Future of the Oil and Gas Industry

David Duguid Excerpts

Thursday 14th March 2019 Westminster Hall

[Pete Wishart]

Absolutely. I was intrigued by the message from the Chancellor yesterday, when this was mentioned. Yes, there are huge opportunities for us. I think the hon. Gentleman will agree that it was mightily impressive to see the things that could come and how these skills could be applied and transferred. Perhaps the Minister can say what more work could be done to ensure that we get this. We would be grateful for any insight into the conversation he has been having with the sector on skills transfer.

The sector deal must bring forward proposals for how the sector will address its carbon footprint, both in the process of producing and extracting oil and gas, and by finding ways to reduce emissions from their use. The report received a mixed reaction from some environmental groups—I will put is as delicately as that. That surprised me, due to the range of recommendations we made and the care and diligence that we gave to shaping up some of the transition recommendations. We believe in a just transition and said as much in the report. We believe that if that is achieved, we will get to a new future—a green and transformative future for the sector.

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

I agree with the Chairman of the Committee, who is speaking very well about the report. We received criticisms from Friends of the Earth, for example, which said that there was no coverage of the impact of climate change. Does he agree that the organisation had clearly not got as far as chapter 6?

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

It is a pleasure to serve under your chairmanship, Mr Walker. As a member of the Scottish Affairs Committee, and as someone with 25 years’ experience of working in the oil and gas industry, I have taken a particular interest in this inquiry and very much welcome the report’s publication. Like all parts of north-east Scotland, my constituency has a deep relationship with the oil and gas sector. Many of my constituents work in the industry, as I did. The industry has helped bring prosperity to the area over the last half a century or so.

It is clear that the industry is moving into a new era, which is why the report is so important. While the industry is emerging from the downturn of the last few years, the medium to long term promises smaller reserve finds, reduced production rates, more decommissioning and the challenge of a wider transition towards a low-carbon economy. The prosperity of north-east Scotland relies on the industry making the most of this transition. The report makes a valuable contribution to the important debate on how we can achieve that. The industry has led the way in that debate, and its recognition of long-term risks and the need to address them will give many people confidence in the industry’s future.

It is worth recognising the work that many of the large oil and gas companies have been doing to encourage a transition towards low-carbon energies. They are often cast as cartoon villains in relation to climate change, but throughout the inquiry I have commended them for leading the way in the sector, and for taking climate change seriously. That commitment was exemplified by the creation in 2015 of the Oil and Gas Climate Change Initiative, initially made up of the BG Group, BP, Eni, Pemex, Reliance Industries, Repsol, Saudi Aramco, Shell, Statoil—now known as Equinor—and Total. Significantly, it was joined in the last year by American companies—Chevron, ExxonMobil and Occidental. Having worked for many of those companies as a member of staff, mostly for BP, and as a consultant for some of the others, I can confirm that that commitment to a low-carbon future is not just lip service.

The Committee’s report praises industry efforts such as Vision 2035 and the “maximising economic recovery” strategy, which aim to ensure that the industry continues to thrive in the medium to long term. As recommended in the report, I hope that the UK Government continue to listen to the call for an oil and gas sector deal to help the industry achieve those aims.

We need to use the next couple of decades to diversify the industry beyond just exploration and the production of hydrocarbons. Decommissioning technology and expertise will not only accelerate the reduction of decommissioning costs in the North sea but open up new export opportunities for the industry. Similarly, the subsea or underwater sector has great export potential, provided that we act quickly and do not fall behind other countries with expertise in this area, such as Brazil and Norway.

I am particularly pleased that the report recognises the potential of carbon capture, use and storage for the future of the industry. As the hon. Member for Perth and North Perthshire (Pete Wishart) mentioned, that is particularly important in my constituency. CCUS technology will be vital if we are to continue to use oil and gas in a low-carbon economy. In assets that have ceased or are due to cease production, decommissioned infrastructure can be converted to use for CCUS purposes. This report is certainly not the first time that that potential has been recognised. Banff and Buchan has been the location of previous proposals for CCUS projects, which were sadly deemed not viable at the time. I continue to believe that CCUS can be part of a great future for the energy sector in Banff and Buchan, provided that the right proposals come along.

I am particularly excited by the Acorn project by Pale Blue Dot. Unlike previous proposals, it focuses on the St Fergus gas terminal, which is the third-largest emissions site in Scotland. The St Fergus gas terminal is an attractive proposition because it is already linked by pipeline to the Grangemouth industrial complex. Unlike previous proposals, Acorn aims to achieve commercial viability by starting small and growing through additions to the core project later. Whereas a previous proposal for a CCUS power station at Peterhead would have cost about £1 billion, the cost of the initial Acorn project is estimated to be just £300 million.

I pay particular tribute to the Oil & Gas Technology Centre, run by Colette Cohen. Its vision is to become more about the technology than the oil and gas. The trade body, Oil & Gas UK, led by Deirdre Michie, provides a huge amount of co-ordination and expertise for the industry. Finally, the Oil and Gas Authority, run by Dr Andy Samuel, is an exemplar of how a UK Government body can be hugely effective when based closer to the action.

I look forward to the Minister’s response to the report and, in particular, the recommendations on the sector deal. The report’s tone and the industry’s approach are constructive and optimistic, so I hope that the UK Government’s response will be similarly constructive and encouraging. Together, we can build on the work already done, and take the necessary steps to help the oil and gas sector continue to contribute to the economy, not just for Aberdeen and north-east Scotland, but for the whole United Kingdom, sustainably and for decades to come.

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[Deidre Brock (Edinburgh North and Leith) (SNP)]

It is a pleasure to serve under your chairship, Mr Walker.

As has been mentioned, Scotland’s oil and gas industry is a world leader in many areas, health and safety being a notable one. Of course, we know the reason for that and we should pay our respects to the memory of the workers who have lost their lives in the industry, particularly in the Piper Alpha explosion and fire, but also in other incidents, including helicopter crashes, which the hon. Member for Coatbridge, Chryston and Bellshill (Hugh Gaffney) mentioned.

We should acknowledge that other workers have suffered serious injuries over the years while working in the industry. The safety record of North sea operations is better now, but that did not come easily or free of charge. The North sea industry has come a long way since its beginnings in the 1960s and the first gas from the Sea Gem rig, which gave us the first large-scale loss of life three months later. The industry has delivered substantial sums in wages, profits and taxes over the last half century, and it is incumbent on the Government to make a substantive contribution to decisions on the future of the industry, as the Committee’s report lays out.

That should include the transfer of skills to new industries, and it seems to me that renewable energy should be a major recipient of those transferred skills. Offshore wind farms and marine energy schemes would be ideal recipients of those skills. I recently had the privilege of visiting Nova Innovation, which is headquartered only a few hundred yards from my constituency office in Leith, and I was extremely impressed by the advances it is making and the pace of change in the offshore renewables industry. Nova leads the way in the tidal energy industry, and the Shetland tidal array looks like it may be at the leading edge of a new energy revolution. Just as Shetland was important in the development of the oil and gas industry, it may well be important in the development of the next energy industry.

While the Government are developing their future plan for the oil and gas industry, they really should be developing a parallel plan for the future of renewables that offers proper financial support for research and development and for connection to the grid. I have a bit of trouble having confidence in the UK Government to do that, however, given the record of past UK Governments when it comes to the North sea. Regulatory and taxation changes have come abruptly and swept in with very little consultation. Frankly, there is little in the current Government’s approach to legislating that gives me much hope of an alternative way of working.

[David Duguid]

Does the hon. Lady, my Committee colleague, agree with me and the testimony of witnesses that locating the Oil and Gas Authority, which is responsible for the regulations, in Aberdeen, close to the action, has already shown benefits and should show more in the future?

[Deidre Brock]

I agree that that was a definite point of progress and much to be welcomed, but the industry has been going for some 50 years, and some within it would argue that it was too little and almost too late. It is great that that came along, but much more can be done to support the industry.

As I mentioned with regard to improved support, I hope that the Government will surprise me, because the industry still has a lot to offer. The industry has plans to increase productivity so that in 16 years’ time it will be producing an additional £920 billion in revenue—not bad for an industry that we get told regularly is finished.

The scale of the contribution that the industry has made over the years is breathtaking. Scots will be aware of the famous, or infamous, McCrone report that was uncovered in 2005 by a friend of mine, Davie Hutchison, but written some years before he was born, in 1974. Professor McCrone was a UK Government civil servant at the time of writing, when he pointed out that the resources in the North sea were so enormous that they destroyed all the economic arguments against Scottish independence. Recently, Professor McCrone said that he regrets that the UK Government wasted that resource, frittering the income away, rather than investing in a sovereign wealth fund.

Furthermore, the McCrone report was written some years before the biggest discoveries in the North sea. Peak annual production did not come until 1999 and, as we have heard throughout the inquiry, new extraction techniques are increasing the potential recoverable resources even now. With another half century of extraction still possible, and new fields coming on stream in other areas, the industry has a long future yet. The Government need to step up to the plate.

One of the issues that has been mentioned is the protection of the environment and the development of serious carbon capture and storage proposals. Previous attempts to develop such schemes fell foul of Government inaction and broken promises. We need to see some serious commitment to making progress. I once heard about a pilot project, I think in Poland, where the carbon was captured and pressurised only to be driven a couple of hundred miles in tankers to the injection site, possibly defeating the purpose.

Some schemes that have been suggested before may well be capable of revival, and I am sure that more ideas would emerge when asked for. I hope that the Government will open the door to those ideas and help fund them, perhaps even hypothecating some of the revenue gleaned from the offshore industry, which should have gone into a sovereign wealth fund for Scots but is instead frittered away by successive UK Governments. The Government should consider doing a lot more for the environment with the resources brought in by the offshore industry. They could match the Saltire tidal energy challenge fund launched by the Scottish Government earlier this year, or reinstate the marine energy subsidy. If oil and gas were the energy choices in the second half of the 20th century, renewables will fill that role in the 21st century. We urgently need Government investment to make that industry a world leader.

The oil and gas industry is not dead yet, not by a long way. With at least as many years of exploitation left as we have already seen, there is still some way to go. The UK Government should sit down regularly with the industry to help plan the next half century. Vision 2035 is the industry view of the next few years; it would be good to see a UK Government vision or, better still, one agreed by the Government with the industry.

[Peter Aldous (Waveney) (Con)]

It is a pleasure to serve under your chairmanship, Mr Walker. I congratulate the Scottish Affairs Committee on producing this informative report and on securing the debate.

The oil and gas industry is extremely important in the north-east of Scotland, but it also has other clusters, although not quite as large, in the north-east of England and East Anglia, which I represent. I chair the British offshore oil and gas industry all-party parliamentary group. It is important to remember that the industry is a national one and that it has a supply chain that extends throughout the whole of the UK.

The industry has been, I would say, the British industrial success story of the past 55 years. The results of extracting hydrocarbons on the UK continental shelf have been the creation of thousands of well-paid good jobs, the generation of an enormous amount of money for Her Majesty’s Treasury, and the development of expertise that can be taken, and has been taken, all around the world. Go to Libya, the gulf of Mexico, Kazakhstan or China, and one hears Scottish, Geordie and East Anglian accents.

[David Duguid]

Following on from something the Chair of the Committee said in his opening remarks—I meant to say this in my speech—I have benefited from that skills transfer, having worked not in Libya but in some of those other places around the world where oil and gas are prevalent. Does the hon. Member for Waveney (Peter Aldous) agree that an important aspect of the sector deal, and the urgency of it, is to encourage the retention of those skills in this country in order to develop the technologies and innovations that we have discussed?

[Peter Aldous]

My hon. Friend is right. We have developed enormous expertise in the oil and gas sector which it is important to retain and build on. We are just beginning to see that in the offshore wind sector as well and, as I will come on to, the two are inextricably linked.

Yesterday was an important day for the industry. The APPG had its annual parliamentary reception, and those attending were in good heart and had a positive outlook for the future. We also had the Chancellor’s spring statement. Normally, the APPG lobbies Government hard coming up to annual Budgets and statements, but yesterday the Chancellor made no mention of the industry. I think that was mainly because he is keen for statements to be just that and not mini Budgets, but in many respects that was good news, because the industry wants a stable fiscal regime with no unforeseen, unpleasant or unhelpful surprises. That said, as we anticipate the autumn Budget, I suggest that we should all be back in top lobbying gear.

I acknowledge that we are now entering the second half of the contest—perhaps I should say challenge—of extracting oil and gas on the UKCS, but we should emphasise that this is not a sunset industry, as indeed colleagues in all parts of the Chamber have said. As in many matches, the best performances, goals and tries come in the second half. The industry has come through a great deal in recent years, but while challenges remain—in particular the low level of drilling activity and exploration—it is largely in a good place. Last year, significant final investment decisions were made on a number of major projects, production performance was strong, and unit operating costs had stabilised.

I shall highlight three areas in which the industry, the Oil and Gas Authority and the Government need to work together in the immediate future to maximise the sector’s potential for the benefit of all those who work in it and for the UK. First, attention needs to be given to strengthening the industry’s supply chain. Many companies’ revenues and margins are under extreme pressure, and increased collaboration and innovative contracting models are needed. If those are put in place, as a country we will be able to continue to compete for international investment, to provide security of energy supply, and to create and support highly skilled and fulfilling jobs.

Secondly, we need to build up expertise and create specialist hubs to carry out decommissioning. A good start has been made with the launch of the National Decommissioning Centre, but we must have it in mind that that is an enormous prize, not just on the UKCS—and, from my own perspective, most immediately in the southern North sea—but in basins all around the world.

Thirdly, the sector has made a good start in promoting and facilitating the transition to a low-carbon economy. Instead of the Danish oil and natural gas company and Statoil, we talk about Ørsted and Equinor. Gas has an important role to play in the transition to a low-carbon economy. In the southern North sea, the oil and gas and offshore wind sectors are collaborating on such innovative projects as gas to wire, which involves gas being generated into electricity offshore and transmitted to shore via spare capacity in the subsea cables that are used for the wind farms.

There are plenty of challenges, but my sense is that the industry is resurgent and brimful of ideas. With the right nurturing, promotion and collaboration, it can play a key role in the UK on the post-Brexit global stage.

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[Douglas Chapman]

My hon. Friend makes an excellent point. Norway’s population is very similar to Scotland’s and it has a similar ability make good from the resource it found on its doorstep. It now has the world’s largest sovereign wealth fund, yet in Scotland and the UK we have not put anything aside for future generations. That is a huge lost opportunity for the industry and the UK people.

[David Duguid]

We often hear about the Norwegian sovereign oil fund. Is the hon. Gentleman aware that the same fund is investing heavily in the UK market as we prepare to leave the European Union?

[Douglas Chapman]

That is a fantastic option that Norway has, but in the UK we do not have that wealth fund to decide how we will invest in the future. That makes a bit of a mockery of us. We have had all that wealth; Norway has done a huge amount with theirs, but we have taken ours off our balance sheet and spent it as it came in. We should have put some away for future generations.