Energy Bill [HL]

Lord Moynihan Excerpts

Monday 31st January 2011 Grand Committee

[Lord Marland]

My Lords, I thank my noble friend Lord Jenkin for raising this issue and, in particular, for this canter through the gas situation as it is today. When I was shadowing my current role during the Labour Government and spoke on a number of occasions about gas storage, they reassured me that we had enough storage and that we were in very good shape. Indeed, now that I have got to the position that I am now in, I largely agree with them. That does not mean that we should be complacent or should not press hard for greater gas storage. But the facts are as follows: we have 16 days of storage available and we have under construction another 25 per cent. Maths is not my strongest suit, but as the noble Lord, Lord Moynihan, can tell us—because maths is his strongest suit, along with running and jumping and other things—that gives us just over 20 days’ storage.

[Lord Moynihan]

Spot on!

[Lord Marland]

The noble Lord has such talent in one body. So we have 20 days’ storage. The noble Lord, Lord Hannay, said quite reasonably that we should compare ourselves to other countries. Obviously, Germany and France have more than that, but they do not have their own gas supply. They are entirely reliant on what used to be called the old Iron Curtain countries for their supply. I would be concerned about the security of supply in the light of some of the endeavours that they have been through. We in this country still produce 50 per cent of our own gas and we are still finding more gas, which will not, admittedly, stop the supply being eroded, but will decelerate the erosion. We have a secure contract. The noble Lord, Lord O’Neill, suggested that we must have good long-term contracts; we probably have as good a long-term contract as any country in the world with Norway, from whom we receive 20 per cent of our supply, managed by Shell, the former company of the noble Lord, Lord Oxburgh—and a marvellous job it does as well. My own view is that we have a very significant secure supply.

Let us look at the matter of storage. Yes, we have given planning permission to various endeavours, but at the moment the cost of storing gas is significantly higher than the price of storing oil, so not unsurprisingly people are giving due consideration to the commercial viability of this project. Of course, part of the thing that we must do in government is to weigh up the pros and cons and absolutely ensure that the nation has security of supply, which is fundamental to all Governments, and to be able to gauge that. We have not had a greater opportunity to gauge that than the unfortunate months of November and December last year, which were beyond record for bad weather, when we came through with flying colours. There were certain countries—and we shall not mention the names—that did not do so. Given the tests that we have had, we have come through with flying colours.

We should not be complacent, of course. That is why we have acted swiftly to engage in planning permission and to make it much easier for big infrastructure projects to be authorised quickly. But we cannot sit in government and insist that certain things are going to be carried out unless they have gone through proper consultation. In many ways, the noble Lord, Lord Jenkin, gave me the answer to the question posed by his excellent amendment. Ofgem is already considering our requirements and carrying out a significant code review consultation, which will be produced at the end of February, on the resilience of our gas energy supply. It would be right for us to take on board what Ofgem has to say, to review it and then carry out what powers are necessary to ensure that, if there are areas that need to be dealt, the Government deal with them.

I hope that that sets the scene for the current gas supply situation. I hope that it answers a number of the excellent questions that noble Lords have asked and allows my noble friend Lord Jenkin to withdraw his amendment.

--- Later in debate ---

[Baroness Smith of Basildon]

I am very grateful to the noble Baroness; her contribution was extremely helpful. Certainly, it was not the intention that the time of applying for a licence should be the only time when financial capability was assessed. The insertion somewhere in the wording of “continuous” would be extremely helpful, as is her point about access to funds via insurance. The contrast I was trying to draw was with the Government’s policy on the nuclear industry. Currently it is the Government’s policy that a nuclear power company would have to be responsible for all the costs of decommissioning for some time—indeed, for the foreseeable future. In our previous debate we talked about 100 years or so. It seemed that equal responsibility should be taken by oil companies. I am grateful to the noble Baroness for her suggestions.

[Lord Moynihan]

My Lords, I was not going to intervene on this, but I have just watched, at some length, the follow-up proceedings in Congress on the first presidential commission report on the BP Deepwater Horizon disaster, which was published several weeks ago. Most of the cross-examination on this issue highlighted the fact that caution should be the order of the day in assessing the level of cover that an operator would require. Caution is needed because there is a massive difference between the majors and the independents. The representatives of the commission, when cross-examined in the last few days, highlighted the fact that they had not had the opportunity to discuss this issue, which is a valid and important one to raise. I welcome the fact that an amendment has been tabled so that we can consider it. However, the representatives had not had an opportunity to sit down with the insurance industry to look in detail at the exposure—the level of cover required—and the impact on the industry as a whole.

We in this country have a proud and, in my view, wise policy of encouraging independents to come on to licences alongside the majors to add further expertise and bring additional value to the table on safety, drilling expertise and well knowledge. I would be cautious about taking too much of a blanket approach to this at the moment—one which did not take into account the exposure that was being sought by the noble Baroness for different licence-holders and different companies on the same licence. The direction of travel in which she is heading is one that the industry will need to follow. This will inevitably be a major issue as the industry moves forward, both in the United States and elsewhere. It is a subject that will require detailed consideration between government, the industry and the insurers to come up with the best possible method of moving forward to ensure that, on the one hand, there is cover but, on the other, we do not end up with just a handful of majors and lose the independent sector. It has contributed so much to the development of the North Sea and has a commitment to safety that is as great as that of anybody else operating there. That is my only word of caution.

This is a highly complex area, which needs a good deal of further reflection, but I welcome the fact that the noble Baroness has brought this to the Committee. It is an important issue and she knows my interest in the subject. I hope the Minister responds equally positively about the importance of this issue and of continuing discussions between the Government, the insurance industry and the operators—and not just the operators but the drillers—to make sure that there is appropriate cover, but that cover is not required to the point at which we lose a significant section of the industry, which so far has contributed greatly to the development of the North Sea.

[Lord Marland]

My Lords, this is an excellent amendment and the Government are entirely in agreement with its broad principles. I am grateful to my noble friend Lord Moynihan for his comment as a practitioner in this field. I should preface any remarks that I make with a reminder that, in my former life, I spent most of my time trying to sell insurance to oil companies and to make myself even richer, so I was all in favour of them buying as much insurance as possible. However, in my current role, I see that a balance has to be struck and that I was wrong at the time—or only partly right. My shareholders thought that I was right.

The Government are in full agreement on this. We have seen the Select Committee’s recommendations and we are evaluating them at the moment. The noble Lord, Lord Moynihan, makes the point that we must not rush into this or have knee-jerk reactions. Of course, when the Government issue licences, a fundamental part of that is that the company awarded the licence becomes a member of the Offshore Pollution Liability Association; it has to purchase £250 million of cover and it then goes into a pool that offers greater cover. This pooling arrangement is fairly unique and it gives us a number of solid assurances. There are two imponderables that need evaluation. One is the quality of insurance cover. Obviously, if the insurance provider is not of A-graded quality, particularly with a longer-term liability situation, that would be a concern. That needs looking at rigorously. Then there is the matter of the quantum.

Two things are going on, as the noble Lord, Lord Moynihan, said. The first is the inquiry that is happening in the United States. We would not want to prejudge what is happening in that inquiry, which we want to evaluate. Also, we want to evaluate the Select Committee’s comments, which are valid. I hope that the noble Baroness will understand that the Government take this matter seriously. She has been persuasive in taking an important line. It is very much in the country’s interest that the subject of pollution should be managed very carefully indeed.