Oil and Gas: Subsidies and Licensing

Lord Lilley Excerpts

Thursday 20th January 2022 Grand Committee

[Lord Lilley (Con)]

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

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

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

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

[Baroness Worthington (CB)]

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

[Lord Lilley (Con)]

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

[Baroness Worthington (CB)]

I am saying the wrong thing?

[Lord Lilley (Con)]

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

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

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

[Baroness Sheehan (LD)]

I want to ask the noble Lord something before he sits down. I bow to his greater understanding of the finances behind pricing of oil. Maybe he can explain why, in 2019, for each barrel of oil the UK received so much less—$1.72 in tax—than Norway’s more than $21 per barrel of oil. On the supply and demand side, would he not say that it is not one or the other? We need to do both if we are to get to net zero in the timeframes that we have set ourselves.

[Lord Lilley (Con)]

I have not looked at the profitability per barrel and the tax paid per barrel, but I used to do that every day 40 years ago. I assume that it is because our fields are now running down, whereas the Norwegian fields are still far from fully mature. As far as I know, Norway’s tax regime is not hugely different from our own; it was not then. On the question of whether we have to restrict supply as well as restricting demand, no, we do not. If you reduce demand and anyone has supply available and no market for it, they lose money—that is their problem—but if you reduce supply without reducing demand, you raise prices, increase profits to the industry and increase costs to ordinary households.

[Baroness Jones of Moulsecoomb (GP)]

Before the noble Lord sits down, can I ask him how he thinks demand could be reduced?

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[Lord Lilley (Con)]

You could do all sorts of things to reduce demand for oil and gas—requiring people to spend thousands of pounds on shifting from gas to electric heat pumps, that sort of thing. The noble Baroness knows the answer to her own question.

[Baroness Jones of Moulsecoomb (GP)]

Except—

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[Lord Oates (LD)]

My Lords, I apologise to the noble Baroness, Lady Boycott, for stepping in. I welcome the noble Lord, Lord Offord, to his place and look forward to his maiden speech. I cannot help noting, although I am very pleased we heard his point of view, that the noble Lord, Lord Lilley, was allowed to speak having arrived about three minutes late, when only recently in a debate on the nuclear industry, the noble Baroness, Lady Bennett of Manor Castle, was refused the opportunity to speak despite arriving at almost exactly the same time. There cannot be one rule for members of the governing party and another for members of the Opposition. I hope the Government Whips will take note of that. However, I am glad we heard from the noble Lord.

The urgent need for the North Sea industry is not further subsidies or contradictory policy-making by a Government who on the one hand say that they are in favour of net zero and on the other continue to endorse the maximum economic recovery policy. The urgent need for the North Sea industry is transition. If there are tax breaks and subsidies, they must be directed at transitioning that skilled workforce out of the oil and gas industry, because that fossil fuel industry is coming to an end. That is what will happen. It is the reality, and those who think they are standing up for workers in the industry by backing further drilling are simply sending people down a blind alley.

As I mentioned during debate on the Financial Services Bill, the last part of my title—Lord Oates of Denby Grange—is taken from a colliery in Yorkshire where my grandfather and uncles all worked as coal miners. I have great respect for the people who work in the fossil fuel industry; they powered our industry and heated our homes, often working in very dangerous circumstances. However, we know what happened to the coal industry: it came to a dead stop. There was no proper transition and, as a result, communities were stranded and suffered massive social and economic deprivation that remains to this day.

Let us not pretend we are doing any favours if we go down this maximum economic recovery route and keep going until the dead stop happens. It will happen; as the International Energy Agency has stated, we cannot burn all the reserves we have already identified if we are to have any hope of keeping to 1.5 degrees. We cannot do it. The argument of the noble Lord, Lord Lilley, is that we have this stuff so let us burn it. If everybody else takes the same view, we will get nowhere near even 2 degrees but go far beyond it. That is not a problem for the noble Lord, because these things do not matter to him. He thinks the whole net-zero thing is ridiculous and absurd, and he calls anyone who stands against that an eco-fanatic. But, for those of us who care about it, there must be a logical policy.

The Government have set ambitious targets for net zero which the Liberal Democrats welcome. However, it is no good having those targets if your policy tools contradict them. Maximum economic recovery in the North Sea, and the tax subsidies, absolutely do that. The noble Lord, Lord Lilley, said that the reserves in the North Sea should be used for the benefit of the people. The benefit of the people would be to keep those reserves where they are, not to burn them. It would certainly be to the benefit of future generations.

[Lord Lilley (Con)]

How long—or how shortly—does the noble Lord think it will be before we cease to use gas, both to heat homes and as the natural source of power to deal with the intermittency from renewables? Most people think we will still be using it in 30 years’ time.

[Lord Oates (LD)]

We have to transition away from using it by 2050, or at least without abatement of it. Exploiting the North Sea resources when we are trying to lead the world is not going to work. It is rank hypocrisy, and it is deeply damaging.

Let me just pick up on the point that the noble Baroness, Lady Boycott, made about energy costs. It is a complete fallacy that the way to reduce energy costs is by scrapping all the green levies, as the GWPF and other people want to do. If you look at what happened to energy costs between 2010 and 2020, in terms of the bills that people paid, you see that total household expenditure on energy fell. It did not rise. One of the reasons it fell was because the levies funded insulation of properties and measures to reduce consumption. Consumption of gas and electricity fell significantly during that time. In fact, the eco levies save people money.

I understand the position of the noble Lord, Lord Lilley, of not worrying about net zero. I do not understand the Government’s position, because they claim to worry about net zero but take actions that show the exact opposite.

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[The Parliamentary Under-Secretary of State, Scotland Office (Lord Offord of Garvel) (Con) (Maiden Speech)]

My Lords, it is a great honour to be here to make the final contribution to this short debate today. As a newly appointed Parliamentary Under-Secretary of State for Scotland, here I am making my maiden speech in this House.

Allow me to start by thanking noble Lords for the great welcome you have given me in this place, my supporters—my noble friends Lord Kirkham and Lord Forsyth of Drumlean—Black Rod, the Clerk and, especially, the doorkeepers, who look with great amusement at me as I wander around the place in circles. I should also give special thanks to my mentor and noble friend Lord Leigh of Hurley, and to my Whip and noble friend Lord Younger of Leckie, for sharing their invaluable knowledge of the workings of your Lordships’ House. We have an important debate to discuss this afternoon, but just before I do, I think it is customary on these occasions to spend a little moment on some personal matters, so let me get those out of the way now.

I was born in a modest but homely tenement at 33 Bank Street in Greenock, an industrial town west of Glasgow on the Firth of Clyde. I was educated at my local schools, Ardgowan Primary and Greenock Academy, and I got a first-class education for free. I am not the first alumnus of that school to be associated with this House; my noble friend Lady Goldie of Bishopton was a distinguished head girl of Greenock Academy, as indeed was the wife of my noble friend Lord Leigh of Hurley. I was dismayed when my old school was closed in 2011, having been founded in 1855. It was determined by the local council that, with Inverclyde depopulating post industrialisation, the schools needed to go down from eight to six, and it was decided that it conferred too great an advantage on the students who went to that school to study there, so it was closed. Surely that is an egregious example of levelling down in Scotland, and it was a personal motivator for me in joining this Government to support the levelling-up agenda.

So, why Lord Offord of Garvel? If you walk down Bank Street, where I was born, past the Wellpark to my local parish church, the mighty Mid Kirk, and cross the road past the magnificent Georgian Custom House on the Clyde, and then turn right along the river, you will come to Garvel Point. Garvel has long been a landmark in Greenock because it is where the deep water is located, and it was originally a safe harbour for the fishing fleets before the first industrial revolution transformed the town into a thriving trading port and shipbuilding hub. Greenock’s most famous son is the inventor and engineer James Watt, and the dock which bears his name today remains in use at Garvel Point. In fact, two of the three dry docks on the Clyde were located at Garvel, and a recent renovation project has repurposed one into the award-winning Beacon theatre.

That brings me neatly to the Question before the Committee today. One of my first ministerial duties was to participate in COP 26 in Glasgow—how fitting that the world came back to the Clyde to seek new solutions to this climate emergency. What a tremendous achievement of the UK’s two-year presidency it was to increase the global commitment to net zero from 30% to 90% of world emissions. Some say that the UK has a limited role to play in climate change as we account for only 1% of world emissions. Yet COP 26 proves that our leadership still counts, because we can demonstrate that it is possible simultaneously to grow our economy while cutting our emissions.

This is what I learned at COP 26: we have the capital, the brains and the political will to meet the climate challenge. Participating in the Net Zero Technology Centre forum—funded by the Aberdeen City Region Deal—I was so encouraged to hear technologists from the oil and gas sector in Aberdeen collaborating with Houston, Calgary, Perth and Canberra as they repurposed their assets and people into low-carbon energy sources.

How gratifying it is that Scotland has such a prominent and world-leading role to play in rebalancing the UK’s energy programme to net zero by 2050. We have all the natural resources and the existing infrastructure, plus the scientists, engineers and skilled workforce required to build a balanced scorecard in energy. Scotland contributes 60% of UK wind and 40% of the 160,000 highly skilled jobs already working in energy across the UK. This is called punching above our weight in a UK where we contribute just 8% of the population but 33% of the geography.

However, we must remember that a key word in this climate debate, already mentioned by the noble Lord, Lord Oates, is “transition”, and that it is to net zero, not to zero carbon. Some 35% of our energy needs in 2050 will still come from carbon; today it is 75%, so that will be a massive reduction—more than halved. It would be foolhardy and irresponsible to ditch our world-class oil and gas sector in the North Sea to increase our carbon footprint by importing, whether from Russia—bad—or Qatar: good.

The North Sea Transition Deal is an exemplar in the G7 of a domestic oil and gas industry working in partnership with government to ensure that net zero is met by 2050. The noble Baroness asked what milestones we have along the way. By 2030, the cash flow generated in oil and gas will contribute £15 billion of long-term investment into new energy technologies. On the transition of jobs, by 2030 the UK offshore energy sector in total will increase from 160,000 to 200,000 jobs, of which two-thirds will be in low-carbon energy sources.

One of my new responsibilities is the North Sea Transition Deal, and in the last forum we had there were presentations from oil and gas companies, talking about how their target for 2025 is 50:50 investment of capex and renewables to get a return on capital in the region of 12%. Speaking as a businessman, I asked what percentage return on capital you get on each side of the scorecard. There was a certain amount of silence, because it emerged that renewables on their own do not return on capital at this point. Therefore, it is essential for the cash flow made in oil and gas to be reinvested to produce renewables. We will get transition to renewables only if it is a managed transition, using cash flow from carbon as it reduces to invest in renewables. That is absolutely essential. The two go hand in hand; you cannot have one without the other.

I will directly answer some of the questions posed in this debate, turning first to the noble Baroness, Lady Jones. I must say, this is a baptism of fire. I do not recognise the country she mentioned as corrupt. Maybe if I am here long enough that will emerge for me, but I do not recognise that to be the case where we are today. The financing of parties seems to be a whole new debate and perhaps can be done another time. I am on the record as saying that parties should not be financed by taxpayers. However they are financed, as long as it is transparent and legal I suggest that it is fine, but perhaps we should park that for another debate at another time.

The key thing that has come through here is the use of language and the fact that the word “subsidy” is so misused. My noble friend Lord Lilley made it very clear that as a matter of business practice, whichever industry you are in, it is entirely legitimate to off-set costs against revenues. In this sector, because the lead times are so long there is quite often a mismatch, and therefore money flows back and forwards. Since the oil and gas industry began in this country, total tax revenues of £360 billion have been received, and £33 billion in the last 10 years alone, but along the way you will see ebb and flow: money in, money back.

Tax relief is a normal part of the corporate tax system. Genuine costs and injuries such as the safe removal of infrastructure at the end of a field’s life are not a subsidy but a tax deduction and quite often, in certain cases, money flows back to the Treasury. Therefore, it is just inaccurate—perhaps self-serving—to use an emotive word such as “subsidy” when something is regulated by our own accountancy businesses, as is the case for all sectors. I push back firmly on the idea that we subsidise. We are against subsidies in this country and generally want to have free trade.

As I said before, on the point raised by the noble Baroness, Lady Worthington, it is essential that we transition jobs to renewables if we are to have two-thirds of jobs in low-carbon renewables. We have discovered from a study at Robert Gordon University that the onshore and offshore skills we currently have in carbon are absolutely essential to the new world. For example, when it comes to carbon storage, floating oil fields, et cetera, we currently have very transferable skills in the oil and gas industry and will transition them into renewables.

The noble Lord, Lord Oates, talked about his heritage in coal mining. We know exactly how that feels in Scotland; 40 years ago we closed the mines and started importing coal. What on earth is the point of that? Are we really going to make the same mistake again 40 years later, when we have a vibrant industry with 160,000 workers?

We are talking about a new Britain here, are we not? This is a new global Britain—a high-production, high-wage economy, with highly skilled jobs. This is an exemplar of highly skilled jobs in this country that we should be very proud of. Certainly, from a Scottish perspective, this is our second biggest industry, after fisheries, food and drink. It is one of our five exemplars in the UK, and we need to protect it.

Before I come to the end of my piece, the answer to the Question—for Hansard—is that the Government do not give subsidies to fossil fuel companies. The licences are awarded by an independent regulator, the Oil and Gas Authority, within the framework of achieving net zero. In fact, on Tuesday the High Court dismissed a case brought by climate activists that the regulator was giving unlawful subsidies.

The OGA is an independent regulator. Its staff are classified as public servants and are subject to rigorous standards and codes. Therefore I would say that the oil and gas industry is subject to a robust, multilayered regulatory system, which is independent and transparent, and there is no

“undue influence from outside interests”.

In closing this debate, let me be quite clear that the Government do not believe that decarbonising our economy means shutting the oil and gas industry, as has been said in this Room. We certainly do not believe in demonising a world-leading industry with the sort of intemperate language used by Patrick Harvie, Green Minister in the Scottish Government, who recently said that only those on the “hard right” would support oil and gas extraction. What an insult to the 160,000 workers in this vital sector. A broad range of stakeholders, from entrepreneur Sir Ian Wood to the GMB trade union, have warned politicians against creating an adverse investment environment for this vital sector. There is nothing just or fair about that, and it would set us back on the road to net zero.

[Lord Lilley (Con)]

May I intervene, on behalf of the Committee, to congratulate the Minister on his maiden speech? It was an eloquent, fascinating account of his background. His is a welcome Scottish voice in this House, and he will bring his experience of developing industries and business to our debates. We look forward eagerly to hearing his future contributions to our debates.

[Lord Offord of Garvel (Con)]

I thank the noble Lord for those kind words.