Offshore Energy Industry

Debate between Lord Bruce of Bennachie and Charles Hendry

Tuesday 13th July 2010 Westminster Hall

[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 ---

[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.