Onshore Oil and Gas

Angela Smith Excerpts

Tuesday 26th January 2016 Westminster Hall

[Angela Smith (Penistone and Stocksbridge) (Lab)]

As always, it is a pleasure to serve under your chairmanship, Mr Howarth. I congratulate the hon. Member for Thirsk and Malton (Kevin Hollinrake) on securing this important debate on the role that manufacturing can play in the unconventional gas extraction industry.

This is not really a debate about whether the UK should develop a shale gas capability. The House has rightly focused on the need for a robust regulatory framework for such an industry, and it will no doubt continue to debate such important issues, but this morning’s debate is much more pragmatic. The question before us is clear: if the shale gas industry is going to develop within the clear regulatory framework agreed by the House, how do we best ensure that UK manufacturing can exploit to the maximum the supply-chain opportunities made available by that nascent industry? That pragmatic point is what is important to people up and down the country who have traditionally depended on manufacturing jobs to maintain their prosperity, living standards and family life. At its heart, this is about a debate that understands the importance of manufacturing to the UK economy.

In the US, which has had a shale gas industry for some time, one of the biggest winners has been the chemicals industry. Shale gas production in the US has seen feedstock costs reduce significantly, giving the chemicals sector a major competitive advantage over manufacturers in the EU and Asia. Shale gas ethane from the US is much cheaper than that from the EU, which is produced from naphtha, a refined form of crude oil. Cheaper energy, combined with cheaper feedstock, has kick-started investment in the US chemicals industry, attracting $138 billion of investment so far and funding 225 new projects.

In the UK, the chemicals industry is already a major exporter, with about £25 billion of exports. Yearly, it adds almost £9 billion to the UK’s GDP, as well as underpinning much of the manufacturing sector, including steel. In terms of competition, the chemicals sector could benefit greatly from a new source of domestic feedstock. It would benefit from lowers costs and, importantly, from shorter, more secure supply lines.

There should also be opportunities for many UK-based manufacturers in other sectors to supply an emerging shale gas industry. A report by Ernst and Young estimates that more than 39,000 indirect jobs could be created by UK shale gas extraction. It also suggests that the total spend involved in bringing UK shale wells into production would be £33 billion by 2032, which would include £17 billion on specialised equipment, such as high-pressure pumps and mixers. I note with interest that EEF has said that, although the majority of pumps are currently manufactured outside the UK, with some assembly done here, there is significant potential to increase UK production. However, if UK manufacturing is to benefit, it will be necessary to build the case for investment in those things, and that is my first ask to the Minister.

This is, however, not just about pumps; it is also about the sand that will be required for the fracking process. That will come from existing quarries and could generate a £2 billion spend in the UK from 2016 to 2032. This is also about the cement, for which there could be a nearly £1 billion market, and that cement could come from the UK’s four cement manufacturers. We cannot afford to dismiss that potential.

For me, as a south Yorkshire MP, however, the most exciting prospect lies in the opportunities the shale gas industry could create for steel manufacturing. Steel is in crisis. A global slump in demand, contractions in the oil and gas industry and the dumping of cheap, subsidised steel on global markets by the Chinese have combined with high energy costs and unsustainable business rates to create a debilitating sense of volatility in the industry. I acknowledge entirely that the industry must respond positively to the challenges it faces, but if UK steel is to develop a positive way out of its difficulties, it needs Government support.

[Tom Blenkinsop (Middlesbrough South and East Cleveland) (Lab)]

My hon. Friend is making a good case in relation to the UK steel industry, but the shale industry could help other integrated industrial sectors in the wider economy to develop, and one of those is carbon capture and storage. In a world where fossil fuels are getting cheaper, we should be using pots of funds originally used for renewables for CCS, and the Government should review their decision to get rid of it. In addition, non-conventional gas such as syngas, which comes from coal gasification—there are still tons of coal in the Durham coalfield under the North sea—could be less than 50% of the price of conventional gas. Those two pillars could lead to an industrial renaissance in some areas.

[Angela Smith]

I completely agree with my hon. Friend on both those points. On CCS, it is difficult for the Government to make progress on gaining public acceptance for the shale gas industry, and part of the argument against the industry has always been the emissions and the problem of using fossil fuels into the foreseeable future. CCS is one of the key ways we can deal with that issue and that argument. If there is to be a long-term future for any fossil fuel, the Government must think again about their abandonment of CCS technology.

We need to understand that the nascent shale gas industry offers one of those rare opportunities to create new demand for steel—something we badly need at the moment—and a new sense of hope that there is a positive future for one of our foundation industries. As United Kingdom Onshore Oil and Gas points out, the crisis that the industry faces will not be solved just by dealing with issues relating to energy and business rates, important though those issues are. It needs to be addressed by supporting UK steel to play a bigger role in manufacturing supply chains domestically and globally. This is about the Government supporting the development of a wider range of steel capabilities, by building the business case for the development of a UK shale gas supply chain.

What we do not need, as the hon. Member for Thirsk and Malton said, is a repeat of what has happened with the UK’s offshore wind industry, where we have missed opportunities to build a robust supply chain, despite our strength in the wind energy market. This time, the Government can get things right by working with industry and by supporting the building of a business case for developing shale gas. They can encourage confidence among investors and supply-chain companies and prevent the industry from meeting the fate that has befallen the green energy sector.

Steel’s opportunities as part of the shale gas supply chain focus on two main capabilities. First, as was pointed out earlier, the shale gas industry could need more than 12,000 km of high-quality steel casing, costing £2.3 billion. It could also need 50 drilling rigs, which would cost £1.6 billion to manufacture. So how do we make sure that we make the best of British, in meeting that potential demand? I suggest that we need first to identify the best means of making the UK contribution to the rigging requirements of the shale gas industry. That may or may not mean the domestic manufacturing of the rig components; but at the very least there is great potential for exploiting domestically the need to upgrade rig components to UK standards and to provide ancillary equipment. According to EEF, that market could be worth £1.2 billion. That is a good, practical, pragmatic way forward, which the Government could help to deliver.

As to the steel casing, the problem is, of course, that the UK manufactures welded tubing—not the seamless tubing required by the industry. UKOOG points out, however, that a significant amount of work is required on seamless pipes before they are ready to be used by the shale gas industry and that that could and should be done in the UK. That position is supported by EEF. I would prefer it if the necessary investment could be made to give a UK home to such a manufacturing capability once again; but, however we look at the issue, the Government have a role to play in supporting the steel industry to exploit the opportunities available and thereby to secure a better future for itself.

The Government need to support the establishment of the business case for all aspects of the shale gas supply chain, with particular urgency in relation to the steel aspects of that supply chain. As UKOOG points out,

“We are at the start of the shale journey and the steel industry needs help now.”

UKOOG has pledged to work with the Department for Business, Innovation and Skills to see whether any support can be given. That is incredibly helpful. What we want from the Minister today is a commitment to ensuring that that offer of collaboration from an industry that in a sense is new to the UK—shale gas extraction is new—is taken up enthusiastically by the Government; we want it to be translated into a supply chain strategy that guarantees that the best of British will lie at the heart of a successful, safe and environmentally sustainable British shale gas industry.

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[Neil Parish]

The hon. Gentleman makes a good point, but we have to ensure that the people who will be living around the mouths of the wells, where the shale gas comes up to the surface, feel that there is a direct benefit to them. It is good to appeal to the greater good, but it is also good to appeal to those who will see the fracking most. That is the particular point I am making.

[Angela Smith]

Does the hon. Gentleman acknowledge that there are already plans on the table to return to local communities some of the investment and profit from the shale gas industry—something like 6% of the value of the gas extracted?

[Neil Parish]

I think there are such plans. There are various ideas, such as sovereign funds, but again, we need to explain to the local residents that they will get that money. One problem in the past with many such schemes has been that the money has not filtered down to the local people who have to live right next to the entrance to a shale gas resource. That is what I want to see.

We need to ensure that we explain the situation to local people and that they know there will be something in it for them—I know that may sound basic—and that they are doing something for the greater good. I will go on to talk about industry, but the hon. Member for Middlesbrough South and East Cleveland (Tom Blenkinsop) made a really good point: fossil fuel extraction is necessary. We need only take the agricultural industry, in which natural gas creates ammonium nitrate, to see that it is hugely necessary.

My hon. Friend the Member for Thirsk and Malton made a point about having a single regulator, which is a good idea. It is about reassuring the public. The fracking will take place far underground and there is little or no chance of any problems with groundwater supply, but people are talking about those things. Those who are against fracking make much of them, so they need to be reassured. We must ensure that someone goes to the areas in question and presents the case strongly, so that people feel reassured about the safety of fracking. People can always cite problems in certain parts of the world, which makes it doubly important that we reassure people.

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[David Mowat (Warrington South) (Con)]

I congratulate my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) for leading the charge on this. It seems that the key word in this debate is “manufacturing”, and it is good to have a discussion that focuses on that. I thought that the hon. Member for Penistone and Stocksbridge (Angela Smith), in particular, made an extremely good speech, not only about the shale industry and manufacturing in that area, but the impact on manufacturing generally. It is very hard to have a march of the makers when we have higher electricity and feedstock costs, and generally a higher cost environment than our competitors, particularly those on the eastern seaboard of the US. Those points were well made.

I support the shale industry, which I have spoken about in the past. I completely agree that the concerns of local MPs—I have a fracking site in my constituency—need to be listened to. The industry needs to be well regulated and safe. I will come on to—what did we hear?—the “pragmatic and responsible” position apparently taken by the SNP.

I completely support the need for good regulation and local involvement, but I also have to say that sadly, in my view, the shale industry in the UK is not going to take off with the current prices of oil and gas. At $28 a barrel, the US shale industry is closing down and it has much more significant economies of scale than we have—the cost is something like $50 or $60 a barrel over there, and the gas price is linked. There will have to be closures. Frankly, in Aberdeen, we are seeing the impact of $28 a barrel. That is only just starting to hit Aberdeen, because $28 is higher than the operating cost in the North sea, let alone development and exploration.

I will put that caveat to one side and turn to the manufacturing potential of the industry—I hope I am wrong, however, and that perhaps prices will increase. We do not know.

[Angela Smith]

I thank the hon. Gentleman for his kind comments. Is it not also the case that the shale gas industry is much more fluid, dynamic and has much lower start-up costs than the oil industry, for instance, and that, in the long term, shale gas probably has a better future?

[David Mowat]

All that is true—and it is much more tactical, quicker and goes on from one to another. It does not have the big up-front development costs of, for example, North sea platforms. That is true, but it is also true that the wells do not last as long. The fact is that in the US, the shale industry is a $50-a-barrel industry, and at $28 dollars, that industry is in trouble. That is the whole strategy that the Saudis are taking and is what they are trying to achieve. They are going to be successful unless other things make them stop.

The title of the debate, however, is “Onshore Oil and Gas”—not shale. I say that because it is worth remembering that we have an onshore oil and gas industry. We have drilling and have had it for the past 30 years in places such as the New Forest, without the level of controversy that appears to surround this industry.

Other Members have talked about this, but let us examine briefly what has happened in the US shale industry. The industry has reduced the cost of gas by two thirds and has been converting—unfortunately, this also might stop—liquefied natural gas import ports to become LNG export ports. Equally important, the US has met any climate change target that anyone has given it. It did not sign up to Kyoto, but it would have met it by miles because of the displacement of coal by gas in its carbon emissions.

I want the House fully to understand that if the world were capable of taking out all coal and replacing it with gas, which is a big ask, it would be equivalent to increasing the amount of renewables in the world by a factor of six. That would be real progress in emissions. When political parties talk about carbon emissions—we heard about that earlier—without giving cognisance to that fact, it is frankly disingenuous at best.

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[David Mowat]

I am not sure whether that was a request for me to talk about coal gasification. I will not because I have been talking for 10 minutes, but I agree that it is a complex market and an opportunity for Teesside. Our country’s industry base in Teesside is extremely important to all constituents there, and I completely agree with that.

On Wednesday, I had dinner with the head of Ernst and Young in the UK and I said that one thing that annoys me about parliamentary debates is that we quote reports from people like Ernst and Young as though they are some sort of gospel. We all say, “That’s what they say, so it is true and I will go with that.” It said in its recent report that it estimates that 64,000 jobs will be created in the shale industry alone, 6,000 direct and the rest in the supply chain, steel and so on. I return to the US experience where more jobs were created in the industries that benefited from the lower feedstocks than in the direct industry—the chemicals industry and so on.

[Angela Smith]

I thank the hon. Gentleman for making that important point. Does he recognise that the steel industry unions are one of the biggest supporters of the shale gas industry in the US?

[David Mowat]

I think the steel industry unions are right, as are the chemicals and aluminium industry unions. The US, unlike the UK, still has an aluminium industry, principally because energy prices there allow it to happen.

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[Kirsty Blackman]

I have never received any misleading information from Friends of the Earth, so I cannot answer that point.

I want to make a few points about fracking. I do not understand what the hurry is. As the hon. Member for Warrington South mentioned, the gas price is pretty low at this point. The risks are not that well known yet. Fracking has been undertaken on an industrial scale really only since the very late 1990s and early 2000s. It does not have a body of evidence behind it. In terms of the rush to do this, the UK Government are trying to paint this as a gas versus coal debate—looking at our energy needs in terms of gas versus coal—but we have been shouting about other things. We have been making the case for things such as renewables and putting them front and centre. I do not think that this is a gas versus coal debate, no matter how much the UK Government try to paint it as such.

[Angela Smith]

For the record, the term “fracking” is not that helpful to the debate, but surely the key point of today’s debate is the importance to the future of UK manufacturing of giving this industry the support that it needs to get going. On that basis, there is surely a sense of urgency around all this. UK manufacturing needs new industries and new activity in order to grow.

[Kirsty Blackman]

I appreciate that point and I will come on to manufacturing; I just wanted to answer first a few of the points that had been brought up throughout the debate. “Fracking” is the term that my constituents use and the term that is recognised throughout the UK. That is why I was using it.

It has been mentioned a lot that we should ensure that controls are in place and there is proper regulation. The Scottish Government’s point of view and the direction that we are taking is that we want to prove the safety first and, if we do decide to do this, ensure that the controls are in place after that.

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[Tom Blenkinsop]

rose—

[Angela Smith]

rose—

[Kirsty Blackman]

I do not want to give way again.

I am concerned about the rush to fracking. The UK Government will not get a major tax take from it, because of the current position with the prices. We should not be rushing to do it. In terms of my constituency and protecting jobs in the north-east of Scotland, we need to be looking at supporting the conventional, established offshore oil and gas industry, as well as supporting renewables. The Government need to rethink their renewables obligation changes.