Orders of the Day — Oil and Pipelines Bill

Part of the debate – in the House of Commons at 7:44 pm on 14th May 1985.

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Photo of Mr Michael Portillo Mr Michael Portillo , Enfield, Southgate 7:44 pm, 14th May 1985

I listened with great interest to the speech of the hon. Member for Dunfermline, West (Mr. Douglas), and I shall refer to some of the points that he made. I was particularly interested in the scenario that he painted, from his great knowledge of the international scene, of the possibility of OPEC forcing up production and forcing down the price. However, the argument that I shall develop is that I cannot see any way in which either the British National Oil Corporation or the agency that is to replace it could influence the prices in a situation as drastic as that.

To some extent, today's debate has been a re-run of the arguments that were put forward on 14 March. I should like to begin by repeating two things that I said on that occasion. First, I congratulate the Select Committee. It produced an excellent report. Today we have had some fun discussing over what period the Government's conversion to the abolition of BNOC occurred. If it was over six or seven days, the Select Committee deserves credit. Secondly, I repeat the tribute that is due to the staff of BNOC, who have performed their duties excellently. The fact that BNOC is being wound up is not a reflection on the way in which they perform their duties.

When we. held the debate on 14 March I gave a loud cheer to the news of the abolition of BNOC because it was welcome. On the other hand, on that occasion I entered some reservations about the role of the agency that was being brought in to replace it because I thought that the Government should make a cleaner sweep and take themselves more distinctly out of the oil trading market. Having considered the matter in the two months since that debate, and having had the opportunity of reading the Bill, I am more convinced than ever that it is right to abolish BNOC. However, my reservations about the agency that is to replace it are even more pronounced.

There are two basic reasons why BNOC should go. First, it has not been able to do what many of us hoped it might be able to do—protect our security of oil supply. Secondly, it has made it appear to the outside world—this is a very important point—that the Government were trying to control, or did control, the price of oil. That has led us into all sorts of diplomatic problems.

What I have said is no reflection on BNOC, as it was not set up in a way that could possibly guarantee our security of supply or even help in securing it. In that respect, I am taking an easier road than some of my hon. Friends because I am not trying to justify a change. I do not think that there was a magic date on which BNOC ceased to be useful. It is my contention that from the moment it was set up, and because of the manner in which it was set up, it had no chance of helping with our security of supply.

My main reason for saying that is that the participation agreements gave BNOC access to 51 per cent. of crude oil. But what good is that? The industries in our country do not run on crude oil. Our cars run on petrol and our industries run on the products of oil. It is those products that are the vital ingredients in the whole scene. Control of about half the nation's crude oil does not guarantee us against interruptions of supply. Even small interruptions in the supply of products can lead to severe dislocation and problems, as happened in 1979.

BNOC also entered into long-term contracts for the disposal of the oil that it took. As some hon. Members said today, that led to a lack of flexibility. BNOC was unable to turn around on a sixpence and shed those commitments quickly. It could not respond to events when they were moving quickly. That is not a matter of theory, but a matter of fact. My hon. Friend the Member for Exeter (Mr. Hannam) referred to what happened in 1979. With BNOC in existence this country was, if anything, worse placed to defend itself against interruptions in supply than many countries that did not have such an organisation.

There has been a great deal of discussion about the nature of the assurances and the informal arrangements that are made between the Government and the oil companies. Hon. Members may have their suspicions as to whether those assurances are watertight and whether the agreements, with all their informality, are sufficient. It seems that those informal arrangements go to the heart of the matter, which is the control and supply of products of oil, and not crude oil. That is a very important distinction. The hon. Member for Merthyr Tydfil and Rhymney (Mr. Rowlands) said that BNOC was a company on which one could rely to defend the national interest. Its heart might have been in the right place but its oil was normally not in the right place as it-was normally committed. That is one of the reasons why it failed.

I am therefore surprised that the Government want to maintain the participation agreements. I was surprised when my right hon. Friend the Minister of State told us in our previous debate on this subject that, if the Government feel that they will need such oil in the medium term, they can activate the participation agreements. He has reiterated that sentiment today. As several hon. Members said, the medium term in this context means at least six months. Any right hon. or hon. Member who could predict whether there will be an oil crisis next week would be a rich man. To predict that we shall need additional supplies of oil next winter assumes supernatural foresight. The Government can choose between exercising the participation options all of the time—which they clearly will not do or we should not be discussing the Bill—or they will never exercise the participation options. When I say "never", I refer to the present Government. A Government of a different colour might take a different attitude.

I should like now to consider the problem of the Government appearing to fix or to control the price of oil. The Government should not attempt to fix the price of oil for two reasons. First, they will never succeed, as we are not powerful enough in the world oil market to have such an impact. Secondly, in the long term, lower oil prices are in our interests. I understand the desire for some stabilising, but the Government never seriously believe that they could control prices in the long term. In that sense, I accept assurances that Ministers have given that that was not the business with which they were involved.

Because BNOC was a price setter and a Government body, it is natural that OPEC Ministers assumed that the British Government were attempting or were able to control prices. Time and again, Britain has needlessly given offence to OPEC countries. Each time the North sea oil price has moved, it has looked to the outside world as though the United Kingdom was leading the way on oil prices. Indeed, it looked as though we were leading the price up to get rich or down to sell our oil without having to cut production like OPEC countries. I believe that Lord Wilson of Rievaulx used to joke about Britain becoming a member of OPEC. It has looked recently as though Britain is trying to reap all the benefits of being a country member of OPEC without being willing to pay the club fees.

The Government's response to all of this is curious. The problem arises because a Government body trades 1 million barrels of oil a day and is a price setter. That is what produces the diplomatic problem for Britain. The answer to that problem is for the Government to get out of oil trading. However, they are now proposing to replace BNOC with another Government body which will trade 250,000 barrels a day. I do not see how the agency can avoid being a price setter. Several hon. Members have said that 250,000 barrels is a substantial amount of oil. It appears that the Government have realised that they are in the international firing line and, having recognised that that problem has come about because they have their head and shoulders above the parapet, their response is to put only their head above the parapet, keeping their shoulders well hidden. That is a curious response.

I should like the Government to give up the participation agreements because I think that they are useless, and I should like them to give up royalty in kind. I understand that the main argument for having royalty in kind—it is not a sufficient quantity to affect security of supply — is the cash flow argument. I understand that the Government receive their money earlier from royalty taken in the form of oil than in the form of cash. If that is so, we should change the rules so that the royalty in cash can be taken earlier, so that the cash flow disadvantage can be overcome. That would be much better than the Government continuing to expose themselves by being involved in the oil market.

I am as worried as any hon. Member about security of supply, but I disagree with several hon. Members about the role of the Energy Act 1976 in securing our supplies. I have sometimes felt this afternoon as though I have read a different Act. I believe that it is much more comprehensive than some hon. Members have given it credit for. It is a good piece of Socialist legislation. It contains sweeping powers, which can be activated in circumstances that fall short of those which Opposition Members have mentioned. For example, the use of oil can be controlled at any time when it seems desirable to the Secretary of State to conserve energy. The full powers can be exercised when there is an international energy emergency and when it seems to the Government that an emergency is looming or is threatened. I do not wish to put ideas into the minds of Opposition Members, but this is a wide-ranging and draconian Act. It is extraordinary to argue that it is insufficient for securing supplies.

I have no doubt that the Government are doing the best thing in abolishing BNOC, but it worries me that they have not given the best reasons for doing so. The best reason is that BNOC never did its job. It is not that it ceased to do its job, as it never could secure supplies. The Government have put all of the emphasis on the recent change in market conditions, especially the change towards the spot market. If they take that line of argument, they are open to the accusation that this is a temporary phenomenon. They are, therefore, arguing for a long-term change—the abolition of BNOC—by giving a short-term reason.

Because the Government have given only half the reason, they are proposing only half of what I believe is the appropriate change. That surprises me as the Government do not have a reputation for doings things by halves. In this, however, they have done things by halves as, first, they cut BNOC in half to create Britoil and today we are discussing a Bill that cuts BNOC in half again to create an agency. I wonder whether the Government will come back with another Bill to cut the agency in half. I am reminded of the old mathematical problem: if a flea starts in the middle of a table and takes a jump followed by a jump of half the remaining distance, and keeps jumping half the remaining distance, when will it reach the end of the table? If I remember correctly, by that method it never reaches the end of the table. My right hon. Friend the Minister of State is not in the least like a flea, but I should like him to steel himself and, with one great bound, get himself free of the table.