Oil and Gas: Subsidies and Licensing

Baroness Worthington Excerpts

Thursday 20th January 2022 Grand Committee

[Baroness Worthington (CB)]

My Lords, I congratulate the noble Baroness, Lady Jones, on securing this debate and look forward to the Minister’s maiden speech later.

We can point to donations or meetings, but I would like to spend a couple of minutes focusing on whether the structures of government are perhaps out of kilter with our modern goals for energy. It appears that there are legacy structures and conflicting goals within government that at times are not joined up.

In 2014, the Wood review was published and made a number of recommendations focused squarely on increasing the efficiency of the UK continental shelf in the extraction of hydrocarbons. The review then informed the Energy Act 2016 and ushered in the Oil and Gas Authority, a government-owned company that has taken over a range of responsibilities from government in relation to overseeing developments in the UK continental shelf. This body’s primary objective is maximising the economic recovery of hydrocarbons. It is therefore not necessarily a question of external influence. Rather, we have created a statutory obligation and a body single-mindedly pursuing a very narrow set of goals within our energy policy. It may be occluding the real energy agenda that we should be pursuing.

At the time of the Energy Bill in 2016, we argued that to create a new body with such a narrow remit represented a missed opportunity. It was clear even then that UK plc’s pursuit of barrels of oil and, to a lesser degree, therms of gas from the North Sea was unlikely to be the biggest priority. It is an old, mature field, and the biggest discoveries were all found decades ago. What remain are very risky and expensive fields, which the bigger operators are now finding it is not in their interests to exploit. When we think about energy security and climate considerations in the round, is it correct and right that we should have this body and this statutory obligation that skew our focus, and potentially the focus of Ministers?

The UK is rightly considered a leader on climate change, thanks to both its domestic actions and its role in international negotiations. It does not sit well for a country such as the UK, a very mature economy that has arguably benefited from the exploration of oil and gas over decades, to be seen to be trying to extract the very last drop of oil and gas out of the North Sea without a real economic case for doing so. We have had decades of relatively stable and secure energy provision. We have managed to provide a secure and affordable lowering of our carbon footprint at the same time, which has benefited businesses and consumers. Our oil and gas efforts in the North Sea and the UK continental shelf have not contributed to those goals; other sources in our energy policy do that job far more effectively. We need only look at the sudden spike in gas prices now to see how a policy based on fossil fuels can undermine our ability to deliver affordable energy.

I turn to the international case. The case will always be stated that we need to extract our oil and gas, otherwise we will be importing from other places. But in reality we do not use the majority of the oil production from the North Sea domestically, because our refineries are not fit for the refining of those oils; most of it is traded. On an economic basis, it does not matter where it is extracted—we will all face the global price set in the traded market—so that argument does not really hold water.

Another often-cited advantage to the UK is the jobs. The jobs in the North Sea oil and gas sector are very limited—around 30,000 direct jobs. Just the low-carbon economy today employs 200,000 employees, so clearly there should be a much greater focus on the low-carbon future sources of energy, rather than pursuing this very narrow goal.

We have not really addressed the problem of how a Government can develop a balanced policy fit for UK plc in terms of a large, rather than a narrow, set of interests. The risk is that, given these high prices, there will yet again be a temptation to invite in the fossil fuel experts. We will probably hear, even today, a call for a return to “drill, drill, drill”, and the idea that finding more resources will be the way out.

I argue that that would distort the reality, which is that we have a vast array of opportunities to exploit energy, which go beyond fossil fuels. We have a huge offshore wind industry and, as we have recently seen, we are granting very large licences to that sector. That is where our future lies, and it would be a mistake to invite in a narrow band of experts, yet again, to dictate to us what our energy policy should be in response to the current energy crisis.

I believe that there needs to be another Wood review—an updated opportunity to look again at what our focus should be for our own indigenous energy sources. It is clear that there are huge challenges ahead of us. From my perspective, climate is the largest of them, but equally there is energy security, and there are economic concerns that we have to address. We have huge potential to secure investment in a range of zero-emissions technologies, but we need to focus on that and make it our priority.

We should see the hydrocarbons in the North Sea in that context. They are no longer our greatest asset; if anything, they will be a net drain on the public purse in coming years. We receive very little in taxation. Let us start a review to assess whether the Government have the right bodies and the right powers in place—and if we are to have an energy Bill, let us look again at the OGA and whether the obligation it was given is correct for 2022.

[Lord Lilley (Con)]

My Lords, I apologise for missing the first few seconds of the debate; foolishly, I was sitting in the Chamber instead of here. I congratulate the noble Baroness, Lady Jones, on securing the debate. I have always longed to agree with her, since I like her so much, and I do agree with her on the two objectives of the debate. I am against subsidies for the oil and gas industry, as I am against subsidies for renewables. I am also against undue influence being brought to bear on government.

The oil and gas resources with which this nation has been endowed by a beneficent providence are, essentially, the property of the people. It is right that the economic rent and value of those resources should be extracted for the benefit of the people and not given away. I first made myself an enemy of the oil industry when I published a document called North Sea Giveaway, advocating that licences should be not allocated but sold to the highest bidder, so as to extract the economic rent. For a while, it actually changed the Government’s policy. That was before I was ever a Member of Parliament; I had more influence then than I do now. Sadly, it did not continue for ever, and eventually Governments and officials went back to allocating, rather than selling, auction blocks.

Instead of extracting the money that way, they tried to do so by imposing a whole range of taxes—the royalty, the petroleum revenue tax and the supplementary corporation tax, all on top of the basic corporation tax that other industries pay. Since 1975, when oil first began to be extracted from the North Sea—I was then an energy analyst in the City—the oil industry has paid over £186 billion in those taxes to the Government.

Beyond the folly of giving away the licences rather than selling them, the idea that the UK subsidises the oil and gas industry is a nonsensical myth. The £4 billion that the noble Baroness mentioned is not a subsidy. Every industry is allowed to offset the costs it incurs to produce revenues against the revenues that those costs generate. The oil industry is no exception, but in that industry some of the costs are incurred after the revenues have been generated—in particular, the decommissioning costs. It is absolutely normal and acceptable for companies to be able to offset those costs against revenues in previous years. They get back tax that they paid on those revenues that were in excess of their costs. That is normal, and to describe it as a subsidy is, frankly, an abuse of language.

[Baroness Worthington (CB)]

I am enjoying this very much, but can the noble Lord comment on the rules that now underwrite those decommissioning costs with taxpayers’ money? As I understand it, that will cost us in the region of £20 billion over the coming years, because we are now underwriting some of those decommissioning costs. Is that not a subsidy?

[Lord Lilley (Con)]

It could well be but, as I understand it, that is not the £4 billion to which the noble Baroness referred.

[Baroness Worthington (CB)]

I am saying the wrong thing?

[Lord Lilley (Con)]

Maybe. It seems unwise to have got into a position in which the oil companies are required to do something that they cannot and have not been financing, and to take it to the taxpayer. I think that the noble Baroness will agree with me that up to now there has not been a subsidy. If we did not allow the costs of decommissioning to be offset against the revenues that the oilfields generate, we would effectively be taxing rather than supporting the most ecological activity that we require of oil companies; namely, the removal of what they have constructed in the North Sea.

The second thing that the noble Baroness is against is undue influence on licensing. One of the arguments in my pamphlet about the North Sea giveaway was that giving away those huge resources means that the civil servants who decide on it will be open to corruption. Amazingly, in the ensuing years, I found no evidence of that micro-corruption; nor is there any evidence of macro-corruption, in the sense of the oil and gas industries exercising undue influence. On the contrary, the offshore fields are not being developed—Cambo and the other one whose name I forget—and, onshore, hugely valuable shale resources are not being exploited. It is clearly not the oil industry that is exercising undue influence; somebody else must be. It is not those who want to reduce carbon emissions who are exercising undue influence because, by and large, particularly in the case of shale, if we import gas instead of producing our own—that is the consequence of not allowing shale exploration—we incur greater emissions, not just in transport but in liquefying and then deliquefying gas, which is an energy-intensive process.

There are two ways in which we can meet the net-zero target. One is to reduce demand, and the other is to reduce supply. The sensible way is to reduce demand. If you reduce supply ahead of reducing demand, the price goes up, as we are seeing now; the oil and gas companies make undue profits, which will upset you all greatly, and I do not particularly want to see them make undue profits either; and it will cause difficulties to households in the short term, which is what we are experiencing. I hope that we will see more realistic analysis than we have heard so far.

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[Baroness Jones of Moulsecoomb (GP)]

Except—

[Baroness Worthington (CB)]

My Lords—

[Lord Oates (LD)]

My Lords—