North Sea Oil and Gas (Employment)

Lord Bruce of Bennachie Excerpts

Tuesday 20th January 2015 Westminster Hall

[Mr Frank Doran]

(Aberdeen North) (Lab): It is a pleasure to operate under your chairmanship, Mr Streeter. We are here to discuss United Kingdom oil and gas, which is in severe difficulties, partly because of a substantial drop in the world oil price. In these debates, it is always important to get the facts right. One key thing about the industry is just how important a part it plays in the UK economy. According to Oil & Gas UK, the industry body, the industry supplies 73% of the UK’s primary energy: oil for transport and gas for heating. The UK balance of payments benefited from oil and gas to the tune of £30 billion last year. The oil and gas supply chain achieved sales of £20 billion outside the UK. The total expenditure in services and infrastructure investment from oil and gas companies in 2013 was £20 billion. Since 1970, the industry has invested £500 billion.

In recent years, the expenditure has been particularly high. In 2014, the industry invested around £14 billion of capital investment in UK oil infrastructure, following on from investment of £11.4 billion in 2012 and £13.5 billion in 2013. Across the industry there is a total committed expenditure—that is, projected future expenditure—on projects in production or under development totalling £44 billion. Figures like these have not been seen since the 1980s. They are massive figures: there is no question about that.

The industry claims to support 450,000 jobs in the UK. These break down as follows: 36,000 employed directly by offshore operators; 200,000 in the supply chain, providing goods and services to the industry; 112,000 jobs in services such as hospitality, taxis, and so on; and 100,000 jobs in the export of goods and services. It is difficult to visit any foreign oil base or complex without hearing a Scottish or English accent. We are operating throughout the world.

Many of these jobs are now under threat because of the collapse of the oil price. Major companies—Shell, Chevron and, last week, BP—have announced redundancies. Some of these have been expected for some time and were part of company restructuring as well as the downturn in the oil price. More announcements are inevitable.

I can find no reliable figures showing the numbers so far made unemployed, but I know from union sources, for example, that roughly 600 people have been made redundant in companies where there are recognition agreements. However, most cuts are likely to be made to the self-employed, who comprise a large number of offshore and onshore employees; they are the easiest and cheapest to remove. At the moment it is estimated that there will be around 2,000 job losses in total. I think that is a fairly realistic projection.

How things will proceed from here on is difficult to judge at the moment. Many jobs lost so far have been lost onshore and it may take time before large numbers of offshore jobs are put at risk. Everyone will be mindful of the need to retain skills for when the upturn arrives, whenever that might be.

In the history of the North sea oil and gas industry there have been at least three serious downturns. The worst and most damaging was the downturn in the mid-1980s, when 20,000 jobs were lost in Scotland, most of them in Aberdeen and the north-east. Some 50,000 jobs were lost in the whole country. The fact that the job losses were higher in the rest of the UK than in Scotland reflects the fact that, although the industry is centred in Aberdeen, the supply chain and the work force is spread throughout the UK.

There is a risk that this year’s downturn could be as serious as the one in the 1980s, but I think it is possible to take steps to mitigate that. In the first place, the industry has changed substantially from the industry we had in the 1980s. For example, it is much more widely spread with fewer of the majors involved. I believe that with the right sort of focused support from Government and the industry, this very difficult time will not develop into the tragedy that we saw in the 1980s. Of course, there is very little we can do about the global price of oil, but we can look at the other issues that have faced the industry for some time now and consider how we can soften the blow and minimise damage.

Exploitable oil and gas are proving harder to find, and discoveries that are made are often in places that are difficult and expensive to exploit, particularly if there are issues around access to infrastructure. Some of these problems will be addressed when the recommendations of the Wood report are fully implemented, but that is likely to be some time away, although there are moves to accelerate the process.

Then there is the skills shortage. Until relatively recently, few companies offered apprenticeships in technical skills. In the 1970s and ‘80s, the industry attracted engineers, welders, boilermakers and others from the collapsing smokestack industries: mining and shipbuilding, and so on. That supply has been exhausted and the work force are ageing. Trainee and apprenticeship programmes have been introduced in recent years, but those take time to make an impact. In the meantime, labour costs have risen enormously and companies have poached skilled staff from each other, driving wages to high levels. With my trade union background, I am the last person to complain about that, but it has a serious impact on costs offshore.

Oil & Gas UK says that contracting prices have doubled since 2010. One executive from a major company told me recently that the cost of scaffolding alone—there are 6,500 workers working on scaffolding in the North sea—has tripled in the last two years. It is obvious that a slice of the money that previously would have been spent on research and development, exploration and appraisal, which are all things to take the industry forward into the future, has been diverted into meeting these wage costs.

[Sir Malcolm Bruce (Gordon) (LD)]

I congratulate the hon. Gentleman on securing this timely debate. He is making some important points. Does he agree that if we—the industry and the Government—get this right, and indeed make the industry more efficient, as and when the recovery happens we will be much more competitive than we have been? The point he is making is that we have been in danger of pricing ourselves out of the business.

--- Later in debate ---

[Sir Malcolm Bruce (Gordon) (LD)]

I congratulate my neighbour, the hon. Member for Aberdeen North (Mr Doran), on securing this debate at a critical time.

I have been connected with the industry since I first arrived at the North-East Scotland Development Agency in 1971—two months before BP announced the discovery of the Forties field. We have certainly had ups and downs before, but my hon. Friend the Member for West Aberdeenshire and Kincardine (Sir Robert Smith) was right to point out that we are much more vulnerable in a mature province than we were in the early stages. That is why it is much more important that we take appropriate and considered action—not panicky action—to get ourselves to a place where the industry has a secure future. One thing that we all have to accept is that the UK has no control over the world oil price. We must deal with it although it is, as all commodity prices are, erratic and unpredictable. It is certainly not a good basis for planning economic policy.

The other thing that we should recognise is that the good thing about our mature province, as the hon. Member for Aberdeen North pointed out, is that we have created a centre of excellence and a critical mass that are incredibly valuable to the UK domestic economy, and which sustain a £10 billion export industry; that industry, however, depends on an active domestic market and levels of activity, which we must secure. It is interesting that Sir Ian Wood, who inevitably has been quoted several times, is taking a characteristically calm and considered view of the situation. He has explicitly said that the Budget is the entirely appropriate place in which to determine the tax cuts and the timing, and he recognises that they need to be balanced and considered.

Having mentioned Sir Ian and the Wood review, I want to commend my right hon. Friend the Secretary of State for Energy and Climate Change, whose initiative it was to invite Sir Ian to conduct his review, on the basis of discussions with the industry and in the wake of its reaction to adverse tax changes in 2011. My right hon. Friend wanted to see how we could better co-ordinate the infrastructure and future development of resources, which the industry admitted were being undermined by its commercial rivalries; unusually, an invitation was issued to partnership with Government, to try to create a framework to secure and unlock a lot more resources than would be done if the industry was just competing within itself. That was a powerful initiative, and although I agree about the importance of establishing the new authority as quickly as possible, we should recognise that it would not exist at all without the initiative of the Secretary of State. I think we all agree that the sooner it can be set up with the right mix of people—who might just be available now—the better it will be able to get on with its important work.

Oil & Gas UK made the point that, with $50 oil, 20% of North sea activity is uneconomic. There are perhaps too many projects in the North sea that have become conditioned to looking at $70 to $90 oil as the essential basis. Frankly, from every discussion that I have had with an oil and gas economist, that is not a wise basis for planning. It has partly been necessitated by the escalating costs that the hon. Member for Aberdeen North addressed. We have a unique opportunity to tackle several problems at once.

[Mr Russell Brown (Dumfries and Galloway) (Lab)]

Like the right hon. Gentleman and, I think, everyone else present for the debate, I received an Oil & Gas UK briefing. It deals with the immediate problem in the sector, but there is no mention of how it arose, with the downturn in China and India, and oil and gas fracking in the United States. That is a longer-term issue. Something of a quick fix may be required, but in the longer term we must take cognisance of what is happening globally.

[Sir Malcolm Bruce]

That is a fair point; I would say only that I have never yet met an oil economist who was any good at anything other than explaining why prices did what they did, rather than what they would do next. Yes, the hon. Gentleman may be right, but people have told me many times that the oil price would stay low, and then it has gone up. When they have told me it would stay high, it has gone down. We have to live with that.

Those of us close to the industry, and the taskforce, of which many of us are members, are aware that in recent years prices have escalated unrealistically and unreasonably on the back of the high oil price. I want to make it clear to the hon. Member for Aberdeen North that that is no excuse for a slash and burn response on employment; it is, however, a recognition that a lot of fat has built up in some of the contractual arrangements.

With the right approach, it would be possible to slim down and maintain skills and capacity for the future. The wrong approach means, of course, making people redundant and losing their skills, so that if and when there is an upturn we will have lost capacity as well. I argue that we need to manage things proportionately. The industry has been rather late in tackling that problem. Quite a few of the redundancies that have been announced since the oil price fell were part of reviews that took place because of the escalating costs before we knew that the price was going to fall.

[Sir Robert Smith]

One of the lessons of history is that if downsizing in the current crisis is inevitable, the way it is handled and the way people are treated, so that they are still interested and willing to come back in the good times, are important. There is a lesson for the industry about the way it behaved in the past.

[Sir Malcolm Bruce]

I completely agree.

Finally, I want to set out what things the Government must consider—for which the Budget seems to be the appropriate place. First, the investment allowance that has been announced needs to be confirmed in the Budget. Secondly, there must be a review of the supplementary charge. In my view the Government will get none of it anyway in the present climate, so getting rid of it would not cost much.

There should also be a review of the petroleum revenue tax for the future. The industry has traditionally been taxed at about double the rate of any other sector. Perhaps that was all right in the good times, but in a mature province, in the present situation, asking for a review is not asking for subsidy; it is asking for a realistic tax regime that can secure an industry that has made a massive contribution to the balance of payments and contributed 25% of our fixed industrial investment every year for the past 40-plus years, and which has a great future if we manage it now. If we do not get it right, there is an existential threat to the industry—certainly to an industry on the scale that we have looked for. We do not need to score points off each other. We need to work together and come up with a systematic package of measures that will restore confidence.

I accept that one thing that has damaged the industry is constant change. It now needs a clear, simple, strategic regime that says that the UK wants its investment and will provide a climate in which, provided it can make itself competitive, the Government will work with it to enable it to secure jobs, exports and investment for the future. If we can do that, whenever the oil price turns up, the industry will be much stronger than it would have been if the crisis had never happened.