Energy Bill [Lords] – in a Public Bill Committee at 9:25 am on 26 January 2016.

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

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Energy and Climate Change)

Good morning, Mr Bailey. It is a pleasure to serve under your chairmanship in this Committee.

The first clause of the Bill is about the very existence of the Oil and Gas Authority. In truth, it is a rather odd construction: it is a regulator, but at the same time it is a limited company, albeit one that does not have to use the word “limited”. Essentially, it is a private company with one shareholder—the Government. Presumably, therefore, the Government may sell their share whenever they wish. The OGA’s members, officers and staff are not, as we see elsewhere in the Bill, to be regarded as civil servants, but they do have access to civil service pensions. The OGA is quite an anomaly in the world of regulators.

My understanding of how regulators work across the board is that they have to perform a function that is clearly equidistant between Government, industry and other arrangements. In this instance, the set-up of the OGA does not appear to conform exactly to that principal definition of what a regulator should be. Why was it decided that this should be the formulation of the OGA? It is rather different from the precedent for regulators. An unworthy suggestion could be made that the OGA has been set up as it is to take it off Government books, although as far as staff of the OGA are concerned it will put them, at least in some instances, back on Government books again. However, I am sure that that is not the sole or the main purpose in deciding to set the OGA up in this particular way.

I would be very interested to hear from the Minister why this structure was chosen and what advantages it is thought to provide. Does she think any particular difficulties might arise from the Government company structure that the OGA is to have, and if so, can they be satisfactorily resolved by other aspects of the OGA’s construction?

Photo of Andrea Leadsom Andrea Leadsom The Minister of State, Department of Energy and Climate Change

Mr Bailey, it is a great pleasure to play a role in the Committee scrutinising this very important Energy Bill, and I thank all hon. Members for being here this morning. I hope we are going to have some very interesting discussions.

Sir Ian Wood published his review on 24 February 2014. It concluded that the UK continental shelf is a very different and more complex operating environment now than in the past. The review proposed four key recommendations, which the Government accepted in full at the time of publication and reconfirmed in our response published on 16 July 2014. The four key proposals were: first, the adoption of a cohesive tripartite approach between the regulator, the Treasury and industry in developing and implementing a new shared strategy called maximising economic recovery UK, or MER UK; secondly, the establishment of a new arm’s length regulator; thirdly, the introduction of a suite of additional regulatory powers for the new regulator; and fourthly, the development and implementation of new sector strategies on issues such as exploration and decommissioning cost reduction.

The Department of Energy and Climate Change is making strong progress in implementing the recommendations of the Wood review. In particular, the principle of maximising economic recovery of offshore UK petroleum was established in the Infrastructure Act 2015. We also took a power in that Act to charge a levy to fund the OGA. As the hon. Gentleman knows, the OGA was initially established as an Executive agency but will become a Government company as a result of this Bill. Classification as a Government company will enable the OGA to have operational independence from Government and will provide a more suitable platform and the regulatory certainty that the industry requires to invest in exploration and production activity. It will also allow the OGA the necessary operational freedoms to recruit high-calibre individuals in a competitive employment market.

To be very clear, there are very well known precedents for Government companies, including the Prudential Regulation Authority, the Financial Conduct Authority and the Highways Agency. The Government-owned company is a private company under the Companies Act 2006, limited by shares, with the Secretary of State for Energy and Climate Change as the sole shareholder. The Secretary of State will appoint the chair and a non-executive director to the board. Of course as the hon. Gentleman knows, the OGA has a new independent chief executive who is already making strong progress. We absolutely support the establishment of the OGA in the terms in which it has been set up.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Energy and Climate Change)

I thank the Minister for that explanation of the set-up of the OGA, but I have to say that the Wood review did not at any point, as far as I can see, refer to the idea that the OGA should be a Government company with a single shareholder. Indeed, as the Minister correctly points out, Wood set out at some length what the activities and scope of the OGA should be—but perhaps that is a debate for another occasion. The issue now is the structure of the OGA in relation to its duties, to the industry and to the question of continuing to maximise the output and return of the North sea. It seems to me that a fairly carefully defined body is required to undertake that regulation.

Sir Ian Wood talked about an arm’s length organisation that would be able to stand between the various interests and make sure that those interests worked collaboratively rather than competitively in securing the success of the North sea. I wonder whether the OGA as constructed will be able to do that in the way that Sir Ian envisaged and all of us in this House want. It is true that, in the past, a few—I emphasise: only a very few—Government agencies have had this construction. I should like to know why the proposed construction is uniquely good for the arrangements of the OGA, in so far as the requirements that Sir Ian Wood set down for the role of the regulator are concerned. What thought have the Government given to other ways of constructing the regulator so that it could provide the best arm’s length arrangement for the industry?

Photo of Andrea Leadsom Andrea Leadsom The Minister of State, Department of Energy and Climate Change

I have to disagree with the hon. Gentleman. It was a clear recommendation of the Wood review that a step change was needed in Government stewardship and regulation of the UK continental shelf, and this required a new independent body with a strong CEO and greater independence from Government to focus fully on maximising economic recovery. As an arm’s length body, the OGA will be in a much better position to play a strong role in catalysing, encouraging and facilitating actions and agreements within and between operators, and between operators and Government, to ensure the success of the tripartite MER UK strategy. It is simply not true to say that this was not part of Sir Ian Wood’s recommendations; I think it was very much a part of those recommendations. The alternative, as the hon. Gentleman will be aware, is that the OGA continues to operate as an Executive agency, and that of course would not have the same extent of separation from Government as Sir Ian Wood envisaged.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.

Clause 2

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Energy and Climate Change)

I beg to move amendment 7, in clause 2, page 2, line 9, at end insert—

‘(2c) The Secretary of State shall, within one year from the date of this section coming into force, undertake an assessment of the fitness for purpose of the OGA’s powers in relation to relevant activities, and shall lay before each House of Parliament a report of the findings.”

This amendment would require the Secretary of State to undertake an assessment of whether the OGA’S powers are fit for purpose within a year of this section coming into force.

With this it will be convenient to discuss Government amendments 2 and 3.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Energy and Climate Change)

Amendment 7 seeks to reflect the newness of the concept of what the OGA is undertaking regarding the North sea. This regulator has previously existed as an Executive agency, as the Minister quite correctly says, and was essentially given authority under the Infrastructure Act; nevertheless, it will be operating in very new circumstances for a regulator.

Unlike some previous bodies, the OGA is not being set up at the same time as the emergence of a specific legislative structure or the development of a new industry. It is coming into an industry that is three quarters of the way through the operational history of North sea exploration, extraction and associated activities. It comes in with a number of new challenges, which include the maturity of the North sea basin and the need for different forms of working for future extraction, such as the sharing of infrastructure facilities and agreements on how the North sea can best be developed in its more mature phase. My central point is that the OGA arises at that new stage in the life of the North sea and the challenge is to get the arrangements right for the future.

A structure has been put in place that is substantially in line with many of the recommendations of the Wood review and seeks to get the best out of an admittedly difficult series of processes. My concern is whether, in setting up the powers and arrangements for the OGA, we have found the best way forward. We will perhaps know that only as the OGA gets under way. Although I do not believe that, with regulators in general, one should pull the plant up by its roots to see if the roots are growing, I think it is important when establishing a new agency to carry out an initial appraisal of its fitness for purpose and ability to achieve what we all want, as well as to inform how best to undertake its activities.

The purpose of the amendment is not to secure regular reviews of the agency’s activities. I suspect the Minister may have one or two things to say about the status of regular reviews. Labour Members believe the Government amendments on regular reviews are about right. There is a different case to be made for the initial scoping of the purpose of the OGA and how it has been transferred from idea to purpose to action. An initial appraisal of whether we have got that right ought to be undertaken in the next year.

It is vital that we get this right, because of the importance of the North sea having a successful future. An initial review would greatly enhance the faith that people will place in the OGA’s ability to regulate activities in the North sea properly. Does the Minister think that that is a good idea in principle? If she does, would she be willing to accept amendment 7 or a similar amendment to inform the activity of the OGA over the next few years?

Photo of Andrea Leadsom Andrea Leadsom The Minister of State, Department of Energy and Climate Change 9:45, 26 January 2016

Amendment 7 would add a new requirement for the Secretary of State to undertake an assessment of whether the OGA’s powers are fit for purpose within one year of clause 2 coming into force. The provision should be read in conjunction with clause 17, to which I have tabled my own amendments to overturn the amendments made in the other place. My amendments reinstate the original wording of clause 17 to require the Secretary of State to carry out a review of the OGA’s performance and functions on a no more than three-yearly ongoing basis

Amendment 7 returns to the notion that a review of the OGA’s powers should be carried out within one year of the Bill coming into force. Moreover, it would seek a much wider review than that specified in clause 17, covering all the OGA’s powers. I remain of the view that the amendment is not necessary and risks damaging the OGA’s effectiveness. The hon. Gentleman puts it very well when he says he does not want to pull the plant up the roots to see if it is growing, and I fear that that is exactly what would happen.

For such a wide-ranging review to be undertaken within one year, it would have to begin almost immediately, diverting significant OGA and Government resources from the urgent task at hand. It would also leave no time for the OGA to operate within the powers that it will have, making it difficult to reach any view on whether they are effective. It would also cut across Sir Ian Wood’s recommendations, which remain crucial. Government and industry have made it clear that, more than ever, we need a robust and well resourced regulator to support the North sea oil and gas industry. It is crucial that the OGA is given the space it needs to fulfil that role as a new regulator with new powers. The amendment risks stifling the OGA and creating uncertainty over its functions at a time when it needs to be resolutely focused on providing urgent support to industry, so I hope that the hon. Gentleman will be content to withdraw his amendment.

Government amendments 2 and 3 overturn Opposition amendments made in the other place and reinstate the original wording of clause 17 to require the Secretary of State to carry out a review of the OGA’s performance and functions on a no more than three-yearly ongoing basis. There is broad consensus that measures are needed to ensure that the OGA remains well equipped to address the diverse challenges faced by the oil and gas industry, and that its role and scope, particularly in relation to carbon dioxide and storage, is appropriate, sufficient and regularly evaluated. As such, the Government introduced provisions requiring a review of the OGA’s effectiveness in exercising its functions, as well as a review of the fitness for purpose and scope of such functions. However, as I said, Opposition amendments made in the other place require an initial review to take place no later than one year after the Bill comes into force, and then annually for subsequent reviews. These time periods were reduced from the three-year periods that the Government had introduced.

I have already set out how a mandatory annual review would be an incredibly onerous process for the Government, the OGA and industry, and is likely to have myriad unintended consequences. It would require the almost continuous evaluation of the effectiveness of the OGA, with very little time to implement the recommendations from each review. Reviews would be extensive, needing to cover both statutory and non-statutory functions, and an assessment of effectiveness against external factors, such as changes in the regulatory landscape, operational practices across the UK continental shelf, and environmental and economic factors. All of this would be required as part of the review to enable the Secretary of State to produce a report setting out the findings of the review, which is to be laid before Parliament. This would create significant resource burdens for the OGA and the Government and risk obstructing the work of the OGA. The process would be inefficient and would therefore risk producing an ineffective review. It would weaken the ability of the OGA to act as an independent regulator free from Government intervention. It would also create a review process significantly out of step with those to which other regulators are subject.

It is worth noting that other mechanisms will be in place to ensure that the OGA is held to account for its performance and functions. It will publish, on an annual basis, a refreshed five-year business plan and an annual report and accounts. The need for an arm’s length body charged with effective stewardship and regulation of the UK continental shelf was a central recommendation of the Wood review. I believe the original three-year review periods introduced by Government must be reinstated to avoid conflict with that recommendation.

Photo of Callum McCaig Callum McCaig Shadow SNP Westminster Group Leader (Energy and Climate Change)

I look forward to serving under your chairmanship, Mr Bailey. It is incredibly important that we establish the OGA, as dealt with in clause 1, and we wholeheartedly support the OGA having the powers that it requires to fulfil its role of securing maximum economic recovery. That principle is enshrined in the Wood review, which was conducted some 18 months ago, albeit in a climate where the price of oil was considerably higher than it is now and the challenges facing the sector were likewise considerably different.

The Scottish National party supports amendment 7. The principle that the Secretary of State should look at the OGA to see whether it has the required powers is fundamental, given the change in circumstances. That said, we are content to support the Government amendments. The principle of establishing the OGA, and looking at it after a year, is sound. However, once that has been done, the OGA should be looked at on a three-year rolling basis. The Minister has made a sensible case not to over-burden the OGA with regular reviews and we support that. In conclusion, the SNP will support both the Labour and Government amendments.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Energy and Climate Change)

I thank the Minister for her response to my explanation of why the amendment is useful for the longer term operational strategy of the OGA. However, I gently suggest that she may have slightly misunderstood my earlier comments. I am certainly not saying that the OGA should be reviewed on an annual basis. I share the Minister’s concerns that were that to be the case, it could well stifle the OGA’s activities.

That is an operational point: how can the OGA best operate over a period of time and how can we make sure that it has the wherewithal to do so? It would have a negative effect to put its operations continually under the microscope, and could stifle its ability to do what we hope it will do best, as far as the future of the North sea is concerned.

We have to look back through the legislation to see exactly where the construction of the OGA comes from. The whole question of strategy arises from the amendment of the Petroleum Act 1998 by the Infrastructure Act to provide the principal objective. Interestingly, that measure refers to “collaboration among”—not regulation between—“the following persons”, and lists some consequences of the principal objective, including the

“development, construction, deployment and use of equipment used in the petroleum industry”.

In other words, under that objective, there is a fairly close relationship between the petroleum industry and the OGA.

That is a particular way of proceeding, and it is what is in the legislation, but it may not, as it turns out, be the best way for the future operation of the OGA. The authority could be carrying out its ongoing activities wonderfully, but be stifled by the way in which its powers and objectives have been set up. The review seeks not to run regular speed checks as the OGA goes down the road in the early stages of operation but to look at whether the vehicle in which it has been designed to travel is the best one. It would at the very least be prudent to take the opportunity to consider the situation one year into the OGA’s operation, to ensure that we have got it right, and it could be useful for the authority’s future, whereas longer-term review methods, undertaken too regularly, could cause operational problems.

I am happy to withdraw the amendment. I hope, however, that the Minister will consider carefully how the OGA has been set up. Can we be certain that the authority will be as fit for purpose in the future as we think it is today, and might there be mechanisms for reviewing that as the OGA undertakes its operations?

Photo of Andrea Leadsom Andrea Leadsom The Minister of State, Department of Energy and Climate Change

I think that the hon. Gentleman and I agree in principle—clause 17 was introduced because of the need for regular review—but we disagree about how soon the review needs to take place. It would be unsettling for the industry that supported the establishment of the OGA if within a year everything could change, so I feel that one year is too short a time. I am grateful to the hon. Gentleman for withdrawing the amendment.

Amendment, by leave, withdrawn.

Clause 2 ordered to stand part of the Bill.

Schedule 1