North Sea Oil and Gas (Employment)

Peter Aldous Excerpts

Tuesday 20th January 2015 Westminster Hall

[Peter Aldous (Waveney) (Con)]

It is a pleasure to serve under your chairmanship, Mr Streeter.

I am grateful to the hon. Member for Aberdeen North (Mr Doran) for securing the debate. As has already been remarked, his timing is appropriate. Although the fall in crude oil prices is good for the UK generally, it has serious implications for this important industry, which provides highly skilled jobs and forms an important part of the UK economy. Much of the sector is concentrated in Scotland around Aberdeen, but the industry is important in East Anglia as well, employing approximately 105,000 people directly and in the wider supply chain.

The immediate problem was caused by the dramatic slump in the price of crude oil, but that served to highlight the challenges facing the North sea oil and gas sector, which Sir Ian Wood considered in his excellent report. They include the growing difficulty and escalating associated costs of finding and extracting oil and gas from what is now a mature basin. In a sector that is globally footloose, most investors have no particular allegiance to the UK—they will do business wherever in the world conditions are most favourable. Our fiscal and regulatory framework is now not fit for purpose and does not encourage them to come here. It is in need of a major overhaul.

We have a regulatory regime that Sir Ian Wood noted was appropriate for the industry in the early days, but it is no longer suitable for a basin that now has more than 300 fields, much smaller new discoveries, many marginal fields and much greater interdependence in exploration, development and production. That model needs to be updated for the 21st century. In addition, a complex, unfriendly and outdated tax structure makes today’s smaller fields a riskier bet.

From my perspective, I am interested in the specific problems of the southern North sea. A significant number of potentially attractive gas prospects could generate much economic activity, create jobs and improve the country’s energy security, but their exploration is not viable, due not only to rising costs and the falling wholesale price of oil but to the relatively low price of gas in relation to oil. That is having a negative knock-on effect on East Anglian businesses, resulting in investment in new facilities and assets being deferred or postponed; a reduction in business investment in advance of the anticipated growth in the offshore wind sector; and a reduction in the ability to attract investment into an area in which many of the larger businesses are owned by overseas companies.

It is necessary to reflect for a moment on the vital importance of the industry to the UK economy. Sir Ian Wood himself drew attention to the industry’s substantial contribution to energy security, the economy and employment. In 2012, production on the UK continental shelf met 67% of the UK’s demand and 53% of the gas demand, and the sector directly supported the employment of 450,000 people throughout the UK. Moreover, in 2012-13, the industry paid £6.5 billion in corporate taxes on production. Despite the challenges and the downturn in production in recent years, Sir Ian points to significant momentum from current production and major investments in capital expenditure over the past two or three years enabling the industry to continue to play the key role that it has been playing over the past 50 years. In that time, many skills and considerable expertise have been developed in the industry and its supply chain, resulting in thousands of well paid jobs and the generation of significant export earnings.

Another advantage is that those skills are largely complementary to the ones needed in the emerging offshore renewables sector. If the potential jobs in that industry, whether in the construction of wind turbines or their subsequent operation and maintenance, are to be fully realised for the benefit of the UK and not exported to foreign yards and ports, it is vital that we retain the skills and develop them further. As a country, we have built up considerable expertise and experience that we must now build upon and not lose or squander.

The Government’s announcements in the autumn statement show that they recognise the importance of the industry and its challenges. The industry must reduce costs and improve efficiency so as to ensure its long-term sustainability, but the further reductions in crude oil prices since the autumn statement in early December mean that more action by Government is now required. There is a pressing need to change the tax regime and to address the industry’s regulatory shortcomings, and the recommendations of the Wood review must be implemented as quickly as possible.

Looking at the industry in East Anglia, an early priority action for the new regulator should be the development of a regional plan for the southern North sea. As Sir Ian Wood himself pointed out, the southern North sea is the most mature region on the UKCS, with first production from the West Sole field in 1967. It is a gas-producing region, now vulnerable to rapid decline, but still with great potential, which has been illustrated by the recent Cygnus development and the Tolmount discovery. Wood commented that the southern North sea is especially vulnerable to premature contraction and decommissioning. He emphasises the pressing need to prepare a regional plan to address all the challenges that the area faces.

In conclusion, the North sea has produced significant benefits for the UK economy over the past 50 years—we must all wonder where on earth we would be without it. With the right stewardship, it can continue to play a similar role for the next two decades and, in doing so, increase GDP, sustain jobs and facilitate the transition to a low-carbon economy. Time is very much of the essence. There is now a need for immediate action.