Offshore Energy Industry

Lord Bruce of Bennachie Excerpts

Tuesday 13th July 2010 Westminster Hall

[Malcolm Bruce (Gordon) (LD)]

I am delighted to have this debate and to speak under your chairmanship, Mr Hancock. As I hope my contribution will make clear, the debate is about one of the most vital sectors of the UK economy, in terms of both securing our deficit reduction and growing the private sector. It is fair to say that in the House a relatively small number of hon. Members engage in detail with the sector, but it is hugely important to the British economy and I am grateful to those hon. Members who are present. I understand that a number of hon. Members have the first sittings of Select Committees in Parliament this morning, which may make it difficult for them to stay for the whole debate. I completely understand if that is the case. Being the Chairman of a Select Committee, I have had the luxury and indulgence of being able to secure a timing that is compatible with this debate.

I have been associated with UK oil and gas developments for nearly 40 years, since 1971, when I became the research and information officer with NESDA—the North East Scotland Development Authority. At that time, exploration was in its infancy. The Montrose field was discovered, and in the autumn of 1971 BP announced the successful testing of the first commercial well for what became the Forties field. After that, Aberdeen went into boom mode as the UK scrambled to get the maximum production out of the North sea, while the Organisation of Petroleum Exporting Countries asserted itself, squeezed supplies and forced up prices across the world. Field after field was brought on-stream. That boom continued until the oil price collapsed in the late 1980s and then there was a sharp and painful downturn.

However, for all of the past 40 years, despite ups and downs, the offshore industry has made a huge contribution to the UK economy. That continues to be the case. We shall be at another key point of development over the next two or three years, when how we deal with the industry as it changes and as other industries associated with it come on-stream will determine precisely how much of a contribution it will make to the UK economy over the next 40 years. There is the development of the renewables industry, which shares much of the same technology as the offshore oil and gas industry. They can complement each other and compete.

Among those who are not well acquainted with the offshore energy industry, there is a presumption that oil and gas are in sharp decline and little recognition of the crossover between oil and gas and renewable energy. In Oil & Gas UK’s latest economic report, there is a clear indication of a huge industry with a long-term future. Domestic oil and gas production was 2.4 million barrels of oil equivalent a day in 2009. That is equivalent to 94% of the UK’s oil needs and 68% of our gas requirements. With sustained investment, that level of production will decline slowly, at about 5% per annum, although even that may level off if we get the right type of investment. The position is that 39.5 billion barrels of oil equivalent have been produced, with between 15 billion and 24 billion barrels of oil equivalent of recoverable reserves remaining.

Capital investment, which had declined, is now rising again towards an estimated £6 billion or more. Indeed, the industry’s total spend in 2009 is estimated at £12.3 billion. With the oil price rising, tax paid in the current year is expected to rise to £9.4 billion—a 45% increase, based on an oil price of $78 a barrel. On top of that, the balance of payments benefited to the tune of £27 billion, and there is £5 billion of exports—a figure that is growing. Altogether, the industry sustained 440,000 jobs across the UK.

It is important to put the figures on the record, because too often people do not appreciate how huge the industry is and how important it is not just to the north-east of Scotland, but to the whole United Kingdom.

[Sir Robert Smith (West Aberdeenshire and Kincardine) (LD)]

I congratulate my right hon. Friend on raising this subject for debate. He is making a vital point. In the north-east of Scotland, we are probably aware of just how vital the industry is to jobs and investment there. What is important is getting the message across to the rest of the United Kingdom about what a success story the industry is. He has touched on the industry’s export potential. The vital point that he is developing is that, with the right encouragement and investment, there is a long-term future for many more jobs for the whole of the United Kingdom. That will be the case if the Government can get the policies right to encourage companies to locate in the north-east of Scotland.

[Mr Mike Hancock (in the Chair)]

That was very nearly a speech, Sir Robert.

[Malcolm Bruce]

It was a long intervention but an appreciated one, because it reinforces the point. Exactly as my hon. Friend says, we who represent the north-east of Scotland know and understand the industry. Generally when it is debated in the House, we are the only people who turn up, along with one or two others, yet the industry accounts for more than 20% of all UK industrial investment. There are much better attended debates on industries whose economic impact is far less than that of this industry, so I make no apology whatever for stressing its importance and for bringing it to the attention of the House and the Minister. I know that the Minister understands these issues and I hope that his response to the debate will demonstrate that.

We have a huge amount of technical innovation to enhance the recovery of our existing reserves, to operate in more difficult areas and to squeeze more oil and gas out of the existing reserves that we have found and, at the same time, to adapt the technology to be able to install offshore wind farms and provide for electrical transmission and possibly other marine renewable energy. This is one of the industries that could help to grow the private sector and grow the recovery of the UK economy if it is handled correctly. It is my contention, and the purpose of asking for the debate was to say, that the economic and Exchequer revenue potential of this sector for the UK economy is massive, and if it is not properly handled, significant future benefits could be put at risk.

Let me be clear. Aberdeen and the north-east of Scotland have welcomed the offshore industry and built up a critical mass of innovation and global activity. It is estimated that more than 1,000 companies are based in our area.

[Miss Anne Begg (Aberdeen South) (Lab)]

I suspect that the right hon. Gentleman was coming on to this point, but Aberdeen and the north-east of Scotland excel not only in the technical expertise but in the intellectual expertise necessary for an energy industry—not just oil and gas. The crucial part that is played by both universities in Aberdeen—Aberdeen university and Robert Gordon university, in my constituency—is very important to the future well-being of the whole area.

[Malcolm Bruce]

I am grateful to the hon. Lady because that is a very welcome and pertinent point. There is a critical mass; there is almost a buzz around Aberdeen among those who are engaged in the industry, because they are at the cutting edge of global technology and innovation. Companies have developed in the area to service activity on the UK continental shelf, but what they have learned in the process of doing that is of so high a standard—we are talking about world-class standards—that many companies are now exporting much, and in some cases the majority, of their output all over the world. That is why we have £5 billion-plus of exports, and that figure is rising quite sharply.

A synergy and value are being added by that dynamic critical mass. Engineers, technicians and certainly academics based in the north-east of Scotland travel all over the world, winning business and servicing the offshore industry. Aberdeen is the world’s leading centre for innovative sea technology. It is a good story and I do not want anyone to suggest that my concerns are about anything other than saying that the north-east of Scotland welcomes this industry, is open for business and has a very dynamic relationship with it, but we need to keep it and to build on it.

I want now to address offshore infrastructure, which is the purpose of the debate. Over the past 40 years, platforms, subsea completions, offshore loading systems and pipelines have been installed all over the North sea, but many of the fields that they originally served have declined, and Brent crude, the North sea’s oil price benchmark, may soon be a thing of the past. BP has sold its interest in the Forties field to Apache, and operations and developments have transferred across the acreage. New, smaller fields are being developed, and they require creative engineering and access to the existing infrastructure to make them viable.

I know that the Department fully understands Oil & Gas UK’s assertion that the North sea’s future lies in exploiting smaller, marginal and technically challenging reserves, the majority of which will not support stand-alone infrastructure, and I am sure that that is why the Department has established the infrastructure code of practice, but there is concern in some quarters about how the code works in practice, and that is borne out by Endeavour International’s request for the Government to arbitrate on its pricing dispute. The other problem is that the older infrastructure was, by definition, developed by the majors—the bigger companies—but is now required by smaller companies. In negotiating terms, there can be an imbalance between the parties, which the Department needs to address to ensure that we achieve optimum use.

I, for one, am pleased that the Government have explicitly recognised the need for a stable and fair fiscal regime for the industry, not least because I and my hon. Friend the Member for West Aberdeenshire and Kincardine (Sir Robert Smith) were instrumental in getting a commitment on that into our party’s manifesto, and the Minister may well have done the same with his party’s manifesto. I am also pleased that a greater understanding has developed between the Treasury and the industry in recent years, and the hon. Member for Aberdeen South (Miss Begg), in her capacity as the chair of the all-party group on the oil and gas industry, has arranged one or two useful briefings with Her Majesty’s Revenue and Customs to give us an insight into how that understanding actually works.

I therefore accept that there is a recognition of the need to balance the desire for short-term tax revenues and the long-term prospects offered by future investment. In simple terms, however, the tax regime can influence investment positively or negatively and therefore—I will return to this—alter the potential revenue profile. Centrica, for example, has said that it has expertise in developing tight gas, but that because that is generally found in larger fields, development does not qualify for new-field allowance or any other allowances, which delays investment, prejudicing security of supply and revenue. Perhaps the Minister can comment on whether his Department or the Treasury are in any way active in addressing that issue.

There is also concern, or at least debate, about the future of the petroleum revenue tax and how it might impact on abandonment and decommissioning, which could be carried out prematurely and in contradiction of the decommissioning code of practice. There is discussion—certainly in the industry—about the scope for PRT buy-out, which has an upside and a downside from the Treasury’s point of view in that it could provide the Treasury with an early cash flow, but only in exchange for future liabilities, and that is a fine balance. Again, it would be interesting to know whether the Minister or the Department have a view on that.

The Secretary of State visited the All-Energy exhibition during his first week in office and saw for himself the growing engagement in offshore technology and the crossover between oil and gas and renewables. That crossover has potentially useful synergies for manufacturing and installations, but it could, as the industry recently said, also create competition between the sectors, which could cause cost inflation, especially if there are significant infrastructure constraints. That could make marginal investments unprofitable and squeeze them out altogether. The core of my concern is that constraints on infrastructure—offshore or onshore—could prejudice investment and cost us jobs, revenue and economic benefits.

Indeed, RenewableUK sent in a contribution this morning making the same point. E.ON states:

“having the right infrastructure in place to accommodate these vessels is essential for making the UK the place for carrying out installation works, when other ports in continental Europe could carry out the same function.”

There is real concern that installation work for UK North sea offshore energy could be carried out by continental ports and that a lot of the support work associated with that installation could therefore be transferred to companies based on the continent. That is one of the concerns that needs to be addressed.

E.ON also said:

“One of the key requirements at port is space for the storage and pre-assembly of foundations and wind turbine parts and port authorities need to see a clear commitment from Government to offshore wind in order to have confidence to invest in these types of facilities.”

The Chancellor of the Exchequer indicated that there would be £60 million of grants to develop port facilities. Can the Minister give us any more information about that in his reply? E.ON’s point was not only that Government money may contribute to ensuring that these things happen, but that private money will be invested in ports provided that there is confidence that the level of activity justifies that investment.

Concern has been expressed about how the infrastructure for offshore wind can be developed. One argument that has been put to me is that developers would like more control over access to infrastructure—for example, designing and constructing it, before transferring it. There is concern that, if the infrastructure is owned by somebody other than the developer, that could lead to delays and make investment calculations more complicated.

There seems to be universal opposition to the bureaucratic confusion between the Department of Energy and Climate Change and the Crown Estate, which are responsible for licensing the sea bed for offshore renewable energy. The Minister expressed his view on the issue in opposition, although I do not know whether he or his Department still hold to that view. My question is simply what prospects there are of DECC becoming the sole licensing agency. The industry is certainly asking for it to take on that role. To anticipate the counter-argument, I accept entirely that the interests of the fishing industry and other commercial maritime interests need to be taken into account, but I, for one, see no reason why DECC could not be trusted to take on such a role.

The story today is as follows. Offshore oil and gas is in a mature phase and has a more challenging and fragmented role than in the past. Properly handled, however, it will make a huge contribution to the UK’s energy supply, investment, our balance of payments and jobs, as well as to deficit reduction and economic recovery. At the same time, we have a growing, new offshore renewable energy industry, which shares some of the same technologies and therefore offers diversification. The industry is already heading for a £2 billion turnover and it has the potential to grow, more than taking up any slack that might emerge in the oil and gas sector. As I said, competition between those sectors could be inflationary despite the obvious synergies. For example, it could cause cost inflation in terms of offshore vessels, because there are nothing like enough vessels to meet the challenge of further developing the North sea, and the same could apply to subsea equipment. All that could prejudice marginal investments so that they do not happen at all.

Ideally, companies operating in the northern North sea would prefer to base their operations in the UK, with north-east Scotland as the preferred location for many of their activities. I completely accept that it might not concern the UK Government if pressure in the north-east leads to development elsewhere in the UK, but Ministers should be concerned if that pressure leads to development elsewhere in the world, whether in Europe or further afield. My concern is that costs and operating difficulties could lose the UK investment altogether, and it is important that UK Ministers understand the problems that north-east Scotland faces, so that we can give these crucial industries the infrastructure that they are entitled to expect.

I turn now to an issue that is not the direct responsibility of the Minister’s Department, although it should concern him. Compared with other energy centres around the world, Aberdeen does not live up to its role as Europe’s offshore energy capital. As one correspondent put it:

“Rail connections are poor and, if anything, in decline. Road to the north is very poor. Air needs sustaining and key connections improved.”

The Aberdeen western peripheral route, which will provide a bypass around the city from the north and north-west, faces delays and uncertainty over funding, but it is essential to the city’s functioning and future credibility. Aberdeen City and Shire Economic Future, which seeks to promote the optimum development of the UK economy, is looking for ways to secure the energy industry’s long-term future, anchoring the industry in our region. It is also promoting a development corridor between Aberdeen and Peterhead called Energetica and hopes to attract a range of energy-related developments.

Anyone who knows the geography of Aberdeen will appreciate that its viability depends on the completion of the bypass and the A90 dual carriageway to the north. Further improvements to the A96 Aberdeen to Inverness route are also required, including to the notorious bottleneck at Inveramsay bridge, where the trunk road passes under a railway; single-file traffic is controlled by traffic lights at that point, and large vehicles are diverted along a B road. Much has been promised, but nothing has been done to resolve the problem.

At the same time, the proposed commuter rail service between Inverurie and Stonehaven—it has always been presented as a complement to the bypass; it is not just a road but a transport solution—has made no progress, not even in relation to the simple job of providing a station at Kintore, a community that has quadrupled in size over the past 10 years. However, although rail investments in recent years have far exceeded the business plan, conservative predictions continue to be used to justify resisting a commitment to further development.

[Miss Begg]

The right hon. Gentleman is right that the north-east, and particularly Aberdeen, has been waiting for a long time for a western peripheral route. Thanks to the last Labour-Lib Dem Administration in the Scottish Parliament, it was finally agreed that it should be built, but almost 10 years later we are still waiting. Not even a centimetre of tarmac has been laid, despite the spending of £100 million. The lack of a western peripheral road and of Crossrail is a double stranglehold. One would help deal with traffic congestion and both would be excellent, but we have neither.

[Malcolm Bruce]

I completely agree. I urge the Minister to listen to this part of the debate. I can anticipate his reply. His brief will say that they are matters for the devolved authorities and local authorities. Indeed they are, but if for whatever reason those authorities are not able to deliver that infrastructure, it is UK Departments that will lose the economic benefit and the tax revenues. It is important that joined-up government engages in this, and I have some practical suggestions and questions for the Minister. I hope that he will not think, “Ah, this is the bit where I just offload it to the devolved Administration.” It is much more serious than that. I am deliberately not trying to pin blame. I simply observe that these vital investments, which are crucial to the dynamic operation of the city of Aberdeen to deal with the next 40 years of development, are not happening. It is important that the Government understand that, and that they are engaged.

Twenty years ago, I was successful in securing the reopening of Dyce station, which has proved a great success. Indeed, trains are so overcrowded that one cannot board them at that station for safety reasons. The problem is that, while the station remained closed, the airport terminal was moved to the other side of the airport, so that vital link is no longer there. The airport has had investment, but for an energy centre of Aberdeen’s importance the range of services and flight links is limited, and the ground links fall far short of what is needed, as those who get stuck there at 5 o’clock will know.

[The Minister of State, Department of Energy and Climate Change (Charles Hendry)]

indicated assent.

[Malcolm Bruce]

I see the Minister nodding. He has been in that situation and will understand.

The two local authorities that serve the north-east of Scotland are struggling to deliver essential services on funding levels well below those of other Scottish authorities, but the latter do not face the same pressures. Both authorities receive grant aid at well below 90% of the Scottish average, despite having the fastest population growth in Scotland—indeed, compared with some parts of Scotland, the only population growth. Aberdeen city businesses pay around £150 million in business rates and receive back only half of that. Although Aberdeenshire is a net beneficiary, the overall grant allocation is a significant net loss.

It is important for the Minister to be aware that in the 1970s, when the scramble to develop the North sea was under way, local authorities in the north-east of Scotland received extra rate support for five years to enable them to meet the infrastructure needs of the growing industry. It was a special one-off recognition of the pressure that they were under. I suggest that something similar may be required now if we are to deliver people’s hopes and expectations for the next 40 years.

The population of the region has grown by around 50,000 over the past 40 years and it is projected to grow by a further 50,000 in the next 15 years. Unemployment is low and incomes are high. People may say, “You’ve got low unemployment and high incomes. What’s your problem?” The problem is that that income does not stay in the area. Taxes go to the Exchequer and business rates go to the Scottish Parliament, and we are dependent on grant support coming back to the area. Unfortunately, that does not happen enough—we do not have sufficient resources. Because of those pressures, housing costs are high, as are the costs of recruiting and retaining key people.

A substantial section of the British economy, for which the Minister and the Treasury are responsible, could be the biggest losers if we do not get it right. I shall give some statistics. If we lose only 1% of the forecast potential average development over the next few years, it would cost us £74 million a year in tax revenue, £270 million a year on the balance of payments, £50 million in exports, £60 million in investment, £60 million in operational spending and 4,400 jobs. If we lost 5%, it would cost us £480 million each year in tax revenue, £1,350 million on the balance of payments, £250 million in exports every year, £300 million in investment and £300 million in operating costs, and 22,000 jobs. I hope that those figures reinforce the fact that a small shortfall could result in us losing a substantial amount of revenue.

I therefore ask three things of the Minister. First, will he engage with the Treasury over the fossil fuel levy attributable to Scotland? The Economic Secretary has confirmed that the Government are committed to reviewing the

“control and use of accumulated and future revenues from the levy”.

I suggest that it would be appropriate for a substantial proportion of that to be allocated to infrastructure support in the north-east of Scotland, specifically to support the offshore renewable industry. I make no bones about it. It would help both oil and gas and renewables. That would be an appropriate use of the money, both now and in future.

Secondly, I remind the Minister that, through an Act of Parliament, Shetland and Orkney secured a share of the continuing revenues based on the flow through their respective oil terminals. No such provision was made, or sought, for the north-east of Scotland, probably because it did not expect to be so badly squeezed by the funding arrangements as they are. That is despite the area being a major landfall for oil and gas. I do not know how many pipelines cross my constituency, but it is probably into double figures. It is also the most important land base for offshore operations.

I therefore suggest that some consideration be given to the tiniest share of revenue from the oil and gas industry being earmarked for infrastructure. That would pay dividends by ensuring maximum long-term revenue. That may sound like a bid for new money, although there is a way of presenting it that would not. However, I return to the debate within the industry about the possibility of PRT buy-outs, which could create a cash-flow windfall for the Treasury. If the Government were minded to consider it, that bonus could support a small infrastructure fund.

Thirdly, given representations made during the debate by other hon. Members, I hope that the Minister will engage constructively with Ministers in the Scottish Administration. If they fail to support essential infrastructure in the north-east, it will prejudice not only the Scottish economy but the entire UK economy. In order to deliver that investment, it is therefore legitimate for the Government to have a partnership with the Scottish Government. So far, they have failed to so. I am trying hard not to be too political about it, but the facts are as the hon. Member for Aberdeen South made clear. Although promises have been made, delivery has not been achieved, and that is a real anxiety for the industry and its confidence in future investment.

The north-east of Scotland is a key economic region for the UK. It delivers far above its weight for its small population, but for it to continue to be a driver of growth for such a large chunk of the UK economy, it needs recognition and support. It suffers from relative remoteness. I meet too many people in Scotland, let alone in England, who tell me that they have never been to Aberdeen, and they have a very warped idea of what it is about. In some ways, the dynamism of the north-east of Scotland is perhaps Britain’s best kept secret. There are not 500,000 people anywhere in the United Kingdom who contribute so much economically. Indeed we have statistics to show that the contribution per capita of the north-east of Scotland is the highest of any region in Europe, and I am not sure whether that is fully recognised or acknowledged in the way in which it is treated by Government at all levels.

I know the Minister, and I believe that he understands much of what I am saying. He certainly knows Aberdeen, and Aberdeen knows and respects him. I look to him to ensure that the whole Government recognise the importance of the issue and act accordingly. I have tried to identify not just the problems but some possible solutions. I have tried to emphasise that if we do not get this right, it is the UK Government and the UK economy that stand to lose the most. We in the north-east of Scotland can proudly say that we have made an enormous contribution to the whole of the UK over the past 40 years, and the right decisions taken now can ensure that we will do that for the next 40 years. I hope that the Minister will understand that this is not just an opportunity for a local press release, but a serious debate where there is real and genuine concern within the industry that, if these issues are not addressed, a substantial amount of investment in the UK economy could be lost.

--- Later in debate ---

[Mr Doran]

My hon. Friend, while representing the well-known oil province of Harrow West, has done a huge amount of important work in this area. He makes a valuable point, and I will say a little about the problems in the drilling industry because it is the last area in the North sea with a frontier mentality. The rest of the industry has made great progress, but I am afraid that the drillers are still in John Wayne territory.

Most of the key economic points and very strong regional points have already been made by the right hon. Member for Gordon, but as this is an industry that both he and I have spent much of our parliamentary life working with, examining and considering, there are three crucial areas of infrastructure that I want to discuss: the kit that is in the North sea—the platforms, the pipelines, the wells and the vessels that service the industry—the people in the industry, because they are a key part of the infrastructure; and the Government at every level. I shall try not to duplicate any of the right hon. Gentleman’s points, but if I do, I hope that they will reinforce what he said.

As I said, we have a huge amount of infrastructure in the North sea. Most of it is ageing and needs to be carefully maintained, but that does not always happen. One of the key problems in the North sea oil and gas industry is the fact that the price of the product is based on worldwide prices and we have no control over it. I remember a time in the mid-1980s when the price dropped almost overnight from $32 a barrel to $8. The North sea industry was devastated. Virtually every job and every piece of investment stopped, and the price stayed low for quite a while. I have always put the fact that I was elected as a Labour MP in a constituency that had always, apart from one occasion in the 1960s, been a Conservative seat down to the fact that the then Government were being punished for that collapse in the oil prices. It had a huge impact, as some 50,000 jobs were lost overnight.

The problems continued into the late 1980s and early 1990s, and then we saw a price rise. In the late 1990s, however, there was another drop in the price. Recently, the price rocketed, going up to slightly more than $100 a barrel two or three years ago. We have now achieved a degree of stability—and tax stability, I hope—with the price standing at about $75 a barrel, which is good for the industry. The money should be in place to ensure that assets are properly maintained.

I raise that point because at certain points over the life of the industry—the last 40-odd years—there were times when the infrastructure was not properly maintained. The classic case is the Piper Alpha disaster, which had its 22nd anniversary last week. If we consider the history of the particular platform that led to the disaster, which was well spelled out in the Cullen report, it is quite clear that a lack of maintenance was one of the key issues. There was a whole host of issues including a water deluge system in which none of the valves worked because they had become clogged up with gunge, and a lack of a proper permit-to-work system. Once the people in the oil industry got over the shock that a disaster on that scale could happen on the platforms that they had built, they said that it could have happened to any one of at least a dozen platforms—many platforms were in the same condition. However, good things come out of every disaster, and the good thing in this case was that the Cullen report established a safety system that is now the template for safety in not just the oil and gas industry, but the rest of industry. It set a goal-setting system rather than a tick-box system, and we have made progress.

It is important to record that over the past four or five years, there have been some difficulties. I have spoken both in this Chamber and in the main Chamber about the KP3 report, which was an attempt by the Health and Safety Executive offshore division to look at the integrity of our assets in the North sea. The report found that the industry was wanting. It identified some very serious problems to which the industry was forced to respond. I will not go through the detail of the report now, as I have done so before and it is not necessary to do so again now, but it is important to record that the industry responded well, as the review that was carried out a couple of years later showed.

There are still difficulties, however. The HSE recently released figures showing that a significant number of enforcement notices were still being issued. A total of 446 safety regulations have been broken by more than 30 companies since 2006. Some of those breaches of safety regulations were minor, but I know that some were not so minor.

The period covered by those figures includes the period when the KP3 report was being put together. Nevertheless, we need to keep underlining and reinforcing the importance of the safety regime to ensure that the industry continues to maintain our assets in the North sea. The health and safety of the work force is crucial. We saw the devastating effect of the Piper Alpha disaster on not only the companies involved, but the whole industry. The same thing is now happening in the gulf of Mexico. There is nothing quite as expensive as an accident. It is extremely important that we remember that maintenance is cheap compared with the cost of an accident.

There are huge opportunities in the industry. The right hon. Member for Gordon rightly talked about the spin-off benefits for the renewables industry, and it is important that we recognise the value of those benefits. I do not think that a renewables industry on the scale that we need will be possible without strong Government support, so I hope that this Government will continue to give the support that was provided by the previous Government. The same goes for other sectors related to the North sea sector, such as carbon capture and storage. The production of a commercial working product in that sector will also require significant Government support.

In addition, we have the huge opportunity of the west of Shetland project—in fact, there is not one such project but a number of projects. Those projects will become much more feasible because of the support that was given through the tax system by the previous Government to the Laggan project, which I hope the current Government will continue. The pipeline that will be built as part of the project will be the key part of the infrastructure that will make many other projects possible, so it is important that Government support continues.

I want to move on to discuss the people involved in the industry. The work force in the North sea are highly skilled, but there are still huge skills shortages. The work force is also ageing. Although it took the industry a long time, it now has an established oil and gas training school: the offshore petroleum industry training organisation based in Portlethen, which is just south of Aberdeen. OPITO has probably become the benchmark for safety regimes, training and safety, and other related skills in the whole world. There is not an oil regime in the world with which OPITO is not involved. It sets safety standards and provides the support that is necessary for companies, particularly those operating in the more remote parts of the world such as the west of Africa and Asia, to have proper, modern safety systems, as well as other systems that support the industry.

We must remember that the North sea is a very dangerous area. While the right hon. Member for Gordon was speaking, I quickly drew up a list of disasters—and they were disasters—in the North sea: the Alexander Kielland disaster; the Piper Alpha disaster; the Ocean Odyssey disaster; the Brent Alpha disaster; and the helicopter disasters, including the Chinook disaster, the Cormorant disaster, the Morecambe bay helicopter crash and the Super Puma disaster in April 2009. They caused huge loss of life across the board.

Safety has improved immeasurably since the Piper Alpha disaster, however, and the industry has made a huge improvement in safety, including by working through its agency, Step Change. Recently, it has also recognised the importance of the work force.

[Malcolm Bruce]

Does the hon. Gentleman acknowledge that one of the reductions in safety has been due to greater automation of offshore activity? That greater automation has meant that more of the industry’s activity is supported onshore, but that has actually increased the pressure on the onshore infrastructure for the very same reason.

[Mr Doran]

The right hon. Gentleman is absolutely right. Nevertheless, there are many reasons for the improvements in safety that have occurred. I think that the most important reason has been the dramatic change in the industry’s attitude. We must constantly be vigilant, which is why we depend on the HSE. Its KP3 report was a wake-up call. The safety of working on platforms has certainly improved dramatically, although there are still issues about helicopters.

The oil and gas industry has realised the importance of engagement with the work force. A key part of the HSE’s review of the KP3 report was a careful examination of worker involvement in the North sea oil and gas industry, which involved working with both the industry and the unions.

A huge step forward was taken when the industry set up its helicopter task group to look at the Super Puma helicopter disaster 15 months ago. Three trade union officials from Aberdeen were involved in that task group, which examined a lot more than the accident itself. It looked at the causes of the accident, worked out what the problems were, reached conclusions and made recommendations. In addition, it looked at issues that had concerned people such as the right hon. Member for Gordon and me for years.

For example, there was concern about the lack of radar in the North sea oil and gas industry. When the Minister was about to make an offshore trip—I know that it was not his first such trip—I told him one of my scary stories about trying to get on to an oil platform in very thick fog in the middle of the North sea. It took us three attempts to get on to the platform. That was not the best experience of my life, but the people who work in the North sea have to make such trips every week when they go out to the platforms and then come back in. However, progress will be made, such as by providing radar and improving the lighting on platforms. The helicopter task group went much further than looking only at the Super Puma disaster and I think that everybody in the industry welcomed the report that it produced. In addition, the Oil Spill Prevention and Response Advisory Group has been set up to tackle the consequences for the North Sea, if there are any, of an oil spill similar to the one that is happening now in the gulf of Mexico. The trade unions are involved in OSPRAG, too.

The Minister cheered me up immensely two or three weeks ago after we had heard the statement from the Secretary of State for Energy and Climate Change on the oil spill in the gulf of Mexico and the action that he was taking in relation to the North sea. After that statement, the Minister said to me, “I’m going up to Aberdeen next week and I’d like to meet the trade unions.” I must say that after the 20-odd years—with a slight break in the middle—that I have been a Member of Parliament, a Conservative Minister saying such a thing shows that there has been a change everywhere. If this Government recognise the importance of the trade unions, particularly in the area of North sea safety, I welcome that wholeheartedly. I know that the Minister had a good meeting with trade union officials in Aberdeen.

The other key part of the infrastructure is the Government. I have seen a massive change in the Government’s approach to the industry. When I was first elected to Parliament in 1987, there was a Department of Energy, which was responsible for both production and safety. However, it was quite clear that the Department did not work, and I must say that we did not need the Piper Alpha disaster to tell us that, although it underlined the fact in spades. Of course, one of the key recommendations of Lord Cullen’s inquiry into the Piper Alpha disaster was that responsibility for checking safety should be passed to the HSE.

At that time, I was appointed to the Front Bench as part of the then shadow Energy team with responsibility for the oil and gas industry. I spent four years shadowing two Ministers: Peter Morrison and Colin Moynihan. Given that and subsequent experience, I have no doubt that the Government in those days saw the industry as a cash cow for raising money, which was one reason why the focus on safety was not as strong as it should have been.

When my party was elected to government in 1997, I do not think that the position changed—the attitude was the same. I remember many battles with Treasury Ministers in 1997 and 1998 when they were reviewing oil taxation and seriously considering increasing the tax on the oil industry. A windfall tax had been levied on the banks, which some of us cheered, and similar measures were being proposed for the oil industry. Those of us who were involved in that campaign recognised that the industry had gone through a sustained period of low prices and that increasing taxes would be the wrong thing to do.

Thankfully, the then Chancellor, who was one of the most dyed-in-the-wool proponents of the tax—I remember a difficult meeting with him—ultimately accepted that we were right, and a Government review decided that the tax regime should not be changed. The tax was increased when prices improved and again, if I remember correctly, during the next Parliament. However, the industry’s position was much more secure by that time, and it was recognised during the 1990s that taking money out of the North sea was wrong.

One result of that, as the right hon. Member for Gordon mentioned, was that the Revenue became more involved in the oil industry task group pilot. That was a fundamental change, because at the time the Treasury saw itself as completely separate from the industry. It had some knowledge of how the industry operated, but did not concern itself with the day-to-day stuff. Sending an observer from Her Majesty’s Revenue and Customs to the pilot meetings fundamentally changed the Government’s attitude to the oil and gas industry. It is now accepted that it is crucial to encourage inward investment in the North sea and to consider how the oil companies spend their money. The right hon. Gentleman rightly discussed the significant sums that will, we hope, be invested this year and next year in the North sea, and the revenue benefit to the Government as a result of that investment.

It is crucial that we continue to bring in new blood. The right hon. Gentleman mentioned Apache, which had never been in the North sea, having concentrated mainly on America and the middle east. Apache came over and bought the massive Forties field. It made it work and is now a major player. When BP was not prepared to invest any more, Apache made things work.

Another crucial thing that the previous Government did was to improve tax reliefs for new entrants to drilling. Before that, drilling, exploration and appraisal costs were allowable only against previous profits. If a company had no previous profits because it had not been in the North sea, it got no tax relief.

I hope that the important changes that have been made, mainly in the past 10 years, will be carried forward by this Government. It is important that we continue to encourage investment in infrastructure and in new fields, although they tend to be smaller. We must also ensure that we encourage new entrants to the North sea, and the tax regime is fundamental in that respect.

I will briefly raise two burning issues that do not get a lot of attention. The first is that we still have a skills problem. A major factor is that we depend hugely on immigrant labour in the North sea. In the main, such immigrants are highly skilled. Two or three years ago, I spoke to a major company that had brought 1,500 skilled engineers over from the Philippines. They had not come as cheap labour; they were essential to the company’s summer maintenance programme. Agreements were reached with the union to pay them the rate for the job, and after it was completed, they went back to the Philippines to do their normal jobs. However, I am hearing about more and more problems in my surgery, although they have nothing to do with the new Government as they have been building up for some years. The smaller companies in the supply chain are finding it particularly difficult to bring people in, while the universities have the same problem. Two universities now operate worldwide to bring in students, particularly from Africa—the students take a first degree in Nigeria or Ghana and then come to Aberdeen to do their master’s degree—but now even Government-sponsored students are finding it difficult to enter the country. That is a serious problem.

Finally—I have probably spoken for a lot longer than I should have—although the Department of Energy and Climate Change is now responsible for the energy industry, who looks after the oil and gas industry as a business? There is a sense in the industry that it has been abandoned by the Department for Business, Innovation and Skills, previously the Department of Trade and Industry, and that the Government are no longer focusing on the industry as a business. Will the Minister say a little about that that important issue, which relates to not the industry’s place in the energy industry, but its status as a business like any other?

--- Later in debate ---

[The Minister of State, Department of Energy and Climate Change (Charles Hendry)]

It is a pleasure to serve under your chairmanship this morning, Mr Hancock. We have had an extremely valuable debate. I congratulate my right hon. Friend the Member for Gordon (Malcolm Bruce) on securing it, raising a wide range of issues and bringing his expertise to the debate. The hon. Member for Aberdeen North (Mr Doran) also brought his expertise to the discussion. I hope that I can give further reassurance and encouragement to them that this is not a partisan issue. I want to work on the subject using the relevant expertise wherever it is found—on both sides of the House and all sides of the industry—to ensure that we can achieve the best possible outcome for this crucial sector of our economy.

My right hon. Friend has rightly understood my reaction to some of his points, particularly those about Scottish infrastructure issues. He will know from the respect agenda that we are committed to working closely with the Scottish Government and Executive to ensure that we do not seek to influence their decisions on those issues, which are devolved. I also reassure him that we are very keen indeed to have a holistic approach to those matters. I have already had an initial discussion with the First Minister and I hope to have a further conversation with him in the next few weeks about how we can most constructively work together in those areas.

That is what the industry is looking for: a seamless Government approach across Departments and different bodies. We will try to ensure that we bring the best endeavours and approach that we possibly can to securing further investment in the sector. From my time as Opposition spokesman on these matters, I hope I have managed to gain some understanding of the issues facing the industry. I assure hon. Members again that I intend to be a regular visitor to Aberdeen. If my right hon. Friend or any of his hon. colleagues feel at any point that I am not talking to the right sections of the industry, I ask him to let me know. I want to ensure that I have as comprehensive a grasp as possible of the issues involved and, as I say, I want to work constructively with those who have great expertise from working in this area.

In initiating the debate, my right hon. Friend spoke about how crucial the sector is to the whole of the UK economy. Although indigenous production is declining, our oil and gas reserves remain a key element of our energy mix. On the reassurance that the hon. Member for Aberdeen North was looking for, there are a number of key pillars of energy policy without which we cannot have energy security—for example, the commitment to the North sea and the development of the UK continental shelf. Nuclear without subsidy is also in that mix, as are coal with carbon capture and renewables.

All those factors are part of a balanced energy policy. I certainly hope to reassure my right hon. Friend that there is every intention of identifying the issues that will help to drive forward investment in the North sea. We will do what is necessary to bring the skills and investment to Britain, because I am very much aware that the companies that are looking to invest are overwhelmingly international. When they consider international opportunities, there is no predisposition for them to come to the United Kingdom. We have to make the strongest possible case for why they should come here instead of taking the many other opportunities that exist around the world.

As my right hon. Friend said, 350,000 jobs in the UK depend on the industry, and a further 100,000 in the supply chain’s thriving export business, with an annual expenditure of about £12 billion. The industry, therefore, makes an extraordinary contribution to the economy. We see no dilemma, however, in the absolute necessity of moving to a low-carbon economy and the desire to get the best out of our indigenous hydrocarbon reserves. That is essential to our energy security and our national prosperity, and particularly to the prosperity of the north-east of Scotland. We will, therefore, work closely with the industry to see what is necessary to encourage further investment in exploration, development and production, while maintaining high standards of management and minimising environmental impacts.

Over recent years, an important role has been played by PILOT, the organisation set up to maintain the dialogue between Government and industry in this area. It has put in place many initiatives to help us to extend the life of the basin, and has significantly contributed to the security of the UK’s energy supply and balance of payments, but we are now looking at how to take that relationship forward. I want to look more at a road map for the future, rather than at setting targets. I am nervous about targets because they tend to be set sufficiently far ahead that nobody is accountable for how they are delivered. I would therefore rather have a more specific road map for what we are jointly expected to do as industry and Government, to try to make this an attractive environment.

I am also keen to broaden involvement in PILOT, to include people from all aspects of the industry. The hon. Member for Aberdeen North talked about the subsea sector, which is an absolutely critical part of the Aberdeen and north-east Scotland economy and an absolutely wonderful example of British engineering and skills providing incredible global leadership in many of these areas. I want to ensure, therefore, that PILOT contains the full range of expertise that is there, and I am also considering how we can increase the regularity of the meetings. As they are currently six months apart, I have a slight tendency to think that there can be a gap before too much is done, and a panic before the next meeting. I want to get a rather more established flow of activity. The guiding principle has to be trying to remove barriers to investment. Where we see barriers to investment, we—with the industry and my parliamentary colleagues—will actively try to remove those barriers, to make this a very attractive place in which to invest.

Many things were done under the previous Government, and historically, to make this an attractive area. We have flexibility in our licensing system to attract the widest possible range of players. The hon. Member for Islington South and Finsbury (Emily Thornberry) asked about the commitment that we made about licensing in our manifesto. That was nothing to do with safety issues. It responded to a concern within the industry about how long the licensing process takes, and considers whether there are ways, taking account of the safety and environmental issues, in which we can tell investors rather more rapidly than at present what the outcome of each licensing regime will be. It is certainly encouraging that the latest round received the greatest number of applications since the first round in 1964, and we hope to be in a position to award licences later this year.

The fallow initiative, put in place by the Department of Energy and Climate Change, continues to encourage companies that are not actively working on blocks or licences to relinquish them so that other companies can be given opportunities to exploit them. To ensure maximum production efficiency from North sea fields, the Department has a stewardship process, which is an annual review in which DECC works with the fields’ owners and looks at individual field performance with the aim of maximising economic recovery and enhancing production levels wherever possible.

We are also considering the whole issue of infrastructure, which has come through very strongly in the contributions to the debate. It is a key part of the coalition agreement. We want to work to improve on that, and we have said that we will consider legislating in that area. I would always prefer that we work through voluntary agreements wherever we can, but we have to recognise that the voluntary agreements in this area involve one party that has overwhelming strength because it owns the infrastructure and essentially has a monopolistic position, and a much smaller company that wishes to have access. We therefore need to find a better way of making that voluntary arrangement work, as I think it often does in other countries, or we will consider taking extra powers to deliver the greater access to the infrastructure that we think will be necessary.

It is absolutely clear that many of the fields now being looked at are more marginal ones, and therefore we will not necessarily be able to attract the huge international oil companies but rather smaller specialist companies, which nevertheless have fantastic records of technological expertise and safety. We therefore have to ensure that the regime is appropriate for those smaller companies.

Several questions have been asked about the fiscal situation. As my right hon. Friend the Member for Gordon will be aware, those are always matters for the Treasury, which rightly guards its leadership on such issues very carefully. I can certainly tell him, however, that there have already between discussions between the Prime Minister, the Chancellor and the Scottish Executive about the fossil fuel levy. We understand the requests that there should be a higher ability to draw down funding from that levy and the Treasury is considering the issues with an open mind.

[Malcolm Bruce]

Allowing for the respect agenda, does the Minister not agree that it would be beneficial, before any agreement were concluded, to have a clear understanding, at least in broad terms, of how the money was likely to be used? To put it at its crudest, the purpose would not be fulfilled if the money were simply to disappear into the block and not benefit the support for the offshore renewables industry in the north-east of Scotland.

[Charles Hendry]

My understanding is that that is the case that has been put to the Treasury by the Scottish Executive, and that they want access to more of that funding to facilitate such investment. Clearly, these are details that have to be sorted out, but I am very encouraged indeed that the Treasury is keen to approach that with an open mind.