Offshore Energy Industry

Charles Hendry Excerpts

Tuesday 13th July 2010 Westminster Hall

[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.

[The Minister of State, Department of Energy and Climate Change (Charles Hendry)]

indicated assent.

[Malcolm Bruce]

I see the Minister nodding. He has been in that situation and will understand.

The two local authorities that serve the north-east of Scotland are struggling to deliver essential services on funding levels well below those of other Scottish authorities, but the latter do not face the same pressures. Both authorities receive grant aid at well below 90% of the Scottish average, despite having the fastest population growth in Scotland—indeed, compared with some parts of Scotland, the only population growth. Aberdeen city businesses pay around £150 million in business rates and receive back only half of that. Although Aberdeenshire is a net beneficiary, the overall grant allocation is a significant net loss.

It is important for the Minister to be aware that in the 1970s, when the scramble to develop the North sea was under way, local authorities in the north-east of Scotland received extra rate support for five years to enable them to meet the infrastructure needs of the growing industry. It was a special one-off recognition of the pressure that they were under. I suggest that something similar may be required now if we are to deliver people’s hopes and expectations for the next 40 years.

The population of the region has grown by around 50,000 over the past 40 years and it is projected to grow by a further 50,000 in the next 15 years. Unemployment is low and incomes are high. People may say, “You’ve got low unemployment and high incomes. What’s your problem?” The problem is that that income does not stay in the area. Taxes go to the Exchequer and business rates go to the Scottish Parliament, and we are dependent on grant support coming back to the area. Unfortunately, that does not happen enough—we do not have sufficient resources. Because of those pressures, housing costs are high, as are the costs of recruiting and retaining key people.

A substantial section of the British economy, for which the Minister and the Treasury are responsible, could be the biggest losers if we do not get it right. I shall give some statistics. If we lose only 1% of the forecast potential average development over the next few years, it would cost us £74 million a year in tax revenue, £270 million a year on the balance of payments, £50 million in exports, £60 million in investment, £60 million in operational spending and 4,400 jobs. If we lost 5%, it would cost us £480 million each year in tax revenue, £1,350 million on the balance of payments, £250 million in exports every year, £300 million in investment and £300 million in operating costs, and 22,000 jobs. I hope that those figures reinforce the fact that a small shortfall could result in us losing a substantial amount of revenue.

I therefore ask three things of the Minister. First, will he engage with the Treasury over the fossil fuel levy attributable to Scotland? The Economic Secretary has confirmed that the Government are committed to reviewing the

“control and use of accumulated and future revenues from the levy”.

I suggest that it would be appropriate for a substantial proportion of that to be allocated to infrastructure support in the north-east of Scotland, specifically to support the offshore renewable industry. I make no bones about it. It would help both oil and gas and renewables. That would be an appropriate use of the money, both now and in future.

Secondly, I remind the Minister that, through an Act of Parliament, Shetland and Orkney secured a share of the continuing revenues based on the flow through their respective oil terminals. No such provision was made, or sought, for the north-east of Scotland, probably because it did not expect to be so badly squeezed by the funding arrangements as they are. That is despite the area being a major landfall for oil and gas. I do not know how many pipelines cross my constituency, but it is probably into double figures. It is also the most important land base for offshore operations.

I therefore suggest that some consideration be given to the tiniest share of revenue from the oil and gas industry being earmarked for infrastructure. That would pay dividends by ensuring maximum long-term revenue. That may sound like a bid for new money, although there is a way of presenting it that would not. However, I return to the debate within the industry about the possibility of PRT buy-outs, which could create a cash-flow windfall for the Treasury. If the Government were minded to consider it, that bonus could support a small infrastructure fund.

Thirdly, given representations made during the debate by other hon. Members, I hope that the Minister will engage constructively with Ministers in the Scottish Administration. If they fail to support essential infrastructure in the north-east, it will prejudice not only the Scottish economy but the entire UK economy. In order to deliver that investment, it is therefore legitimate for the Government to have a partnership with the Scottish Government. So far, they have failed to so. I am trying hard not to be too political about it, but the facts are as the hon. Member for Aberdeen South made clear. Although promises have been made, delivery has not been achieved, and that is a real anxiety for the industry and its confidence in future investment.

The north-east of Scotland is a key economic region for the UK. It delivers far above its weight for its small population, but for it to continue to be a driver of growth for such a large chunk of the UK economy, it needs recognition and support. It suffers from relative remoteness. I meet too many people in Scotland, let alone in England, who tell me that they have never been to Aberdeen, and they have a very warped idea of what it is about. In some ways, the dynamism of the north-east of Scotland is perhaps Britain’s best kept secret. There are not 500,000 people anywhere in the United Kingdom who contribute so much economically. Indeed we have statistics to show that the contribution per capita of the north-east of Scotland is the highest of any region in Europe, and I am not sure whether that is fully recognised or acknowledged in the way in which it is treated by Government at all levels.

I know the Minister, and I believe that he understands much of what I am saying. He certainly knows Aberdeen, and Aberdeen knows and respects him. I look to him to ensure that the whole Government recognise the importance of the issue and act accordingly. I have tried to identify not just the problems but some possible solutions. I have tried to emphasise that if we do not get this right, it is the UK Government and the UK economy that stand to lose the most. We in the north-east of Scotland can proudly say that we have made an enormous contribution to the whole of the UK over the past 40 years, and the right decisions taken now can ensure that we will do that for the next 40 years. I hope that the Minister will understand that this is not just an opportunity for a local press release, but a serious debate where there is real and genuine concern within the industry that, if these issues are not addressed, a substantial amount of investment in the UK economy could be lost.

--- Later in debate ---

[The Minister of State, Department of Energy and Climate Change (Charles Hendry)]

It is a pleasure to serve under your chairmanship this morning, Mr Hancock. We have had an extremely valuable debate. I congratulate my right hon. Friend the Member for Gordon (Malcolm Bruce) on securing it, raising a wide range of issues and bringing his expertise to the debate. The hon. Member for Aberdeen North (Mr Doran) also brought his expertise to the discussion. I hope that I can give further reassurance and encouragement to them that this is not a partisan issue. I want to work on the subject using the relevant expertise wherever it is found—on both sides of the House and all sides of the industry—to ensure that we can achieve the best possible outcome for this crucial sector of our economy.

My right hon. Friend has rightly understood my reaction to some of his points, particularly those about Scottish infrastructure issues. He will know from the respect agenda that we are committed to working closely with the Scottish Government and Executive to ensure that we do not seek to influence their decisions on those issues, which are devolved. I also reassure him that we are very keen indeed to have a holistic approach to those matters. I have already had an initial discussion with the First Minister and I hope to have a further conversation with him in the next few weeks about how we can most constructively work together in those areas.

That is what the industry is looking for: a seamless Government approach across Departments and different bodies. We will try to ensure that we bring the best endeavours and approach that we possibly can to securing further investment in the sector. From my time as Opposition spokesman on these matters, I hope I have managed to gain some understanding of the issues facing the industry. I assure hon. Members again that I intend to be a regular visitor to Aberdeen. If my right hon. Friend or any of his hon. colleagues feel at any point that I am not talking to the right sections of the industry, I ask him to let me know. I want to ensure that I have as comprehensive a grasp as possible of the issues involved and, as I say, I want to work constructively with those who have great expertise from working in this area.

In initiating the debate, my right hon. Friend spoke about how crucial the sector is to the whole of the UK economy. Although indigenous production is declining, our oil and gas reserves remain a key element of our energy mix. On the reassurance that the hon. Member for Aberdeen North was looking for, there are a number of key pillars of energy policy without which we cannot have energy security—for example, the commitment to the North sea and the development of the UK continental shelf. Nuclear without subsidy is also in that mix, as are coal with carbon capture and renewables.

All those factors are part of a balanced energy policy. I certainly hope to reassure my right hon. Friend that there is every intention of identifying the issues that will help to drive forward investment in the North sea. We will do what is necessary to bring the skills and investment to Britain, because I am very much aware that the companies that are looking to invest are overwhelmingly international. When they consider international opportunities, there is no predisposition for them to come to the United Kingdom. We have to make the strongest possible case for why they should come here instead of taking the many other opportunities that exist around the world.

As my right hon. Friend said, 350,000 jobs in the UK depend on the industry, and a further 100,000 in the supply chain’s thriving export business, with an annual expenditure of about £12 billion. The industry, therefore, makes an extraordinary contribution to the economy. We see no dilemma, however, in the absolute necessity of moving to a low-carbon economy and the desire to get the best out of our indigenous hydrocarbon reserves. That is essential to our energy security and our national prosperity, and particularly to the prosperity of the north-east of Scotland. We will, therefore, work closely with the industry to see what is necessary to encourage further investment in exploration, development and production, while maintaining high standards of management and minimising environmental impacts.

Over recent years, an important role has been played by PILOT, the organisation set up to maintain the dialogue between Government and industry in this area. It has put in place many initiatives to help us to extend the life of the basin, and has significantly contributed to the security of the UK’s energy supply and balance of payments, but we are now looking at how to take that relationship forward. I want to look more at a road map for the future, rather than at setting targets. I am nervous about targets because they tend to be set sufficiently far ahead that nobody is accountable for how they are delivered. I would therefore rather have a more specific road map for what we are jointly expected to do as industry and Government, to try to make this an attractive environment.

I am also keen to broaden involvement in PILOT, to include people from all aspects of the industry. The hon. Member for Aberdeen North talked about the subsea sector, which is an absolutely critical part of the Aberdeen and north-east Scotland economy and an absolutely wonderful example of British engineering and skills providing incredible global leadership in many of these areas. I want to ensure, therefore, that PILOT contains the full range of expertise that is there, and I am also considering how we can increase the regularity of the meetings. As they are currently six months apart, I have a slight tendency to think that there can be a gap before too much is done, and a panic before the next meeting. I want to get a rather more established flow of activity. The guiding principle has to be trying to remove barriers to investment. Where we see barriers to investment, we—with the industry and my parliamentary colleagues—will actively try to remove those barriers, to make this a very attractive place in which to invest.

Many things were done under the previous Government, and historically, to make this an attractive area. We have flexibility in our licensing system to attract the widest possible range of players. The hon. Member for Islington South and Finsbury (Emily Thornberry) asked about the commitment that we made about licensing in our manifesto. That was nothing to do with safety issues. It responded to a concern within the industry about how long the licensing process takes, and considers whether there are ways, taking account of the safety and environmental issues, in which we can tell investors rather more rapidly than at present what the outcome of each licensing regime will be. It is certainly encouraging that the latest round received the greatest number of applications since the first round in 1964, and we hope to be in a position to award licences later this year.

The fallow initiative, put in place by the Department of Energy and Climate Change, continues to encourage companies that are not actively working on blocks or licences to relinquish them so that other companies can be given opportunities to exploit them. To ensure maximum production efficiency from North sea fields, the Department has a stewardship process, which is an annual review in which DECC works with the fields’ owners and looks at individual field performance with the aim of maximising economic recovery and enhancing production levels wherever possible.

We are also considering the whole issue of infrastructure, which has come through very strongly in the contributions to the debate. It is a key part of the coalition agreement. We want to work to improve on that, and we have said that we will consider legislating in that area. I would always prefer that we work through voluntary agreements wherever we can, but we have to recognise that the voluntary agreements in this area involve one party that has overwhelming strength because it owns the infrastructure and essentially has a monopolistic position, and a much smaller company that wishes to have access. We therefore need to find a better way of making that voluntary arrangement work, as I think it often does in other countries, or we will consider taking extra powers to deliver the greater access to the infrastructure that we think will be necessary.

It is absolutely clear that many of the fields now being looked at are more marginal ones, and therefore we will not necessarily be able to attract the huge international oil companies but rather smaller specialist companies, which nevertheless have fantastic records of technological expertise and safety. We therefore have to ensure that the regime is appropriate for those smaller companies.

Several questions have been asked about the fiscal situation. As my right hon. Friend the Member for Gordon will be aware, those are always matters for the Treasury, which rightly guards its leadership on such issues very carefully. I can certainly tell him, however, that there have already between discussions between the Prime Minister, the Chancellor and the Scottish Executive about the fossil fuel levy. We understand the requests that there should be a higher ability to draw down funding from that levy and the Treasury is considering the issues with an open mind.

[Malcolm Bruce]

Allowing for the respect agenda, does the Minister not agree that it would be beneficial, before any agreement were concluded, to have a clear understanding, at least in broad terms, of how the money was likely to be used? To put it at its crudest, the purpose would not be fulfilled if the money were simply to disappear into the block and not benefit the support for the offshore renewables industry in the north-east of Scotland.

[Charles Hendry]

My understanding is that that is the case that has been put to the Treasury by the Scottish Executive, and that they want access to more of that funding to facilitate such investment. Clearly, these are details that have to be sorted out, but I am very encouraged indeed that the Treasury is keen to approach that with an open mind.

[Mr Doran]

My understanding is that the money is not passed to the Scottish Executive because they have consistently failed to put forward projects on which to spend the money.

[Charles Hendry]

As I say, there is much devil in the detail in these matters and the Treasury is taking forward the discussions. I am, however, encouraged by the approach taken in general.

About 45% of all the UK’s oil and gas-related jobs are in Scotland, and many, as we have heard, are in Aberdeen. I know from my own experience how committed that work force is. I was there most recently just a few weeks ago, and went through the helicopter training exercise. They decided that they should not yet dunk me in the water, that perhaps I was too new a Minister. I am not sure that any Minister has gone through the dunking process, and I have made a rather rash commitment to be the first. It is incredibly important that as policy makers we understand how the industry addresses these issues, and, as far as we are concerned, there should be no short cuts on safety. The visit brought home the great measures that have been put in place since the helicopter tragedies, to ensure that we have the toughest safety standards in the helicopter transportation that operates there. I went out to the Beryl platform, which I was particularly keen to see because it is an old platform still operated by its original operators, but drilling again for new reserves. It is a very good example of how, after some decades of operation, there is still much life and activity.

We travelled nearly 200 miles from Aberdeen airport to the rig, passing over two structures that had human life on them, and the very often incredible isolation and the bravery of the people who work there also came home to me very clearly. I travelled out there on a nice June day, when there was a little ripple in the water, and I cannot imagine what it would be like in a cold February gale. The landing spot for the helicopter looked small enough in those conditions. The hon. Member for Aberdeen North talked about making several attempts to land when he went out there some time ago. It really brings home to us the courage, the expertise and the global skill set that we have in the North sea, something to which we should always pay tribute.

I am certainly always willing to talk to the trade unions on these matters. Safety is not an issue for industry versus workers. There is a great recognition that for the industry, it is absolutely critical for everybody, every business and every organisation working with it. I will always be keen to find reasons to talk to the people who represent that work force.

Our approach to North sea regulation is among the most robust in the world, and our record there is strong, but the tragedy in the gulf of Mexico has to give us pause for thought. As we move into deeper waters west of Scotland, there is every reason to increase our vigilance. We have announced that we will double the number of annual inspections and increase by one half the number of inspectors. There is the inevitable time span before they are recruited, but the process is already under way.

Right hon. and hon. Members should be in no doubt that, if there is evidence from the reviews of the gulf of Mexico tragedy that requires us again to improve security and health and safety measures, we will do so. We are determined that the safety regime in the North sea will be the toughest operating anywhere. I am pleased that we will do that in partnership with the industry. The Oil Spill Prevention and Response Advisory Group is an industry-led initiative that does critical work in looking at these issues, just as it looked at the measures necessary to improve safety after the tragedies involving helicopters. We are very much in debt to it for its leadership in ensuring that we introduce measures in this area. Again, I welcome the role that the trade unions play in ensuring that workers’ voices are heard and represented.

There has been discussion about other ways in which the North sea can be a global centre for international excellence in energy infrastructure. Foremost among those will be offshore wind. We recognise that the United Kingdom is now a global leader in offshore wind, but much needs to be done if we are to meet the targets that have been set. The aspirations are high, and a great deal more has to happen if we are to get the right investment and infrastructure in place to achieve them. Some £15 billion of new investment is required in transmission assets to connect offshore wind farms to the onshore grid.

I am determined that we roll out the programme in a more structured way. Again, the Government want an approach that focuses on the problems, so we will look at where there are barriers to investment. We see working constructively and jointly with the industry as the best way to get around those issues.

My right hon. Friend spoke about the need for more ships, which are critical to this work. With the number of ships available in the world at present, we simply cannot put in place the number of turbines necessary to meet the aspirations. Grid infrastructure and connectivity will be fundamental to that.

The hon. Member for Islington South and Finsbury asked why the announcement has been delayed. There was every opportunity for the previous Government to make an announcement. Not only was there a little letter in a drawer which said that there was no money left, but there was a big pile of paper labelled, “Too difficult to think about.” There is a range of complexities, and different views from different sectors of the industry. We have been actively looking at the full range of grid and transmission issues with a view to announcing a decision in the near future. We absolutely understand that these are critical issues for the industry, and we are determined to give early clarity.

[Emily Thornberry]

I am sure that the Minister is aware that a date at the end of June was set for an announcement on the offshore grid. Why the delay, and when will we get an announcement?

[Charles Hendry]

We are trying to ensure that we have cohesion across the whole range of issues relating to the grid, including the offshore transmission system, transmission access and transmission charging, which is particularly critical as far as Scotland is concerned. I want to ensure that we have a complete response to all the issues involved as we try to move forward in this area. The hon. Lady will not have to wait much longer. I understand that the industry attaches a great deal of importance to the sector, and this is very much at the top of the list of things that we are seeking to resolve.

Questions were asked about the ports project. It has not been suspended or cancelled, but, within the framework of the comprehensive spending review, we are trying to ensure that all such major projects are handled in the most sensible and constructive way, to deliver the best response and to make the best use of taxpayers’ money. We are committed to taking the work forward, but it will be handled within the network of the comprehensive spending review.

We will also be looking at how we take forward work on carbon capture and storage, which offers many partnership opportunities. Some of the most extraordinary academic work on CCS in the world is being carried out in Scottish universities. People such as Professor Jon Gibbins and Professor Stuart Hazeldine at the university of Edinburgh are doing wonderful work to ensure that we lead the world in that technology. I want to work closely with them in ensuring that we make the best and strongest case for Britain in that respect.

There was a question about the working relationship with the Crown Estate. We believe that the regime is working at present. There is clearly a difference between the role of the Crown Estate as the landlord and the role of the Government who, as the regulator, are able to issue licences. If there is evidence that the regime is not working, we will certainly look at how the matter can be addressed.

The hon. Member for Islington South and Finsbury asked about our continuing commitment to renewables obligation certificates. We have said that we are looking at introducing feed-in tariffs. We indicated prior to the election that there is a strong case for using feed-in tariffs for the third round of offshore wind because investors have told us that that would be more attractive. We have also been told that feed-in tariffs would be more attractive for marine technologies, so we are looking at the most appropriate balance between the renewables obligation and feed-in tariffs to see how we can best stimulate investment. At the core of all that we are doing is a desire to make this the most attractive place to invest in energy infrastructure, and that applies to oil and gas, nuclear, coal with carbon capture and renewables.

The debate has touched on many critical issues, and there is an overwhelming sense on both sides of the House that the industry will continue to make an enormous contribution to the British economy. The North sea sector is sometimes seen as an old industry, but it is, in fact, a ground-breaking industry in the development and application of technology. Probably only space travel has the same level of involvement.

Let us look at what is happening in the gulf of Mexico at present, where BP is drilling down 18,000 feet below the surface of the water, through perhaps 13,000 feet of rock. It intends to intersect a pipe that is just a few inches across in order to stop the flow of oil from the well. We should pay tribute to it for the work that it is doing and the cap that it appears to be putting in place successfully. The technology involved is extraordinary.

In all our debates about the industry, we should see it as an industry of the future which has an extraordinarily important role to play. I can say to right hon. and hon. Members who have spoken this morning that, even though I may be a Conservative Member of Parliament from the south-east of England, I have an absolute commitment to being a champion of the industry. I want to visit Aberdeen regularly and know about all aspects of the industry. I want to know the industry and the trade union sides, and to work with both of them to deliver the best possible outcomes for investment. We have an absolute national interest in ensuring that we secure the best from our indigenous resources.

We have had an outstanding debate this morning, which has raised many critical issues. I look forward to working closely over the coming months and years with right hon. and hon. Members, who have great expertise in the sector, and with the companies and people in their constituencies who work in this sector and deliver so much in terms of our energy security.

[Mr Mike Hancock (in the Chair)]

Thank you, Minister. I thank all those Members who have taken part in the debate for the courtesy that they have shown to the Chair and for their indulgence of each other. I wish you much luck with your dunking exercise, Mr Hendry. I hope that the safety procedures are all in place when you do it, by the way. I am sure that the whole House would regret any mishap. Do not forget the wet suit.

As we are now all in place, we can move on to the next debate. Before we do so, several Members have indicated that they want to take part. I want to try to get as many in as possible, so I ask that interventions be short and to the point, and that replies be quick as well. I ask for the indulgence of the Minister and the Opposition spokesman: could they give me an indication at some stage of how long they will want to speak so that I can ensure that we can get in as many people as possible?