Offshore Oil and Gas Industry

Kirsty Blackman Excerpts

Thursday 3rd March 2016 Westminster Hall

[Peter Aldous (Waveney) (Con)]

I beg to move,

That this House has considered the offshore oil and gas industry.

It is a pleasure to serve under your chairmanship, Mr Walker, for this important debate. I am grateful to the hon. Members for North Tyneside (Mary Glindon) and for Aberdeen North (Kirsty Blackman) for the work they did in helping to secure it.

The North sea oil and gas industry is a significant employer in my constituency, with Lowestoft and its port being an important service centre. It is important to have this debate now as the industry faces major challenges that need to be addressed urgently. Further fiscal measures need to be introduced in the Budget on 16 March, and the debate provides us with an opportunity to consider what such measures should be as well as the industry’s longer term framework.

First, the industry must survive. We must then ensure that everything possible is done so that it can thrive. We owe that to those who work in what is in many respects a dangerous industry, to their families, to the communities from which they come and to those businesses who are making investment decisions in a risky and unpredictable market—particularly so at this time—to give it that sustainable and, I think, exciting future.

The oil and gas industry on the UK continental shelf faces serious challenges. It is fighting for its very existence and tens of thousands of people’s livelihoods are on the line. About 75,000 jobs have gone in the past 15 months, primarily due to the collapse in oil prices and the increasing maturity of the UKCS as an oil and gas producing basin. The industry is drowning in a tsunami of oil and gas supply just as demand is cratering around the world.

In mid-2014, oil was trading at in excess of $100 a barrel, but today the price is between $30 and $35 per barrel. At the beginning of the year the combined market value of 112 publicly traded oil companies—the entirety of the UK’s oil and gas industry excluding Shell, BP and GP—had the same value as Marks and Spencer: £7 billion. Two years ago, just one of those companies, Tullow Oil, was worth more than Marks and Spencer: it had a market value of £8.2 billion.

Oil & Gas UK’s recently published activities survey for last year confirms the serious nature of the situation. While production on the UKCS rose by 9.7% in 2015 to 1.64 million barrels of oil equivalent a day, revenues fell by 30% between 2014 and 2015 to £18.1 billion, and although the industry has been successful in achieving significant cost reductions and efficiency improvements, 43% of the UKCS oil fields are likely to be operating at a loss in 2016 at prevailing prices. Oil & Gas UK estimates that, in the southern North sea, 51 fields may cease production by 2020. That is a third of the fields in that area and equivalent to 51 factories closing their gates.

Oil and gas companies are cutting almost all of their discretionary expenditure to survive in a $30-a-barrel world. Intense global competition for capital and contraction in expenditure is leading to a major downturn in activity and subsequent job losses across the sector. There is concern that the situation will get worse over the coming year as companies in the supply chain complete contracts commissioned in better times and the insulation provided by price hedging taken out by many operators disappears. The industry is used to working with great uncertainty and risk, but with greater market volatility and lower prices likely to prevail for much longer augmented by the challenges of working in a mature basin, there is a need for a more robust framework. There is a moral imperative as well as a business imperative to manage the industry better.

Some might say that, with all those challenges, why does it matter? It really matters. The industry is vital to UK plc. Despite the job losses, 375,000 people are employed in the industry, its supply chain and ancillary service industries, with those jobs concentrated around Aberdeen, on Tyneside and Teesside, and in East Anglia around Great Yarmouth and Lowestoft. If we do nothing, in effect we will be hollowing out those communities.

There will also be a knock-on effect on other areas of the economy such as steel production in manufacturing and in the City, where oil and gas company shares figure prominently in many pension funds. The industry has also built an integrated supply chain that is the envy of the world, which produces exports worth an estimated £39 billion a year. We have great depths of knowledge and expertise built on decades of experience that we must nurture and cherish, not throw away.

In 2014, UK oil and gas provided 68% of the UK’s total primary energy and, in the same year, 45% of the oil we used came from the UKCS, 48% of natural gas came from UK natural gas production and the industry provided £2.2 billion in taxation to the Treasury, though that was the lowest figure for 20 years. The situation has deteriorated in the past 18 months, but, despite the serious challenges, the UK offshore oil and gas industry has a vital role to play in the next 30 years. There are numerous reasons for that.

First, energy security must be a priority for the nation. We need to be able to maximise production of oil and gas at home to reduce our dependency on imports in an increasingly uncertain world. Secondly, while 42 billion barrels of oil equivalent have been produced from the UKCS in the past 50 years, there are known reserves of 20 billion barrels of oil and gas to be recovered from our offshore waters. Of that, there are 8 billion barrels of natural gas. As the Secretary of State set out in her reset speech for energy policy in November, gas has a key role to play in keeping the lights on in the immediate future. Recovery of those reserves, and hopefully others, is a prize worth fighting for.

Thirdly, the Secretary of State in her reset speech also set out an exciting future for offshore wind, an industry that is bringing exciting opportunities to East Anglia. Offshore oil and gas in many respects complements offshore wind because their supply chains overlap. The transition to a low-carbon economy will not take place overnight, and oil and gas production on the UKCS has a vital role to play in securing a smooth transition and helping to build another world-class industry of which Britain can be proud.

Fourthly, I do not wish to be unnecessarily negative about another technology, but we must be realistic about the role that onshore fracking will play in the immediate future. It will have to overcome planning hurdles, and it should be pointed out that in the US they have known about large tight gas fields since the 1930s. They are working those now because new technology has made that viable. In the UK, first we must establish the extent of those fields and then we must assess their full economic viability and establish the infrastructure to service them. We already have that infrastructure in the North sea, so it makes sense to make best use of it.

While the industry’s challenges have come into stark focus in the past 18 months as the price of oil has plummeted, its structural defects have been evident for some time. That is why the previous Secretary of State, Ed Davey, instructed Sir Ian Wood to conduct a review. Sir Ian published his findings in February 2014. They were endorsed across the industry and across this House, and form the basis of much of the Energy Bill. His main recommendations were to commit the industry to the principle of MER—maximising economic recovery from the UKCS—and, to achieve that, to create a new arm’s-length regulatory body to provide effective stewardship and regulation. That body is the Oil and Gas Authority, which is the cornerstone of a new strategy: a tripartite approach of industry, the OGA and Treasury working together. The OGA will promote collaboration, which is vital to ensure that infrastructure is used and shared on a fair basis and that decommissioning takes place at the right time, not prematurely, which would undermine the objective of MER. The OGA will give greater security to those working in the industry.

Some might say that Sir Ian wrote his report in a different time, when the industry was not facing the acute challenges it is today, and that his recommendations are out of date. I disagree. The framework he recommends provides the industry with the best chance at survival and at realising its potential over the next 35 years. Time is of the essence, as Sir Ian stated in his report, and it is vital that the Energy Bill receives Royal Assent as soon as practically possible in the next few weeks.

Sir Ian stressed the importance of the industry collaborating. I will come back to that theme quite a lot over the next few minutes. It was a theme taken up by Deloitte in its recent publication, “Making the most of UKCS: Collaborating for success”, which highlighted that all too often in the past, collaboration in many oil and gas companies has been left to a few heroes—the few trusted individuals who

“actively look for opportunities to collaborate and ensure that their partners share the benefits.”

Deloitte points out that

“companies should do more to foster a collaborative environment through leadership, targeted strategies, allocated resources and personal objectives linked to rewards. Successful collaboration depends on encouraging workforce to focus on the end-result, sharing goals and empowering staff to accept compromise, rather than systems and processes.”

Deloitte adds that while there are good examples of collaboration, there are clearly opportunities for improvement for both operators and those in the supply chains, which should be doing more to

“improve financial incentives and contractual terms to encourage collaboration.”

It adds that

“operators especially need to improve in areas that foster innovation—such as seeking out new ideas and solutions, or implementing change effectively.”

It is vital that instead of a few individual heroes, there is a whole legion of them operating throughout the industry.

I will provide a quick comic interlude. On Saturday, on the eve of the Oscars ceremony, the actor George Kennedy died. He won an Oscar in 1967 for his role in “Cool Hand Luke”. For people of my generation, he was perhaps better known for what was a less challenging role in acting terms, playing Carter McKay in “Dallas”, in which he spent most of his time fighting with the Ewings for control of both Ewing Oil and WestStar Oil. While “Dallas” was glamorous fiction, it parodies what some people say the oil industry used to be about: aggressive competition and greed descending into criminality. Those days, if they ever existed, are long behind us.

The ethos that must be installed across the industry going forward is one of collaboration—collaboration between the OGA, industry and the Treasury, with the OGA providing the framework for that collaboration. We now have a regulator with the same bite as its counterparts in Norway and the Netherlands. That collaboration must involve industry, building on the significant progress it has made in the past year in reducing operating costs from an average $24.30 per barrel to $20.95 per barrel. Yesterday, at the Southern North Sea conference in Norwich, the ambition of reducing costs to $15 per barrel was stated. One operator, in what I should emphasise was very much an isolated case, explained how it was achieving costs of $7 per barrel.

In this tripartite approach, the Treasury needs to deliver its side of the bargain, providing a taxation framework that shows real confidence in the industry’s long-term future and helps to attract global footloose investment. However, collaboration must not stop there; it must permeate the industry and beyond. Operators must collaborate with operators. That is evidenced by the partnership currently being operated by Faroe Petroleum, Petrofac and Eni Hewett, about which I also heard yesterday.

Trade organisations must also collaborate with one another, which again was evidenced yesterday in Norwich by the signing of a memorandum of agreement between Oil & Gas UK and the East of England Energy Group. Operators must collaborate with their service providers, building long-term partnerships and learning lessons from other sectors such as the aviation and car industries. Small and medium-sized enterprises operating in the sector have a proven track record of driving innovation and achieving efficiencies. Operators now need to work with them.

Finally, the sector needs to work with other sectors, in particular the offshore wind sector, with which it has a great deal in common. The oil and gas industry post-Piper Alpha has a good track record of operating safely in what is a hazardous and dangerous environment. That must never be compromised, but one has to ask: is it necessary to have two separate regimes—one for the oil and gas industry, and one for the offshore wind industry? Going forward, collaboration must underpin everything. It is probably too late for the Budget in under two weeks’ time, but for the autumn statement, consideration should be given to introducing measures that encourage collaboration—for example, tax breaks and incentives to carry out seismic work that can lead to new discoveries.

Alongside the implementation of Sir Ian’s recommendations and the move towards a more collaborative approach to business, changes to the fiscal regime are imperative, not only to get over the immediate challenges the industry faces, but to provide a framework to attract global investment. That is already acknowledged by the Treasury. Its “Driving investment” plan, which came out in December 2014, recognised that substantial improvements in the oil and gas fiscal and regulatory landscape, including a reduction in the overall tax burden, are required for the UKCS to remain globally competitive and to attract international capital.

When the “Driving investment” plan was published, the oil price was around $60 a barrel. Given that the price is now in the range of $30 to $35 a barrel and that the observed impacts of prevailing low oil prices and the depth of the downturn in the UKCS are considerable, those improvements are even more imperative. There are huge pressures on company and project financing, and more job losses and company defaults are a real worry. Further fiscal measures are now required as a matter of urgency to support the industry, and I urge the Government to bring such measures forward in the forthcoming Budget.

The package included in the March 2015 Budget was very much welcomed by the industry and should now be the foundation for further measures. Such additional measures would also help the industry’s supply chain and therefore meet the second principle in the “Driving investment” plan: revenues. In setting further reforms, we must have in mind the requirements of the secondary industries. I would therefore be grateful if my hon. Friend the Minister, along with her Treasury colleagues— I am delighted to see one such colleague, the Exchequer Secretary to the Treasury here today—included Oil & Gas UK’s proposals in the Budget. I will not go through them, because Members will have seen them, but they set out the situation clearly and speak for themselves.

In addition, Oil & Gas UK has requested two non-fiscal measures to be introduced. First, access to finance is a major problem at the current time. That could be overcome to a large degree by the introduction of a Government loan guarantee scheme, which would help companies to access affordable working capital, which is vital for their survival in the downturn. Constraints on expenditure and an increasing unwillingness among finance markets to lend are currently resulting in a liquidity crunch across the sector, which is driving a further downturn in activity.

It is also very important, out there in the real economy in the regions in which we operate, for businesses and their representatives to talk to their banks, to explain their problems and to work with them. The feedback I am getting in East Anglia is that at the moment the banks are being responsible, but in other sectors in the past—whether it was the dairy or the house-building industry—when times have got difficult, the banks have sometimes panicked.

[Kirsty Blackman (Aberdeen North) (SNP)]

I was at a meeting last week with a local supply chain company, which said it was finding it difficult to get finance and that although a number of banks were saying to Government that they are still lending, they were saying to local oil companies, “We are not lending to oil right now.”

[Peter Aldous]

It is very helpful to have that feedback. I raised this at the New Anglia local enterprise partnership oil and gas taskforce meeting last week, and the feedback I got from people was that they had spoken individually to all the banks in the region and that the banks were being co-operative. However, it can, of course, vary from region to region, and that is what we have look out for.

I have talked about the short-term measures. Secondly, in the longer term, the Treasury needs to work with the industry on producing an overall road map for fiscal change. That would include not only the fiscal changes in this Budget, but a longer-term blueprint for further reductions in the fiscal burden as the basin matures. That would help to provide greater clarity for all those working in the UKCS at a time of uncertainty, and it would boost investment and hopefully give confidence to banks. In short, the industry needs its own long-term economic plan.

It is also important that local initiatives are put in place to support people and businesses at this uncertain time. The New Anglia LEP oil and gas taskforce, of which my hon. Friend the Member for Great Yarmouth (Brandon Lewis) and I are members, has developed a package of measures to provide advice and support to businesses and their workforce. The taskforce commissioned research that showed that 26 companies have filed for administration in the Lowestoft and Yarmouth area between April and October 2015 and more than 1,000 people directly employed—that is, directly employed people only—in the industry have been made redundant, with many companies asking staff to take unpaid leave or salary reductions. As a result of that research, the taskforce has agreed a package of measures prioritising two areas.

First, for oil and gas businesses, free initial face-to-face assessments will be provided, followed by, if required, a 50% discount towards a more intensive support package that will be provided by specialist consultants. That will include advice on diversification, restructuring and alternative growth opportunities, as well as on developing business plans. Those discounts will be funded by Norfolk and Suffolk County Councils and by Waveney District Council and Great Yarmouth Borough Council, which have set aside £80,000. In addition, the LEP is modifying its growing business fund grant scheme to support and sustain future business plans, with £250,000 being set aside.

Secondly, those losing their jobs are being provided with support to retrain, find alternative employment or maintain their industry certificates. Assistance will be provided via Jobcentre Plus to ensure that displaced workers are properly supported to access new job opportunities in the local area. The taskforce is also working with local colleges and training providers to ensure access to relevant training courses.

It is important to acknowledge those in the New Anglia LEP and the East of England Energy Group who have worked tirelessly to come up with this package, as well as the four councils and the LEP for providing the funding at a time when their budgets are under great pressure. It is right that such packages are worked up locally, so that they are tailored to the specific needs of those in the local areas, but there is a role for Government. First, they should co-ordinate such initiatives across the country—I understand that Scottish Enterprise is doing something similar, although I am not aware of the position in the north-east and in the north-west. Secondly, if the schemes are a success but the downturn goes on for longer, the Government should look to provide the funds for these initiatives to continue.

If you will bear with me for a few minutes, Mr Walker, I am getting towards the end of my speech. Let me say a few words about the urgent need for a regional plan for the southern North sea, on which the OGA has started work. Sir Ian Wood recommended that regional plans should be developed for the different areas of the UKCS. There is a vital need to do that in the southern North sea, where there are significant potential reserves of gas remaining to be recovered. That is evidenced by the Cygnus find—the largest gas discovery in the last 25 years; work is due to start later this year—and the potential of the Tolmount discovery. With gas continuing to play a key role as the main fuel source for UK electricity generation, this plan is important to maintain security of supply.

Today, gas is very cheap and it is readily shipped around the world in liquefied natural gas form. Seventy per cent of gas is currently imported, but much of it is from countries that have an unpredictable political outlook. However, the gas price is increasingly volatile and we need to have our own domestic source of supply. Although the southern North sea still has significant potential, it is particularly vulnerable to premature contraction and decommissioning. We need to ensure that the existing infrastructure is fully utilised and not placed at risk, and that licences are in the hands of those prepared to invest.

The price of gas used to be closely tied to the oil price. With the rise of shale gas in the US, that is no longer the case, and I am advised that there is now a closer link to something called the “Henry Hub”. That leads one to consider whether there should be a different fiscal regime for gas in the southern North sea. Industry opinion is divided; some say that the fuel should have its own tax framework, whereas others say that would be complicated and that we need to move to a simpler system. On balance, I am coming round to favouring the latter, but I urge the Treasury to look at this issue closely.

Although the southern North sea is a mature basin and, in many respects, we are embarking on the final chapter of oil and gas recovery on the UKCS. In some respects this voyage is a new venture, with a new business model built on a cornerstone of collaboration. Up until now, the big oil companies have led the way in pursuing innovation, efficiency and cost reduction. With the industry in future likely to be made up of a larger number of smaller businesses, a new way of harnessing the drive for innovation needs to be found. The offshore wind catapult has been very successful in promoting innovation and driving down costs. I would be grateful if the Government considered setting up a similar catapult for the oil and gas industry.

In conclusion—I sense I have tried your patience for a little too long, Mr Walker—the North sea oil and gas industry is a great British industry, which has given so much to the UK over the past 50 years. It is currently facing extreme challenges, but it can play a key role for the next 35 years. That key role involves keeping the lights on, providing good and exciting jobs and making a significant contribution to GDP—to Great Britain plc. Three ingredients are required for it to do so: the right regulatory framework—Sir Ian has provided us with that particular framework, which we now need to move forward with—the right fiscal framework and, above all, a spirit of collaboration.

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[Kirsty Blackman (Aberdeen North) (SNP)]

It is a pleasure to serve under your chairmanship, Mr Walker. With my fellow MPs, I am pleased that this debate was chosen by the Backbench Business Committee and I appreciate the fact that it agreed that the debate could be held today.

I represent Aberdeen North, which is obviously one of the places most heavily affected by the current downturn. Last summer, when we were first meeting oil companies and talking to industry bodies about what was happening in the oil and gas industry, they were talking about the oil price being “lower for longer” and about being cautiously optimistic about the future. There has now been a shift in the feeling: it feels as though the price will be lower and lower for longer and longer. They are not talking just about being robust at $60 a barrel; they are talking about being robust at $50, and there are even whispers about people trying to be robust at $40. It has become a completely different feeling, even in the few months since the summer, because the global oil price is so unpredictable and it is not something that we can do anything about. One industry leader, when asked the other day what we could do about the oil and gas price, said, “Hope.” That is the only thing that we can do about the price.

There are other things that can be done, though. I want to talk about the situation in Aberdeen and how we are feeling now. I read an article from a couple of years ago that said that about 40,000 people were employed directly in the oil and gas industry in Aberdeen and Aberdeenshire. Aberdeen is a relatively small city; only 225,000 to 250,000 people live there, so if 40,000 are directly employed in the oil and gas industry, that is a massive proportion of our employment.

I grew up in Aberdeen. It was always the case that the dads of people I knew were away offshore, working in the oil industry. Now, people I know are themselves away offshore, or their husbands are away offshore, working in the oil industry. It is every second or third family. The oil and gas industry is not a small employer in the city; it is massive. I was talking to Scottish Enterprise the other day, and it reckons that there have been 10,000 direct job losses in the industry.

Looking more widely, Aberdeen and Grampian chamber of commerce did a survey last November that found that hotel occupancy was down by 15%. The people working in hotels are finding themselves squeezed as a result of the downturn; those are indirect job losses. Housing sales in Aberdeen are down by 14% in the course of a year. Taxi drivers are complaining like crazy—they always complain, but they are complaining particularly about the downturn. One of the local food banks made money by selling fruit to companies. Those companies are no longer buying that fruit because they have cut back on the extras, so the food bank, as well as seeing extra people coming through the door, is suffering on the basis that it does not have the revenue streams that it had before. We are not just talking about direct job losses in the oil and gas industry in Aberdeen; this a real issue for our whole city.

When oil and gas operators were surveyed in November, 85% of them foresaw further redundancies in 2016. This is not the end of the story for Aberdeen; the bottom has not been reached yet. We do not know what the oil price will do in 2016, but we are pretty sure that it will not get back up to $100 a barrel.

The job losses are a major issue, but there are many people in Aberdeen who have never worked in the oil and gas industry. Despite it being so important for our city, there are many people who have never had those high salaries and who have always struggled. Because we had the industry and the high salaries, they have had to struggle against massive house prices and, for example, a pint of beer in a pub in Aberdeen costing much more than it does down the road in Dundee. Having struggled with all those issues, the knock-on impacts from what is happening in the industry now are hitting them even harder, even though they never had the high salary beforehand to back them up. Therefore, this is a very big issue for our city—for our micro-economy in Aberdeen.

I do not want to carry on being quite so gloomy. There are patches of light—good things happening in the industry and in the wider economy in Aberdeen. We are seeing a degree of resilience in Aberdeen. Aberdeen has been through downturns before. It has not been through any big ones in the times that I can remember, but it has been through downturns before; we have suffered before. One big issue that we are struggling with involves those companies that are becoming market leaders in things such as decommissioning. We are now what is called a super-mature field in the North sea and we are getting very good at and ahead of the curve on things such as decommissioning, but there are issues.

The hon. Member for Waveney (Peter Aldous) mentioned the banks. Although the banks say that they are lending, the people from the companies I have been talking to say, “Yes, the banks say that, but they are not actually following through and it is not happening.” There is an issue there. The banks are not lending to the companies, so the companies are in a shakier situation financially, so they are less likely to get money from the banks. If the Government showed confidence in the oil industry and made it clear that they would support the long-term future of the industry, we would get out of the current cycle of banks refusing to lend and then the companies not being so financially viable—and on and on.

The Scottish Government are doing a huge amount to try to inspire confidence in Aberdeen and to make people realise that things are good in Aberdeen. The Scottish Government, along with the UK Government, have signed the city deal, with each putting in £125 million for the city. The Scottish Government are also putting in extra money that will particularly benefit the city. They are putting in £254 million of infrastructure investment, which is additional to the Haudagain roundabout improvements—people who have been to Aberdeen have probably heard about the Haudagain. Also, there is the Aberdeen western peripheral route, which has been on the books—in the pipeline—for an awfully long time. Basically, in Aberdeen we do not have a bypass—our current “bypass” goes through the city. The new road will actually go around the city. It is a huge infrastructure project and it is doing its bit to help the economy and increase confidence in north-east Scotland.

We in Aberdeen have been shouting for many of these infrastructure improvements for a very long time, and now they are finally coming through. I am particularly pleased to see that measure of confidence from the Scottish Government. There has been a slight measure of confidence from the UK Government, I agree, but we would like more. We would like more support for the industry in general and for Aberdeen in particular.

I have spoken about confidence and the effect that that will have on things such as the banks. There are a couple of other issues. What if the big companies decide that the North sea is too difficult? Many of these companies are global companies. They can choose to invest elsewhere; they can choose to put their money elsewhere. That is bad for the UK because the UK does not get the tax take anymore, but something that is a major problem is if people start to decommission too early. If people know anything about the infrastructure of the North sea, they know that if we start to decommission one place, the satellites are scuppered and further out fields are less viable as a result. This is what the maximising economic recovery report was about. If we think about it purely in fiscal and financial terms, it is hugely important to push decommissioning out as far as possible, to maximise the amount of money that the Treasury will take, to increase jobs for the long term and to become the market leader in the supply chain and the decommissioning sector.

What can the Government do about the fiscal regime? We would really like them to look at the supplementary charge and at the tax regime around late life assets, to ensure that assets can be transferred to smaller companies that can prolong the life of the assets to get as much as possible out of the fields before choosing to decommission. Also, any pressure that the Government can put on the banks actually to lend, rather than just to say that they are lending, would be fantastic.

I have another wee ask for the Government although it is not really for either of the Ministers present to answer. Will the Government ensure that the jobcentre gives my guys the correct advice when they walk through the door? There are lots of things going on for people who have been made unemployed in the offshore oil and gas industry. I am sure that my hon. Friends will talk about Scottish Enterprise’s taskforce. Jobcentre staff need to know all that information, so that when somebody walks through the door, they can give them all the information about the taskforce and about where to go for extra training.

Aberdeen has not been in this situation before. We are talking about highly skilled people, some of whom have never been unemployed in their lives. They need to be given the right support because we cannot afford to lose them from the oil industry or from Aberdeen. People are making the choice to go to Dubai and to other countries to support their families financially, but we do not want to lose them and their expertise from this country. We do not want them to have to go to another industry if there is a job opening in the oil and gas industry here. If there is a job opening in renewables—fantastic—we can get them moved to that field and improve our standing in it. We need these people to be pointed in the right direction to make our economy, particularly our micro-economy, as prosperous as possible

Every company and industry body that I have spoken to thus far is cautiously optimistic about the OGA. Everybody says, “It looks like the OGA is going to do the job that it is setting out to do. Let’s see if it follows through.” The Government have backed the OGA and I hope that they continue to do so. We will continue to back the OGA and support it in whatever way we can because its work is vital and it has been very good at listening thus far.

What about the legacy? What happens to Aberdeen? In Aberdeen, we are good at a number of other things. We are getting particularly good at biopharmaceuticals, which is terrible because I cannot spell it—every time I try to write it down, I have a major problem. We are very good at food and drink, and are world leaders in nutrition. Apparently, we are getting very good at big data, which I will have to learn about very quickly because I do not know much about that. There are two world-class universities in Aberdeen. In transferable skills from the oil and gas industry in a city that has been a world leader in innovation, we will be top of the pile when it comes to renewables, especially if the Government support and give investors confidence in renewables in general, and particularly in Scotland.

I appreciate the chance to have this debate and to talk not only about the offshore oil and gas industry, but about Aberdeen, which I cannot help but talk about whenever I stand up to speak.

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[Callum McCaig (Aberdeen South) (SNP)]

Me? Right. [Laughter.] Thank you, Mr Walker, for calling me to speak. I was not quite expecting to be called and there are other people in the room who I assumed were speaking before me; clearly, I assumed wrongly.

I commend the hon. Members for Waveney (Peter Aldous) and for North Tyneside (Mary Glindon), and my hon. Friend the Member for Aberdeen North (Kirsty Blackman), for securing this debate at the Backbench Business Committee. One of the unique frustrations of having the privilege of being my party’s Front-Bench spokesperson in this area is that I could not add my name to those of the Members who secured the debate, such is the importance of this industry to my constituency, to Scotland and—as we have heard today—not only to large regions of the United Kingdom but to the United Kingdom as a whole.

We have heard from the three key areas: Aberdeen; north-east England; and south-east England. We have heard of distinct challenges facing these areas and we have heard accounts in different accents from the different areas, but let us be clear that those of us here who represent these areas speak with one voice about what is required.

I add my backing to everything that has been said about support for the industry. For all of us who represent constituencies with an oil industry, whether job losses in the industry are in Aberdeen, East Anglia or the north-east of England, we all feel them. They are hugely damaging to communities and it is incumbent upon us to do everything we can to secure the bright future that I believe this industry has; with the right support, I am absolutely sure that it will have a bright future.

The hon. Member for Waveney made an absolutely superb speech to kick off this debate, covering the issues in great detail: the challenges; the opportunities; and the solutions that exist. Let us be clear—the Government do not have the silver bullet that is the cure to the industry’s ills, but they have a significant remit in terms of tackling those ills.

There are three key areas around which there are challenges facing oil and gas. The first is price, which we can do nothing about. The second is the industry’s costs, which the industry is doing its bit on; it is doing it well, but that will result in job losses as money is taken out of the system. Nevertheless, that process is required to get the industry to that bright future. And the third factor is tax.

It may seem slightly perverse that at a time when companies are not making profits and when taxes are not flowing into the Treasury that we should be calling for tax cuts, but it is precisely at this time that we need to call for tax cuts and it is at this time that they will not come at great expense to the Treasury. It will not cost the Treasury anything, or it will only cost the Treasury little, to make tax cuts, but the benefit of making them will be substantially felt in the wider economy, as they will support employment and unlock the finance that we have talked about, which in turn will drive the innovation to support our supply chain in delivering the changes, the innovation, the skills and the expertise that this industry is already world-class in and world famous for.

[Philip Davies in the Chair]

What is at stake here? As we have heard, the industry has produced 42 billion barrels. The reasonable estimate is that there are another 20 billion barrels left. Even if we do nothing, a number of those barrels will be produced; the investment has gone in and the existing platforms will continue to produce. The projects that are in development at this stage will happen.

However, a considerable amount of those reserves that are left in the North sea might not be extracted, and if they are not extracted the cost will fall upon us all. There would be a loss of jobs, particularly in the areas represented by those of us who have spoken today. That would have a knock-on impact on the wider economy—the supply chain that stretches the length and breadth of these islands.

[Kirsty Blackman]

Specifically on the point about the barrels that are still to be extracted, does my hon. Friend agree that some of them are in more difficult types of field and so are more difficult to extract? The innovation, the research and development and the funding towards that are therefore hugely important for those fields.

[Callum McCaig]

I agree wholeheartedly. The make-up of the North sea is different from what it was and what has gone past. As well as the innovation and expertise, there is also the infrastructure that is already there, as a number of Members have mentioned. Once that is gone, there are fields that will go from being marginal on the positive side to being marginal on the negative side or just entirely uneconomic.

Returning to the point I was making on the missed opportunities, every single barrel of oil that we do not produce from the North sea we will need to get from somewhere else. We import oil and gas, and we should not underestimate the importance that being an oil producer has for the UK’s balance of payments, which, frankly, are not great as it is. If we have to rely more on imported oil and gas for our supply, it will further exacerbate that issue. If we miss the opportunities to further develop and support the supply chain, the ability to provide the project management, skills, expertise and technology will go with it as oil and gas is exploited in other, perhaps more favourable basins. The prizes are clear: jobs, energy security and support for our balance of payments and exports. Those huge prizes are there, and if the industry is given the right support, they can and will be obtained.

The Prime Minister has talked about building a bridge to the future, and that is necessary and required. The same turn of phrase has been used by my colleague, the Scottish Government’s Energy Minister, Fergus Ewing. We have left a period of very high oil prices, but as day follows night, oil prices will go up. None of us can predict when that will be, but at least until now it has been the case that they have always gone back up again. The difference in supply and demand that we are talking about is not huge, but the impacts that that has over a sustained period of time change the price and make it far more volatile and far lower.

It is a curious situation, but Aberdeen is probably one of the few places in Europe where the local radio stations tell their listeners what the oil price is. At the end of every bulletin, the newsreader will say something like, “Oil trades at $36 a barrel”—folk are happy with $36 a barrel, because it is better than the $29 a barrel it was at. That is strange, and on the face of it that seems like a slightly useless snippet of information, but it signifies how important the industry is to the city that I am proud to represent.

What would a tax cut do? It would provide the clearest signal that the Government can offer that they believe in the future of oil and gas and will do everything they can to ensure that that future is realised as well as possible. We are talking about a multibillion pound investment in a platform 40 or 50 miles out into the North sea, and that is a significant investment. That investment is likely to have a lifespan well in excess of 20 years—potentially, it is 30 to 40 years. In the time that that field will be looking to make its money back, the oil price will go through many ups and downs, but when many international companies are looking across the globe at where to invest their ever-shrinking piles of capital—the oil industry globally is facing a crisis of investment—we need to be at the most competitive we can be. Part of that is the skills, innovation and expertise that I am absolutely certain we have, but that change in the headline rate of tax over the lifespan of a field can put the decision from being, “We do not proceed,” to, “Yes, let’s press the button and go ahead and develop this field.”

Reducing the headline rate of tax is the clearest single way that we can boost the efforts in exploration and in developing the fields that we know about, and it will provide the clearest way forward on the bridge to the future. It will require people to invest. Whether that is companies using the strength of their balance sheet—some are doing that, buying up other operators and such like—or whether it is borrowed money, if we can de-risk the investment decision as much as possible, there is a greater chance that someone will invest that money in the UK continental shelf, as opposed to one of the other basins.

--- Later in debate ---

[Andrea Leadsom]

I take that extremely personally. That is going to cost the hon. Gentleman chocolate raisins in our next debate—he knows what I mean. I am watching him very closely.

Like other Members, I was delighted that my hon. Friend the Exchequer Secretary to the Treasury was able to join us for much of the debate and hear the views of several Members on the needs of this important sector. The North sea is a mature basin, yet it is still meeting the equivalent of around 65% of the UK’s oil demand and 55% of its gas demand. As many Members have said, there is no doubt that oil and gas will remain central to the UK’s energy mix as we make the transition to a low-carbon economy in a cost-effective way for consumers, so investing in domestic oil and gas production is essential. It helps to reduce our reliance on energy imports and provides a significant input to our economy, supporting hundreds of thousands of jobs directly and indirectly.

As all speakers have pointed out, over the past year oil prices have continued to fall, dropping to below $30 a barrel earlier this year. The impact of the fall on the industry was reported last week in Oil & Gas UK’s annual activity survey, which also indicates that investment in new projects has fallen from approximately £8 billion a year over the past five years to an expected £1 billion in the coming year, and that the number of wells drilled to explore for new reserves is low. It is therefore vital that industry and Government step up and respond to the challenges facing the industry.

I assure all Members that the Government are committed in their support for the industry and have already made significant changes to the fiscal regime. In the March 2015 Budget, the Chancellor introduced a £1.3 billion package of reforms, including reductions to headline rates of tax, a new investment allowance and £20 million of funding for seismic surveys to support exploration. In fact, no other Government have made fiscal changes as extensive as the UK’s in response to falling oil prices. Both the Government and the Oil and Gas Authority will continue to listen to the industry’s views on further reforms in this area, but, as the Wood review made clear, fiscal changes are not the only solution to the issues the industry currently faces.

Several Members, including the right hon. Member for Tynemouth (Mr Campbell), spoke about the need for fiscal measures to be taken in the next Budget. I hope that he and others were reassured by the presence of my hon. Friend the Exchequer Secretary. The changes announced in the 2015 Budget were obviously significant. Several large projects have already gone ahead as a result of them, such as Maersk’s Culzean project—an investment of £3 billion in the UK, supporting 6,000 jobs—and BP’s eastern trough area project, which is a £670 million investment. In response to the March 2015 Budget package, the then CEO of Oil & Gas UK, Malcolm Webb, said:

“These measures send exactly the right signal to investors. They properly reflect the needs of this maturing oil and gas province and will allow the UK to compete internationally for investment.”

That is what we were setting out to achieve, and I think those measures were very well received.

Members have highlighted what the industry is asking for: that we address the remaining fiscal barriers to late-life activity; that we abolish the supplementary charge, or at least reduce it by 10%; that we bring the rate of the investment allowance for offshore expenditure in line with that for onshore expenditure; that we temporarily remove all special taxes from exploration, so that only basic corporation tax will apply for all discoveries made over the next five years for the whole life of the field; and that we introduce a Government loan guarantee.

The Government have been building on the evidence gathered at working groups that met over autumn 2015. The Treasury, supported by the OGA, is conducting internal analysis of the findings of the three workstreams on barriers to exploration, infrastructure access and new entrants for late-life assets. As usual, should the Chancellor make any decisions, the announcement and implementation of any changes to the tax regime will follow the fiscal policy-making process. I hope that that reassures Members, but they should understand that I cannot make any further comments. It is not a matter for me anyway, but the Budget is coming the week after next.

In addition to looking into and undertaking further fiscal reform, the Government are supporting the industry in a number of other ways. The OGA has been established as an independent regulator and asset steward for the UK continental shelf. The Energy Bill before Parliament will provide the OGA with the powers it needs to maximise the economic recovery of oil and gas from the continental shelf. The OGA is working with the industry to identify opportunities to reduce costs, and good progress has already been made, with Oil & Gas UK’s recent activity survey showing that production rose by 10% in 2015, while production costs fell by a third. That is an impressive achievement.

As the hon. Member for North Tyneside (Mary Glindon) pointed out, we have recently re-established the cross-party oil and gas group, and we are aiming to promote the competitiveness of the offshore fabrication sector. Our first meeting, in January, was very productive. I am grateful to my hon. Friend the Member for Waveney (Peter Aldous), the hon. Member for North Tyneside and other Members for their involvement in the forum. As the hon. Lady mentioned, our next meeting will be with fabricators, and we will be looking at new opportunities not only in the traditional oil and gas sector but outside it.

Supporting the industry’s supply chain is crucial at this time, as it is a vital and integral part of the UK oil and gas industry. As those Members who have constituents who work in the industry and others who themselves have worked in the industry will know, it has suffered job losses and revenues falling by around a quarter last year. We must acknowledge that. The hon. Member for Aberdeen North (Kirsty Blackman) asked whether enough is being done about job losses. I can tell her that in intergovernmental ministerial meetings, and particularly in the work I am doing with my right hon. Friend the Minister for Small Business, Industry and Enterprise, we are examining what more can be done to view the energy sector holistically to see how job losses in the oil and gas sector can be a win, not only for offshore and onshore wind but, for example, for the new nuclear efforts. We are looking at what more can be done to provide new opportunities in the energy sector.

Despite the low oil price and the downturn of work being contracted offshore, there are steps we can take to support our supply chain and put it in the best position to win contracts. The OGA is actively involved in promoting future success through its supply chain strategy and board, for which unlocking new investment and future work is a priority. The OGA is working closely with the Department for Business, Innovation and Skills and with industry to make sure that companies remain competitive. The Government are working to further develop mechanisms to provide greater transparency about upcoming business opportunities to companies in the supply chain.

I am delighted to be able to inform Members that over the past few days I have held meetings with several offshore wind developers to emphasise to them that I want to see them do more to make the industrialisation of the UK offshore wind supply chain happen. In particular, the industry needs to work collaboratively to deliver a UK jacket foundation solution and competitive UK tower solutions. Successful delivery of towers and jacket foundations will create opportunities for fabricators and enable people with the right skills to transfer across to the offshore wind sector.

In the past 48 hours, I have met a couple of developers, one of whom told me that they have been very successful in winning overseas offshore wind business by using onshore Aberdeen-based oil and gas consultants with expertise in engineering, if hon. Members can follow that tortuous thought process. Rather than using offshore wind consultants, wherever they are based, they are using the UK’s long-established expertise in onshore oil and gas to win overseas wind business. That is important, and we need to do more to promote that interesting opportunity.

I am working with my hon. Friend the Minister for Skills to develop a national college for wind energy to provide people with the right skills to work in the sector. I had a meeting yesterday with a number of hon. Members from across the House to talk about what more we can do to get it up and running. Retraining is required if we are to take the people who lose opportunities in the oil and gas sector into offshore and onshore wind and other renewables sectors. There is a big opportunity there.

The UK has a strong record on manufacturing jackets and topsides for offshore wind substations. The majority of those items are manufactured in the UK. Sembmarine SLP Ltd, which won a contract from Siemens Transmission and Distribution in 2014 to design, engineer, procure, project manage and construct its platform’s jacket substructure and topside, has begun fabrication. The offshore transformer station, which is being constructed at SLP’s yard at Lowestoft on the Suffolk coast, is providing work for up to 300 employers for the next 21 months. I encourage all hon. Members—I know they are already doing this—to work with Ministers, cross-party groups and the OGA to look at other opportunities in the energy sector, not only on direct workforce re-engagement but on supply chain opportunities. That is really important. The Government and the OGA are continuing to work with initiatives such as the Scottish energy jobs taskforce and the New Anglia local enterprise partnership to support those who have already, sadly, lost their jobs. We need to continue that work.

In addition to those measures, during his visit to Aberdeen in January, the Prime Minister announced a package of measures to support the industry, including £20 million of Government funding for a second round of new seismic surveys to unlock new exploration activity in the UK continental shelf, which is the lifeblood of the basin. That funding, together with the OGA’s flexible and pragmatic licensing strategy for frontier and mature acreage, is designed proactively to influence and incentivise exploration on the UKCS. To back genuine innovation, the data from those new surveys will be made publicly available and £1 million will be allocated to fund innovative uses of data to unlock new fields. That additional investment will help to accelerate the drilling of new wells, which will replenish our reserves and lead to new infrastructure projects.

In addition, £700,000 is to be invested in the development of world-class 3D visualisation facilities at the Lyell centre at Heriot-Watt University in Edinburgh. The appointment of a new oil and gas ambassador will help to ensure the best possible access for UK companies to markets overseas, promote the North sea around the world and boost inward investment. The new strategy to maximise the economic recovery of offshore oil and gas in the UK will, subject to the will of Parliament, come into force soon. I share the sense of urgency of my hon. Friend the Member for Waveney, who rightly pointed out that that needs to happen as soon as possible.

In addition to all those measures, Innovate UK is set to launch an energy game-changer, which will make £1.5 million available to encourage innovators, microbusinesses and small and medium-sized enterprises from outside the energy sector to come up with radical solutions and disruptive technologies in response to challenges set by the energy industry. The Natural Environment Research Council will also allocate an additional £1 million investment in the successful oil and gas centre for doctoral training, led by Heriot-Watt University in Edinburgh. Aberdeen University is another core partner. That further investment will enable the programme to be extended for another year and will take the total number of PhD students funded under the scheme to 120 by 2017.

The Government are committed to supporting regional development. Aberdeen is Europe’s energy capital, and has rightly received a package of investment through the Aberdeen city region deal, which included funding for an oil and gas technology centre that will help to strengthen the UK’s position as a global centre of expertise for offshore oil and gas and encourage future investment in the UK. However, that is not the only area that contributes to the industry. Although Scotland supports 45% of the UK’s oil and gas jobs, largely in and around Aberdeen, 55% are located in England, with concentrations in the south-east, the north-west, the west midlands and the north-east. Those areas all support thousands of highly skilled and well-paid jobs. I was very pleased that my hon. Friend the Minister for Housing and Planning was able to join us for part of the debate and that he lent his support for our doing all we can to ensure the success of the sector. It is crucial that we have a joined-up approach across the Government, the OGA, industry and the regions.

As my hon. Friend the Member for Waveney made clear, the southern North sea off the coast of the east of England is a vital part of our industry. For that reason, we are moving forward with our regional development plans. This year, the OGA will carry out an evaluation of the potential for transforming the southern North sea into an energy hub.

As many hon. Members pointed out, although the industry faces challenges, we must remember that there are still opportunities out there. It is definitely not all doom and gloom. As Sir Ian Wood pointed out recently, there is still a huge prize out there. There are still up to another 20 billion barrels of oil equivalent to recover, and 10 new developments will come online in the next two years, which will create much-needed jobs. There is a strong portfolio of new projects in the planning stage just waiting for an upturn in the oil price.

[Kirsty Blackman]

Sir Ian Wood also said recently that we needed drastic changes to the fiscal regime to ensure the oil and gas industry’s future.

[Andrea Leadsom]

I am grateful to the hon. Lady for reminding us of that. The Budget is coming up soon, and I am sure Ministers are listening to what she has to say.

Production on the UK continental shelf rose by 10% in 2015 to 1.64 million barrels of oil equivalent a day. Almost 43 billion barrels of oil equivalent has been recovered so far, and there are up to 20 billion barrels—about a third—to be recovered. The UK remains the second largest producer of oil in Europe after Norway, and the third largest producer of gas after Norway and the Netherlands. The UK remains in the top 25 of global producers of oil and gas—for oil we were 21st in 2014, and for gas we were 22nd in 2014—despite the decline in production in recent years. The opportunities remain, and we still have every chance of success.

Although we wish to avoid premature decommissioning, it is a big business opportunity for the future, and £1 billion is already being spent per year. Many suspended wells are waiting to be permanently abandoned. We hope to stimulate that market and, in doing so, provide a valuable market for the supply chain. The OGA will publish a UKCS decommissioning strategy that will enable the UK service sector to become a hub for decommissioning and help UK firms to be ready to capitalise on the huge opportunities that are coming in the years ahead. That will be supported by the National Environmental Research Council, which is also investing up to £1 million in a cohort of new projects to support the development of expertise in the UK on decommissioning and its environmental management. With that proactive approach, we seek to position the UK so that it can be an early mover in that emerging market and establish a highly competitive and capable new sector.

I am grateful to my hon. Friend the Member for Waveney and the hon. Members for North Tyneside and for Aberdeen North for bringing this important debate to the House. The discussion has been constructive and I have listened with enormous interest to what right hon. and hon. Members have had to say. I congratulate the hon. Members for Livingston (Hannah Bardell) and for West Aberdeenshire and Kincardine (Stuart Blair Donaldson), but particularly the hon. Member for Livingston. She has a huge amount of experience in the oil and gas sector and it was interesting to hear her contribution. The hon. Member for West Aberdeenshire and Kincardine spoke of the importance of oil and gas to Aberdeenshire, but their importance has also been made clear by Members representing other areas.

There is no doubt that the industry is facing particularly testing times, not only in the UK but globally. As I have outlined, the Government are working hard with the Oil and Gas Authority and the industry to provide the right support to this vital sector during the current oil price crisis. There is of course more to be done, and I assure right hon and hon. Members that the Government will continue to do all they can to support this great British industry during these challenging times.