UK Oil and Gas Industry

David Duguid Excerpts

Thursday 19th April 2018 Westminster Hall

[Colin Clark]

I will not disagree, save that the principle is that that £330 billion was to the UK Treasury, which invested for many years throughout the United Kingdom. As the hon. Member for Stockton North will remind me, not only the original Scottish sector has oil, but the islands, the rest of the UK east coast and now the west coast of Scotland as well.

[David Duguid (Banff and Buchan) (Con)]

I wanted to make this point earlier; it came up in conversation with a Treasury Minister last year. We had to remind that Minister that oil and gas exist not only off the coast at Aberdeen, but all down the east coast, on the west coast, to the west of Shetland and the Northern Isles in general, off Morecambe bay and all around the UK. That is why we call it the UK continental shelf and not just the North sea.

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[David Duguid (Banff and Buchan) (Con)]

It is a pleasure to serve under your chairmanship, Mr Sharma. I congratulate and thank my hon. Friend the Member for Gordon (Colin Clark) for securing this important debate. It is also a pleasure to follow my hon. Friend the Member for Waveney (Peter Aldous), the hon. Member for Aberdeen North (Kirsty Blackman) and, although he is no longer in his place, the interventions of the hon. Member for Stockton North (Alex Cunningham).

Before I was elected to this place last year, I myself spent 25 years working in the oil and gas industry, as many of our constituents still do. This is still a hugely significant sector for employment, as my hon. Friend the Member for Gordon mentioned. It still employs 300,000 people around the UK. Many of those people, from around the UK and, indeed, the rest of the world, have made their home in north-east Scotland. As a result, even with the downturn in recent years, unemployment in that part of the country is still very low, at about 1.2%. That sometimes creates an issue for businesses and industries in general when they wish to expand, but for local society it is a nice problem to have.

Many people rightly think of Aberdeen as the oil capital of Europe. I spent the best part of 10 years of my career working in Aberdeen—most of which while living there, but some while commuting from my hometown of Turriff, 35 miles away, where I grew up and where I returned to live after working overseas in the oil and gas industry in the countries of Azerbaijan and Angola. That illustrates the global nature of this industry and, as my hon. Friend the Member for Waveney finished by saying, reminding the world of the expertise that this country still has to offer and will continue to offer is very important.

Many people still commute to Aberdeen from around north-east Scotland. They commute from major towns in my constituency—Peterhead, Fraserburgh, Banff, Macduff and my own town of Turriff—as well as from everywhere in-between. In some cases, people travel up to 50 miles from around north-east Scotland to Aberdeen. Of course, in many occupations, which are often office or desk based, there can be the opportunity to work from home—a practice that is becoming more and more common, but which often relies on a dependable broadband signal: sadly, not always available in rural north-east Scotland or elsewhere around the country.

The idea of working from home has traditionally seemed strange or been difficult for some people to get their head around. The same thing applies to much of the “new” technology mentioned by my hon. Friend the Member for Gordon. In many cases, the technology itself is not particularly new; what has taken longer to change is the culture and behaviours required to get the most out of the technology.

For example, the technology to operate sophisticated offshore installations from onshore has existed since the Forties field came on-stream in the mid-1970s. In fact, it was originally designed to be run from onshore, but that was never quite made to work. Only in recent years has that technology been made to work practically and effectively. That illustrates the recent developments and the developments that we hope to see in the near future.

The oil and gas industry is a major employer in Banff and Buchan, as is the supply chain that supports it. Peterhead is famous as a fishing port, of course; hon. Members have no doubt heard me mention that many times before. However, it is also a major supply port for offshore oil and gas. The Forties oil pipeline, supplying 30% of the UK’s oil, comes ashore at Cruden Bay in my constituency. Also in my constituency is the St Fergus gas terminal, through which 25% of the UK’s gas is received. North sea gas also supplies the power station in Peterhead.

Peterhead power station was a proposed site for the development of carbon capture and storage, but of course one of the many reasons why that was, unfortunately, abandoned, was the absence of surrounding infrastructure. I am sorry that the hon. Member for Stockton North is not here to intervene at this point, because Teesside has the surrounding infrastructure that we do not necessarily have in north-east Scotland, unfortunately.

Peterhead is also the location of the Score Group headquarters. Score Group is one of the largest employers in my constituency—across the north-east of Scotland, indeed. It consists of 20 different companies across five continents and is one of the biggest employers of apprentices in the whole of Scotland.

The future of the oil and gas industry is positive, as many hon. Members have said, but there needs to be flexibility and openness to change. The Government have supported that, which is most welcome. Transferable tax history was highlighted by my hon. Friend the Member for Gordon. That was a great good-news story from last year’s Budget and shows how important it is that we continue to speak up for the oil and gas industry.

It is also great to see support for decommissioning, which is a growth industry with huge potential. As my hon. Friend mentioned, it is like the original installation to begin with, but in reverse. It is like manufacturing: the biggest and most expensive part of it is in the design and strategising. However, we do not need to go looking for the raw material. It is there and we know where it is. It is a great opportunity for Aberdeen, the north-east and the UK in general to become known as a global centre of excellence for decommissioning. I was pleased to hear Maersk recently announce that it is establishing a new, dedicated decommissioning company, with offices in Aberdeen, to make the most of the opportunities our North sea assets provide. That could be a great boost for the Aberdeenshire economy, with close to £40 billion in decommissioning projects up for grabs over the next eight years.

While decommissioning opportunities are inevitable from the more than 400 fields that have ceased—or will cease—production, the industry is far from dead. For example, I found out yesterday that 27% of BP’s new exploration is taking place in the North sea. I formerly worked for BP and I remember a time when BP felt that it was looking for the least expensive basins around the world to operate in. It had the economies of scale to be able to do that at a large scale. However, BP also always described the North sea and the UKCS as a whole as its own backyard. It is great to see it coming back. Unit operating costs have reduced significantly since 2014 from $30 a barrel equivalent to around $15 in 2017.

The UKCS is still one of the most expensive basins in the world to operate. However, investors and the industry are relatively comfortable investing in North sea oil and gas for other reasons, such as security, stability and access to some of the best, brightest and experienced talent in the industry. Other hon. Members have mentioned other aspects that make this basin more attractive to invest in and how we should make it as attractive as possible.

The Oil and Gas Technology Centre, partly funded by the Aberdeen city and region growth deal, is a great example of how the industry is coming together, not only to fix the inefficiencies and maximise recovery, but to transform the industry for tomorrow. Last year £37 million was co-invested in industry-led projects by the OGTC, with £22 million of that coming from industry partners—more than three times what had been originally expected when the OGTC was set up. Much of that contribution from industry partners has been in kind, as well as direct cash funding. The industry has provided resources such as personnel, as well as access to rigs and platforms for the important field trials to test and optimise the new technology.

The partnership between OGTC, Oil and Gas UK and the OGA—all of which have been mentioned—as well as the different operators and suppliers in the industry, would have been almost unthinkable not that long ago, in my experience. Since the recent downturn, the industry has experienced a modest, yet encouraging recovery, but the industry has been forced to look inwards and across, including across sectors such as renewables, which my hon. Friend the Member for Waveney mentioned. In my experience, there was always a need for greater collaboration across the industry and sectors. I am glad to say that this is becoming more evident.

I hope that mistakes made in previous recovery phases from previous downturn cycles are not repeated. Too often, we have not gone beyond seeing the green shoots, but when we are actually back in full recovery mode and the pendulum has swung right back to the triple-figure oil prices, we have gone back to the same old inefficient behaviours. Again, we are seeing more evidence that through recent collaboration and Government support, there is a lot less chance of that happening.

Partnering with the industry and bodies such as Oil and Gas UK and the OGA, the OGTC is looking to use the latest technology to transform the oil and gas industry for our low-carbon future. I would like to see the Government do all they can to support this transformation for tomorrow. I understand that the OGTC applied for the industrial strategy challenge fund, as mentioned by the hon. Member for Aberdeen North, as recently as yesterday. As she mentioned, we hear that decisions on that are not due until November, but I take this opportunity to encourage the Minister to look closely at what it is proposing and accelerate that decision, if at all possible. Even if only a decision of additional funding can be made well in advance of the funding being made available, it would allow planning and budgeting to take place in the nearer term.

In conclusion, I reiterate that the contribution of North sea oil and gas to our economy is not a spent force. Oil and Gas UK has predicted that hydrocarbons will still be providing two-thirds of the total primary energy by 2035. It represents a huge economic opportunity for the UK, particularly in Scotland, but requires industry and Governments to work together to foster the partnership and collaboration I have mentioned, and in many ways continue to develop new and innovative ways of thinking, not just new technology.

Finally, it should be noted—it has been already—that hydrocarbon exploitation is not just about providing energy, although that is an important factor. The UK Government are doing great work in reducing the amount of single-use plastic that the nation uses, but we still have a need for oil and gas as a feedstock for multi-use plastics in the foreseeable future.

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[Alan Brown]

I will come to the management of the downturn, but I think the hon. Gentleman has helped to make the case for an independent Scotland, so I thank him for that. I was not going there; I would not have touched on an independent Scotland, but I thank him. I still stand by the fact that, in my opinion, the money was going to the UK Treasury and was not distributed to the areas that were generating the wealth.

Interestingly, when it comes to fracking, in 2015 the UK Government promised a shale wealth fund of up to £1 billion for the north of England where fracking is proposed. Perhaps that is a lesson learned. It reinforces the omission of not setting up an oil fund for the benefit particularly of Scotland and other areas of the UK that extract oil and gas.

In Scotland we became used over the years to the scare stories about oil running out before yet again we discovered new oilfields. If we want to talk about not seeing it as a stopgap measure, we obviously need to watch how politicians talk about oil reserves. I certainly appreciate that everyone in this room has been very positive about the reserves that are there, the amount that could still be extracted and the future of the industry. However, other politicians sometimes try to exploit the concept that oil is running out, and we need to be careful about that.

[David Duguid]

It should be recognised, as I tried to point out in my speech, that it is fair to say that the easiest oil and gas low-hanging fruit to get has been got. There is a future for oil and gas, but, as I said, we cannot use the same behaviours and technologies as before, which is why it is important for Governments and industry to pursue the developments in technology and changes in behaviour required in future to exploit what is left, which is not so easy to get as what came before.

[Alan Brown]

I do not disagree. Clearly, the industry has shown a lot of innovation over the years and will continue to do so, and obviously it needs to do so to get additional extraction. My hon. Friend the Member for Aberdeen North gave the example of partial decommissioning to allow the technology to be input for enhanced extraction. That is something that industry is looking at now, and I am sure it will continue to innovate.

We know that prices can be volatile; we have had to deal with that over the years. Oil bottomed out at just under $12 a barrel in 1997 before rising rapidly to $91 a barrel by 2008. That was under a UK Labour Government. If I go back to legacy issues, I wonder what happened with that money, because there was no way oil projections at that time were going to be based on the oil price increasing dramatically. It was such a windfall with that massive increase in price, but I do not think we have seen the benefits of that, either.

On the point made by the hon. Member for Banff and Buchan about managing the downturn, we have been consistently told that we need the broad shoulders of the UK, but if we look at the support that the UK Government have implemented in the past few years, the spring 2016 Budget reduced the supplementary charge back to 10%, which was a welcome measure. The Red Book predicted that that would cost £1 billion, and yet nearly three times that was given away in inheritance tax to millionaires. That shows skewed priorities.

In the spring 2017 Budget, there was nothing specific for the oil and gas industry, except one paragraph promising another discussion paper. However, it did confirm the lowering of corporation tax. Despite what everybody says about how it grows the economy and creates more tax, the Red Book predicted that that would cost the Treasury £24 billion over the lifetime of this Parliament. That was the Government’s Treasury prediction. Let us think what could be done with that £24 billion in terms of infrastructure investment or additional support for the oil and gas industry. In my opinion, it was a lost opportunity.

In the November 2017 Budget, a measure was introduced: transferable tax history. As my hon. Friend the Member for Aberdeen North said, that was genuinely welcome. It is predicted to bring an additional £70 million in revenue to the Treasury, so it was not a difficult decision. That decision supports industry, but it helps the Treasury, so it should have been taken long before. We are still awaiting the appointment of the oil and gas ambassador first promised by David Cameron in January 2016, so the Government really need to provide additional support for the industry.

Yesterday I raised this matter in the debate on industrial strategy. The oil and gas sector deal has been supported by every colleague here today, but I was disappointed that the ministerial response from the Despatch Box yesterday never mentioned the oil and gas industry or Scotland and did not pick up on the point that I had made, along with my hon. Friend the Member for Inverness, Nairn, Badenoch and Strathspey (Drew Hendry). I hope today’s Minister will respond. I am sure she is working on the oil and gas sector deal and is positive about it, but it would be good to have that confirmation.

I must repeat my disappointment about the pulling of the CCS fund. That must be a lesson for the Government going forward because it scared the industry and scares away other people trying to make private investment. Again, the Minister has spoken positively about the future of CCS, so it would be good to hear her reinforce that when she sums up.

I appreciate time is moving on, Mr Sharma, so I will try to hurry up, but I want to mention another renewable energy project that has been developed at Grangemouth and would support the Grangemouth refinery: the Grangemouth renewable energy project, which has been successful in the CfD auction. Because it contains biomass, the whole premise of the project is based on securing renewable heat incentive funding as well. The UK Government are looking at retrospectively capping the amount of RHI funding available to projects to 250GWh. That would put the Grangemouth renewable energy project at risk, so I urge the Minister to reconsider, because the project is so innovative. It is a world leader, it would support the Grangemouth refinery, and it could develop industry for export and help grow the UK economy.

We have heard some impressive contributions. All have concluded that the oil and gas industry has a bright future, and I certainly echo that. I look forward to hearing the Government’s response.