Offshore Energy Industry

Anne Begg Excerpts

Tuesday 13th July 2010 Westminster Hall

[Malcolm Bruce]

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

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

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

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

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

[Malcolm Bruce]

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

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

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

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

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

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

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

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

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

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

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

E.ON also said:

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

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

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

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

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

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

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

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

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

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

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

[Miss Begg]

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

[Malcolm Bruce]

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

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