Clause 36 - Maximising economic recovery of UK petroleum

Infrastructure Bill [Lords] – in a Public Bill Committee at 4:30 pm on 8th January 2015.

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Photo of Tom Greatrex Tom Greatrex Shadow Minister (Energy) 4:30 pm, 8th January 2015

I beg to move amendment 6, in clause 36, page 39, line 10, after “industry”, insert

“and the co-ordination of the transportation and storage of CO2

The amendment relates to the scope of the Oil and Gas Authority, aspects of which are established through clause 36. An amendment was tabled, not by members of the Committee, to remove the clause completely, which would be a mistake. Perhaps we will come to those wider discussions when we get to clause stand part.

In the time that the Minister has been in the Department, she has become well aware of the level of interest in carbon capture and storage among a number of Members who are keen and concerned to help the Government on their way to ensuring that the ambitions for it, which are frequently cited in her Department’s publications, on its website, and on road maps and everything else, are achieved. If we are to achieve lower carbon overall—in terms not just of energy but of industrial emissions—it is vital that carbon capture and storage plays a significant part. There are few, if any, ways of realistically and significantly reducing industrial emissions without carbon capture and storage, other than the loss of those emission-producing industries, which would be to the detriment of the UK, particularly in certain areas where such industries are clustered, which tend to be away from south-east England.

The amendment would ensure that the scope of the proposed Oil and Gas Authority is appropriate to ensuring that those CCS developments, particularly in relation to the point about offshore storage and the storage of carbon dioxide, are given a fair chance to make some progress. The process of establishing the Oil and Gas Authority follows the report from Sir Ian Wood, which we may come to in a little more detail. It is very much focused on maximising economic recovery and there are good reasons for that, as there were prior to the oil price changes that we have seen in the past few weeks, but it is also important in relation to developing potential storage sites and seeing that as an opportunity.

As this part of the Bill is currently written, the measures are relevant in terms of carbon dioxide storage only where there is enhanced oil recovery. That leaves us with a concern that the development of those storage sites will be at a disadvantage in the work that the Oil and Gas Authority undertakes in its early stages. The amendment is designed to ensure that the scope of the Oil and Gas Authority explicitly and completely includes carbon dioxide storage sites in the North sea. Those may well become a very good economic opportunity for the UK, given that carbon capture and storage is not just of interest to the UK. We are in the rare, if not unique, position of having many potential carbon storage sites. Other states do not have the benefit of that.

The amendment is designed to help in that way, and I hope that the Minister will accept that intent. It does not contradict the Government’s own stated intentions for carbon capture and storage and decarbonisation. I therefore hope that the Minister will reflect on that and perhaps accept the amendment, which would help to enhance the Bill and to get us further along the path towards making real progress with carbon capture and storage in storage sites in the North sea.

Photo of Alan Whitehead Alan Whitehead Labour, Southampton, Test

The amendment throws into relief a number of the problems that exist at present with the development of a mature series of oilfields in the North sea. The regime that has ruled the development of a field may transpose itself into one that has a substantial hand in securing long-term facilities for carbon capture and storage in the North sea. Those facilities may not only be of benefit to the UK but could also act as a repository for European carbon and therefore be a substantial source of income for the UK in the longer term. One difficulty that the Select Committee of which I am a member has identified in the past is the lack of continuity between licensing arrangements for the exploitation of petroleum, oil and gas in the North sea and licences to do anything else. Someone has to start from scratch to realise that potential.

One witness who gave evidence to the Energy and Climate Change Committee pointed out that he had obtained a hydrocarbon extraction licence for a field in the North sea. That field subsequently proved to be uneconomic for extraction. He thought, however, that it might be suitable for CO2 storage. Despite the assistance of DECC officials at the time, there was no regime that would allow him to convert the licence into one for CO2 storage, and he therefore had to return it. Indeed, the present arrangements for licences are very much based on the idea that a field is exploited and when that field is no longer economically recoverable, there is then the  task of closing it down, removing the equipment and pipelines from it, capping the wells and effectively declaring it dead.

Substantial activities are going on at present in the North sea to decommission some 500 installations and 35,000 kilometres of pipeline as a result of the maturing of that field and the redundancy of the equipment at the end of the licensing period. Not only is that large amount of work under way, but it is under way at a very substantial cost, currently estimated at £23 billion. Individual installations come in at between £5 million and £300 million.

So a very large amount of money is going into closing down installations when, at the same time, we have the prospect of a substantial industry—the storage end of carbon capture and storage—that could use a lot of those facilities. It would use the same holes in the ground from which the oil and gas had been extracted. Obviously, instead of taking stuff out, you are putting it in, but a lot of the techniques are essentially the same.

We have a regime that effectively extinguishes a licence, with all the consequent arrangements and costs that that entails, and then declares a field dead. If someone wishes to come along and develop that same field for carbon capture and storage, they have to start again from scratch and unpick the work that has been done to finish the oil field. They then declare it open for business for carbon capture and storage.

It so happens that the body that gives one lot of licences out may be responsible for the other lot of licences. In other words, it gets the same amount of money twice for doing something that should be—or could be—a continuous process. Interestingly, the body that gets that licensing money twice gives money back to the Treasury. The Treasury then gives out money for exploitation of the North sea oil fields; it is a roughly circular process. If we are to maximise the resource of the North sea—after all, that is what the clause is about—we need to make sure that we are not maximising a resource in one direction and denying the opportunity to maximise it in another direction. That is precisely what the present regime is in danger of doing.

So, including the question of carbon capture and storage within the definition of maximum economy recovery points in the direction of developing a much more coherent regime in the longer term for those fields. In trying to end the exploitation in one direction, we are cutting off a route to move in another direction, which I think all of us would agree is very important for the UK, in terms of carbon capture and storage that can make use of those facilities.

Photo of Andrew Miller Andrew Miller Chair, Science and Technology Committee (Commons), Chair, Science and Technology Committee (Commons) 4:45 pm, 8th January 2015

This is an important addition for us to consider. We need to ensure that when the Bill is enacted it facilitates the development of technologies. By way of illustration, I will, if I may, take Committee Members back through my own working life, a part of which started in geology. In the ‘60s and ‘70s we were developing techniques that were regarded as cutting edge. Concepts such as carbon capture were not considered for another 15 years after I left that discipline.

I come from humble beginnings—there are people with much more eminent scientific qualifications, such as the hon. Member for Suffolk Coastal, who has a  PhD in chemistry. She will recognise that the techniques developed in science and engineering have advanced incredibly rapidly over the past 10 or 12 years, partly as a result of the more recent developments in supercomputing and the tools that that can produce. That has fundamentally altered our understanding of the sub-surface geology of the UK, which in turn has opened up the opportunities that we will discuss in our debates on later clauses.

It has also opened up opportunities to understand better the incorporation of carbon capture in some of our ex-wells more effectively. The UK is beginning to develop some extraordinary skills in that technology. This part of the Bill covers a sector in which the UK is in a pre-eminent position. Whatever we do with the Bill, it is critical that we improve public confidence in our ability to regulate these technologies, some of which are controversial, and that we enable the science and investment communities to introduce new technologies that will impact profoundly on the security of our economy and energy supply.

It is critical that we take a flexible approach as we go through this part of the Bill. In that context, I urge the Minister to look with some care at the amendment tabled by my hon. Friend the Member for Rutherglen and Hamilton West, because flexibility is required to create a more all-embracing, enabling Bill that, with a strong regulatory regime, will allow us to both look our constituents in the eye, in terms of giving them confidence that we are dealing with their legitimate regulatory concerns, and address some of the country’s big economic challenges. Against that background, I urge the Minister to give some thought to my hon. Friend’s amendment and to similar aspects of this part of the Bill as we proceed.

Photo of Amber Rudd Amber Rudd The Parliamentary Under-Secretary of State for Energy and Climate Change

I thank the hon. Member for Rutherglen and Hamilton West for tabling amendment 6, because we have heard some very interesting comments from the hon. Members for Southampton, Test and for Ellesmere Port and Neston based on their significant knowledge of the subject

I want to reflect on some of the points that have been made. Amendment 6 would extend the “maximising economic recovery” principal objective to include co-ordination of the transport and storage of carbon dioxide. The storage and transport of carbon dioxide is not directly related to the recovery of oil and gas, and although there is a clear need for collaboration, it is a nascent industry. Consequently, the Government are of the view that it is premature to extend the obligations on the Secretary of State and industry to matters on which we cannot say with certainty how relevant they will be to maximising the economic recovery of petroleum. We believe that further discussion with industry and the relevant trade associations is required before we can say with certainty how the principle should apply to areas such as carbon capture and storage.

Nevertheless, I would like to reassure hon. Members that CCS is not being overlooked in the creation of the Oil and Gas Authority. As announced in the Government response to the Wood review, in addition to its role associated with licensing and stewardship functions related to oil and gas recovery, the OGA will have responsibility for issuing carbon dioxide storage licences and approving carbon dioxide permit applications.

The OGA will have a responsibility to ensure that CCS is considered as part of a proposed decommissioning plan. That will ensure a strategic, joined-up approach within the OGA on both CCS and maximising economic recovery of UK oil and gas.

Additionally, in line with the Wood review recommendations, the OGA, with the input of industry, will be required to produce a number of important sector strategies to underpin delivery of MER UK. Among these will be decommissioning and technology strategies, to achieve the maximum economic extension of field life and to ensure that key assets are not decommissioned prematurely, and to examine the business case for the use of depleted reservoirs for carbon storage and possibly enhanced oil recovery. The hon. Member for Southampton, Test was particularly concerned about that.

I reassure Committee members that the UK has one of the most comprehensive programmes on CCS anywhere in the world, to support the commercialisation of the technology and develop the industry. Indeed, my right hon. Friend the Member for South Holland and The Deepings, when a Minister in my Department, formulated the first competition, which was so important for stimulating carbon capture and storage.

Our CCS programme includes a competition with up to £1 billion capital plus operational support for the large CCS projects and a £125 million research and development and innovation programme. As this technology develops, we will ensure a strategic approach to deployment in the UK’s continental shelf.

The hon. Member for Rutherglen and Hamilton West suggests some lack of commitment to CCS, due to its not being included in this proposal for MER, but that is absolutely not the case. We remain committed and agree with his assessment that the UK is one of the leaders in this technology. However, it is still a nascent technology. Therefore it is not yet clear how the concept of maximising economic recovery will apply in practice. Although collaboration will be important in this area, further discussion is needed with industry and the trade body before we take steps to set out an obligation in the Bill.

I hope that the hon. Gentleman found my explanations reassuring and will, on this basis, ask leave to withdraw his amendment.

Photo of Tom Greatrex Tom Greatrex Shadow Minister (Energy)

The Minister is right to say that the opportunities are there but are not necessarily yet developed. Her ministerial colleague sitting next to her, the right hon. Member for South Holland and The Deepings, was previously in her Department, and although he may have been there for a short period, during that time he certainly got a lot of attention for many different things, including for work on CCS, which had some more attention than it might have had previously and subsequently, within the Department.

It is not necessarily true any more to say that we are in the lead in this technology, as we have been saying for a number of years. If we are still in the lead, it is diminishing now that there is an established power project in Canada and now that the partnership work that the UK Government have been involved in in China is starting to bear fruit—but in China, not the  UK. In the Bill we are setting up a new regulator for the UK continental shelf, following the Wood review, which has at its heart the need for collaboration, not just to maximise economic recovery, but to achieve wider energy goals. The issue about how we ensure that the transportation and storage of carbon dioxide is achieved fits exactly into that.

I will not press the amendment to a vote, because the Minister has said, and I take her word, that there will be discussion with the trade body and the industry about developing this. However, I want to say for the record that it is important that those discussions happen.

The Oil and Gas Authority, when established, will have some urgent things to consider and, given the current economic context in the North sea, it is important that these are regarded not as an add-on to its work, but as integral to the work it needs to do. If that does not happen, we may find that, despite all the comments made by all parties in the House about how far ahead we are, how many opportunities we have, and the position we are in with a potential storage facility, we end up talking about those advantages as a missed opportunity rather than one that we are still able to achieve.

Photo of Amber Rudd Amber Rudd The Parliamentary Under-Secretary of State for Energy and Climate Change

It is absolutely our intention to ensure that CCS is at the front of our strategy. We recognise, as does the hon. Gentleman, the important role it can play. I repeat that it is a nascent strategy, but that does not mean it is not important. The OGA, the new body being set up, will have its obligation to develop and license CCS at its core. That is not part of this particular element, but it will be up to the new authority to form a strategic policy around supporting both sides.

Photo of Tom Greatrex Tom Greatrex Shadow Minister (Energy)

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Photo of Tom Greatrex Tom Greatrex Shadow Minister (Energy)

I want to make a couple of comments on clause 36. They relate to some of the comments made in the previous discussion, but are slightly wider regarding the OGA. When we started our deliberations on the Bill prior to Christmas, I think my hon. Friend the Member for Birmingham, Northfield referred to it as being a portmanteau Bill—maybe the explanatory notes say that, but it has lots of things in it from lots of different directions. Clause 36 is one of the more significant and urgent parts of the Bill.

In the context of what has been happening in the North sea in the past few months, particularly the past few weeks, the clause has got more attention than it had before. However, it is important to remember that the Wood review, which the clause effectively begins to implement, was done in the context of what was a mostly mature basin, even prior to the recent changes in oil price. It is pretty obvious that oil revenues, by record, are volatile; we can all see that and have seen it in the past few months. Oil resources and recoverable resources are, by definition, declining. As we get more out of the sea there is less left in it. Therefore, the need to ensure that the economic recovery of what is becoming a mature basin—and was a challenging place to be extracting oil prior to what we have seen in the past few months—is vital.

I want to briefly ask the Minister about a couple of points around the OGA. As the OGA is within a Bill that covers lots of other things, I am sure it was incorporated because it was the most appropriate vehicle to get it through and in place as soon as possible, given recent events and what we have seen happening in the North sea—we have started to see for the first time in many years some significant numbers of job losses in some of the operators in the north-east of Scotland and some significant concerns from a number of operators about the longevity of some of their operations. When the break-even point might well have been at $70 or $90 a barrel, the longer we have an oil price at $50 a barrel, the harder it becomes to justify continued levels of investment in the North sea.

Will the Minister clarify, given that the clause is in the Bill to institute the OGA, in line with the Wood review, as soon as possible—the chief executive has been appointed—what would happen if the Bill did not pass and that was delayed? What functions and roles that the OGA is being established to fulfil would it be unable to do? That is an important point around the wider context of the Bill. If it does not, for some reason, take effect prior to the end of the Parliament, that could have significant and real implications for the North sea at what is currently a critical time. It was urgent prior to the start of the changes in price in late summer and has become, to many observers, critical. I would appreciate it if the Minister responded to that specific point because it is important that the Committee is well aware of that to aid our deliberations of subsequent clauses and as we reach Report.

Photo of Amber Rudd Amber Rudd The Parliamentary Under-Secretary of State for Energy and Climate Change

Clause 36 provides for an overarching MER UK principle that places a requirement on the Secretary of State to act in accordance with the strategy when exercising relevant functions, which will include working with petroleum licence holders, operators under petroleum licences, owners of upstream petroleum infrastructure, and persons planning and carrying out commissioning of upstream petroleum infrastructure, in order to maximise economic recovery from the UK continental shelf. Our aim is to maximise economic recovery of oil and gas from the UK continental shelf in order to maximise long-term added value to the UK as a whole. The principle applies to all activities at all stages of the oil and gas recovery life cycle, starting  from exploration, through appraisal and development and finally during decommissioning.

The clause creates a framework to establish the MER UK definition in the strategy. Flexibility in approach is needed to keep pace with the developing needs for exploration and production in the North sea and changes in technology. We believe that is best achieved through a strategy that can adapt to new challenges and the evolving needs of oil and gas in the North sea. The clause requires the Secretary of State to produce a strategy for enabling the principal objective—maximising economic recovery—to be met. The strategy will be developed over a period in a tripartite manner.

The hon. Gentleman referred specifically to how challenging it will be to deliver MER UK when the market sentiment is bearish and oil prices keep falling. We are facing challenging times, but the Government are committed to implementing the Wood review, which he referred to, to maximise economic recovery. We believe that, by acting in accordance with the strategy, there will be a significant reduction in costs through increased collaboration, which will bring real benefits to licence holders. That benefit would not be possible without the clause.

The hon. Gentleman asked, in a slightly fatalistic way, what would happen if the clause did not stand part of the Bill. However, I judge that, from his enthusiasm for the principles that we have put here and from the lively enthusiasm of Government Members, that will not happen. As he is aware, the setting up of the Oil and Gas Authority as a separate entity is a little way away. In the meantime, it will be an executive part of my Department, but we are committed to ensuring that that takes place, because we share his concerns about the industry, given the dramatic changes in prices. On that note, I hope that the hon. Gentleman will be able to support the clause.

Question put and agreed to.

Clause 36 accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Dr Thérèse Coffey.)

Adjourned till Tuesday 13 January at twenty-five minutes past Nine o’clock.

 Written evidence reported to the House

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