Offshore Energy Industry

Mike Hancock Excerpts

Tuesday 13th July 2010 Westminster Hall

[Sir Robert Smith (West Aberdeenshire and Kincardine) (LD)]

I congratulate my right hon. Friend on raising this subject for debate. He is making a vital point. In the north-east of Scotland, we are probably aware of just how vital the industry is to jobs and investment there. What is important is getting the message across to the rest of the United Kingdom about what a success story the industry is. He has touched on the industry’s export potential. The vital point that he is developing is that, with the right encouragement and investment, there is a long-term future for many more jobs for the whole of the United Kingdom. That will be the case if the Government can get the policies right to encourage companies to locate in the north-east of Scotland.

[Mr Mike Hancock (in the Chair)]

That was very nearly a speech, Sir Robert.

[Malcolm Bruce]

It was a long intervention but an appreciated one, because it reinforces the point. Exactly as my hon. Friend says, we who represent the north-east of Scotland know and understand the industry. Generally when it is debated in the House, we are the only people who turn up, along with one or two others, yet the industry accounts for more than 20% of all UK industrial investment. There are much better attended debates on industries whose economic impact is far less than that of this industry, so I make no apology whatever for stressing its importance and for bringing it to the attention of the House and the Minister. I know that the Minister understands these issues and I hope that his response to the debate will demonstrate that.

We have a huge amount of technical innovation to enhance the recovery of our existing reserves, to operate in more difficult areas and to squeeze more oil and gas out of the existing reserves that we have found and, at the same time, to adapt the technology to be able to install offshore wind farms and provide for electrical transmission and possibly other marine renewable energy. This is one of the industries that could help to grow the private sector and grow the recovery of the UK economy if it is handled correctly. It is my contention, and the purpose of asking for the debate was to say, that the economic and Exchequer revenue potential of this sector for the UK economy is massive, and if it is not properly handled, significant future benefits could be put at risk.

Let me be clear. Aberdeen and the north-east of Scotland have welcomed the offshore industry and built up a critical mass of innovation and global activity. It is estimated that more than 1,000 companies are based in our area.

--- Later in debate ---

[Mr Doran]

The right hon. Gentleman is absolutely right. Nevertheless, there are many reasons for the improvements in safety that have occurred. I think that the most important reason has been the dramatic change in the industry’s attitude. We must constantly be vigilant, which is why we depend on the HSE. Its KP3 report was a wake-up call. The safety of working on platforms has certainly improved dramatically, although there are still issues about helicopters.

The oil and gas industry has realised the importance of engagement with the work force. A key part of the HSE’s review of the KP3 report was a careful examination of worker involvement in the North sea oil and gas industry, which involved working with both the industry and the unions.

A huge step forward was taken when the industry set up its helicopter task group to look at the Super Puma helicopter disaster 15 months ago. Three trade union officials from Aberdeen were involved in that task group, which examined a lot more than the accident itself. It looked at the causes of the accident, worked out what the problems were, reached conclusions and made recommendations. In addition, it looked at issues that had concerned people such as the right hon. Member for Gordon and me for years.

For example, there was concern about the lack of radar in the North sea oil and gas industry. When the Minister was about to make an offshore trip—I know that it was not his first such trip—I told him one of my scary stories about trying to get on to an oil platform in very thick fog in the middle of the North sea. It took us three attempts to get on to the platform. That was not the best experience of my life, but the people who work in the North sea have to make such trips every week when they go out to the platforms and then come back in. However, progress will be made, such as by providing radar and improving the lighting on platforms. The helicopter task group went much further than looking only at the Super Puma disaster and I think that everybody in the industry welcomed the report that it produced. In addition, the Oil Spill Prevention and Response Advisory Group has been set up to tackle the consequences for the North Sea, if there are any, of an oil spill similar to the one that is happening now in the gulf of Mexico. The trade unions are involved in OSPRAG, too.

The Minister cheered me up immensely two or three weeks ago after we had heard the statement from the Secretary of State for Energy and Climate Change on the oil spill in the gulf of Mexico and the action that he was taking in relation to the North sea. After that statement, the Minister said to me, “I’m going up to Aberdeen next week and I’d like to meet the trade unions.” I must say that after the 20-odd years—with a slight break in the middle—that I have been a Member of Parliament, a Conservative Minister saying such a thing shows that there has been a change everywhere. If this Government recognise the importance of the trade unions, particularly in the area of North sea safety, I welcome that wholeheartedly. I know that the Minister had a good meeting with trade union officials in Aberdeen.

The other key part of the infrastructure is the Government. I have seen a massive change in the Government’s approach to the industry. When I was first elected to Parliament in 1987, there was a Department of Energy, which was responsible for both production and safety. However, it was quite clear that the Department did not work, and I must say that we did not need the Piper Alpha disaster to tell us that, although it underlined the fact in spades. Of course, one of the key recommendations of Lord Cullen’s inquiry into the Piper Alpha disaster was that responsibility for checking safety should be passed to the HSE.

At that time, I was appointed to the Front Bench as part of the then shadow Energy team with responsibility for the oil and gas industry. I spent four years shadowing two Ministers: Peter Morrison and Colin Moynihan. Given that and subsequent experience, I have no doubt that the Government in those days saw the industry as a cash cow for raising money, which was one reason why the focus on safety was not as strong as it should have been.

When my party was elected to government in 1997, I do not think that the position changed—the attitude was the same. I remember many battles with Treasury Ministers in 1997 and 1998 when they were reviewing oil taxation and seriously considering increasing the tax on the oil industry. A windfall tax had been levied on the banks, which some of us cheered, and similar measures were being proposed for the oil industry. Those of us who were involved in that campaign recognised that the industry had gone through a sustained period of low prices and that increasing taxes would be the wrong thing to do.

Thankfully, the then Chancellor, who was one of the most dyed-in-the-wool proponents of the tax—I remember a difficult meeting with him—ultimately accepted that we were right, and a Government review decided that the tax regime should not be changed. The tax was increased when prices improved and again, if I remember correctly, during the next Parliament. However, the industry’s position was much more secure by that time, and it was recognised during the 1990s that taking money out of the North sea was wrong.

One result of that, as the right hon. Member for Gordon mentioned, was that the Revenue became more involved in the oil industry task group pilot. That was a fundamental change, because at the time the Treasury saw itself as completely separate from the industry. It had some knowledge of how the industry operated, but did not concern itself with the day-to-day stuff. Sending an observer from Her Majesty’s Revenue and Customs to the pilot meetings fundamentally changed the Government’s attitude to the oil and gas industry. It is now accepted that it is crucial to encourage inward investment in the North sea and to consider how the oil companies spend their money. The right hon. Gentleman rightly discussed the significant sums that will, we hope, be invested this year and next year in the North sea, and the revenue benefit to the Government as a result of that investment.

It is crucial that we continue to bring in new blood. The right hon. Gentleman mentioned Apache, which had never been in the North sea, having concentrated mainly on America and the middle east. Apache came over and bought the massive Forties field. It made it work and is now a major player. When BP was not prepared to invest any more, Apache made things work.

Another crucial thing that the previous Government did was to improve tax reliefs for new entrants to drilling. Before that, drilling, exploration and appraisal costs were allowable only against previous profits. If a company had no previous profits because it had not been in the North sea, it got no tax relief.

I hope that the important changes that have been made, mainly in the past 10 years, will be carried forward by this Government. It is important that we continue to encourage investment in infrastructure and in new fields, although they tend to be smaller. We must also ensure that we encourage new entrants to the North sea, and the tax regime is fundamental in that respect.

I will briefly raise two burning issues that do not get a lot of attention. The first is that we still have a skills problem. A major factor is that we depend hugely on immigrant labour in the North sea. In the main, such immigrants are highly skilled. Two or three years ago, I spoke to a major company that had brought 1,500 skilled engineers over from the Philippines. They had not come as cheap labour; they were essential to the company’s summer maintenance programme. Agreements were reached with the union to pay them the rate for the job, and after it was completed, they went back to the Philippines to do their normal jobs. However, I am hearing about more and more problems in my surgery, although they have nothing to do with the new Government as they have been building up for some years. The smaller companies in the supply chain are finding it particularly difficult to bring people in, while the universities have the same problem. Two universities now operate worldwide to bring in students, particularly from Africa—the students take a first degree in Nigeria or Ghana and then come to Aberdeen to do their master’s degree—but now even Government-sponsored students are finding it difficult to enter the country. That is a serious problem.

Finally—I have probably spoken for a lot longer than I should have—although the Department of Energy and Climate Change is now responsible for the energy industry, who looks after the oil and gas industry as a business? There is a sense in the industry that it has been abandoned by the Department for Business, Innovation and Skills, previously the Department of Trade and Industry, and that the Government are no longer focusing on the industry as a business. Will the Minister say a little about that that important issue, which relates to not the industry’s place in the energy industry, but its status as a business like any other?

[Mr Mike Hancock (in the Chair)]

As no other Back Bencher wishes to catch my eye before I invite the Front Benchers to respond, I call Emily Thornberry.

[Emily Thornberry (Islington South and Finsbury) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Hancock, and to listen to a debate by Members of Parliament who clearly know a great deal about the industry. That includes the hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith), the right hon. Member for Gordon (Malcolm Bruce), whom I congratulate on securing this debate, and my hon. Friends the Members for Aberdeen South (Miss Begg), for Aberdeen North (Mr Doran) and for Harrow West (Mr Thomas).

It is vital that the Government give a clear direction to the offshore industries. Given the huge amounts of capital investment required and the long time frames within which the industries work, they need uncertainty like they need a hole in the head. Although I am sure that many people were greatly heartened by the Minister’s assertion last week that the Government will provide leadership on such issues, I suspect that the fears likely to have been inspired by the coalition agreement have not been allayed sufficiently. I remind him that the agreement says specifically that the parties share a conviction that the days of big government are over. These are exactly the circumstances in which we need big government to give direction. Since the coalition was formed, a number of uncertainties have arisen in relation to infrastructure for the offshore industry. In my contribution, I hope to clear up some of those uncertainties by asking several questions.

The economic downturn hurt our oil and gas industry, which already faced high costs, low prices and a lack of cheap credit. In January this year, my right hon. Friend the Member for Edinburgh South West (Mr Darling) extended tax relief worth up to £160 million a field to fields west of Shetland. His announcement came at the same time as the announcement of the 26th offshore oil and gas licensing round. I am pleased that the UK North sea oil industry is once again attracting investment, as we heard from hon. Members’ contributions. That is reflected in a great increase in the number of bids made during the licensing round.

In its report last summer, the Select Committee on Energy and Climate Change highlighted the difficulties in accessing infrastructure that some smaller companies experience. The difficulties came to a head when Endeavour International sought arbitration from the Secretary of State regarding the charges levied by Nexen for access to the gas transportation infrastructure. What progress has the Department of Energy and Climate Change made in finding a more equitable solution to that problem?

After the explosion of the Piper Alpha rig in the North sea in 1988, which resulted in 167 fatalities, the UK’s regulatory regime was tightened. I listened with great interest to the highly knowledgeable contribution of my hon. Friend the Member for Aberdeen North and his account of the day-to-day realities of working in the North sea. I was also greatly interested to hear what a contribution the trade union movement has made to ensuring the safety of the work force.

Since the disasters, licensing and health and safety have been separated in the UK. In light of the Deepwater Horizon spill, I understand that the US will now adopt a similar model. Despite our already robust regulatory regime, the disaster in the gulf of Mexico must give us pause for thought in the development of deep waters off the west coast of Shetland. I welcome the Secretary of State’s decision to increase inspections, which seems sensible. Will the Minister tell us when those increased inspections are likely to commence and will he explain the apparent contradiction between an increased regulatory regime and what was promised by his manifesto? The Conservative party promised to streamline government in its manifesto. I would welcome his comments on the following Conservative party quote:

“We will offer exploration companies a simpler, clearer and more transparent licensing process.”

That is question No. 3.

The UK is the leader in offshore wind capacity. Given that only a few countries have more than 3 GW of offshore wind power, the amount of wind power we have is amazing. The annual amount of offshore wind power generated will soon explode, which shows the huge increase in the proportion of wind in our energy mix. The development of the offshore wind industry has been made possible by the leadership and vision of the previous Government. I obviously hope that such leadership and vision will continue under the new Government.

The contribution of public money and the renewables obligation have ensured the fast development of the industry. In the 2009 Budget, £50 million of funding was made available for the testing of offshore wind facilities and £15 million was provided to the new renewable energy centre in Northumberland to test wind turbine blades. Just this month, the Secretary of State reconfirmed the previous Government’s decision to grant £5 million to Siemens Wind Power. In the March 2010 Budget, the Labour Government also announced a £60 million competition to help ports to develop, to which the right hon. Member for Gordon referred. We wanted ports to have the capacity to help to drag out to sea massive, heavy windmill towers for the turbines to sit on. The amount of money offered might not have been large, but it was of sufficient size to be an important signal, and General Electric and Siemens quickly declared that they would be investing £200 million in the UK’s offshore wind industry. On 15 June, the Minister announced that the ports competition was under review. Will he commit to the level of investment proposed by Labour or is he prepared to risk driving away such investment?

In the case of offshore wind generation, a loss of investor confidence would be an absolute tragedy because, according to the Select Committee on Energy and Climate Change, it is the only low-carbon technology that is ready for large-scale deployment now. Perhaps another way of asking question four is this: what plans does the Minister have for offshore wind infrastructure and for port development? In the energy security debate last week, the Minister was kind enough to agree that the renewables obligation has helped to expand the UK’s offshore wind capacity. Will the Minister commit himself today to continuing with our commitment to renewables obligation certificates?

I would also like the Minister’s help with the offshore grid and how that will develop, because it is particularly important to the infrastructure for offshore industry. The offshore wind industry and network industry are awaiting Ofgem’s decision about what the offshore transmission regime will look like. I understand that the Minister’s party has a different emphasis in terms of how the competitive tenders should be administered. I certainly hope that there will be no undue delay while the coalition decides what to do. An announcement on the offshore grid was expected at the end of June. Does the Minister know what the hold-up is, and when will the industry know what will happen to such a vital part of its infrastructure?

Of course, the offshore grid connects to the onshore grid. We hope that the onshore grid will become a smart grid, which we hope will be informed by smart meters. I would like to ask the Minister a number of questions about smart meters and his ambition to put a smart meter in every home by 2017—not 2016 as promised in the manifesto. I have what I would call a number of sub-questions to question six. How does the Minister expect to install smart meters in every home in the country? How many staff will be required and, if he wants all smart meters to be put in by 2017, when is the process likely to start? Given that the Digital Britain programme will ensure that all hard-to-reach homes are linked by 2012, will he link in that programme with the smart meters installation programme?

[Mr Mike Hancock (in the Chair)]

Order. We are drifting slightly from the subject of the debate .

[Emily Thornberry]

The thrust of my remarks is that there are a number of questions about this aspect of Government policy. My biggest and most important point is that we could clarify many of those questions if the Government were to publish their energy national policy statement. I understand that a consultation on that statement finished in February. Is the statement likely to be radically different from the one that was to be published by the previous Government? Is that the reason for the delay or is there another reason why there might be some delay in the statement being published? The industry needs to have some certainty about what has been happening. Perhaps the Minister is reconsidering the Lib Dem manifesto.

[Mr Mike Hancock (in the Chair)]

Order. That is not the Minister’s responsibility, is it? We need to stick to the subject of infrastructure support for the offshore energy industry. If the hon. Lady confined her comments to that, I would be extraordinarily grateful.

[Emily Thornberry]

Is the Minister considering making a commitment to investing £400 million in refurbishing the shipyards in the north of England and Scotland, so that they can manufacture wind turbines and marine renewables? I understand that that is a commitment of one of the parties in the coalition. If there is a hold-up in publishing the statement, perhaps it is because he is reconsidering that aspect of policy.

--- Later in debate ---

[Charles Hendry]

We are trying to ensure that we have cohesion across the whole range of issues relating to the grid, including the offshore transmission system, transmission access and transmission charging, which is particularly critical as far as Scotland is concerned. I want to ensure that we have a complete response to all the issues involved as we try to move forward in this area. The hon. Lady will not have to wait much longer. I understand that the industry attaches a great deal of importance to the sector, and this is very much at the top of the list of things that we are seeking to resolve.

Questions were asked about the ports project. It has not been suspended or cancelled, but, within the framework of the comprehensive spending review, we are trying to ensure that all such major projects are handled in the most sensible and constructive way, to deliver the best response and to make the best use of taxpayers’ money. We are committed to taking the work forward, but it will be handled within the network of the comprehensive spending review.

We will also be looking at how we take forward work on carbon capture and storage, which offers many partnership opportunities. Some of the most extraordinary academic work on CCS in the world is being carried out in Scottish universities. People such as Professor Jon Gibbins and Professor Stuart Hazeldine at the university of Edinburgh are doing wonderful work to ensure that we lead the world in that technology. I want to work closely with them in ensuring that we make the best and strongest case for Britain in that respect.

There was a question about the working relationship with the Crown Estate. We believe that the regime is working at present. There is clearly a difference between the role of the Crown Estate as the landlord and the role of the Government who, as the regulator, are able to issue licences. If there is evidence that the regime is not working, we will certainly look at how the matter can be addressed.

The hon. Member for Islington South and Finsbury asked about our continuing commitment to renewables obligation certificates. We have said that we are looking at introducing feed-in tariffs. We indicated prior to the election that there is a strong case for using feed-in tariffs for the third round of offshore wind because investors have told us that that would be more attractive. We have also been told that feed-in tariffs would be more attractive for marine technologies, so we are looking at the most appropriate balance between the renewables obligation and feed-in tariffs to see how we can best stimulate investment. At the core of all that we are doing is a desire to make this the most attractive place to invest in energy infrastructure, and that applies to oil and gas, nuclear, coal with carbon capture and renewables.

The debate has touched on many critical issues, and there is an overwhelming sense on both sides of the House that the industry will continue to make an enormous contribution to the British economy. The North sea sector is sometimes seen as an old industry, but it is, in fact, a ground-breaking industry in the development and application of technology. Probably only space travel has the same level of involvement.

Let us look at what is happening in the gulf of Mexico at present, where BP is drilling down 18,000 feet below the surface of the water, through perhaps 13,000 feet of rock. It intends to intersect a pipe that is just a few inches across in order to stop the flow of oil from the well. We should pay tribute to it for the work that it is doing and the cap that it appears to be putting in place successfully. The technology involved is extraordinary.

In all our debates about the industry, we should see it as an industry of the future which has an extraordinarily important role to play. I can say to right hon. and hon. Members who have spoken this morning that, even though I may be a Conservative Member of Parliament from the south-east of England, I have an absolute commitment to being a champion of the industry. I want to visit Aberdeen regularly and know about all aspects of the industry. I want to know the industry and the trade union sides, and to work with both of them to deliver the best possible outcomes for investment. We have an absolute national interest in ensuring that we secure the best from our indigenous resources.

We have had an outstanding debate this morning, which has raised many critical issues. I look forward to working closely over the coming months and years with right hon. and hon. Members, who have great expertise in the sector, and with the companies and people in their constituencies who work in this sector and deliver so much in terms of our energy security.

[Mr Mike Hancock (in the Chair)]

Thank you, Minister. I thank all those Members who have taken part in the debate for the courtesy that they have shown to the Chair and for their indulgence of each other. I wish you much luck with your dunking exercise, Mr Hendry. I hope that the safety procedures are all in place when you do it, by the way. I am sure that the whole House would regret any mishap. Do not forget the wet suit.

As we are now all in place, we can move on to the next debate. Before we do so, several Members have indicated that they want to take part. I want to try to get as many in as possible, so I ask that interventions be short and to the point, and that replies be quick as well. I ask for the indulgence of the Minister and the Opposition spokesman: could they give me an indication at some stage of how long they will want to speak so that I can ensure that we can get in as many people as possible?