North Sea Oil and Gas (Employment)

Debate between Lord Bruce of Bennachie and Frank Doran

Tuesday 20th January 2015 Westminster Hall

[Mr Frank Doran]

(Aberdeen North) (Lab): It is a pleasure to operate under your chairmanship, Mr Streeter. We are here to discuss United Kingdom oil and gas, which is in severe difficulties, partly because of a substantial drop in the world oil price. In these debates, it is always important to get the facts right. One key thing about the industry is just how important a part it plays in the UK economy. According to Oil & Gas UK, the industry body, the industry supplies 73% of the UK’s primary energy: oil for transport and gas for heating. The UK balance of payments benefited from oil and gas to the tune of £30 billion last year. The oil and gas supply chain achieved sales of £20 billion outside the UK. The total expenditure in services and infrastructure investment from oil and gas companies in 2013 was £20 billion. Since 1970, the industry has invested £500 billion.

In recent years, the expenditure has been particularly high. In 2014, the industry invested around £14 billion of capital investment in UK oil infrastructure, following on from investment of £11.4 billion in 2012 and £13.5 billion in 2013. Across the industry there is a total committed expenditure—that is, projected future expenditure—on projects in production or under development totalling £44 billion. Figures like these have not been seen since the 1980s. They are massive figures: there is no question about that.

The industry claims to support 450,000 jobs in the UK. These break down as follows: 36,000 employed directly by offshore operators; 200,000 in the supply chain, providing goods and services to the industry; 112,000 jobs in services such as hospitality, taxis, and so on; and 100,000 jobs in the export of goods and services. It is difficult to visit any foreign oil base or complex without hearing a Scottish or English accent. We are operating throughout the world.

Many of these jobs are now under threat because of the collapse of the oil price. Major companies—Shell, Chevron and, last week, BP—have announced redundancies. Some of these have been expected for some time and were part of company restructuring as well as the downturn in the oil price. More announcements are inevitable.

I can find no reliable figures showing the numbers so far made unemployed, but I know from union sources, for example, that roughly 600 people have been made redundant in companies where there are recognition agreements. However, most cuts are likely to be made to the self-employed, who comprise a large number of offshore and onshore employees; they are the easiest and cheapest to remove. At the moment it is estimated that there will be around 2,000 job losses in total. I think that is a fairly realistic projection.

How things will proceed from here on is difficult to judge at the moment. Many jobs lost so far have been lost onshore and it may take time before large numbers of offshore jobs are put at risk. Everyone will be mindful of the need to retain skills for when the upturn arrives, whenever that might be.

In the history of the North sea oil and gas industry there have been at least three serious downturns. The worst and most damaging was the downturn in the mid-1980s, when 20,000 jobs were lost in Scotland, most of them in Aberdeen and the north-east. Some 50,000 jobs were lost in the whole country. The fact that the job losses were higher in the rest of the UK than in Scotland reflects the fact that, although the industry is centred in Aberdeen, the supply chain and the work force is spread throughout the UK.

There is a risk that this year’s downturn could be as serious as the one in the 1980s, but I think it is possible to take steps to mitigate that. In the first place, the industry has changed substantially from the industry we had in the 1980s. For example, it is much more widely spread with fewer of the majors involved. I believe that with the right sort of focused support from Government and the industry, this very difficult time will not develop into the tragedy that we saw in the 1980s. Of course, there is very little we can do about the global price of oil, but we can look at the other issues that have faced the industry for some time now and consider how we can soften the blow and minimise damage.

Exploitable oil and gas are proving harder to find, and discoveries that are made are often in places that are difficult and expensive to exploit, particularly if there are issues around access to infrastructure. Some of these problems will be addressed when the recommendations of the Wood report are fully implemented, but that is likely to be some time away, although there are moves to accelerate the process.

Then there is the skills shortage. Until relatively recently, few companies offered apprenticeships in technical skills. In the 1970s and ‘80s, the industry attracted engineers, welders, boilermakers and others from the collapsing smokestack industries: mining and shipbuilding, and so on. That supply has been exhausted and the work force are ageing. Trainee and apprenticeship programmes have been introduced in recent years, but those take time to make an impact. In the meantime, labour costs have risen enormously and companies have poached skilled staff from each other, driving wages to high levels. With my trade union background, I am the last person to complain about that, but it has a serious impact on costs offshore.

Oil & Gas UK says that contracting prices have doubled since 2010. One executive from a major company told me recently that the cost of scaffolding alone—there are 6,500 workers working on scaffolding in the North sea—has tripled in the last two years. It is obvious that a slice of the money that previously would have been spent on research and development, exploration and appraisal, which are all things to take the industry forward into the future, has been diverted into meeting these wage costs.

[Sir Malcolm Bruce (Gordon) (LD)]

I congratulate the hon. Gentleman on securing this timely debate. He is making some important points. Does he agree that if we—the industry and the Government—get this right, and indeed make the industry more efficient, as and when the recovery happens we will be much more competitive than we have been? The point he is making is that we have been in danger of pricing ourselves out of the business.

Finance (No. 3) Bill

Debate between Lord Bruce of Bennachie and Frank Doran

Monday 4th July 2011 Commons Chamber

[Malcolm Bruce (Gordon) (LD)]

I shall speak briefly to amendment 51. Since the Government announced the additional corporation tax on oil companies in the Budget, I have been urging and, I hope, taking a constructive part in getting the companies and the Government to talk through how field allowances can be used to ensure that projects reviewed as a result of the tax changes can still go ahead. The purpose of the amendment is to get feedback from the Government on the progress of such negotiations, which I hope will have a positive outcome. Immediately after the Budget, Statoil made the most controversial, and certainly the most high-profile, announcement: that it was putting on hold the Mariner and Bressay fields. I imagine that those fields involve up to £6 billion of investment, with 600,000 barrels of oil recoverable and the possibility of a headquarters building being located in Aberdeen. I hope that the Government will find a way to ensure that the project goes ahead.

Next week, my hon. Friend the Member for West Aberdeenshire and Kincardine (Sir Robert Smith) and I are taking a number of oil companies that are members of Oil & Gas UK to meet the Secretary of State for Energy and Climate Change to discuss in detail the implications of the tax. The difficulty is that the tax changes impact differently on every field and on every company and its planned investments. I hope that active negotiations will lead to a recognition that allowances can be adjusted for particular types of field or circumstances, and that as a net result we will not lose too many of the investments that were originally at risk. I also hope that engagement over time will lead to both parties agreeing that a simplification of the tax system might be desirable. When prices are high, the industry might reasonably be expected to make a contribution; equally, we should recognise its need to know with some certainly the return that it is likely to get on significant investments.

The hon. Member for Hayes and Harlington (John McDonnell) made a powerful and persuasive case regarding rewards for work not done or risk not taken, but it is easy to look at the oil companies as rich fat cats, which is how the public and the House often view them. However, developing oil from under the North sea involves huge risks in relation to technology, geology, exchange rates, markets and weather. Many people engaged in the industry use their technical knowledge and expertise to make a substantial return for their companies and for the UK economy, and although they have good, well-paid jobs, the payments and returns they receive are not in the same league as those received by people in financial services.

The Government have acknowledged that they do not want to lose the production from marginal and mature fields, and they are prepared to use field allowances. According to conversations I have had, negotiating in detail over a project for a field is incredibly complicated, requiring an enormous amount of civil service time, expertise and engagement, as well as executive management time, so I hope that the system will be simplified. Perhaps everybody is prepared to devote such time to significant projects, but the Department has a limited capacity to engage in too many of those negotiations, and companies sometimes have a limited capacity and willingness to engage, to the extent they might say that investigating or investing in other projects is more worth while.

I want to be encouraged by the knowledge that constructive engagement is taking place. I get good feedback from the industry about talks that it hopes and believes will lead to agreements that ensure that investments go ahead. In the long run, I hope that we will have a system in which there is trust and understanding and the Government get the revenue from high oil prices to which they are entitled, but the country gets the investment in the expertise, people and resources that will maximise production of oil and gas in the North sea, maximise jobs in the UK, and maximise and sustain the export industry, which is growing substantially. I hope that the Government will give a positive response in due course.

[Mr Frank Doran (Aberdeen North) (Lab)]

I support amendment 51, tabled by the right hon. Member for Gordon (Malcolm Bruce). As neighbours, we share the same interest in the oil and gas industry and know full well its importance not just to the north-east of Scotland but to the whole United Kingdom. One of our disappointments about the imposition of the tax is that the Government seemed not fully to understand the industry and its importance, which I hope they understand now.

Like the right hon. Gentleman, I am pleased to hear from my contact with the industry that discussions are under way, with the possibility of improvements to field allowances. If the Government had thought the tax through properly, they would have already prepared the ground for field allowances to mitigate the damage done to the industry. It is not possible to overstate that damage. A huge blow was dealt to confidence, not just because the industry had been involved in regular discussions with the previous Labour Government and the current Government about a review of the tax system to deal with a host of areas that had been remained untouched over the years, but because of how that was done. It seems from all the available information that the politicians had no contact or discussions even with tax experts in the Treasury. This was a purely political decision that did not arise from the review, from consultation, or from any wider consideration than the need to raise money.

Offshore Energy Industry

Debate between Lord Bruce of Bennachie and Frank Doran

Tuesday 13th July 2010 Westminster Hall

[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?