Offshore Oil and Gas Industry

Debate between Kirsty Blackman and Peter Aldous

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.