Abandonment of offshore installations

Energy Bill [Lords] – in a Public Bill Committee at 12:30 pm on 28 January 2016.

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

With this it will be convenient to discuss new clause 9—Report to Parliament on decommissioning costs—

‘Within one year of this Act coming into force, and annually thereafter, the Secretary of State shall report to each House of Parliament on estimated decommissioning costs for North Sea oil and gas infrastructure.’.

This amendment would require the Secretary of State to make an annual report to Parliament on the estimated decommissioning costs for North Sea oil and gas infrastructure.

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

In this clause, we come to the substantial and often vexed question of decommissioning. Indeed, if we take into account the related schedule, the clause contains provisions about abandonment of offshore installations and the duty to act in accordance with the maximising economic recovery strategy as far as decommissioning and its alternatives are concerned.

I emphasise that the Bill already deals with some considerations, but we contend—we may discuss this later in our proceedings—that the alternatives to decommissioning may need to be looked at rather more carefully to make sure the strategy works as well as it can overall.

Photo of Chris Heaton-Harris Chris Heaton-Harris Conservative, Daventry

I would just like a bit of clarification from the hon. Gentleman. I assume he will be talking about the need for decommissioning and about how to incentivise it and to make sure that the funds are available under the decommissioning fund.

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

Indeed. That is already in the Bill. Clearly, we need to decommission substantial parts of the precommissioned asset in the North sea. The question I hope that we will discuss in some detail is what one needs to do to achieve a proper balance, so that we get decommissioning firmly under way, because an enormous amount of asset clearly needs to be decommissioned. There should certainly be no suggestion that part of the policy is simply to abandon that infrastructure and leave it there to decay.

It is clear that activity needs to be undertaken. As I will mention in a moment, the extent of that activity needs to be understood, because decommissioning could be a substantial new industry in its own right in the North sea—it certainly already appears to be one to many people. Indeed, at conferences, exhibitions and various other things, people are looking at the opportunities the process offers for employment, for supply chain development and for translating decommissioning expertise and practice in the North sea to other parts of the world to create added value. There is, therefore, no doubt that decommissioning is a substantial enterprise that will produce jobs, as well as opportunities in the supply chain and elsewhere, and that is underlined by the scale of decommissioning on the UK continental shelf.

Decommissioning is not just a question of the external infrastructure of the North sea; there is also the important point that we need to plug and cap the wells themselves, as the depletion process continues, and that is—certainly from an environmental point of view—the most important part of the process. We need to make sure that the abandoned, worked-out wells are properly stewarded and plugged and securely taken down and put out of use. At that point, all the other infrastructure that surrounds them can be safely and properly dismantled.

Photo of Chris Heaton-Harris Chris Heaton-Harris Conservative, Daventry

I thank the hon. Gentleman for making that point so plainly and putting it in layman’s terms so that even I can understand it. I just wanted to ensure that we had established—and were not going to talk about—the principle of the need to decommission large-scale energy projects and the importance of that to the environment. As that is a given across all political parties, we can get to the meat of the Bill.

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

Indeed, that is a given regarding the situation in the North sea. Of course, that relates to the fact that the North sea is a mature basin. Having a new dawn of massive exploration and the need to develop infrastructure on the back of that massive exploration is only a relatively small part of the future of the North sea. The fact that we have to deal with what has happened so far in the North sea properly, safely and with full confidence is what some people determine is at the heart of the decommissioning industry at the moment.

The scale of decommissioning before us on the UKCS is frankly enormous. Something like 4,000 wells need to be plugged, securely abandoned, and have all the infrastructure taken away. There are something like 290 fixed platforms and 33 floating installations that require particular arrangements to be removed. It is not only that the wells need to be plugged. A substantial number of subsea wellheads and structures that sit on the bottom of the sea to undertake some activities that otherwise would be on the fixed platforms need to be dealt with, and they also need a pretty specialised approach. Above that is the question of the pipelines connecting those wellheads, platforms and installations to the landing points. Something like 20,000 km of pipelines may need to be decommissioned over the next period.

The Committee has discussed the fact that the North sea will have different uses in the longer term, not only carbon capture and storage, and I have already mentioned other uses that may arise. Even if one goes down that particular route—our concern is that proper account is taken of that route when it comes to decommissioning in the North sea—there is still an enormous amount of decommissioning to undertake.

The Wood review made a number of important points about what the decommissioning process might need to be couched within, bearing in mind that we are talking about not only what future uses, such as carbon capture and storage, might be in mind for the North sea in the very long term, with enhanced recovery in the shorter term, but developing marginal fields and ensuring that they have the infrastructure, which they are not likely to be able to afford in their own right, to be able to be exploited.

Part of a maximum economic recovery process in the North sea should include the infrastructure being properly in place to enable the eventual maximum overall economic development of the North sea. If those smaller fields find themselves unable to access infrastructure, because it has been decommissioned, they will simply not ever be exploited, and the net result will be that the overall exploitation of the North sea will not be determined by the maximum that can be exploited, but by the steps we have taken and in what order those facilities are decommissioned. While it is an enormous activity, it nevertheless needs to be tempered with those thoughts in mind. One of the key roles that I see the OGA undertaking is getting that balance right.

There may be concerns about the relationship between the proper underpinning that the Government are providing in terms of grants, tax offsets and various other elements—together, they will come to about 60% of likely decommissioning costs—and whether those particular grants and underpinnings may cause the decommissioning industry that appears to be developing to go into overdrive. The decommissioning industry may think, “Can we rush ahead with decommissioning and get the maximum grants available? Those grants may not always be available. We therefore want to rush on with decommissioning, particularly because there are lower prices in the North sea and particularly because those particular modes of assistance will not necessarily be available in the future.” It is important that we have a clear understanding of the extent of decommissioning, of how decommissioning disadvantages other activities and of what the industry needs to be assured of in how that decommissioning process goes forward, over what period and with what effects. We will later consider an amendment that addresses a number of those issues so far as those companies are concerned.

New clause 9 was tabled to seek a clear picture for Parliament of what is happening with decommissioning costs: whether they are running ahead in the way that I described or whether they are part of a much longer and more measured process, which I hope will be the outcome with the proper oversight of the OGA and the considerations it will bring to the whole decommissioning process.

The new clause is fairly straightforward, but it is absolutely necessary, given the scope of the activity we are undertaking and the extent to which various thoughts are swirling around on what the decommissioning industry is actually likely to consist of over the next period. It would be a great help if that material was available in an annual report for all who are looking at that process. That is the heart and purpose of the amendment, which would be a thoroughly constructive addition. I trust that the Minister will immediately take it on board and decide to run with it.

Photo of Phil Boswell Phil Boswell Scottish National Party, Coatbridge, Chryston and Bellshill 12:45, 28 January 2016

We are conscious that Oil & Gas UK already publishes an annual decommissioning insight, and that that is the leading forecast for decommissioning activity in the UKCS. Oil & Gas UK has also published guidelines on decommissioning cost estimation from 2013, providing a methodology for breaking down the process of decommissioning into separate phases, to enable the development of robust and consistent decommissioning cost estimates that can be meaningfully compared across the industry.

As the decommissioning sector evolves and matures, it is important that the industry has an accurate and consistent basis on which to estimate costs. Oil & Gas UK’s new decommissioning cost estimation guidelines build on the industry’s latest experiences in the practice and will be used extensively in planning future projects.

We have some concerns that such frequency of report by the Secretary of State might duplicate and, depending on the methodology used, conflict with the industry work already going on in the area. It might also create additional onerous data-reporting demands on the OGA. However, reliability, transparency and effective cost-management in this respect are critical. We would also expect wide consultation across the OGA, the Department of Energy and Climate Change and the industry to be undertaken.

As such, we are minded to support the amendment.

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

I am delighted to tell the hon. Member for Southampton Test that I welcome his bringing forward this proposal, as it is an important area for debate. It gives me the opportunity to set the record straight on the economic narrative of the North sea. I am sure all hon. Members here will be aware of the issue, but it is important to put it on the record.

The Government believe in making the most of the UK’s gas and oil resources. To date, the oil and gas industry has contributed more than £330 billion to the Exchequer, and it is the UK’s largest industrial investor, supporting hundreds of thousands of jobs, supplying a large portion of the UK’s primary energy needs and making a significant contribution to GDP. Those jobs are not just in Aberdeen, or indeed in Scotland, but right across the UK. Members have all paid tribute to the contribution made by that North sea basin over many years.

With between 11 billion and 21 billion barrels of oil equivalent still to be exploited, the UK continental shelf can continue to provide considerable economic benefits for many years to come. That is what we are here to try to sort out, with the establishment of the OGA.

As the hon. Member for Southampton, Test pointed out, decommissioning is an inherent cost of doing business in the UKCS. Capital allowances are available on decommissioning expenditure, as they are for most of the costs of doing business in the UKCS. The rate of allowances for decommissioning match those for oil and gas research and development, exploration and appraisal, and mineral exploration and access.

I will answer the specific point raised about whether the tax relief situation might encourage people operating in the North sea to hurry to decommission, lest they be whisked away. The tax relief rate is guaranteed by way of decommissioning relief deeds between Government and operators so there is not a likelihood that either they will disappear or that people need to take precipitate action to avoid the risk that they might disappear.

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

One issue around decommissioning that is inhibiting new players from coming into the market, as I am sure the Minister is aware, is that of transferring tax history and the tax basis built up to allow it to be offset against decommissioning in future.

If new entrants do not have a significant tax history, that could be an impediment to their coming in because they would have to foot a greater part of that bill. Likewise, the company looking to offset an asset may not want to transfer it because it might come back, should that company be unwilling to do that. Would the Government be willing to look carefully at that issue to find a solution to allow the freeing up of assets?

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

That is exactly the area we are looking at. That issue has been raised, including at the maximising economic recovery meetings before Christmas.

To reiterate, as hon. Members from all parties have repeatedly stated, it is crucial now more than ever that we provide support for this industry that has contributed, and will continue to contribute, so significantly to the balance sheet of our country.

I will now speak to new clause 9, and I thank the hon. Member for Southampton, Test for tabling it. It would require the Secretary of State to report to each House of Parliament on the estimated cost of decommissioning North sea oil and gas infrastructure, one year after the Act comes into force and annually thereafter. As we have discussed, the inevitable consequence of a maturing basin means that the future cost of decommissioning activity in the North sea is expected to be substantial, and the scale of the decommissioning challenge is undeniable. That is why Government measures in the Bill are aimed at preventing premature decommissioning of critical UKCS infrastructure and ensuring that the decommissioning that does occur represents the best value for money.

Photo of Matthew Pennycook Matthew Pennycook Labour, Greenwich and Woolwich

Under the new tax regime, we know that the bulk of the costs of decommissioning will be borne by the taxpayer; the Government’s estimates put them at £7.5 billion over the total life of the North sea continental shelf, out to 2040-41. Given how important it is to make decommissioning cost-effective, may I press the Minister, if she is not minded to accept the new clause, on the circumstances under which the Secretary of State might intervene to modify or impose conditions on an abandonment programme?

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

I will come on to address most of the points the hon. Gentleman has raised. As we have discussed in Committee, the OGA will have a very clear role in decommissioning plans. If he will bear with me for a minute, I will come to that, but I want to make a further point about decommissioning.

The forthcoming increase in decommissioning activity presents a major opportunity, as the hon. Gentleman said. It could become a new industry in itself, although we do not want it to do that too quickly. There is the opportunity to increase efficiencies and reduce costs to both the industry and the taxpayer. That is really important. Given that we have one of the most mature basins, we will be doing some of the decommissioning first, so there is a big opportunity to try to reduce costs and improve efficiency.

We recognise that the reporting of these costs plays an important role in understanding and preparing for the challenge ahead. Most importantly, we recognise the need for transparency regarding the costs that could ultimately fall to the taxpayer as a result of tax relief mechanisms for decommissioning costs.

To that end, Her Majesty’s Revenue and Customs provides a detailed account of expected decommissioning liability in its publicly available annual accounts. The approach by which that liability is accounted for has recently been revised to provide a longer-term estimate of the costs of decommissioning. That should provide both industry and Government with a much fuller picture of the expected future cost landscape, allowing those costs to be robustly managed, and ensuring that decommissioning is executed as efficiently as practically possible.

Colleagues, have no doubt, the Government are committed to ensuring that decommissioning programmes represent the best value for money. Not only that, but the OGA is working extensively with operators across the UKCS on ensuring the development of marginal fields by ensuring that critical infrastructure is preserved. That would avoid the potential domino effect that the hon. Member for Southampton, Test raised with regard to decommissioning.

Amendments brought forward in the other place will require decommissioning programmes to be cost-effective —in answer to the hon. Gentleman’s point—will ensure that OGA has the powers it needs to scrutinise companies’ decommissioning plans to ensure they are cost-effective; and enable the Secretary of State to require a company to take specific action to reduce the costs of decommissioning to address cost overruns.

Robust safeguards are also in place to prevent the costs of decommissioning from falling to the taxpayer. Measures under part IV of the Petroleum Act 1998 include the ability for the Secretary of State to require owners of an offshore installation or pipeline to prepare and execute a decommissioning programme for those assets and to take financial securities from the companies to protect the taxpayer from any default.

I hope that those provisions, coupled with HMRC’s existing publication of annual reports, reassure the Committee that the reduction of decommissioning costs to both industry and taxpayer is at the forefront of the Government’s agenda, and I ask hon. Members not to press the new clause.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Energy and Climate Change) 1:00, 28 January 2016

I am reassured by the Minister’s indication of the extent to which one might say that matters are already in hand. In any event, whether as part of the Bill or not, I would commend to the Minister the idea of a regular and forthright account of what is happening with decommissioning costs, on the rate at which the grants and the assistance are being used, and on how that impacts on the future use of the North sea. That would be a good management tool for the process. The Minister might consider a more informal report to the House from the Department, which would be of great benefit all round. I hope that the Minister will at least consider doing it that way.

Question put and agreed to.

Clause 73 accordingly ordered to stand part of the Bill.

Schedule 2 agreed to.

Clause 74