony Hayward had no port of call, as he had no effective chairman. As a result, he had become too close to the action. When the chairman finally appeared, to the embarrassment of many his reference to “the little people” on the lawn of the White House achieved the unthinkable by yet further damaging the reputation of the company. As a result, BP presented a soft public-relations target.
Interestingly, BP is in the interesting position that there may be a silver lining for the company in this tragedy. The real problem facing the major oil companies is growth. Many are simply too big. BP has been forced to shrink substantially, to a level from where it can begin to grow again. I believe that the very size of the behemoths in the industry will lead to potential safety incidents in the future, unless these issues are addressed very seriously world wide today. Over time, the reaction will be for these very large companies to break themselves up into refining, marketing, midstream and downstream businesses. I sensed that the noble Lord, Lord Browne—an eminent former CEO of BP—came very close to this point.
A second issue, which is well known to the Minister from his previous professional life, results from insufficient capacity in the insurance market. The liabilities are now too big for few except the majors to deal with. The question that I pose is whether the insurance market can be encouraged to provide more cover and, if so, how. Most available capacity is about £2 billion yet, post the Deepwater Horizon disaster, capacity needs to be of the order of £20 billion or more.
The nature of deep-water drilling—indeed, the nature of our offshore licensing regime—requires work in partnerships. On many occasions in the North Sea, BP has benefited from working with small independents, which often have the ability to show more ingenuity, more innovation, more responsiveness and more fleetness of foot. Small independents can be more focused on the success of an individual well, which can have a major impact on an independent’s balance sheet, whereas the majors can sometimes lose sight of the detail within a wider portfolio of assets and innumerable drilling activities, which dilutes the focus of the senior management. Put simply, on many occasions independents have brought a more user-friendly approach to drilling activity. I am a believer in diversity in the industry, as you get the most out of any situation from having a range of players involved in an activity. However, the disaster in the Gulf of Mexico has pushed back deep-water exploration to the big battalions, in an unseemly battle between a major oil company and a sovereign Government.
If I were running an independent today, the first question that I would ask my management team is, “Are we engaged in operations anywhere in the world that could bring down the company?”. If so, deep-water drilling is not a risk that I would be prepared to take. However, there is little evidence that the independents can receive protection from the insurance market. I put it to the Minister that this is potentially a huge loss to an industry that is focused on the deep-water exploration that, as I outlined earlier, is so essential to the future of oil and gas production. We must avoid a scenario in which the independents are precluded from deep water.
I turn to the implications that I believe will follow. The first and most important issue for any oil and gas company—indeed, for any company—is safety. Safety is everything. Safety cases need to be in place on oil rigs, not gathering dust. Active, live safety regimes are critical to the safe performance of activities in very hostile conditions. Nothing is more important than a strong safety culture. There needs to be more on-board safety exercise, with all persons on rigs required to participate.
I propose for the consideration of the industry that, in each country world wide, a single entity should have broad safety and pollution prevention responsibility to avoid the gaps, overlap and confusion that exist in some safety and regulatory regimes. The regulator’s core responsibilities and objectives must be clearly identified. Safety management and regulatory priorities should also be identified through a comprehensive risk assessment programme.
At the heart of safety is training. Training and competency programmes must take account of new risk information. Contracting strategies need to take account of safety and risk implications.
I have always believed that government and industry should promote an improvement mentality, not a compliance mentality. Continuous communication is essential—communication among regulators, operators, contractors, workers, industry associations and public interest groups—if we are to achieve that objective of a continuous improvement in safety. Operators and contractors must manage their companies to achieve safety objectives and must continually assess the effectiveness of their management programmes. I believe that regulators world wide should seek not to resolve problems but to serve the industry by distributing information by, for example, hosting workshops so that the industry itself can solve the problems.
Wherever possible, the best standards should be identified and applied internationally. The industry should not have different standards in different countries. Accident investigations should always be conducted independently, and findings should be promptly and broadly distributed and discussed with all personnel.
Industry and government cannot rely solely on incident data to identify risks. New indicators must be explored and assessed, particularly for major hazards and safety culture. Worker input into safety culture is absolutely essential—you are as strong in safety as your weakest link. Peer-based audit programmes should be considered for both regulators and operators. I hope that the Minister will agree that all personnel should be trained to be safety leaders and should be empowered to stop work on a rig without blame. In the context of the disaster in the Gulf of Mexico, inspection of life capsules also needs to be reviewed. Why were two life capsules not deployed on the Transocean rig?
As I mentioned, training is critical. Back on land, training to plan for managing disasters offshore—from media training and helicopter co-ordinator training to incident command training—needs to be reviewed in order to understand better how to handle an incident.
A final point on the implications of those safety considerations is the importance of a clearer definition of the respective roles of the drillers and operators. While the operator is the overall supervisor and co-ordinator of the project, the processes and the people lie within the control of the driller.
Against that background, I congratulate the Government on their measured response to the incident. However grave the human and environmental disaster—and there is no denying the scale of severity of both—this was not the time for the fury of a nation to be turned on a major drilling accident. The aftermath became grossly political and over-reactive, from the press coverage to the McCarthyesque attempt at character assassination by some at the congressional hearings. Both of those damaged American national interest and were in stark contrast to our reaction to the Piper Alpha disaster, with its huge loss of life.
The Secretary of State, Chris Huhne, was right to state that the Deepwater Horizon gives us pause for thought and, given the beginning of exploration in deeper waters west of Shetland, there is every reason to increase our vigilance. DECC has increased the oversight of drilling operations by requiring additional inspectors in its Aberdeen office. Can the Minister confirm that the number of annual inspections of drilling rigs will double? If that is the case, do the Government feel that there should be further changes to the inspections, both in content and frequency?
I understand that DECC is also reviewing the indemnity and insurance requirements for operating on the UK continental shelf. Can the Government respond to my earlier observations on the cost of cover and exposure, which will be prohibitive for many of the independents on which the success of North Sea exploration and production has been built? Does my noble friend agree that this could seriously damage future activity in deep-water, high-pressure fields to the detriment of activity in UKCS waters? If so, what action do the Government intend to take in this context? Have the Government asked the insurers to work with a new group of regulators and oil companies—the oil spill prevention and response advisory group, or OSPRAG—to study this issue and come forward with solutions? If action is not taken, only the very few, strongest self-insured operators will, as I have argued, be able to participate.
Having made some observations earlier on the chairman of BP, I hope that the House will allow me to end by paying tribute to the substantial contribution that Tony Hayward made to the company throughout his lifetime of service. His knowledge base and talent were identified, recognised and nurtured by the noble Lords, Lord Simon and Lord Browne, who as his predecessors encouraged his exceptional talents. On the occasion of the explosion of the Macondo well, in terms of the safety culture that he had rigorously sought to implement since first setting foot in the CEO’s office, Tony Hayward’s instincts, initial judgments and strategy were sound in the immediate aftermath of that crisis and helped to pave the way to assist many thousands of people affected by the tragedy. The problem grew into an issue of how those judgments and strategy were put into effect and how to handle the media and inevitable US pre-election political assault. History will show that it can never be said that Tony Hayward did not recognise the incident’s heavy toll on the Gulf, its inhabitants and the workers on the rig. Nor can anyone doubt his total commitment in seeking to address the nightmare that was engulfing the industry, BP, his colleagues, his family and himself on the very subject to which he was committed—the safety of his workforce in the world’s most hostile yet necessary industry. That industry will fuel much of the world’s economy in the 21st century through deep-water offshore oil provinces, in which so much of the industry’s future will be based.
Lord Grantchester
While the rhetoric has subsided to a large extent on the oil spill disaster, nevertheless the reality of the event has to be recognised and recent events taken into account. For BP, the event was a near-death experience. It appeared that BP did not know what was happening as it seriously underestimated the flow-rate discharge. It appeared not to know how to stop the flow, as three attempts to stem the well failed. It appeared unappreciative of the depth of the concern regarding the effect of the spill on the environment and the impact on other businesses in the gulf.
The Macondo spill resulted at one stage in a 50 per cent fall in BP’s share price, while the stock market had concerns about whether the asset base of the company was deep enough to meet its ultimate liabilities. BP’s stock briefly rallied following the initial disaster but this morning it fell again as the US Government announced their plan to take legal action against BP for the disaster in the Gulf of Mexico. They are planning to sue BP, in addition to Anadarko of the US and Mitsui of Japan, its partners in the disastrous Macondo well; Transocean, the owner of the Deepwater Horizon drilling rig; and the QBE syndicate 1036 at Lloyd’s of London, which insured the rig. The claim is for $21 billion.
Following extensive political debate and government discussion undertaken in the full glare of publicity, BP has responded to stabilise the situation. Among the measures taken, it has set aside $20 billion in an escrow account under third-party control with no cap on its liabilities and excluding potential penalties. BP is perhaps grateful for the political pressure to withhold two quarters’ dividend payments, with the challenge to resume but not restore dividend payments in 2011. It must be borne in mind that this affected the pension funds of many people on both sides of the Atlantic. In addition, BP has cut its capital expenditure and, since the disaster, has now disposed of $43 billion value of assets to increase liquidity. The spill over the 87 days before the capping stack attempt succeeded in stemming the leak is estimated at 4.9 million barrels and resulted in a record $17 billion second-quarter loss to the company.
The company has made its internal inquiry extensively available. The internal inquiry did not identify any single action or inaction that caused the accident. Rather, a complex and interlinked series of mechanical failures, human judgments, engineering design, operational procedures and contractor interfaces allowed an escalation of errors. The report presented eight key findings related to the causal chain of events and recommendations that have been examined throughout the industry and between national regulatory regimes.
The UK already has a robust regulatory regime introduced following the Piper Alpha disaster of 1988. For deep-water drilling, operators are being required to demonstrate that the factors identified in the BP report have been satisfactorily addressed—that there is effective co-ordination between all the companies involved and between companies and relevant government agencies. In this light, it is correct that the UK Government do not see a case for any ban on deep-water drilling. The strength of the UK regulatory regime was recognised in the initial report from the US Department of the Interior, which identified that elements of our regime should be implemented there, in particular a case-by-case safety appraisal, independent verification of the design of wells and, most important, the separation of the health and safety function from the licensing function within government.
The Macondo incident has shown that co-ordination between all the companies involved and between companies and relevant agencies is an essential part of safe operations and will be a requirement to be demonstrated. The industry needs an environment where best practice is shared and lessons are learnt. The UK regulations also contain a range of additional safeguards, statutory requirements, checks and verifications. While it is impossible to say that such a blow-out as occurred in the Gulf of Mexico could never happen in UK waters, our regulations provide a reduced probability of such an event.
The US has separated health and safety from licensing in two different agencies and has implemented two new rules to improve safety. First, there is the drilling safety rule to make mandatory several requirements for the drilling process and, secondly, there is the workplace safety rule to make programmes to identify potential hazards and to introduce risk reduction protocols.
Since the capping of the well on 15 July, BP has had to revise its business to ensure that safety is placed at the heart of its operations. Finance and reputation have been further strengthened through structural and personnel changes. Under the guidance of a new chief executive, Bob Dudley, the exploration division has now been split between exploration, production and development, each with separate leaders reporting to the chief executive. In addition, BP has re-examined the low-probability, high-impact quartile of its risk register and introduced a new executive role with powers to intervene, also reporting to the chief executive. These changes help to ensure that a greater emphasis is placed on risk management.
Furthermore, BP has examined its relationships with contractors to review the balance between, on the one hand, its incentives and reward structures, with the corporate emphasis on operational objectives such as timely fulfilment, and, on the other hand, the emphasis on safe operations. It needs to introduce further measures to incentivise safety. BP has identified improvements to its response capability in operations made complex by the very nature of deep-water drilling.
I am informed that BP, with the rest of the industry, is examining best practice in communication and sharing of experiences. In hindsight, it is examining the disincentive to share near-miss experiences, such as the one that happened in the Shell Sedco 711 platform in the North Sea in December 2009, when a blow-out preventer worked and shut down operations, in contrast to what happened in the Gulf of Mexico.
I am grateful to the Minister for making his contacts in BP available to outline their changes to business practice. Not only is it necessary to focus on preventing major oil disasters and disastrous events, but examination of all leaks, spills and seepages in operations must also take place, with the necessary reporting structures to build up a culture of continuous improvement within the industry and with the emphasis on safety and the minimisation of environmental degradation.
In response to the gulf inquiry, an industry-led initiative has set up the Oil Spill Prevention and Response Advisory Group—OSPRAG—to liaise with industry and government. I would like to ask the Minister what discussions have taken place with this group. What areas of concern are being addressed? Will it continue to meet to a regular timetable?
In light of the huge amounts of dispersant that have been used in the gulf, can the Minister tell us what monitoring and research is happening and being shared with Her Majesty’s Government concerning dispersant effects on the environment? I understand that no advances in dispersant technology have occurred since the 1989 Exxon “Valdez” spill.
I am grateful to the department for making available the shareholder map of responsibilities in respect of the regulatory framework. Action 9 of the department’s annual energy statement makes a commitment,
“to undertake a full review of the oil and gas environmental regime following the outcome of the investigation into the causes in the Gulf of Mexico incident”.
Can the Minister advise the House when that review will be finalised and whether it will include a best-practice review by the Better Regulation Task Force or the Risk and Regulation Advisory Council?
Finally, I ask the Minister whether the Government are setting up any formal structures to improve dialogue internationally between Governments, especially with the United States, to monitor exploration as it takes place in ever more remote and potentially hazardous environments as the search for oil reserves continues.
The North Sea remains an extremely important resource to the UK: the UK’s oil and gas resource is estimated to be up to 24 billion barrels equivalent. The sector at present provides about 60 per cent of the country’s energy and benefits the balance of trade to the tune of some £30 billion a year. This disaster highlights the challenge to move decisively towards a low-carbon economy. Recently a report from a group of business leaders drew attention to what it called the peak oil debate and urged an added emphasis behind renewable energy that green campaigners have been longing for. Meanwhile, BP announced yesterday a significant discovery in the deep-water west Nile delta in Egypt. It cannot be a return to status quo practices. We must press on and continue in the transition to safer, more sustainable energy. I look forward not only to the Minister’s reply but to his Statement later today.
Baroness Falkner of Margravine
My Lords, the BP oil spill in the Gulf of Mexico was the biggest oil catastrophe in American history and possibly in peacetime history overall. Eleven people died; numerous others suffered injuries as a result of the explosion on the Deepwater Horizon platform; an estimated 5 million barrels of oil escaped into the sea; and we will never know how much oil ended up in the deeper ocean. There was considerable damage to people’s livelihoods, and to marine and wildlife, as well as to the reputation of a distinguished multinational connected to this country.
While my noble friend Lord Moynihan and the noble Lord, Lord Grantchester, have greater expertise on the technical aspects of this catastrophe and what it means for safety regulation for oil rigs in the deep seas, I shall concentrate on the unsustainable and insatiable American appetite, and that of the developed world, for fossil fuel in non-renewables. The implications for the UK are equally profound.
I merely note that the debate about the technical failures of BP and the other companies involved is of great significance because we must learn the lessons from it. As a recent report on the “Today” programme revealed, a Shell platform only narrowly avoided a similar incident in December 2007. The safety review discovered a series of misinterpretations and mistakes by the crew operating the platform, which was very similar to what happened in the BP case. Fortunately, as the noble Lord, Lord Grantchester, said, the blow-out preventer worked and a major oil catastrophe was averted in the North Sea. While the risks of deep-sea drilling are thus evident and widespread, I want to focus on some of the bigger lessons on which we need to draw for a British policy on energy and oil, and on climate change and the environment.
The BP oil spill is not an isolated case with tragic outcomes. It is in fact symptomatic of the larger risks that we are forced to take as the world reaches the point where our demand for petroleum outstrips our capacity to find and produce it. It is a simple geological truth that the world’s oil reserves are limited. What is not known is the amount of oil that is still available to us for commercial exploitation. For decades, the international oil companies and the Governments in oil-rich countries have assured us that there was no danger that we would soon come close to exhausting world oil reserves. They told us that the doomsday scenario of a so-called “peak oil” was misguided. This optimistic outlook seemed justified over the past several decades as new oilfields were discovered and technological innovation allowed us to dig for ever more remote reserves. But in recent years peak oil theory has gained traction in international energy debates and can no longer be dismissed as scaremongering or out of hand.
In 2009, the UK Energy Research Council carried out a major review of about 500 studies of future oil reserves. It concluded that,
“a peak in conventional oil production before 2030 appears likely and there is a significant risk of a peak before 2020”.
Other bodies, such as the respected International Energy Agency, have also begun to change their forecasts for oil reserves. In 2007, the US Department of Energy warned that,
“peak oil presents the world with a significant risk management problem of tremendous complexity”.
We in the UK should be particularly receptive to these warnings, for our own experience with oil production provides a classic illustration of what an oil peak looks like, albeit in a regional context. Oil production in the North Sea peaked in 1999 and is now on a declining path. Britain has been a net importer of oil since 2005—something we did not anticipate and plan for quite well enough.
As other oilfields are becoming unavailable, either because they have reached the end of their lifetime or because they are in the hands of state oil companies, we need to search for oil in ever more inaccessible parts of the world. As the BP oil spill demonstrated, the scramble for unconventional oil comes with growing safety and environmental risks. They are also likely to lead us into civil war and conflict—not least if you look at countries as far apart as Equatorial Guinea, Nigeria or Saudi—to doing business with those we may not wish to be so dependent on.
What are the answers? A tightening of safety standards and regulatory oversight of the oil industry will be an important answer to the BP issue. But if we focus solely on this aspect, then we miss the bigger threat of our continued dependence on oil, which is fuelling the search for unconventional oil reserves deeper and deeper in inhospitable waters, literally. In fact, given current trends in road and air transport in the UK, our oil dependence is set to grow even more. We may be able to replace coal and oil-based energy production with renewable energy sources and nuclear energy, but oil remains an irreplaceable fuel for the transport sector. Although households and industry have been able to reduce their dependence on oil since the 1970s oil crisis, the transport sector’s share of oil consumption has steadily risen. Cars, trucks and airplanes now consume about 50 per cent of oil in the United Kingdom.
There are compelling reasons for reducing our dependence on oil. The fight against climate change requires us to reduce greenhouse gas emissions, chiefly those from the burning of fossil fuels. A shift away from oil would also be beneficial for the UK’s foreign policy, which I have already touched on. As more and more oil reserves are controlled by Governments that are neither liberal nor democratic, we would do well to reduce our addiction to oil and our dependence on the good will and co-operation of often unpalatable and unpredictable regimes in oil-rich regions.
The BP oil catastrophe should thus be seen as a wake-up call. It brought to light extraordinary failings in safety procedures and management structures by, as I have said, a proud international oil company. It is also shone a light on how our dangerous dependence on oil is forcing us into ever riskier forms of oil exploration. We cannot address the former problem without dealing with the latter as well. It is for these sound environmental reasons that this Government have embarked on a radical overhaul, and we will hear today about the electricity market reforms. We look forward to my noble friend’s Statement in a short while and the consultation process that is to follow.
Lord Selsdon
My Lords, I should declare a number of interests that may confuse your Lordships as much as they do me. I am grateful to my noble friend Lord Moynihan. My first interest lies in my great aunt Jenny Mitchell-Thomson, a canny Scot from the east coast who, 50 years ago, left to the nephews and nieces, of whom I was one, £500 in British Petroleum shares with instructions that they should never be sold except in dire emergency. I did actually sell some of those shares briefly to help pay for the education of my son, Calum Mitchell-Thomson—the same name as my own—who has a degree in marine economics and is the managing director of one of the larger investment banks dealing with energy. He is my specialist adviser from time to time.
I declare another interest in that 20 years ago Earl Jellicoe, a mentor of mine as he was of the noble Lord, Lord Moynihan, appointed me at a young age to serve on one of the EU committees, together with the noble Lord, Lord Stoddart of Swindon, and other great names. We were to determine where our future would lie, including what would happen when North Sea oil ran out. We said that it would be a worrying time, but that the technology that we would have gained from those developments in the North Sea would benefit us worldwide.
I then asked myself who owns the oil under the sea, and remembered the old Scottish definition of freehold, “All from heaven above to hell beneath”, with a few extra territorial rights in that you controlled the foreshore or the sea as far as you could ride a horse and throw a javelin. Looking out at the North Sea one day, I wondered whether I could design a form of cannon or weapon that would give control of that sea. I looked up Big Bertha, the gun used during the war. I found that no one had yet worked out who owned those areas of the North Sea beyond the 200-mile limits.
I scratched my head and asked what would happen when the oil runs out. Our oil did run out, as the noble Baroness mentioned just now. We had a sudden change from a surplus to a deficit. We have a deficit in manufactured goods of £100 billion a year and in foreign trade of £45 billion, and the decline in revenues from North Sea oil is having an impact. The only conclusion is that the economy of the United Kingdom has to be worldwide. Within that, our expertise in oil and gas in the energy sector is quite significant. My son was briefing me last night and said that I should think of six things—high, high, high; low, low, low. Low—low depth, low pressure, low temperature—exploration that is not complicated. High—high depth, high pressure, high temperature—exploration that is complicated and technically difficult.
I then set out to evaluate this issue, as I tend to do from time to time, and said, “Goodness me, 71 per cent of the earth’s surface is covered by sea. Who owns and controls the sea? Who has, or should have, those rights?”. Not so long ago I suggested in your Lordships’ House that perhaps the 200-mile limit should be extended to 500 miles or something of that sort because the law of the sea is quite complex. I found in my evaluations that the United Kingdom coastline is longer than that of India. Noble Lords might say that that has no relevance, but it has some small relevance because it is full of creeks and inlets that go in and out, and these provide an opportunity for shellfish.
The pollution of our inland and coastal waterways could have a major impact upon shellfish production and £45 million a year of exports. That is only a small amount but a study of the seas of the world—the Pacific Ocean, the Arctic, the Mediterranean, the southern seas—will disclose vast coastlines. Where are these coastlines and to whom do they relate? Some 44,000 kilometres of them relate to the British Commonwealth, including overseas territories, dependent territories, bailiwicks and others. It is the same length of coastline as that of the former Soviet Union. Of course, the Americans’ is much smaller. So we have coastlines to consider within our Commonwealth relationships. Among other former empires and territories, the French and their francophone territories have 34,000 kilometres of coastline. This may or may not be relevant but we need to consider the sea and look not only at the opportunities within in it but at the pollution dangers that can befall us again from an explosion related to oil or to anything else.
We all remember the tsunami, but what few of us knew at the time the first buoy triggered an alarm in the Pacific was that if the telecommunications world had been sufficiently switched on, someone with a mobile telephone could have sent a signal to almost everyone in Indonesia and elsewhere saying, “Get off the beach”. We have to consider the question of communication, including satellite communication.
We already accept that 91,000 vessels sail upon the oceans of the earth, ignoring, of course, the vast numbers of British private yachtsman—I declare an interest as secretary and treasurer of the House of Lords Yacht Club—sailing under 147,000 different flags and ensigns, which is almost as much as anyone else in the world does; and, of course, we are sea-related.
One of the worries is how we can patrol and control the seas when we have lost much of our Navy. However, on the merchant shipping side, as I have pointed out, there are 91,000 vessels. The biggest individual fleet is that of the Japanese, but the Commonwealth has 21,000 vessels. So there again is a relationship, and, perhaps multilaterally with our Commonwealth friends, we should give some thought to the oceans of the world.
As I went down this route I asked myself what technological advantages we have that can determine when disasters, oil-related and others, are picked up. We have satellite technology—I declare an interest as having been secretary of the Parliamentary Space Committee for some years. The new satellites, most of which contain British technology, are the size of a washing machine. I was a director of an Italian washing machine company for a while so I know the size of washing machines. I have mentioned before that these satellites can scour from a relatively low earth orbit the oceans of the world and can pick up oil spills, the migration of fish and almost anything else. They are surveillance satellites, and are within our own capabilities.
The point I am trying to make is that although there may be an oil disaster—and we all worry about health and safety—we must accept that, at the end of the day, there will be many developments under the earth and under the sea. I pause for a moment to express my regrets for the two recent mining disasters. We do not know how or why the earth suddenly decides to tremble. We know well how tsunamis arrive. We also know that HMS “Scott”, our survey vessel, is the only vessel that can carry out underground surveillance of tectonic plates and, if it had been surveying before, might well have determined the causes or the potential for tsunamis.
Here in this country, with our international relations, we have certain resources and technical capabilities, although we may now lack the financial muscle. We have a lot going for us. The implications of the spill are not just for health and safety; they are for where and how we exploit the underground resources of the world or even space resources.
I feel very worried about the balance of trade and our current difficulties. I do not mind so much about the decline in the value of the pound, because I have to declare an interest in that my great uncle, Stafford Cripps, had the job of devaluing it for the first time. It is within the family. We all talk about these things over Christmas lunches or dinners. I am not optimistic, but what my noble friend has done today is open a door for wider debate. I congratulate him on his own know-how—and know-how, I was once told, is a magic word for turning common sense into cash.
Baroness Smith of Basildon
My Lords, I doubt that the noble Lord, Lord Moynihan, could have foreseen quite how topical his debate would become today, with the news coming through late last night that the US Government are to take legal action against BP and eight other firms following the Deepwater Horizon oil spill. The noble Lord clearly highlighted the challenges facing the industry. I found very interesting his assessment of the levels and elements of risk involved.
As we have heard, this catastrophic incident on 20 April this year created explosions and fire on the rig, causing the rig to collapse and leading to the deaths of 11 people with 17 others being injured. The oil spill continued until 15 July, when it was temporarily closed by a cap, and was then declared “effectively dead” on 19 September.
Initially, it was estimated that around 1,000 barrels of oil a day were being released from the well; that estimate was later increased to 5,000 barrels a day. In the largest ever accidental leak in the ocean, millions of barrels of oil were spilled over five months. It can be quite hard to comprehend the scale of such a disaster, the scale of the exercise undertaken to stop the oil spill and the scale of the clean-up operation, let alone the ongoing issue of whether there is adequate research and investment into spill response technology.
It is hard also to comprehend the social and environmental impact. The spill was in an area where 71 per cent of employment came from tourism and recreation. A further 200,000 jobs were in recreational fishing. It is an area on which the nation relied for commercial fishing stocks. It was hugely important also for bird and wildlife watchers.
It may take many years, particularly with the legal action that is now under way, for the financial implications fully to be understood. There is and, as we have seen, will continue to be considerable litigation. As was reported in the Financial Times, there is,
“no way to put this in historical context because we have never faced anything like this before”.
We know from the speeches that we have heard today that the ramifications are likely to be long lasting, not just for the Gulf of Mexico, which has been hit environmentally and economically, but for BP and the other companies involved. As the noble Lord, Lord Moynihan, outlined, there are implications for the future of offshore drilling across the world.
Do we know what exactly went wrong? The Minerals Management Service, which has since been renamed the Bureau of Ocean Energy Management, Regulation and Enforcement, is the regulatory and inspection body for offshore oil drilling and rigs in the USA. An investigation by the Associated Press claimed that such examination as was performed was in the most part brief, perfunctory, extremely lax and with poor record-keeping. Crucial safety and emergency procedure information, including documentation for the precise incident that later occurred, was not available. The investigation by AP claimed that after just over the first three years around 25 per cent of inspections were omitted, although that could be explained by weather and other factors, which could mean that an inspection was not possible. However, the last three inspections took two hours or less. Nevertheless, the rig was regarded as having a strong safety record and was never on the informal watch list for problem rigs.
The question is whether we in the UK should take comfort from the difference in our regulations from those in the US. There are key differences. Mr Steve Walker, the head of the Health and Safety Executive's offshore division, described it as,
“additional and different layers of regulation”,
with a system of independent verification enshrined in law, which the US does not have. In his evidence to the Select Committee in the other place, he also considered that our performance-based legislation was more sophisticated than the US checklist of inspection. When asked whether the Deepwater Horizon would have been allowed to operate in the UK, given that it had,
“a single blind sheer ram on the blowout preventer”,
he informed the members that in the UK the HSE would have seen the design 21 days before drilling began, asked questions about the design and would have assessed the answers before deciding whether to take any action. Also, in the UK we have a separation of licensing from health and safety oversight, which helps to ensure the appropriate distance between the interests of the industry and the health and safety of those involved. I welcome the fact that the HSE has made its own response to this incident and will undertake a further examination of the regulation and the record of the UK industry.
BP has undertaken its own investigation and, as we have heard from the noble Lord, Lord Grantchester, made significant and welcome changes to its own organisation to improve safety, becoming more risk-averse as a result. There are lessons to be learnt for the whole industry. The development of North Sea oil fields has been subject to considerable debate, controversy and conflicting views over many years. Numerous oil and gas companies, including BP and Chevron, which was granted a licence for deepwater drilling in the North Sea on 1 October, are looking to expand their operations and to go forward and deeper to more remote areas than previously. The debate between those who argue that such drilling is necessary for energy security and those who feel that the environmental costs are too high has been intensified by the Deepwater Horizon spill. The comments of the noble Lord, Lord Selsdon, highlighted his concerns about coastline pollution and the impact on the UK. Given his obvious love of the oceans, I am sure that he shares my concern at the news today that so many coastguard stations are to be closed around the coast of the UK.
Drilling for oil has continued; record numbers of bids for new offshore oil and gas licences were submitted in 2010 and, in October, 144 new licences were issued, including more than 20 for drilling in deep sea areas. Greenpeace has now issued a legal challenge against the Government to stop the 22 new deepwater drilling licences until the causes of the Deepwater Horizon explosion have been properly established. The arguments advanced by the lawyers are that the licences are close to environmentally sensitive areas which support legally protected species such as whales and dolphins. I am aware that the Minister can say very little about this issue because it is subject to legal action, but I seek his views on the department's confidence in the UK regulatory regime. The noble Lord, Lord Moynihan, was right in highlighting that safety has been of particular concern on this issue.
Following President Obama's review, the US Government have announced additional rules. Before drilling takes place, stronger environmental and safety standards are to be in place, working on the principle that the Administration should proceed with caution and create a more stringent regulatory regime. Does the Minister consider that the differences in the two countries’ regimes offer greater protection in the UK? What ongoing discussions is the department engaged in with the HSE? Is the Minister satisfied that all the current deep-drilling rigs in the UK fully comply with emergency policies and ongoing training on how to respond in event of an incident? How often does he consider that deepwater drilling rig inspections should take place to be confident of safety procedures, and what lessons have been learnt in the UK from this incident?
The noble Baroness, Lady Falkner, rightly highlighted her concern, shared by many, about the sustainability of the ever-increasing demand for oil and the ongoing quest for new reserves because of this demand. The Minister will be aware of the report last month from a group of business leaders, including Richard Branson, about UK dependence on oil and their concerns about this. What consideration has the department given to this report? With business, there is always the relationship between risk and money. How much will it cost when things go wrong? As we have heard, BP has footed a hugely significant bill for the beach clean-up and may, in addition, become liable to additional financial loss depending on the US Government's litigation. The Department of Energy and Climate Change has reported that licensees operating under the Petroleum Act 1998 are required to have sufficient funds available to discharge any liability for damage attributable to any oil pollution incident. The licence does not set a limit to the licensee's liability and licence applicants must demonstrate that at all times they have sufficient funds to meet expected commitments, liabilities and obligations. Further to the event in the Gulf of Mexico, I understand that the department has asked the Offshore Pollution Liability Association, or OPAL, immediately to revisit its risk modelling for worst case scenarios. Can the Minister provide any information about how this review is progressing and when we can expect to hear results? I appreciate that the news of the US legal action is very new and clearly carries the possibility of profound implications. It may be too early for the Minister to have reflected on these points but, if he is able to say anything further, particularly if there have been discussions between the Attorney-General in this country and the Attorney-General in the US, it would be helpful.
Finally, I thank the noble Lord, Lord Moynihan, for bringing this issue before us today, topical as it turned out to be. This debate should be seen in the wider context of ongoing debates that we are having and the Statement that we will shortly hear from the Minister on the ongoing Energy Bill. This is a huge issue for this country with huge implications. Our role as an Opposition is to work with him to deal with these hugely important and crucial issues. When we are able to support, help and advise, we will want to do so, playing a constructive and helpful role in securing the security for life of this nation.
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Lord Marland)
My Lords, I thank my noble friend Lord Moynihan for bringing this to the House and his invaluable insight and very measured speech on this matter. I hope that my own speech will cover a number of the issues raised by noble Lords in what I think has been an excellent and very informative debate. I think that the Opposition have set out very clearly the state of the nation as regards the oil industry. My noble friend Lady Falkner made very clear the long-term problems for the nation, and I shall deal with some of those points later. Noble Lords must forgive me if I repeat in my speech some of the things that have already been said, but they are worth repeating.
The Deepwater Horizon accident was a most serious and tragic event in recent years. We must not forget that 11 people died, which was a terrible loss of life, harrowing for the families and friends of all those involved in the industry. There were very serious consequences: the resulting oil spill and its after effects caused untold stress and heartache for local communities, with widespread disturbance of fishing, tourism and other activities in the region, which is still recovering from the horrendous Katrina hurricane. But in considering all this, let us keep it in a degree of context and recognise the vital contribution that oil and gas exploration has made to the world economy.
We have all noticed that lawsuits are back in the newspapers today. It is clear that the legal process has had some time to run. We should wait for the due process of the presidential and the Marine Board and other investigations to shed light on where responsibility lies and the action that could be taken. It would be wrong to suggest that there have been extensive cross-Atlantic discussions at this point between legal departments but, obviously, there is an ongoing process that started when the incident happened because BP, among others, is a transatlantic company. Both departments have been talking for a long time, to answer one of the questions asked by the noble Baroness.
We should not forget that BP is a great British company, creating not just wealth and jobs here in the UK but also in the US and many other parts of the world. Millions of pensioners benefit and this Government have been right to stand behind it during this time of crisis.
Ultimately, BP has suffered badly. This was manifested in its stock market value and in the eventual resignation of its CEO, Tony Hayward, to whom my noble friend Lord Moynihan paid tribute. BP is of course working hard to complete remedial actions stemming from the incident, and to learn from it. It is restructuring its safety culture and has reviewed its operations around the world. It has sold some of its assets to provide assurance that it can meet all legitimate liabilities arising from the disaster.
In the UK, while we are working hard to move towards a less carbon-intensive future, we cannot overnight remove our need for hydrocarbons. We will be dependent on oil and gas for several years to come. We have a choice of either producing oil and gas in UK waters, where we are recognised as having one of the most robust safety and environmental regulatory regimes in the world, with all the economic benefits that that will bring, or paying to import oil and gas from elsewhere.
The oil and gas industry, which has been operating here for more than four decades, is a fantastic success story. Its innovation and verve have ensured that we have been able to produce 40 billion barrels of oil and gas in the UK. We should not forget that UK oil and gas still provide around two-thirds of the UK's primary energy needs. However, the contribution is not just to our security of supply, but to our economy. The industry supports around 350,000 jobs directly and indirectly, and another 100,000 people are involved in exporting goods and services. Annually the industry spends around £12 billion in the UK and provides around £10 billion to the Treasury in taxation. The good news is that we still have the equivalent of some 20 billion barrels of oil—perhaps more—left to produce. To realise this potential, we need continued investment and new exploration, and we want to support the industry in every possible way to achieve this.
My department is working closely with the oil industry on a number of fronts to ensure that the right incentives remain to bring the required level of investment and exploration, and that the legislative framework facilitates new developments, for instance by securing third-party access to existing pipelines and facilities. I will bring new provisions in this area in the forthcoming Energy Bill. My department was pleased to offer 144 new licences recently in our 26th offshore round. This shows the continuing confidence in the future of the UK continental shelf and provides a strong basis for continuing exploration and development activity.
We have an innovative and productive industry. The UK was one of the first areas worldwide in which offshore exploration and production took off, and we now have more than four decades of experience. More than 10,000 wells have been drilled in UK waters, including more than 300 in depths of more than 300 metres. This means that the risks associated with drilling wells on the UK continental shelf are well understood. Our regulatory system has been developed to meet the evolving challenges. Following Piper Alpha, safety regulation was brought under the Health and Safety Executive umbrella to get the benefit of its expertise, not least in regulating major hazards.
The recommendations after the Piper Alpha inquiry of the noble and learned Lord, Lord Cullen, shaped the North Sea safety regime that the UK industry has been successfully operating under for the past 20 years. It was a step change, and it was recognised at the time that a more comprehensive approach to regulating safety in the industry was required, with a change of culture that put more responsibility on duty holders to manage risks across the range of their activities. The concept of goal setting was introduced, with duty holders required to identify their hazards, assess the risks they posed and put controls in place to minimise those risks. For high-risk offshore activities it was necessary to formalise the process into a permissioning regime, with the industry required to show in writing, via a safety case, that the health and safety risks were “as low as reasonably practicable”. The regulator’s role is to assess the safety case, accept it when appropriate and initiate inspections to ensure that it is being implemented. Other legislation on evacuation, escape and rescue, management and administration, design and construction, was revised in a less prescriptive style to complement the new safety case regime. I could go on. The key point is that we have a tough and effective regime in the UK that is considered a benchmark around the world, and particularly in Europe.
DECC plays a vital role in overseeing the exploration, development, production and environmental performance of the offshore industry. Following the US incident, an internal review was conducted by senior officers on the basis of the information available immediately after the accident, looking at the implications for DECC’s offshore regulatory regime. Both current and expected future drilling operations were considered. I am glad to report that the review did not uncover any gaps in the regulatory controls, or any reason to doubt their effectiveness. I pay tribute to the previous Government, too, for their activity in this regard. However, it was recognised that, with the prospect of more activity in deep waters, it is increasingly important to be assured that operators are doing what they should be doing. We have taken a number of steps to further strengthen our regime. We have increased the number of environmental inspectors and doubled the number of environmental inspections of mobile drilling rigs. The requirements for OPEPs were revised. All OPEPs submitted for exploration, appraisal and development drilling must now assess the worst-case scenario where all containment barriers have failed, resulting in a well blowout. Pre-drilling inspections are now carried out on deepwater mobile rigs before any final drilling permit can be issued. Containment devices are now available in the UK, and the industry is working on a capping device that we expect will be ready for deployment in the North Sea before the end of next year. I hope that that answers one of my noble friend’s questions.
The ceiling on the industry insurance liability scheme, Oil Pollution Liability Ltd, which the noble Lord also asked about, was increased from $120 million to $250 million, and the industry is looking at liability issues in general to see if anything more is required. I am aware that the European Commission wishes to look at the way in which deepwater drilling activities are regulated across Europe, with the aim of ensuring consistent standards. While we will continue to work on this with our European counterparts and the Commission, everyone should be clear that we will strongly defend the UK’s ability independently to regulate its oil and gas industry, because we have been shown in the past to have a strong regulatory regime. If the exercise is focused on raising standards in other member states’ territories, the UK can provide a strong contribution, given our substantial experience in this world.
Before summarising, I will answer a few specific questions that I have not yet covered, and perhaps amplify my noble friend Lord Moynihan’s question about insurance. I spoke to insurance industry leaders this morning and I do not believe that there is no market available for an increase in liability protection. However, we should recognise that BP was not a great purchaser of insurance and elected to run potential liabilities against its balance sheet. Of course, insurance should not be a substitute for a balance sheet. People should not carry out work unless their balance sheet can cope with the inevitable potential liabilities that manifest themselves.
The noble Lord, Lord Grantchester, asked whether we were in contact with OSPRAG. We are in regular contact and, as I indicated earlier, we are looking for technological advancement. Huge lessons have been learnt from this disaster. We must look at the US review when it comes out; we await it with great interest. We will consider its implications for our own regime and will implement any changes that we think should be made. However, I point out that we suggested to the US regime that they follow our regime, which separates health and safety from departmental issues. The US regime chose not to, but I understand that it is now about to do so. On the wider issue, the G20 has initiated a best practice dissemination work group for deepwater drilling as part of a global marine environmental initiative, and of course we strongly support that.
The noble Baroness, Lady Falkner of Margravine, has told us, rightly, that we cannot continue to depend on oil. I welcome her encouragement of the development of renewables, which we will doubtless be discussing in a few minutes’ time.
The noble Lord, Lord Selsdon, made a most engaging speech. Earlier, I looked up what his interests may be in this field and I was glad that he came out with about 30 or 40 of them in a very short time to demonstrate that he has a close association with the oil industry. I look forward to hearing about his discussions at the Christmas table as much as he looks forward to hearing about ours.
I am grateful to the noble Baroness, Lady Smith of Basildon, for giving me prior notice of one or two of her questions, because that meant that I could do the requisite research to respond to them in a way that I hope she feels is adequate for her needs.
One of the questions was, “Do you consider that the difference in the two countries’ regimes offers greater protection in the UK?”, which was a further amplification of things that I had discussed. The straight answer is that, as I said earlier, we have in place a number of safeguards that offer the UK greater protection. The requirement for a safety case ensures that risks are identified and suitable controls are selected. HSE reviews, well design and procedures are fundamental, while a schedule of well examination by independent and competent persons is an addition to the HSE review. A scheme for the verification of safety-critical equipment, including blow-out preventers, is in place and the HSE monitors well operations on a weekly basis. These are critical issues.
Our department has a close working relationship with the HSE and has accepted safety cases of the current deep-water drilling activities that include the emergency procedures required to ensure safety. After the HSE has accepted the safety case for an installation, it produces an inspection plan and inspects the installation at least once a year—sometimes three times a year, depending on the type of installation and activities being undertaken.
The noble Baroness rightly brought ITPOES, the UK Industry Taskforce on Peak Oil and Energy Security, to our attention and she mentioned that Sir Richard Branson was a member. Of course we welcome any outside suggestions and contributions to this debate. It is not as if we are not carrying out such work ourselves; our chief scientist is permanently in discussion with stakeholders about the threats to oil supply. We started an initiative in that regard in August and we intend to review that and work within its results.
In summary, the Deepwater Horizon accident was a most serious and tragic event, causing 11 deaths and, subsequently, environmental and unprecedented economic consequences. I am sure that the knock-on effects will be felt by local people and businesses in the region for years to come. It was also viewed as a wake-up call for the industry and regulators worldwide.
The oil industry is fundamental to Britain. We will be reviewing the US report once those investigations are complete to see whether there is anything more that we need to do on top of our own significant regulatory scheme. Deep-water drilling in the UK is not a new concept; the industry has been conducting such activities here since 1974. However, we must not be complacent. We have to remain extremely vigilant. I thank noble Lords for their excellent contributions to this debate and I look forward to further discussions as the years go by.
Lord Moynihan
My Lords, I am most grateful to the Minister and to noble Lords for participating in this debate. Over the past 10 years, I have learnt much about the family history of my noble friend Lord Selsdon. Once again, the House enjoyed his contribution, expertise and family insights. May he speak on any subject on which I am fortunate enough to win the ballot in future.
If American politicians were listening, they would have been impressed by the noble Lord, Lord Grantchester, because of his well researched speech and his calm, professional, all-party approach, which has also characterised the approaches of this House and another place to oil disasters, both within the UKCS and beyond our shores. It was echoed in content, delivery and expertise by the noble Baroness, Lady Smith of Basildon, as well as in her welcome focus on the changes that BP has made in the light of the disaster.
I thank my noble friend Lady Falkner for widening the debate to the challenge of macro-energy policy. As the Minister states, the truth is that, whatever steps we take—and we are about to hear about more welcome ones—the global demand for oil and gas will continue to grow over the next 30 years and we had better be prepared for the technical challenges, the political issues and the high prices that will accompany the world’s insatiable demand for hydrocarbons.
I particularly thank the Minister for his speech, for the work undertaken by his excellent officials, some of whom I recognise from over 20 years ago when I was in the department, for his answers to noble Lords’ questions and, above all, for focusing, as indeed has the House, on safety. An unremitting focus on safety is essential and is the most important implication that we should draw from the Deepwater Horizon oil tragedy. I thank noble Lords for their contributions to this debate and I beg leave to withdraw the Motion.