Clause 72

Energy Bill – in a Public Bill Committee at 1:00 pm on 6 March 2008.

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Model clauses of petroleum licences

Question proposed, That the clause stand part of the Bill.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform 1:15, 6 March 2008

This clause will give effect to the amendment of the terms of existing petroleum licences, as set out in schedule 3. Section 4 of the Petroleum Act 1998 allows the Secretary of State to set out in regulations model clauses, which are incorporated into petroleum licences. Section 4 requires that any regulations prescribing model clauses for such licences are made through secondary legislation. However, new regulations will affect only licences granted after the regulations come into force.

As section 4 powers do not allow the Secretary of State to make regulations amending the terms of existing licences, we are making changes to existing licences by way of clause 72 and schedule 3. The Government have used primary legislation to amend the terms of existing licences in that way in the past. For example, amendments were made to existing petroleum licences under the Petroleum and Submarine Pipe-lines Act 1975, the Petroleum Act 1987, the Offshore Safety Act 1992 and section 5(5) of the Petroleum Act 1998.

Schedule 3 will amend the model clauses in four ways: first, by requiring licensees to provide up-to-date contact details to Ministers to ensure that the Minister can send notices and directions to the licensees; and secondly, by allowing the Minister to issue a notice requiring licensees to plug and abandon wells to reduce the risk of a licensee leaving a well suspended, but not properly plugged and abandoned, for a number of years and then not having the funds to plug and abandon it properly at the end of their licence. Without that power, there would be an increased risk of the liability falling to the taxpayer.

Thirdly, such amendments can be made by extending the circumstances in which the Secretary of State can revoke a licence in the event of a change of control. The Secretary of State can currently revoke a licence if there is a change of control or of the person to whom it was originally granted, the Minister objects to the change of control, and the licensee does not take the requisite steps to address the Minister’s objections.

The new model clauses will extend the power, so that it can apply to anyone the licence is assigned to, not just to the person to whom it was originally granted. That is important because it is always necessary, at any stage of a licence, to ensure that licensees are suitable—for example, that they are interested in and capable of maximising  production on the UK CS. Without that power, if a licence is transferred to a party that experiences a change of control, the Minister could not revoke the licence.

Fourthly, the Minister will be given a power partly to revoke a licence, so that if one person in a consortium that holds a licence breaches certain terms—for example, becomes insolvent—the Minister can, rather than revoking the whole licence, partly revoke the licence interest of the defaulting person. That is important because, in some circumstances, it will allow a consortium to continue production, rather than revoking the licence and forcing the remaining members of the consortium to wait for the next licensing round to reapply for one if they want to continue production.

The clause will also set some conditions on the operation of those amendments to the model clauses to ensure that all relevant licences already in existence before commencement are amended with the new model clauses. That is important to ensure consistency across the petroleum licensing regime as far as possible.

Although all licences should contain these new model clauses, in certain circumstances, where things happened before commencement of the Act, it would be unfair to apply the rules retrospectively. So, for example, the clause sets it out that, if the drilling of the well started before commencement, the power to require a licensee to plug and abandon it will not apply. It also sets it out that, if the event that leads to the need for partial revocation happens before commencement, the power will not apply.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

On a point of order, Mr. Amess. I wish to address some of the issues raised by the Minister, but I had expected to do so under schedule 3, which is listed as the next item for consideration. I seek your advice on the appropriate point at which to refer to the detail of schedule 3, which addresses the same points.

Photo of Sir David Amess Sir David Amess Conservative, Southend West

I confirm to the hon. Gentleman that there will be a stand part debate on schedule 3, and that it will be perfectly in order for him to make his points then.

Photo of Brian Binley Brian Binley Conservative, Northampton South

The Minister has confused me a little, although that is not unusual. I am concerned about capping and abandoning a well in a given set of circumstances. I assume that that will take place when an unconsented transfer has happened—that is, one without the Minister’s consent. I assume that, if the Minister thinks that the person to whom the transfer is made is unsuitable to carry out the responsibilities, he will also assume that the transfer has not taken place and the original licensee will be told that he has to close and cap the well if the Minister thinks that that is necessary.

Legal matters are likely to arise in such complicated situations, and I do not understand what will happen. Will the Minister tell me in what circumstances he might tell the original licensee to cap and abandon the well, what cost there would be and whether it would be easy to open the well again without too much cost? These are valuable resources to the nation, and capping a well seems a pretty drastic step.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

Yes, I agree; we are trying to establish a regime that will lead to that happening only in extremis. We need a regime whereby licences can be transferred only in bona fide circumstances. Much of this part of the Bill will put in place that regulatory system, so that we can ensure that decommissioning is done effectively, at the right time and in a way that does not jeopardise the taxpayer’s interest. That is the burden of this part of the Bill.

Photo of Brian Binley Brian Binley Conservative, Northampton South

Can the Minister give me an idea of the cost of capping and abandoning and then later reopening a well? I want to be clear in my mind what the cost of the exercise will be for the people granted the licence in the first instance, because that is where it will revert, will it not?

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

The endeavour will be to ensure that a well is not capped while it still has economic life. Given the market situation, there is every chance that another commercial player could be brought in. However, I am advised that a well cannot be reopened once it has been plugged and abandoned. We abandon only those wells that have no economic life remaining. After all, they are valuable assets. I am also advised that the cost of capping could be £1 million to £10 million. There is a double jeopardy in the economics, which is why we try to keep wells open.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

Those comments raise another issue: who decides that the well is empty? We know from how drilling and extraction are done that often substantial reserves—20 per cent. perhaps—are left underground. Will a well be considered empty because a large concern decides not to go on extracting oil or will it have to be genuinely depleted before these actions come into play?

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

I think that I used the phrase “no economic life remaining”. That is not the same as saying that there is not another barrel or so of oil down there.

We talked earlier about the importance of enhanced oil recovery and the potential to associate that with carbon capture and storage, for example. These are largely commercial decisions, of course. It will be mainly up to oil companies to make that judgment, albeit within the regulatory framework. We are talking about a very good industry, whose professionalism I have seen at first hand. No company is going to abandon a well if it has commercial life left in it. It will be for the licensee—the company—to judge, but as a safeguard, Government will have to agree.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

Some of the larger oil companies leave when a significant amount of oil is left in the well. Indeed, other companies have specialised in going into partly depleted oilfields and extracting what remains. Although the major international companies might say that it is not economical for them to do that, there is an economic benefit to be pursued by a smaller company that has developed a niche market in those areas. I hope that the Minister will not be guided only by what the larger international companies say, if some smaller companies feel that they can still go into those fields to extract more than is currently being taken out.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

I understand the point that a time comes when a large company wants to move on—its geographical priorities may lie elsewhere—and that provides an opportunity for a smaller company. However, one would imagine that the larger company would see some commercial advantage in arranging a transfer to the new player, because I assume that financing would be involved. I do not think that it is in anyone’s interest simply to abandon such a resource.

I think that I was asked how we obtain the information that a company is no longer using its well. We know that by a variety of means; largely through the normal dialogue that takes place between the regulator and the licensee, and not least because the regular well production reports would start to fall to zero.

Photo of Hugo Swire Hugo Swire Chair, Speaker's Advisory Committee on Works of Art

Is there anything in the legislation, or anything further envisaged, that would stop companies creating a bank of drillable wells that still have resources within them, to maximise what is coming out of the North sea? Is there anything in legislation that prevents companies from stockpiling assets without exploiting them?

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

We have an effective partnership with the industry, known as the PILOT partnership, which the Secretary of State now chairs. There are regular meetings, which I normally attend, in which a range of matters are discussed. I am therefore confident that we have arrived at an acceptance of a “use it or lose it” principle. The industry itself has signed up to that. If a large company—it might not always be a large company—decides that its priorities lie elsewhere, there is a recognition that the licensed work should transfer to another company, given the importance of the UK CS to the British economy. I am satisfied that the regime in place is truly the envy of the world. Many oil company executives tell me that they wish other zones had that kind of partnership, so I think that we have got it right.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

It is good to serve under your chairmanship again, Mr. Amess. The Minister said that such decisions would be essentially commercial, yet the powers in the clause are given to him and not to the commercial operators. Therefore, the Department for Business, Enterprise and Regulatory Reform will be evaluating the commercial considerations. A rather crucial consideration that comes into play is the future cost of climate change, especially if, as the Minister says, the wells covered by the clause could be used for carbon capture and storage.

The Stern report recommended that we take the future cost of climate change into account in making commercial decisions now. That was a key recommendation, and it suggested a methodology based on a rather optimistic outlook that may or may not be right. Not all the measures that the world was trying to put into place to reduce carbon emissions will succeed. That seems to be a realistic assumption.

Stern recommended that methodology as the commercial basis for calculating the future cost of climate change. That would be important if wells had a value related to carbon capture and storage. If the  future price of carbon was expected to be high, carbon capture and storage would probably be more viable in that respect. If the price was artificially low, it would be less viable. Will the Minister confirm that, in any commercial calculations that DBERR might make under the clause, it would follow the methodology advocated by the Stern report in calculating the future cost of climate change?

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform 1:30, 6 March 2008

On the hon. Gentleman’s first point, most of this is about commercial judgment, commercial decisions, and deals and partnerships between different commercial entities. However, the state does not hold its hand. The state intervenes through a regulatory process. The state intervenes through the PILOT partnership that I have just described—the use it or lose it, or fallow approach. The state is actively involved. In these clauses we are trying to do our utmost to ensure that there is final and effective decommissioning of this infrastructure in our seas. We want to ensure that if one company runs into financial difficulties and an associated company is involved, decommissioning still happens, but not at the expense of the taxpayer. That is what this is all about.

The hon. Gentleman introduces a far wider subject, which is featured in various parts of the Bill. We have already discussed carbon capture and storage and I feel confident that we will be able to demonstrate its value and practicality. Given that the most obvious place in the UK to store CO2 is under the sea in depleted oil and gas reservoirs, we need to think this through. We are doing that, but we have some time to consider the interface between the oil and gas industry and the reservoirs and pipelines and the kind of infrastructure and regulatory framework that we might one day need for CCS.

I think that the historian will look back on this Bill—I hope this will encourage Members during the more tedious moments of dry explanation—as the first time that this Parliament looked ahead and sought to begin to put in place a regulatory framework. Despite the Bill’s excellence it will not be the end of the story. We will need to make progress to ensure that the issues raised by the hon. Gentleman are properly considered.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

Perhaps I can buy the Minister a few more minutes to glance at the advice that he might have been given. I hope that he will respond to my substantial point about the future cost of climate change and the carbon price that it would dictate in any cost benefit analysis and commercial evaluation when deciding whether to maintain access to a well or to plug and abandon it. The cost of carbon dictated by the methodology on calculating the future costs of climate change is crucial to that. Stern made clear recommendations on what that methodology should be. I hope that the Minister can respond positively now and say that DBERR, in making calculations like this, will use the methodology on the future cost of carbon set out in the Stern report.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

The Stern report is a keynote document for the century. I am not in a position yet to say the precise methodologies that we will explore, but  we are certainly seized of the need to relate our thinking and planning on CCS to that on the UK CS. Where there is a potential for CO2 to enhance economic production, for example, we would want to insist that it happened. I may not entirely understand where the hon. Gentleman is coming from and perhaps there will be another arena in which we can discuss this. It is not as if we are being slow on CCS—we are an active lead nation.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs)

I am not suggesting that we are going slow on CCS, although I might have done so on other occasions. I am trying to tease out the methodology that DBERR will use in calculating the cost of carbon and whether it will be based on the methodology for the future cost of climate change used in the Stern report. It is a fairly straightforward question, although it may have a slightly complicated answer, and it is critical to considerations such as this. If DBERR is going to make essentially commercial evaluations of such projects, it has to use a cost of carbon in its calculations. I am trying to work out how it will calculate that cost and whether it will use the methodology recommended in the Stern report.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

I might need to come back to the hon. Gentleman on those methodological issues once I have looked at the record and fully understood his questions. It is not as if we are being relaxed about CO2 emissions. If companies in any arena emit large amounts of CO2, their activities will be captured by the European Union’s emissions trading scheme. They will therefore have either to reduce their emissions—that is what I would hope—or pay for any additional CO2 ETS allowances that they would need to buy. I think that his point is more specific, although I am not saying it is not important. With his approval, and possibly without it, I will write to him.

Photo of Brian Binley Brian Binley Conservative, Northampton South

I am still concerned about the question of capping and abandoning wells in the North Sea in relation to carbon capture and storage and their potential use some considerable period hence after a well has been abandoned. I think I understood the Minister correctly. I think he said that, once a well had been capped and abandoned, it could not be reopened. He also said that wells would only be capped and abandoned in extremis. I am told by the industry that we could get up to another 15 per cent. of additional oil using carbon capture and storage from the North sea wells. The process and the technology for doing that, however, are some way off. I wonder, therefore, what “in extremis” means. I would hate the thought of capping and abandoning a well which in 15, 20 or 25 years’ time could be used not only for carbon capture and storage but to enhance our oil energy needs at that time. Therefore, I want to understand what “in extremis” means in that respect.

The Minister is right to be proud of the Bill. We are creating an important platform for the future. Therefore, this is not a knocking process, but we need to understand the possibilities inherent in additional North Sea oil.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

I have touched on the issue of enhanced oil recovery and I have said that, in future, where there is potential for CO2 to enhance economic  production, we would want that to happen. I am thinking through the implications of the hon. Gentleman’s remarks. I agree with his train of thought and, although he was not suggesting this scenario, it would be ridiculous if we abandoned all the oil and gas wells, capped them and made it very difficult to reopen them and then a few years later discovered that we wanted to use them for CCS. Therefore, I can see where he is coming from.

My understanding is that, once a well has been capped, it cannot be reopened. I will check again with some experts to ascertain whether that is really the case or whether we are talking about reopening at enormous expense. I will make sure that the record is accurate. We could be talking about a real difficulty if a well is capped.

There are two stories about the UK CS. Both are true, but we need to say both of them virtually in the same breath. We have been very fortunate with the oil and gas in the UK CS since the mid-1960s. The first truth is that the resource is now in decline. The last estimate I saw showed that the decline was something of the order of 8 per cent. per year—it is quite marked.

The other story is that that oil and gas are still very important to us, and probably will be for about half a century or more—who knows? No doubt, people will then re-evaluate. For example, there is the potentially exciting development of feasibility studies looking at west of Shetland, which was previously unexplored. Four major companies are working together to determine the potential in that very difficult terrain, where connections could be very expensive. The story of the North sea continues, despite the decline. Why do I say that? Because there will still be plenty of oil and gas wells as we develop CCS potential.

As a lay person, it does not seem to me that there is a problem of the two time scales being totally out of sync, if hon. Members follow me. We will have our demonstration project, and I suppose that in six or seven years we will be in a better position to see the potential of CCS. I hope—we all hope—that there is real potential. If so, we will start to see new industries being born around carbon capture, the transportation of CO2 and its storage.

One can see the economic opportunity and the importance of Britain becoming one of the world leaders on the issue. One can imagine that there is a new book to be written about the UK CS and the North sea in terms of the storage, the monitoring and so on of CO2. We are not in a difficult position time-wise, as far as I can judge.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

Will the Minister clarify the retrospective nature of the clause? Subsection (4) states:

“Where an amendment made by a paragraph of Schedule 3 confers a power to give a notice requiring the plugging and abandonment of a well, the power may not be exercised in relation to a well the drilling of which began before commencement.”

Subsection (8) defines commencement as

“the time when that paragraph comes into force.”

Does that mean that that cannot be done retrospectively to wells that have already been sunk and that the measure applies to future wells rather than ones that have already been constructed?

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

I think that the answer is yes. I will say one or two other things on the matter. I did not anticipate such an interesting debate on what I assumed was a humble clause, but I am encouraged.

With the hon. Member for Wealden, I was trying to think about how this area might develop over the next few decades. In the future, when we think that a well might be ideal for CO2 storage, it is possible that we could suspend it rather than abandon it totally. I am advised that we need to be careful about that option because, apparently, wells cannot be used after 10 to 20 years as they become unsafe in a number of ways. Nevertheless, that new information helps us with the scenario that we are building up. Although I was hedging a bit on the issue of abandonment, I am now clearly advised that it is permanent. Even if it was felt that there was potential, it would apparently be cheaper and safer to drill a new well rather than to open one up.

On retrospection, the power cannot be used for wells that have already been drilled or where drilling has commenced. I think that I said that in my speech, but I would like to emphasise it to the Committee.

Question put and agreed to.

Clause 72 ordered to stand part of the Bill.