Energy Bill [HL]

Baroness Sheehan Excerpts

Committee stage
Monday 16th January 2023 Grand Committee

Moved by

[Baroness Sheehan]

222A: After Clause 227, insert the following new Clause—
“Transparency of decommissioning costs(1) The Secretary of State must publish, within 6 months of this Act coming into force and not less than every 3 years thereafter, a statement on decommissioning offshore installations that includes—(a) a list of decommissioning relief agreements in force and the qualifying companies which are parties to each agreement,(b) the estimated likely range of the total future amount of tax relief to be granted in respect of any decommissioning expenditure under existing decommissioning relief agreements under—(i) current oil, gas and decommissioning prices, and(ii) expected future oil, gas and decommissioning prices,in current prices and as a proportion of tax revenue paid by qualifying companies which are parties to those agreements;(c) an assessment of how the estimates under paragraph (b) would be affected by world oil and gas prices equal to the lowest cost of global oil and gas production.(2) In this section—“decommissioning relief agreement” and “qualifying company” have the meanings given in section 80 of the Finance Act 2013;“offshore installation” has the meaning given in section 44 of the Petroleum Act 1998.”Member's explanatory statement
This amendment is intended to bring greater transparency to the future taxpayer liability in respect of decommissioning relief agreements.

[Baroness Sheehan (LD)]

My Lords, I rise to speak to Amendments 222A and 227AA in my name. I put on record my support for Amendment 223 in the name of my noble friend Lord Teverson; Amendment 227 in the name of the noble Baroness, Lady Bennett of Manor Castle; Amendment 227A in the names of the noble Lord, Lord Lennie, and the noble Baroness, Lady Blake of Leeds; and Amendment 232 in the names of my noble friend Lord Teverson and the noble Baroness, Lady Bennett of Manor Castle, to which I have added my name. I regret that I cannot offer support to the remaining amendments in this group, which I am sure will come as little surprise to those who tabled them.

I start with my Amendment 222A on decommissioning tax reliefs, and why I think it necessary. I hope that I can provide some useful background information, taken mostly from the National Audit Office report of January 2019 entitled Oil and Gas in the UK—Offshore Decommissioning. The report sets out the landscape of oil and gas decommissioning so that Parliament is in a position to consider whether the various government departments involved are protecting taxpayers’ interests effectively. The report states that:

“There are currently around 320 fixed installations, such as oil platforms, in production in the UK, primarily in the North Sea. … Oil and gas operators … are increasingly decommissioning their assets as they are reaching the end of their useful economic lives … Decommissioning affects the government’s finances because operators can recover some of their costs through tax reliefs. These enable operators to deduct decommissioning costs from their taxable profits and potentially claim back some taxes that they have previously paid.”


That is all well and good, and fairly normal practice. However, the report goes on to say:

“With decommissioning activity increasing, the government is paying out more in tax reliefs for decommissioning at the same time as tax revenues have fallen due to a combination of lower production rates, a reduction in oil and gas prices and operators incurring high tax-deductible expenditure.”


That represents a triple whammy for UK taxpayers such that, as the report says:

“In 2016-17, the government paid out more to oil and gas operators in tax reliefs than it received from them … for the first time”.


While oil and gas expansion looks artificially secure, with very generous tax reliefs, it is nevertheless clear that government is, on behalf of taxpayers, taking on a liability that is ultimately unknown. The lower and upper estimates of decommissioning costs from the Oil and Gas Authority, now known as the North Sea Transition Authority, are £38 billion and £61 billion respectively, but even that is only a guestimate. With another round of new licences being issued—potentially up to another 100—the risk is enormously compounded. Furthermore, it used to be that a ceiling was kept on the overall cost to the taxpayer by the fact that a firm cannot claim back more in decommissioning tax relief than it has previously paid in tax. However, since 2017, when firms default, government has explicitly said that partner firms that pick up the Bill can claim back more in tax relief than they have ever paid.

This amendment is designed to put more information into the public domain about who the taxpayer is on the hook to; what the liability amounts to, as a proportion of tax received; and by how much this amount will increase in a low-demand world, which is the way in which we are headed.

The amendment asks for three things. First, in proposed new subsection (1)(a), it asks for

“a list of decommissioning relief agreements”

and who has signed them—because at the moment we have no idea. We know how many there are—approximately 100—but not who those agreements are with. As the taxpayer faces a liability from each of these agreements, at an average of £200 million per agreement, some public transparency is desirable.

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[Lord Moylan (Con)]

The name of the regulations that I am suggesting we review is the Gas Safety (Management) Regulations, so I fully acknowledge that this is a question of safety, but it is not necessarily the case that these regulations, passed in 1996, that we are still adhering to could not be looked at to see whether, precisely as I say in my amendment, they could be

“safely amended to allow more efficient use of extracted … gas.”

It may be that they cannot but, nearly 30 years on, it would be helpful if the Government could look more closely at this.

My principal point in raising these amendments relates to Amendment 224. A bit like the noble Baroness, Lady Worthington, earlier, I want to know whether the Government have a strategy for resilience. Do they contemplate the dependence on foreign supplies going on endlessly in very large measure, and what would they like to do about it? I think that an awful lot of people in this country were shocked to discover our level of dependency on imports and would like to hear that we are becoming more self-sufficient.

[Baroness Sheehan (LD)]

My Lords, may I address some of the noble Lord’s responses to my comments earlier? It is clear to me that we have a fundamental difference of opinion on the science behind climate change. I believe that climate change is real, as is shown by the change we are experiencing. What evidence can the noble Lord point to that climate change is not real? There is substantial evidence of it, including the unprecedented levels of the concentration of carbon dioxide in the atmosphere, as verified by ice core samples from the Antarctic and tree rings over millennia. The changes in carbon dioxide correlate precisely to the changes in climate that we have seen in historic times. That is the basis on which my amendments have been tabled, and they are clearly designed to meet the Government’s legal duties under the Climate Change Act and their need to reduce oil and gas consumption to meet net zero by 2050. The noble Lord’s amendment talks about a strategy for increasing domestic gas production. That cannot be compatible with meeting climate change targets—the Government have a legal duty to do that. Will the noble Lord, Lord Moylan, please accept that?

[Lord Moylan (Con)]

I am grateful for those points, which I will try to answer briefly since they were put to me directly.

First, I hope that nothing in what I said suggested, implied or stated that I do not accept that climate change is happening. I am also perfectly happy to accept that there is a man-made contribution to that. What I reject is the language of climate alarmism and climate crisis. The questions around the consequence, in practice, of climate change and the best means for dealing with it remain absolutely open. Over the last 20 years, we have seen wild, extravagant and unjustified claims about how large parts of the world are going to sink under water and we are all going to scorch; in fact, we see very little of that, but we see a few weather events being played up as if they are great catastrophes. Even if that were happening, the question that arises is what you do about it.

Many of us would rather put the emphasis on mitigation and adaptation rather than what we are doing at the moment, which is absolutely damaging our economy, in order that we should try to avoid those emissions. The cost of that damage to our economy has been estimated by the Climate Change Committee as at least 1% of GDP per annum—most people recognise, I think fairly, that it is closer to 4% or 5%. There are those who would say that that that cost is both necessary and justified, but it is none the less a damage to our economy, and not all of us accept that it is necessary and justified—we think that there are other methods of dealing with it.

I have not rejected climate change. I accept that net zero is a statutory target—I said nothing contrary to that. If I may repeat myself—this is my fault entirely; it is the problem with having an amateur such as myself drafting amendments—I apologised when I spoke for using the word “increase”, which I can change if we come back to this on Report. That was not quite what I meant; I meant increase relative to imports, such that I explained that my amendment would be applicable even if our consumption of gas was falling.

There is not that much in the substance of the comments that the noble Baroness, Lady Sheehan, made about my remarks. None the less, we have a profound disagreement—less about the science and more about what to do about it.

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[Lord Lilley (Con)]

If that the best argument against the thesis I put forward, I know I am on strong ground. The noble Baroness says that we might end up with cheap fuel and the oil companies losing money: well, I can cope with both those things.

[Baroness Sheehan (LD)]

Will the noble Lord at least agree that, when we are looking at supply and demand and prices going up and down, that will work only where we have a level playing field? Where you have a market that is skewed, with perverse incentives, such as tax reliefs in the example I gave on my first amendment, that really negates his argument: you cannot say supply is going to be one factor and then have it overridden by incentives to investment that reduce the risks for the people taking them.

[Lord Lilley (Con)]

I think that is a rather different set of arguments. My point is that we can approach net zero by reducing demand and let supply find its own level, with or without incentives. Incidentally, the idea that there are incentives to oil production, when the taxes at our pumps are a massive proportion of the price we pay and when oil in the North Sea pays double the corporation tax rate that other companies do in any other industry, is simple nonsense.

However, now I will turn, if I may, to my own Amendment 226, which would ensure that the conditions relating to vibrations from drilling for shale should not exceed those applied to other industries, for example under British Standard 5228. There is no reason that shale drilling should face different conditions as to the tremors it may cause from, say, quarrying, mining, construction or pile driving. In particular, there is no reason, other than environmentalist virtue signalling, why standards for shale as far as tremors are concerned should be stricter than drilling for geothermal or carbon capture and storage—other than that they get positive ticks from the green lobby whereas shale does not, even though we are going to continue using gas for many decades to come.

Indeed, recently, there was a 1.6 magnitude tremor in Cornwall as a result of drilling for geothermal. People could feel it. It did not do any damage, of course, and it is an order of magnitude higher than the maximum tremor that we allow without stopping production in shale. The level set by Sir Ed Davey when he was Secretary of State for Energy was a magnitude of 0.5 and the one in Cornwall was 1.6. Sir Ed Davey has since admitted that he was proud that, by setting this limit, he effectively stopped the fracking industry in this country. Of course, that was not what he said at the time.

At the time, he said that he was accepting the report that came out at the time. It was an excellent report, produced by the Royal Society for Science and the Royal Academy of Engineering, called Shale Gas Extraction in the UK: a Review of Hydraulic Fracturing. The opening paragraph states:

“The health, safety and environmental risks associated with hydraulic fracturing (often termed ‘fracking’) as a means to extract shale gas can be managed effectively in the UK as long as operational best practices are implemented and enforced through regulation.”


So it gave a pretty clear vote of support. It said that the

“magnitude of seismicity induced by hydraulic fracturing would be no greater than”

magnitude 3, which would be

“felt by few people and result in negligible, if any, surface impacts.”

So we are left with this absurdly low criterion, which is an order of magnitude more severe than that applied to any other industry.

It is not only an order of magnitude; it is entirely unreasonable. Natural earthquakes in this country can be several orders of magnitude greater than is permitted as a result of fracturing for shale gas, and these natural earthquakes occur with little damage. I can remember being woken up at midnight on 23 September 2002 in London. My whole house shook and the windows rattled and I was woken. It was the only time—no, I will not say anything about that. The earthquake was actually centred in Dudley in the Midlands and was a force 4.7 and had that effect in London. There were no reports of damage anywhere in the United Kingdom as result of it—and that was 500 times greater than the highest seismicity induced so far by fracking in the UK, let alone the low 0.5 standard set. Over the last 50 years, according to the British Geological Survey, there have been 25 natural earthquakes of greater than or equal to magnitude 4 and in the last 60 days we have had 29 minor earthquakes in the United Kingdom about which no one has complained at all.

The University of Liverpool produced a study using seismicity measurements which showed the impact of a whole range of household events. I have a copy of it here. It showed that, for example, a door slamming uses more vibration at its surface than the maximum magnitude permitted from fracking in the United Kingdom. So does sitting down suddenly on an office chair, or a building site piledriver 15 metres away. They are all similar orders of magnitude—they are 0.6—but you can find things which are an order of magnitude higher, and we should remember that this is a logarithmic scale. Dropping a large bag of shopping has a magnitude of 1.5 and a toddler playing on a wooden floor, I am astonished to learn, can produce seismicity of 2.1. So we are talking about having such a degree of security against any seismic shock resulting from fracking as to be completely ridiculous.

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[Lord Callanan (Con)]

Well done to the noble Baroness, Lady Blake, for avoiding the question.

I thank everyone who has contributed today; it has been a fascinating debate. In the context of the Energy Bill, I think it is the first we have had on the fundamentals of our energy policy, with both sides: those who, in the case of the noble Baroness, Lady Bennett, seem to want to ban everything, and those who take a more pragmatic view of the issues. I will attempt to set a centre course of a sensible, pragmatic energy policy, which is the one we will follow.

I will address the various amendments, starting with Amendments 224 and 227, tabled by that fascinating pairing: on the one hand my noble friend Lord Moylan and on the other the noble Baroness, Lady Bennett. I will also address the contribution from the noble Baroness, Lady Worthington.

I begin by stating our fundamental policy of driving down demand for fossil fuels as we transition to our legally binding net-zero economy. Of course, the noble Baroness’s Amendment 227 would have significant ramifications. At a time of global energy crisis, an orderly transition underpinned by oil and gas is the best approach and it is crucial to maintaining our energy security of supply.

Outside the rarefied world that the noble Baroness lives in, Greens in other parts of the world are having to live up to these difficult choices in the real world, in real policy. At the moment, the German Greens are quite hilariously justifying the expansion of a massive new coal mine—producing lignite coal, one of the dirtiest forms of coal—in northern Germany, because of the energy crisis. The noble Baroness, Lady Bennett, might think it is funny for us all to sit in the cold and dark, relying on unstable sources of power, but the rest of us think that we need to supply this country with the energy it needs. We need to set the country on a net-zero transition, but we need to do it gradually and responsibly. We set this out in the British Energy Security Strategy, where we set out our long-term plan for greater energy security, including references to domestic gas supply. In the Autumn Statement, the Chancellor built on that and set out that the Business and Energy Secretary will publish further details on our energy independence plans in due course, and we will do so.

The North Sea Transition Authority launched the 33rd licensing round on 7 October 2022. This is expected to deliver over 100 new licences, which will put more UK gas on the grid. I repeat: it will not put more gas on the grid—it will put more UK gas on the grid. I have had this debate many times in the Chamber with the noble Baroness, Lady Sheehan, and I still fail to see how she does not think that this is a good idea. In our transition, as we are reducing our demand, it makes sense to have that gas from relatively low carbon-producing sources rather than importing highly polluting, high-carbon fracked gas from other parts of the world.

[Baroness Sheehan (LD)]

So the gas produced from the licences that will be issued in the 33rd round will not be traded on the commodities market—is that what the Minister is saying?

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[Lord Callanan (Con)]

The decision was taken by a different department, by DLUHC, in a quasi-judicial manner. It is likely to be the subject of judicial proceedings, so I cannot comment in detail on that decision, as the noble Lord will understand. I am sure we will be having this debate lots of times in future.

I move on to the question from the noble Baroness, Lady Blake. The reasons for the Secretary of State’s decision are set out in full in his published letter on GOV.UK, which takes into account matters like the demand for coal, climate change and the impact on the local economy. To reiterate the point of my noble friend, coking coal is used in the production of steel—it is not used in power generation—which is, of course, crucial to building the infrastructure that we all wish to see more of, such as offshore wind turbines.

On fracking, I thank my noble friend Lady McIntosh for her contribution. The Government have been clear that in line with the commitment made in the 2019 Conservative manifesto, it is adopting a presumption against issuing any further hydraulic fracturing consents for the extraction of shale gas. That position is, in effect, a moratorium. This will be maintained until compelling new evidence is provided that addresses the concerns around prediction and management of induced seismicity.

I move on to my noble friend Lord Lilley’s amendment. I welcome his thoughtful contributions to today’s debate, as well of those of my noble friend Lady Altmann. British Standard 5228, which my noble friend quoted, recommends procedures for noise and vibration control in respect of construction and open-site operations. It is not a measure designed to reduce the risk of induced seismicity. The potential for induced seismicity from hydraulic fracturing is a result of the injection of fluid deep underground, at depths of one kilometre or more. Seismicity induced by hydraulic fracturing is therefore different in nature from vibration directly induced by a construction site, and the application of BS 5228 would therefore not be appropriate.

My noble friend Lord Moylan tabled an amendment about the composition of our domestic gas supply. A review of the Gas Safety (Management) Regulations 1996 is currently under way. The Health and Safety Executive has been reviewing these regulations, which govern gas quality, and is consulting on a set of proposed changes. The HSE’s consultation closed in March 2022, and it will be aiming to publish its response in due course. BEIS has worked closely with the HSE and has taken regular opportunities to input into the process in both an analytical and a policy capacity. A statement by the Secretary of State at this stage is therefore unnecessary as the publication of the Government’s formal response will be tantamount to just that. I hope my noble friend will understand that in advance of that document, I cannot comment as it would not be proper.

The noble Baroness, Lady Sheehan, tabled two amendments in this group. On Amendment 222A, I should say at the outset that tax matters are an area for the Treasury. Since the introduction of decommissioning relief deeds—DRDs—the Treasury issues a Written Ministerial Statement at the end of each financial year updating on DRDs, including the total number of DRDs in force during the past financial year, past payments under DRDs and the projected value of future payments under ongoing DRD claims. While a DRD claim may arise where a company has defaulted on its decommissioning obligations, the tax system also provides tax relief for decommissioning costs in recognition that decommissioning is a significantly expensive and statutory obligation. HMRC publishes information annually on the estimated sum of all forecast tax relief payments due to decommissioning as part of its annual report and accounts.

[Baroness Sheehan (LD)]

I thank the Minister for his comments on decommissioning. He is unwilling to move further on the amendment, but will he at least commit to writing with the current estimate of the Exchequer costs of decommissioning if prices were to fall to less than $5, in line with Clause 1(3)(c), and to explain how these risks are being managed? I think that would be within scope.

[Lord Callanan (Con)]

Decommissioning relief deeds are private contracts between the Treasury and the relevant company. That is a matter for the Treasury. I cannot give a commitment on behalf of the Treasury. I suspect that the best option would be for the noble Baroness to take it up with Treasury Ministers.

[Baroness Sheehan (LD)]

I hope the Minister will not mind me pressing on this issue. I am not asking for anything commercially secret but just for some assurance, which I think the PAC and the NAO have sought, that the Government have a handle on the liability and risks which they are potentially exposing taxpayers to in the future.

[Lord Callanan (Con)]

As I said, the noble Baroness should take this matter up with the Treasury. I cannot give commitments on its behalf. I do not know the details. I have set out the position on DRDs. As far as I am aware, this is not tax or revenue legislation. I suggest that the noble Baroness take this up with a Treasury Minister.

I move on to Amendment 227AA on the prohibition of flaring. The Government are already taking steps to drive down routine flaring and the similar practice of venting. The UK has committed to the World Bank’s Zero Routine Flaring by 2030 initiative, and we are working with regulators towards eliminating this practice as soon as possible. Through the North Sea transition deal, industry has committed to accelerating compliance with the World Bank initiative ahead of 2030. We are making good progress: in 2021, total flared gas and vented gas reduced by 20% and 22% respectively, relative to 2020. Furthermore, the North Sea Transition Authority, as the lead regulator on these matters, expects all new developments to be planned and developed on the basis of zero routine flaring and venting.

With the explanations on these various points, I hope that the noble Baroness will feel able to withdraw her amendment.

[Baroness Sheehan (LD)]

I thank the Minister, but I have to say that I am not hugely satisfied with the responses on decommissioning tax reliefs. I take up the point made by the noble Lord, Lord Lilley, about stranded assets and who will pick up the risk. In a scenario where, say, Shell decides that a particular field has become uneconomic for it to exploit commercially and decides to sell on that asset, which is then picked up by another entity which, in turn, goes bust, who will pick up the cost of that decommissioning? I hope that the Minister will be able to quickly address that.

In terms of flaring, I am really disappointed. It is such a no-brainer. Since 1991, Norway has been able to ban flaring—and, within that, I would include venting—yet our Government cannot give that commitment, when we have made commitments at COP 26 and COP 27 under the Global Methane Pledge, and we continue to do this. It really is on a par with asking countries to ban coal and then giving permission for our own coal mine in Cumbria to go ahead. It is just incomprehensible, and I hope that the Minister can quickly address that before I withdraw my amendment.

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Tabled by

[Baroness Sheehan]

227AA: After Clause 229, insert the following new Clause—
“Prohibition on flaring(1) The Secretary of State must by regulations prohibit the practice of flaring by oil and gas installations within the jurisdiction of the United Kingdom.(2) In this section “flaring” means the burning of gas, produced during oil extraction, in order to dispose of it.(3) Regulations under this section must be made so as to bring the prohibition into force by 31 December 2025.”Member’s explanatory statement
This amendment would prohibit ‘flaring’ which is the burning of gas, produced during oil extraction, to dispose of it. This is in line with recommendations made by the Commons Environmental Audit Committee and would help ensure the UK fulfils commitments it made at COP26 and COP27 under the Global Methane Pledge.

[Baroness Sheehan (LD)]

Despite the Minister’s lack of response to my comments, I will not move the amendment at this stage.

Amendment 227AA not moved.