Exploration and Appraisal Drilling

Jim Shannon Excerpts

Tuesday 24th February 2015 Commons Chamber

[Mrs Mary Glindon (North Tyneside) (Lab)]

I am really pleased that the Minister who will respond to this evening’s debate is my former colleague on the Environment, Food and Rural Affairs Committee, the Under-Secretary of State for Energy and Climate Change, the hon. Member for Hastings and Rye (Amber Rudd). I hope it will be a good debate.

This debate could not be more timely, as only today Oil & Gas UK published its 2015 activity survey, which has, quite rightly, attracted much news coverage throughout the day, not only because of the ongoing crisis with the price of oil, but because, as the chief executive of Oil & Gas UK, Malcolm Webb, has said:

“This offshore oil and gas industry is a major national asset.”

Although the report contains some bad news about the fortunes of the oil and gas industry, it also identifies the potential of the UK continental shelf, which, according to the recent Wood report, has produced 41 billion barrels of oil equivalent, and it is estimated that a further 12 billion to 24 billion could be produced.

The report highlights a number of important statistics, notably that 1.42 million barrels of oil equivalent per day were produced in 2014, which represents the best year-on-year performance in 15 years. However, production revenues fell to just over £24 billion for the year—the lowest since 1998—and there was a negative cash flow of £5.3 billion, which was the worst position since the 1970s.

It is expected that production could be about 1.43 million barrels of oil equivalent per day this year, and up to 15 new fields could come into production. By 2019, more than half of the UK continental shelf production is likely to come from fields that have started production since 2012.

The survey states that the long-term outlook for the UKCS is bleak, with drilling activity collapsing and prospects for significant new developments fading. Exploration activity was significantly worse than expected in 2014, with only 14 of the expected 25 wells drilled, which reflects the downward trend since 2009. An inability to access capital was cited as the main reason for low exploration activity, leading to the discovery of just 50 million barrels of oil equivalent with the potential to be commercially developed.

As few as between eight and 13 exploration wells are forecast to be drilled in 2015, as the lower oil price adds to existing barriers. Eighteen appraisal wells were drilled, which is more than were forecast, but that is a significant fall from the 29 wells drilled in 2013. No more than five appraisal wells are forecast for this year, a fall driven by poor exploration results over the past four years.

[Jim Shannon (Strangford) (DUP)]

The hon. Lady is outlining the case for help for the industry. We all know that the good news this year has been the lower price at the pumps, meaning that we all—my constituents—benefit, including from the fact that that has driven down the price of oil for home heating. There have been real benefits from the reduction in the oil price. I know the hon. Lady accepts and acknowledges that prices have come down, and therefore that inflation has fallen and people have more money in their pockets. Is she suggesting to the Government that we are looking for tax incentives for the oil companies so that they can proceed?

[Mrs Glindon]

That is exactly what I hope for from the Government, and I will come on to that.

Six more development wells were drilled than in the previous year. In relation to reserves, the survey states that there are potentially 10 billion barrels of oil equivalent, with 6.3 billion in sanctioned projects or under development and 3.7 billion yet to get boardroom go-ahead. However, companies say that fewer than 2 billion barrels of oil equivalent are likely to be developed, and that figure could fall further because of current global capital rationing. Under the right conditions, the industry would need to invest £94 billion to recover those reserves.

The fact is that our reserves and untapped resources could provide a successful industry for years to come, but the industry faces exceptional challenges and an uncertain future. There must be a concerted effort on tax, regulation and cost to make the basin more attractive to investors and to ensure that significant sums of much needed capital come to the UK.

The best year-on-year performance was largely due to new investment in new start-ups enabled by tax allowances. Tax concessions are generally the most effective and meaningful incentives. There needs to be a permanent reduction in the headline rate of tax for the industry, a simplification of the tax allowance structure and stimulus for exploration.

I hope that the Minister will confirm that the Chancellor, in his forthcoming Budget, will significantly reduce the headline rate of tax for the industry, which is currently between 60% and 80%. The Oil and Gas Authority must be rapidly resourced with the right capability and capacity to implement swiftly the recommendations of the Wood report. Enhanced capability and the authority of a better resourced regulator would greatly improve the stewardship of our oil and gas resources on the UK continental shelf, and cut through many of the existing blockages to maximising its economic recovery.

The Treasury is going through a public consultation regarding a proposed investment allowance for North sea gas and oil developments. The allowance should be modified to include provisions to support exploration and appraisal drilling along similar lines to the Norwegian approach. A decade ago Norway was faced with a slowdown in exploration and investment, but it has solved the problem by giving a massive rebate to those exploring in Norwegian waters. It is only through exploration that we find new discoveries.

It would be helpful if receipt of the investment allowance was subject to an undertaking by operating oil companies that full and fair opportunity on a level playing field will be given to the UK supply chain to tender for related contracts. The North sea can indirectly be a significant stimulant to jobs, especially in the manufacturing sector and deprived areas of the UK such as the north-east. Over the past five years the majority of North sea fabrication contracts have been placed overseas. The Government can do a lot more to support the British fabrication industry without breaching EU or World Trade Organisation regulations. Our domestic fabrication industry has the skills, expertise and track record to fulfil most of the contracts that have, sadly, been placed elsewhere.

Oil and Gas UK has recently highlighted that development costs for new offshore facilities over the past four years have risen to unsustainable levels. Budgets have been exceeded and projects have suffered major delays. In most cases the projects under review were constructed outside the UK. Recent contracts awarded by Maersk to overseas fabricators for the forthcoming development of the Culzean field—I apologise for my pronunciation—have been widely reported. However, very few UK jobs will be created by the development of this field, even though Maersk will benefit from significant UK tax concessions. At best, UK fabricators will be second-tier contractors. UK fabricators, including OGN in my constituency, are facing a bleak future, along with the rest of the industry, with a limited number of contracts on the horizon. Unless those fabricators win a reasonable proportion of the projects, there will be significant job losses, likely yard closures, and the extinction of domestic manufacturing skills that will never be restored.

It is vital that we maintain pressure on oil companies to place work in the UK. That pressure can be maintained by ensuring that the work of the Department of Energy and Climate Change industry development team is fully transferred and incorporated in the Oil and Gas Authority. For my part, I will press to have the work of the cross-party industry promotion group carried forward into the next Government. That group, of which I am a member, has proved to be very successful. It will be meeting three major operators this week to discuss their projects and what opportunities those will bring to the UK supply chain. I look forward to reassurance from the Minister that she is listening to the oil and gas industry, and that action taken by the Government will mean that jobs are protected and our major national asset is there for many years to come.