[Sir Nicholas Winterton in the Chair] — Oil and Gas

– in Westminster Hall at 12:00 am on 29 October 2009.

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[Relevant documents: First Report from the Energy and Climate Change Committee, on UK Offshore Oil and Gas, HC 341-I, and the Government response, HC 1010.]

Motion made, and Question proposed, That the sitting be now adjourned.-(Steve McCabe.)

Photo of Paddy Tipping Paddy Tipping Labour, Sherwood 2:30, 29 October 2009

I am delighted to speak about the first report of the Energy and Climate Change Committee. As the first report of this new Select Committee, it is the first bit of work that we have undertaken, and we now have a 100 per cent. record: we have produced a report and are having a debate about it in Westminster Hall.

Perhaps I could just say a few words about the Select Committee's inquiry. It involved three public evidence sessions in March, one of which was held in Aberdeen. I believe that there is a strong desire across the House for Select Committees to get out and about and take evidence elsewhere. We had a range of witnesses: the Oil and Gas Independents Association, the Royal Society for the Protection of Birds, Professor Alexander Kemp, who also acted as an adviser to the Committee, the trade association Oil and Gas UK, and the Minister of State, Department of Health, my Friend Mr. O'Brien, who was then the Minister for Energy and E-Commerce, and his officials. In Aberdeen, the Committee had a breakfast meeting hosted by the Scottish Council for Development and Industry that brought together more than 50 individuals who work in the oil and gas sector and related businesses, and we visited Subsea UK-the trade body that represents those who work in the subsea supply chain.

The Select Committee's report, which was unanimous-there was a lively discussion around its conclusion-was published on 30 June. Perhaps I could highlight briefly some of the issues that are contained in it. The Select Committee believes that we must move to a low-carbon economy, and that we must decarbonise our generating industry. At the same time, there is practical acknowledgment that the UK continental shelf will continue to provide oil and gas resources for a long time. It is vital, therefore, that we make best use of those resources.

We live in a difficult time for the economy and the environment. There are real concerns about the future of our energy policy. In broad terms, the Government's energy policy depends on three pillars: first, the need to combat climate change; secondly, affordable products for consumers; and thirdly, security of supply. It is security of supply that I want to turn to first.

The UK has traditionally been a net exporter of gas and oil, but the situation has changed and is continuing to change rapidly. Last year, in 2008-09, 40 per cent. of our gas was imported, and figures from the Department of Energy and Climate Change suggest that 60 per cent. of the UK's gas needs could be met from imports by 2020. That is a remarkable change-around from being a net exporter of gas.

The situation is highlighted and put into profile by the difficulties with the transmission and export of gas. The Minister will have followed the dispute between Russia and Ukraine about the transport of gas, which was an issue primarily for Ukraine but one that affected major economies in western Europe. I am interested in the gas industry in Russia. Gazprom is a good company in many respects, but people who have dealings with it and the Russian economy are concerned about the transparency and openness of the gas market there. To be so heavily dependent on gas from abroad, particularly from Russia, may not be a wise way forward.

Of course, Gazprom always tells me that the majority of its product goes to the west. However, there is a ready market to the east as well, so Russia is not dependent on the market in western Europe.

Photo of Simon Hughes Simon Hughes Shadow Secretary of State for Energy and Climate Change

I appreciate that this debate is about UK offshore oil and gas, but the hon. Gentleman rightly puts the subject in the context of the wider European and global oil and gas industry. Did his Committee form the view during its inquiry that it would be in the interests of the UK, as well as more widely, that there is a much more clearly integrated European energy policy to give the continent, as well as the UK, security of supply?

Photo of Paddy Tipping Paddy Tipping Labour, Sherwood

Those of us who believe in the benefits of the European Union believe that that issue comes high up the agenda. The Committee came to no formal decision about it, but we hope to visit Brussels soon to discuss that exact point, among others. If we had a more transparent gas market across Europe, for which many of us have argued for a long time-that has been the Commission's position for as long as I can remember, and it has been promised for at least a decade-we could make some progress.

The notion of European direction on a European market and transmission system makes a great deal of sense long-term for Europe and particularly for the UK. But of course, one thing that makes it so significant is that, because we have reserves in the North sea, the gas storage facilities here in the UK have been limited. Again, using the Department's own figures, there is storage for 13 days' supply of gas in the UK, compared with 99 in Germany and 122 in France.

There is recognition that more needs to be done. There are a number of planning applications in for new projects of this kind, but some are facing real difficulty and real objections. Faced with a heavy winter, there are concerns, which are shared across the industry, that the present storage capacity is not sufficient. Therefore, being able to extract more, more quickly from the UK's own reserves makes a great deal of sense. The Prime Minister's own adviser, in the Wicks report, has just looked at this issue. I suspect that there has been far too little discussion about the importance of security of supply, compared to climate change, but that is a real, pressing issue. I say gently to the Minister and the Secretary of State that, if the lights go off in the UK, it will not be the chief executive of E.ON UK, Paul Golby, who is called to account, but the Minister and his officials.

Photo of Paddy Tipping Paddy Tipping Labour, Sherwood

Yes, he would be in the firing line. He is coping well with his new tasks, but let me bring this point to the forefront of his mind.

The second issue that we must take into account, which the Committee considered, is the importance of gas and oil revenues in the UK. The industry employs about 350,000 people, so it is a significant employer, particularly in the Aberdeen area. The industry acknowledges and predicts tough times ahead over the next two years: there is a suggestion that 14 per cent. of those jobs could be lost in that time. There is an argument for moving people away from working in the oil and gas industry into offshore renewables and carbon capture and storage; but ultimately, we need to acknowledge the importance of the industry for our economy.

As I have said, oil and gas production is declining. It peaked in 1999 and is declining by about 5 per cent. annually. There are various estimates of the amount of oil and gas remaining, ranging from around 11 billion to 37 billion barrels of oil equivalent. That is a marked gap. The Government-the Department-take a mid-term estimate, which might be a sensible way of going forward. A lot of the discussion about future extraction depends, of course, on the price of oil and gas. But it would make sense to try to have further, more detailed and precise estimates on the way forward.

The Select Committee commented that the industry faces a

"quadruple whammy"- taking a phrase from your party, Sir Nicholas-

"of high costs, low prices, lack of affordable credit and a global recession."

So we need to be clear that the industry faces a tough time.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Order. Just for accuracy, in the Chair, I have no political party: I am entirely unbiased, and I listen with an open mind and open ears to everything that is said.

Photo of Paddy Tipping Paddy Tipping Labour, Sherwood

I know that to be the case, Sir Nicholas. I have heard you make comments, in the Chair and elsewhere, about various parties, including your own. That reflects a lack of partisanship.

The industry acknowledges that there are real problems and says that, by 2010, 50,000 jobs could disappear. So, for the industry, the issue of credit is live and important. Some banks-a limited number-are prepared to invest for the future, but the sector faces a tough time for credit, as does all industry.

There was a long discussion in the Select Committee about the measures in the 2009 Budget, and we received a lot of evidence about it, particularly about a new initiative called the field allowance, which was generally welcomed, to allow the development of and extraction from new fields. But the Select Committee's view is that that does not go far enough. It is early days for that initiative, which concentrates on new development. We need to consider carefully making best use of and maximising the resources from existing, established oil fields. The field allowance does not do that, and there is no agreement across the sector that the major area left for development west of Shetland will be brought forward by the use of field allowances.

The area west of Shetland is an important resource that provides 20 per cent. of our future needs. It is important that there is a strategic view on how we can get into that field, discover oil-discoveries are being made-and bring it back. The Government have a role to play in this. This takes us to the heart of the argument on small government and big government. We have intervened in a big way in the bank sector. The Government will have to think through carefully what their role is in respect of the oil and gas sector and how far they will play a more interventionist, positive role.

We received evidence on the environment. Many environmental organisations are, to put it bluntly, giving the oil and gas industry a bad press, but the record on the ground or out at sea is not bad. The big companies are keen to meet their environmental responsibilities. The industry feels that it has done a lot, but it is an area that needs careful consideration.

Finally, the Select Committee was interested in the development of carbon capture and storage, which the Government are also interested in and making progress on. However, although they describe themselves as a world leader in that regard, I am not sure whether that is so. The notion that we can capture carbon from coal-fired power stations and sequestrate it into former oil fields is good for the coal industry and could be good for the oil and gas industry. The Government are committed to going forward on this issue. Currently, there is a competition to try to identify four pilots for demonstration projects. However, I say gently to the Minister that, at the moment, this appears to be a competition without a finishing line and that the finishing line has been moved on a number of occasions.

If the Government want to make a proud claim that they are a world leader, they need to match their rhetoric with reality. It will be good for the oil industry if we can do that and good for my area, too. Perhaps I can make a local point. Harworth colliery in Nottinghamshire is presently mothballed, and it will take £200 million to access new coal reserves there. UK Coal is confident that it can do it, but is finding it difficult in the present financial climate to raise money from the market. There is a discussion with the European Investment Bank about making that money available. A number of hurdles have been jumped; but ultimately, the EIB is asking whether the coal can be burned more cleanly. At present, there is nowhere in the UK where coal can be burned using clean technology or carbon capture and sequestration. Although there is rhetoric on carbon capture and storage, many of us believe that much more needs to be done much more quickly.

Despite criticisms, the Government responded favourably to the report, and produced their response on 16 October. They welcomed it, and I shall pick up one or two points from their response. They accepted that we must maximise resources from existing gas and oil fields and said that they would work with the industry to produce

"a more effective performance framework...which would focus on more accountable measures, or a basket of measures."

Will the Minister tell us today what that basket of measures might be? There is agreement in principle on the way forward, but it is incumbent on the Government to state clearly for the oil and gas industry how it might go forward.

The Government also said, to my surprise, that complaints from the oil and gas industry about difficulties with their banking facilities and raising capital for new development

"do not seem to differ significantly from" other parts of the economy. In fairness, people in Aberdeen could argue that the Government have provided major aid in a variety of ways to the car industry. They have some responsibility, given that oil and gas are strategic assets, to consider carefully how more readily available finance could be found for the industry to move into the future. A few of us of a more radical hue find it hard to understand why, as a major shareholder in banks, the Chancellor cannot influence better behaviour. Shareholders can argue for changes, and I am not convinced that we are using the leverage that we undoubtedly have to produce better results.

A further area of discussion is the notion of using a common infrastructure and common pipes when developing oil and gas fields, and it makes sense to use commonality of infrastructure whenever possible. There have been difficulties with companies agreeing to that, but there is a structure for forcing that through. The Government possess reserve powers, but they have never been used. In their response, the Government state that they are

"working with the industry, through improving guidance...and through other initiatives, to strengthen the voluntary arrangements".

The Committee and I, and particularly the industry, would be interested to know what steps the Government intend to take.

Taxation and the introduction of field allowances have been an issue. I have acknowledged that these are early days for seeing how that develops, but the Government have said that they

"will continue to review the effectiveness of the field allowance".

There may be an opportunity for the Minister to make a lengthy reply, and again it would be helpful if he used that opportunity. He will say that it is a matter for the Treasury, not for him, but I am keen to know what representations the Department is making to the Treasury.

I turn to the marine environment. You will know, Sir Nicholas, as will hon. Members in the Chamber, that this week the House agreed radical and landmark legislation in the Marine and Coastal Access Bill. The Minister's Parliamentary Private Secretary has been involved in that, and it gave us the opportunity to consider the marine environment in detail. Extraction west of Shetland will, by definition, produce major environmental issues that must be considered carefully. The Government have a lot of information, as have the oil companies, and a lot of survey work has been done; but ultimately, in the light of the new legislation, the Government should practice what they preach and consider a comprehensive study of environmental factors and constraints west of Shetland if we are to balance economic growth and environmental protection. It is important to have the best possible knowledge.

I welcome the work that my Committee colleagues have done and the evidence that was provided by our witnesses. I also welcome the Government's response; but ultimately, our long-term interest is to ensure that the UK really does have security of supply. The Government must treat the matter extremely seriously, acknowledge the problem and discuss the way forward. As always with the energy industry, there is a view that the Government's rhetoric and good intent must be matched with real action. The report sets out some steps for real action. The Government are on the road, and I hope that they will look closely at the recommendations, work with the industry and ensure that we maximise the reserves that are left for us and our children.

Several hon. Members:


Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Order. I intend to call the Minister last, and he will be preceded by Her Majesty's Opposition spokesman, who will be preceded by Simon Hughes. I will also call other hon. Members who catch my eye.

Photo of Simon Hughes Simon Hughes Shadow Secretary of State for Energy and Climate Change

On a point of order, Sir Nicholas. Following that indication, will you reconsider and give permission for the Minister to speak next, because the Government have given their response, and then to speak at the end of the debate, with your leave and that of the House? It might be helpful for colleagues to hear the Minister's response, so that they may then respond. We have seen the Government's written response to the report and I think that there would be time for the Minister, as well as the Committee Chairman, to wind up.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

I do not believe that that suggestion has ever been made to me during all the years that I have been a member of the Chairmen's Panel, but I am happy to work with the House on this matter. If hon. Members believe that it would be helpful for the Minster to speak next, I will be happy to call him, if he is prepared to speak.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Given the number of hon. Members present, it may be possible, with the permission of the House, for the Minster to speak again at the end. We can be flexible in the Chamber to meet the requirements of hon. Members who are participating in the debate.

Photo of David Kidney David Kidney Parliamentary Under-Secretary, Department of Energy and Climate Change 2:59, 29 October 2009

I am pleased to follow my hon. Friend Paddy Tipping, who is so ably now chairing the Select Committee. I enjoyed reading its report on UK offshore oil and gas, and I am glad that the Chamber has the opportunity to debate it, and to highlight the huge contribution that the North sea and the oil and gas industry make to UK energy needs and our economy.

The oil and gas industry in the UK is one of our most important and impressive industries. Since the beginning of offshore development four decades ago, we have seen a sequence of major, often unprecedented engineering projects, requiring huge investments and repeatedly groundbreaking innovation. I pay tribute to the enterprise and commitment of the companies and individuals who have made that possible.

We cannot forget the courage of those who work in this very hostile environment. Indeed, some have tragically lost their lives in the pursuit of exploring for and producing this vital national resource. The oil industry does not always receive the attention that it deserves. As we enter a new era of energy developments in the UK, in which the skills, enterprise and commitment of the oil and gas industry will surely find new application, we should be proud of it and take full note of what it has already achieved.

As the Select Committee recognises, even though indigenous production is declining, UK oil and gas remain the major constituent of the UK energy mix. They currently provide for about two thirds of the nation's primary energy needs. By 2020, it is likely that well over half our energy use will still be fuelled by oil and gas, half of which might be from UK production.

Supporting about 450,000 jobs-including those that rely on the industry-and with annual expenditure of about £10 billion, the UK oil and gas industry makes a massive contribution to our economy. Indeed, there is no doubt about the industry's world-class credentials. Its reputation for meeting the challenges from harsh operating conditions and coming up with workable solutions to continuing technological challenges sets it apart as one of the most dynamic and successful industries in the world.

The North sea still offers many very good investment opportunities and it is important to all of us that those are encouraged, not deterred. Looking at reserves, we have, as my hon. Friend the Member for Sherwood said, about 20 billion barrels of oil equivalent, or perhaps more, remaining to be produced. A key Government aim is to ensure that the UK realises the full value of its oil and gas resources.

We have a clear strategy to maximise the benefits to the UK of our hydrocarbon resources. Working closely with the industry, we are seeking more exploration and new developments; we are seeking to get the best value from existing acreage and existing developments; and we are keeping the fiscal regime under review to ensure that it provides the right incentives for continuing investment.

I want to say something about new exploration and development. We continue to hold regular offshore licensing rounds, with the aim of making as much acreage available as possible for new exploration. We have taken a number of steps in recent years to offer more flexibility in licensing to attract the widest possible range of players. For example, we introduced the promote licence, at one 10th of the cost of a traditional licence, to allow smaller investors to get involved. There is also the frontier licence-covering areas such as west of Shetland-which initially offers a larger amount of acreage and so gives licensees a better chance during the appraisal process to identify exploration potential in those areas, where the geology is less well known and not so clearly defined.

All those initiatives have led to significant renewed interest in the North sea in recent years. In fact, recent licensing rounds have been some of the most successful ever. In the 24th round, we awarded 150 licences to 104 companies. Our 25th round offered a record-breaking 2,297 blocks or part-blocks for exploration, and received a record number of applications. As a result, late last year we were able to offer for award the highest number of licences ever-171 new licences to 99 companies, covering 257 blocks. I can confirm that work is being taken forward so that we should be in a position to announce a new, 26th round in January.

The industry has, of course, felt the effects of the financial crisis, and I will say something later about those effects and our response to them. In addition, the rollercoaster of rising and falling oil prices has impacted on some investment decisions and on the pace of development. However, the past few months have seen more financing activity, and a number of relatively big North sea projects are in prospect. That said, we are not taking anything for granted. We continue to monitor exploration levels. They fell in the first half of the year, but I am glad to say that there has been a significant recovery in the third quarter, when 27 new wells were started, compared with 29 in the first half.

Photo of David Kidney David Kidney Parliamentary Under-Secretary, Department of Energy and Climate Change

I shall have to come back to the hon. Gentleman in a moment with the figure, but I know the point that he is making: that exploration is key and numbers are down. I am prepared to accept that point, but on the figure, I hope that he will allow me to come back to him in a while. We intend to maintain momentum by launching, as I mentioned, a 26th offshore licensing round next January.

I want to deal directly with the issue of the area west of Shetland. We are working with the industry to bring forward development west of Shetland, where about 15 per cent. of remaining UK reserves are thought to lie. It is vital that we unlock the gas potential west of Shetland, and a timetable has been established. As my predecessor mentioned in evidence to the Select Committee, Total has commissioned basic engineering studies in respect of development of the Laggan and Tormore fields, with capacity for further fields in that area. The participants are moving towards a decision on development in 2010, which we expect will be followed by a development plan submitted to DECC.

The area west of Shetland has been extensively surveyed in one of the largest and most comprehensive marine surveys undertaken for the offshore oil and gas industry. That work has been updated and extended by subsequent work carried out for the Department within the strategic environmental assessment framework. Future work will seek to ensure that appropriate environmental data for that area are kept up to date.

Photo of Simon Hughes Simon Hughes Shadow Secretary of State for Energy and Climate Change

I am not an expert on this issue; my hon. Friend Mr. Carmichael is an expert on it, as is our friend Tavish Scott, our party leader in Scotland. However, I understand that one of the issues rightfully preoccupying people in Shetland in particular and Scotland in general is that some of the explorations or the potential supply might be just within or just outside our territorial waters. Will the Minister tell us whether any discussions are already taking place with the Faroese authorities, which are the other side of the line, so that there are efficiencies of scale and intelligent conversations about maximising the benefit to everyone of any exploration going on currently west of Shetland?

Photo of David Kidney David Kidney Parliamentary Under-Secretary, Department of Energy and Climate Change

There certainly is work to be done in the area that the hon. Gentleman mentions. On the specific point about discussions with other authorities, I need again to take advice and perhaps I shall be able to come back to him on that point in a moment. It is a good one and I certainly endorse what he says about the expert knowledge of Mr. Carmichael.

Photo of Michael Weir Michael Weir Shadow Spokesperson (Trade and Industry), Shadow Spokesperson (Environment, Food and Rural Affairs)

Before the Minister moves on from discussing the area west of Shetland, I want to point out that one that the Select Committee came across was that many of the finds west of Shetland are much smaller than traditional North sea finds, and there is huge concern about the infrastructure needed for smaller companies to develop those. Will the Minister tell us whether there have been any discussions on that? He mentioned Total and the studies in that respect. Has there been any discussion with the smaller companies about how they might join in and how to ensure that they have the infrastructure to develop smaller fields?

Photo of David Kidney David Kidney Parliamentary Under-Secretary, Department of Energy and Climate Change

The hon. Gentleman raises two issues. One is the viability of constructing new infrastructure, based on projections of what returns might be had from the development. The other issue is the access of smaller players to that infrastructure if they are involved. If I may, I shall come later to what I can say on access to infrastructure. Clearly, the discussions that we have with the potential collaborators in the development include the first of those points-the viability of the scheme and what it will take for it to be viable. I am sure that the hon. Gentleman appreciates that we have such discussions with the proposed developers all the time.

I want to move on to the issue of making the most of existing licensed areas and developments. We continue our drive to identify and carefully scrutinise fallow acreage and discoveries. Where it is clear that no work plans exist, licensees are encouraged to relinquish the licence, so that such acreage can be made available again via our licensing rounds. That allows others the chance to bid for such acreage and exploit it.

We have also taken action with industry to improve oil and gas recovery from existing brown fields. We have a rolling programme and we meet all the North sea field operators regularly to consider fields' performance and to help to identify ways in which long-term production levels might be increased. Taking a regular look at older producing fields, a number of operators have successfully increased production levels through refreshed seismic and geological interpretation, additional drilling, further investment in platform facilities and the use of new technologies.

With production levels declining overall, it is important that the industry considers how enhanced oil recovery techniques might improve overall recovery from North sea fields. The potential exists to tap more than 1 billion extra barrels using enhanced oil recovery. The Energy Minister, Lord Hunt, chaired a session on the subject with a number of key operators in Aberdeen. It proved a very useful discussion, bringing a sharper focus to some of the key challenges and stimulating ideas for overcoming some of the obstacles.

For example, it was agreed that enhanced oil recovery can be more difficult for mature fields and that issues exist around project economics and the availability of injection fluid. It was also recognised that research is needed into ways to reduce the cost and weight of facilities upgrades and to promote low-cost methods and collaborative pilots to share costs. My Department is now working closely with the industry to take forward the subjects that were discussed.

On access to existing infrastructure, we are promoting new action to facilitate fair and reasonable access. In particular, my officials have embarked on a series of one-to-one meetings with the directors of companies that own and operate North sea pipelines and infrastructure. The key aim is to ensure that smaller players with development options can get access to infrastructure within reasonable time scales and on fair terms. I recognise that that is a long-standing issue for the industry and that responsibility for a successful outcome lies largely on the industry's shoulders. Of course, an industry code of practice and guidance from the Secretary of State provide a framework for decision making, but we continue to make it clear that the Government would be prepared to intervene in a case if stalemate were reached between an infrastructure owner and the operator of a development that required access.

Photo of Robert Smith Robert Smith Shadow Deputy Leader of the House of Commons, Opposition Whip (Commons)

Although the long-stop exists for companies to challenge something through that formal process, that has never actually happened. An optimist might say that that is because everything is going so swimmingly that it is not necessary, but the feedback from those trying to get access is that people are reticent to go to a formal process. In January 2009, the Minister wrote to companies to engage on the issue, but is there any feedback on how that engagement is going?

Photo of David Kidney David Kidney Parliamentary Under-Secretary, Department of Energy and Climate Change

Obviously, I did not write that letter, because I was not a Minister in January-the hon. Gentleman will no doubt say that that is a shame. The one-to-one meetings are a result of the engagement that began with those letters and they are continuing. We are keen to ensure that the industry understands exactly how the Secretary of State would respond if asked to use his powers. The hon. Gentleman and my hon. Friend the Member for Sherwood are absolutely right that no one has yet asked him to exercise his powers, and we all understand the pressures that mean that people would not want to ask. Nevertheless, we have those powers.

The Secretary of State's previous guidance was quite helpful in terms of the charging activities of those who give access to infrastructure. If new obstacles are arising, we will be happy to look at ways of ensuring that people understand how the Secretary of State would approach the issue. At the moment, however, the meetings are going extremely well, and a further understanding between us and the industry may emerge as a result. I hope that that is helpful to the hon. Gentleman. We hope that, as a result of our frank discussions with infrastructure owners, the industry can use the code of practice principles to ensure that nobody needs to come to the Secretary of State, but we stand ready if somebody does.

For the common good of maximising all our reserves, it is vital that smaller developments within the economic reach of existing pipelines are not stranded because they cannot obtain access, and we will be keeping a close eye on progress to ensure that that does not happen.

Photo of Michael Weir Michael Weir Shadow Spokesperson (Trade and Industry), Shadow Spokesperson (Environment, Food and Rural Affairs)

I am not entirely clear about how we have moved on. In the evidence before us, the small operators and Oil and Gas UK acknowledge that the existing system-discussion with each other, with the long-stop of approaching the Government, as the hon. Member for West Aberdeenshire and Kincardine said-is not working satisfactorily. What difference will the new system make? The independents suggest that we should go as far as legislation for common carriers. There seems to be a huge gap, and I am not entirely clear from what the Minister has said what progress has been made.

Photo of David Kidney David Kidney Parliamentary Under-Secretary, Department of Energy and Climate Change

Let me make it clear to the hon. Gentleman that we are not proposing further legislation at this point. The discussions that we are having on the basis of the code of practice and the Secretary of State's guidance-perhaps with an opportunity to update in 2010-will be sufficient. If somebody wants the clarification of a decision by the Secretary of State, we will very much welcome their asking for such a decision. No one has come forward yet, but if they do, we will welcome the opportunity to give a ruling, which would then set a precedent for the entire industry. Unfortunately, that has not happened so far. The discussions that I have described, and the potential for updating the Secretary of State's guidance, are where we are in the process.

I was asked a little while ago about taxation. My predecessor was quite robust with the Committee on this issue and was not going to talk about it when he came to give evidence. However, I have specifically cleared the text that I am about to deliver with the Treasury, so I will be speaking with one voice with my colleagues there. Of course, taxation policy is a matter for Treasury Ministers, but the Committee will be aware that the Chancellor this year introduced a new field allowance-the consultation document called it a value allowance, and some people still use that term, but it is the same thing-to encourage smaller or more technically challenging fields to be brought into production.

The Chancellor himself visited a North sea installation -Shearwater-earlier this month, so he is well aware that conditions in the North sea are constantly evolving and that we have to ask ourselves whether the tax regime is right. He thinks, and I think, that it is important that the Government and industry work together on these issues. Stakeholders discuss a number of specific issues arising from the Budget 2009 package with DECC and Treasury Ministers and officials. Those discussions are ongoing and help to inform Government thinking. I can assure hon. Members that the Government will keep the North sea fiscal regime under review and monitor the impact on activity in the North sea of the package of changes introduced at Budget 2009. If there is a case for further change to the regime to meet our objective of maximising economic production from the North sea, the Government will be prepared to act. I hope that that is a helpful response to the request from my hon. Friend the Member for Sherwood.

We continue to work with the industry through PILOT -the joint Government and industry oil and gas forum -to secure the long-term future of the UK continental shelf. At the next PILOT meeting, in November, we will challenge industry to take a long-term look at the province and to come forward with new ideas, which could add renewed emphasis to maintaining investment and ensuring that we exploit UK resources to the full.

Photo of Simon Hughes Simon Hughes Shadow Secretary of State for Energy and Climate Change

This is just a reflection really. When, as a result of pressure, the Government varied the incentive for people to invest in the renewables industry, people were fairly sceptical about whether that would meet the concern that people were not investing. However, it produced quite a significant positive response, and I compliment the Government on that. I am sure that colleagues from Scotland will make this point more strongly than me, but let me say that it does not take much Government fiscal encouragement to produce the investment response that people are calling for. I hope that the Treasury understands that, that it is sympathetic to such calls and that it will respond to them in the months between now and the general election.

Photo of David Kidney David Kidney Parliamentary Under-Secretary, Department of Energy and Climate Change

The hon. Gentleman should spit it out: the Government's action was a success, and if we tell the Treasury, officials there might be all the more willing to talk positively in the way that he indicates. That is a good point for us all to make. I have just recalled that the answer to the question about the number of exploration wells in the third quarter of the year was seven, as against nine in the whole of the first half, which fits with the picture of things picking up.

I want to deal with the environment. A comprehensive framework of environmental protection measures has been developed to minimise the impact of oil and gas activities. That is embodied in bespoke oil and gas legislation, consistent with and in large part derived from the legislative framework of the European Community. All activities that could have an impact on the environment are subject to rigorous assessment, and significant activities are controlled through the issue of permits, consents or approvals. There is also an inspection and enforcement regime in place to confirm compliance with the conditions included in the environmental approvals. That robust regime is reflected by the industry's performance and the UK has a good environmental record. I noted, in reading the Committee's report, that although suggestions had been put to it about non-compliance with conditions on environmental matters, the Committee found the industry to have a good record. I am grateful that it came to that conclusion.

The Chairman also raised carbon capture and storage, which is something in which I, too, am interested. Looking further ahead, we believe that carbon capture and storage will be one of the key technologies that will help the UK to meet its carbon reduction targets. The North sea has the potential to store more than 100 years' worth of UK power station CO2 emissions. Many in the oil and gas industry will have the knowledge and expertise to help us to realise that potential. However, the industry is keen, among other things, to get a clear regulatory regime for CCS. Last month my Department issued a formal consultation on how we propose to license the storage of CO2. We are keen to have comments from industry and stakeholders by the end of the year, so that we can move forward with the formulation of the regulations.

The significance of a competitive and competent supply chain to the success of an oil basin is often underestimated. Indeed by far the greater part of the 450,000 jobs supported by the UK oil and gas industry is provided by the contracting community, and it is vital that the Government should maintain a close relationship across that sector. DECC, as the Department responsible for delivering energy policies, has a key role to play in promoting a successful upstream oil and gas supply industry. The fact that many areas of specialist support are provided by other Departments and agencies can create complexity, so it is important that DECC should maintain close links with industry to provide additional guidance when required. That is achieved either directly with companies, or via regional or sector trade associations, many of which it was instrumental in establishing.

A good example is Subsea UK, which was set up five years ago with initial core funding from DECC when, along with industry representatives, it recognised the enormous growth potential in the subsea sector, both in the continental shelf and the broader international market. Subsea UK is now well established and is helping to grow opportunities for its 200-plus member companies and to secure a good share of the rapidly expanding global market, which is set to expand by a further 50 per cent. in the next five years. The current sectoral focus for DECC is now on offshore decommissioning, where funding is being provided to help to create a new trade body to foster UK capability and to assist indigenous companies to win a share of that work, which will be worth billions of pounds over the next few decades.

The UK oil and gas supply sector has been a great success story, from the early days of the industry when American companies and personnel dominated and carried out much of the work to the present day when UK expertise is recognised and sought after in almost every oil-producing province in the world. The challenge will be to anchor that expertise in the UK and to ensure that we still have a significant oil industry well beyond the life of the UKCS. Currently the overseas oil and gas supply market is worth around £5 billion a year, with the potential to grow fourfold in the next 25 years. DECC and its partner UKTI will continue to work closely with the sector to help it to achieve that ambition. I alluded earlier to my being a fairly new Minister in the post. I am about to arrange my first ministerial visit to Aberdeen to see for myself the work that is now going on.

The debate comes at an important point in the development of our offshore oil and gas resources. The industry faces a key challenge to achieve full economic recovery in a phase of inevitable decline in production levels and in the size of the remaining prospects. The financial crisis and the volatility of oil prices have magnified that challenge. The Committee's inquiry into this vital industry has therefore been timely, and we welcome its constructive recommendations. I assure hon. Members that the Government are fully committed to playing their part, through continued close working with the industry, to ensure that offshore oil and gas continue to contribute as much as possible to energy security, investment and employment in the UK, and, not least, to the vital transition to a low-carbon future, which matters so much to us and the whole world.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

I am hoping, subject to time, that we shall be able, with Members' permission, to call the Minister to reply to the points that they raise in the remainder of the debate.

Photo of Robert Smith Robert Smith Shadow Deputy Leader of the House of Commons, Opposition Whip (Commons) 3:25, 29 October 2009

Perhaps as a member of the Procedure Committee, I should write to myself to see how today's procedure has unfolded, and whether any lessons can be learned for future Westminster Hall debates.

I welcome the fact that the report has come before the House today. Paddy Tipping, in introducing the report and the Committee's findings, put the case that the Committee had found for the industry's needs. It was the Committee's first inquiry, and it was welcome that it shone the spotlight on such an important industry.

I declare my entries in the Register of Members' Interests, as a shareholder in Shell and as someone who recently visited a carbon capture and storage pilot project in France, funded by Total. Of course, my main interest is a constituency one, however, as my constituency is just outside Aberdeen, in the north-east of Scotland, where the heart of the industry is based-although not the whole of it; it is UK-wide. The jobs that we speak of affect the whole of the UK.

I pay tribute to the history of the industry, and its contribution to our security of supply and balance of payments. It has benefited our climate change agenda. This country met its Kyoto commitments because of the lower carbon outputs from gas generation, and could well meet its future climate change commitments if, as has been talked about, carbon capture and storage is further developed. The industry has made a phenomenal contribution to the country's tax revenues, and I am sure that the Treasury is aware of that, and does not need the Minister to remind it. As we have said, there has also been a massive contribution in the form of jobs. The Minister rightly paid tribute to the sacrifice that has been made, because the industry operates in an extremely hostile and dangerous environment, and lives have been lost over the years in making sure that this country has benefited from the resource.

The nature of the oil and gas industry will always lock Government and the private sector together, because the resource under the ground belongs to the nation and for the nation to benefit from it we need the private sector to use its skills and initiative to get it out of the ground. That inevitably means a far closer link between Government and industry than there is in many other sectors of the economy. I pay tribute to PILOT for its work in bringing together the industry, the Department and the wider Government in dialogue to build a common purpose for the benefit of society.

To deal now with the recommendations of the Committee, I think that the fiscal regime is still at the heart of the effort to unlock that full potential. The Minister may not be a Treasury Minister, but the Department's crucial role is to make sure that the Treasury understands how much it needs to engage, if the Department is to achieve its full objectives on security of supply and promoting the industry in this investment climate. There has been a welcome improvement in that engagement, through the field allowance discussions, but the Treasury still shows too much caution at this time in the life cycle of the North sea. Understandably, the phrase "a dead weight" is brought up. To explain to the layman, if the Treasury gives a tax incentive that encourages an activity that would have happened without the incentive, it will lose out. However, the Treasury needs to recognise that this time, given the maturity of the North sea, the age of its pipelines and platforms, and the costs of investment, if there is a real downturn in the North sea and we lose that core infrastructure, it will not come back.

During past downturns, there have been enough large fields to tempt people back, so the Treasury could err on the side of caution in respect of the dead weight argument: it could afford to be cautious about incentives because it knew that if it got it wrong it could up the incentive and bring people back. However, at this time in the North sea, in the context of the downturn in the world economy, when the North sea is hitting maturity and there is an expensive operating environment and much smaller fields with which to compete for global investment, in the dialogue that the Treasury says it will continue with the industry, it needs to work fairly quickly to ensure that it maximises the incentives. There may be a bit of loss of future tax revenue because the Treasury has incentivised something that was going to happen, but a more important outcome will be if, globally, we still have a sustainable industry and are still maximising recovery from the North sea.

Photo of Michael Weir Michael Weir Shadow Spokesperson (Trade and Industry), Shadow Spokesperson (Environment, Food and Rural Affairs)

Is it not also true that if we are to have a future in carbon capture and storage it is vital that existing infrastructure continues to be invested in, so that it is available for that future work? If it is not, we may not be able to do carbon capture and storage.

Photo of Robert Smith Robert Smith Shadow Deputy Leader of the House of Commons, Opposition Whip (Commons)

That is a valuable point. The pace of progress that we are making towards carbon capture and storage means that it is important to keep that infrastructure there for some time-there have been several postponements on the route to CCS. The Treasury must recognise that it has a very targeted regime-it is high-temperature and high-pressure. All the experts say that it is going to incentivise just one field in the whole of the UK continental shelf.

Ensuring that the existing platforms-the existing hubs-get incremental development has been mentioned. The enhanced oil recovery talks are welcome, but one of the quickest ways to enhance oil recovery for a platform is to get new wells drilled from that platform. The Treasury needs to consider how it can incentivise that extra development in those platforms. If the big platforms and the pipelines that connect them are decommissioned early, the small fields lying around them will no longer be worth exploiting.

The west of Shetland has already been discussed. What the Minister needs to take away today is the fact that the decision points are coming up on that project, at a time when the gas price for the industry is extremely low. A bold investment decision is required on the gas price going up between the point when the decision is made and when the gas is needed. Every encouragement, therefore, is needed for the west of Shetland. That encouragement is psychological, because if the province were unlocked more fully, that would send a positive message about the vibrancy of the UK continental shelf, and support the supply chain that would still be there for the more incremental developments in the remaining part of the North sea.

One of our recommendations that the Minister did not touch on was the acceleration of payment of tax allowances to try to deal with the bank cash-flow crisis. The hon. Member for Sherwood made the valid point that, although the Government replied that they have a global strategy for dealing with the banking crisis-that is a recognisable part of the strategy-in the car sector, it was not just left to the banks to sort out the sector's problem. A lever has been identified by the industry, which the Government could use in that industry, which is important both for employment and strategically. The Minister should take back to the Treasury the need to look again at that matter, to ensure that it is doing everything it can to overcome the cash-flow crisis, which is stifling potential developments. He should take back the message to the Treasury, "No shocks in the pre-Budget report this November". Again, stability is the watchword for getting investment into the industry.

We have the pipes and platforms, but if other investors coming into the North sea cannot access them, we are not getting the benefit. It could be said that we might not start from here and that we do not have the regime we need for now. The regime started off all right with big players coming in. People thought that the North sea had a short life cycle, and did not see the need to build in some of that infrastructure. The Gulf of Mexico has a much more effective regime for handling access to infrastructure, and the Department may need to dangle even more tough talk about how it will come back to the issue to incentivise the owners of that infrastructure, so that they see that it is in their interest to unlock it efficiently to small players, rather than have the Government come in and do that for them.

The wider public need to understand that, at this point in the life cycle of the North sea, it is smaller, new companies that are bringing in that investment opportunity, and the innovation and excitement to unlock the smaller finds. However, they will not keep coming here if they keep hearing stories about how the person ahead of them in the queue got everything else lined up, but when it came to getting the stuff ashore could not find a practical way to do it, even though it looked as though there was an obvious solution there. Unless we can unlock the infrastructure and ensure fair and effective access to it, we will lose out again.

We have already touched on the environment, and the recognition of the industry's good work. The Government's response to recommendation 17 was that they had written to the statutory nature conservation bodies to see if there were any concerns. Has the Minister had any replies from those bodies?

We have also touched on carbon capture and storage, and the important contribution the North sea can make in that field. It was frustrating seeing the Miller field project nearly come to fruition, and then see a competition launched to replace that project, with the competition deadlines and rules shifting. Will the Minister assure us emphatically that this competition will meet its deadline, and that people who make the effort to put in tenders will get a positive and quick response? We will not be the world leaders in this industry unless we get started on making the industry possible. As the hon. Member for Sherwood said, we have so much to play for in this country. We have that storage resource in the North sea, the carbon sources in the coal, oil and gas that we can still produce, and the innovation, skills and technology in the industry. A regime to effectively unlock that full potential and deliver that green agenda is needed.

The other welcome part of the report is the spotlight we put in the last recommendation on the export potential of the industry. I look forward to the Minister's visit to Aberdeen, because he will see a physical sign of what we have been talking about. He will see a vibrant, go-ahead, goal-setting, high-tech industry, which is a major manufacturing base and a major source of new technology and export earnings for the United Kingdom, anchored in the north-east of Scotland, because of what has happened in the North sea. Departments have been restructured, and energy has moved from DTI to DBERR and BIS, and now to DECC. DECC obviously focuses on the environment and climate change, but will the Minister reassure me that it still has just as vibrant a role as spokesman for the industry as a major employer and exporter?

I welcome the Committee's report and the spotlight that it puts on an often unsung hero of the UK economy and a major contributor to our country's well-being. The Government and industry are for ever inevitably locked together in an attempt to make the best of those resources. Any oil and gas left in the ground does not pay tax, does not support jobs and does not contribute to our security of supply. The North sea is a great success story, but a lot remains to be achieved.

Photo of Michael Weir Michael Weir Shadow Spokesperson (Trade and Industry), Shadow Spokesperson (Environment, Food and Rural Affairs) 3:40, 29 October 2009

I agree about the importance of the oil and gas industry to the economy, particularly in the north-east of Scotland. The House will not be surprised at the fairly strong Scottish input to this debate from me and my parliamentary neighbour, my hon. Friend Sir Robert Smith.

The oil and gas industry has been hugely important to the economy of the north-east of Scotland for the last 40 years. As a student who went to Aberdeen university in the early 1970s, I have seen also the social implications of the industry over those years. The oil industry has provided a great deal of money and employment in the area, but that comes with human consequences, as has been noted. That was brought home to me when I attended a memorial service at the Kirk of St. Nicholas in Aberdeen for those who lost their lives in the helicopter crash in the early part of the year. It showed the huge dangers that those employed in offshore oil and gas face in their day-to-day work. Indeed, during the course of our investigations, members of the Committee visited a gas rig off the Humber to see for life there for ourselves.

As we have heard, this is the first report from a new Committee. It is significant that we chose to focus on the oil and gas industry, which is important to all for the reasons already given. We say in the introduction to the report that

"It is vitally important swiftly to decarbonise the UK economy if the country is to meet its obligations to tackle climate change, and clearly the use of fossil fuels must diminish. But within the timescale for these changes to take place, the UK will still need to use the oil and gas resources remaining in the UK continental shelf."

I come at this possibly from a different angle from other Members here today in that I would like to see the word "Scotland" rather than "UK" in there. None the less, the sentiment is the same. We are moving towards decarbonising our economy, but it will take time. We have huge resources, but they must be used to the best advantage.

The Secretary of State appeared before the Committee yesterday, and he too made the point that we are in a state of transition as we work towards a low-carbon economy. He is perfectly correct. The existence of oil and gas off our shores puts us in an enviable position in some respects, in that we have a cushion during the transition. However, it also presents us with a big challenge. So many people are employed in the oil and gas sector that we need to manage the transition carefully, ensuring that the skills developed in the North sea are retained and transferred into new jobs in that new economy. We have been presented with the real challenge of ensuring that carbon jobs are transferred into green jobs-a subject to which I shall return.

The importance of the oil and gas industry to the economy cannot be overstated. As we note in the report, more than 38 billion barrels of oil equivalent have been produced over the last 40 years, and the UK remains 13th in world rankings for combined oil and gas production-I hope that the Minister is not superstitious. The industry body Oil and Gas UK told us that

"the industry is the most significant contributor to this country's security of energy supply, today providing 70 per cent. of our primary energy needs."

That again illustrates the importance of ensuring that the industry functions properly and that we get the maximum from our oil reserves.

It is also abundantly clear from the Committee's report that a considerable amount of oil and gas remains within our waters. Witnesses estimate that it is anything between 11 billion and 37 billion barrels of oil equivalent. As Paddy Tipping said, that is a wide variance. I appreciate that the Department of Energy and Climate Change will take the median figure, but by any account a great deal is still there. Whether it is recoverable will depend on many factors, some of which are detailed in the report. It will also depend on the prevailing price of oil, and whether some of the smaller finds are economic.

The oil and gas industry will clearly remain an important aspect of energy policy and energy security in the years ahead. We said in the report that

"The Government is right to focus on security of energy supply as a key challenge for the UK. Much of the UK's current electricity generating capacity is set to close over the next decade, and there is a continuing risk of disruption to energy supplies internationally as a result of political and economic turbulence. In this context the importance of domestically produced oil and gas is obvious and the case for Government doing all it can to help maximise economic production is compelling."

I do not think that anyone would disagree with that.

The industry is most concerned about the tax aspects. I noted the papal bull read out by the Minister, but it told us next to nothing. I spoke with several representatives of the oil industry at a recent CBI reception. What they most want from the pre-Budget report is no nasty surprises. I hope that the Minister can at least assure us of that. [Interruption.] I take it from the Minister's smile that the answer is no. To be scrupulously fair, however, the CBI representatives said that they had had a good engagement with the Chancellor when he visited Aberdeen recently to speak to the industry.

The Minister has made it clear that he cannot say too much about taxation. Frustrating though that is, we all understand why. However, he spoke of the difficulties in respect of development west of Shetland. New thinking may be necessary if development is to go ahead on a major scale. It became clear during the course of our investigations that there are serious concerns, and not only about taxation. We say in the report that the current field allowance is inadequate, especially when trying to encourage development in the difficult terrain west of Shetland. I urge the Minister to consider with his departmental colleagues and the Treasury what more can be done to ensure proper fiscal incentives, so that the industry can continue to develop west of Shetland.

The Committee also pointed out the twin difficulty that many in the industry are finding in arranging finance. The hon. Member for Sherwood said that few banks were operating in that area. However, I recall being told that only one of the major banks-Lloyds HBOS, or Lloyds banking group as it now is-operated in the North sea, but that it was not keen on making new investments. The result is that companies already operating in the North sea can obtain finance, but that new entrants to the market are finding it extremely difficult. Indeed, the Oil and Gas Independents Association has said that the bank was not lending to new operators. We also noted that many of the major companies were reviewing budgets in light of the recession and that they were taking a most conservative approach.

The then Minister of State said in evidence that the major oil companies were unlikely to be affected. That may be true, but as has been pointed out, many of the companies operating west of Shetland and in the more marginal parts of the existing North sea fields are smaller companies, and they are feeling the chill winds of the credit crisis and finding it difficult to obtain the necessary finance. Indeed, at least one small company went bankrupt as we were starting our report. I recall receiving a massive number of e-mails on the reasons for that, but it was linked to the difficulty of getting credit to allow the company to continue working in the North sea.

Finance is very important, and I again urge the Minister to push his colleagues to take up the matter with the banks. The matter was addressed, to some extent, in the Government's response. It states:

"The Government has introduced a range of general measures to support the financial sector and encourage lending to businesses, including the recapitalisation of the banks and the introduction of the Asset Protection Scheme. These measures are supporting access to finance for all sectors of the economy, including the oil and gas sector. To date, the difficulties reported by oil and gas companies do not seem to differ significantly from those encountered by other sectors, but the situation is kept under review and the Government will consider the case for more specific measures in the light of emerging information."

To be blunt, that strikes me as slightly complacent. There is ample evidence from those we spoke to in our report that there is a serious difficulty here. The BPs and Shells of this world probably do not have a finance problem to the same extent, but the small companies do, and it is the small companies that hold the key to development not only west of Shetland but in the more marginal parts of the existing mature basin of the North sea. Many of the companies find that, along with difficulties in finance, they face steadily rising costs. Much of the reason for that is outwith Government control; it is about the availability of particular rigs and the difficulties after hurricanes in the Gulf of Mexico with rigs being sent there and such like. We were told that someone was paying £400,000 a day for a drilling rig, which, by any calculation, is a fantastic sum of money to operate in the North sea.

Photo of Robert Smith Robert Smith Shadow Deputy Leader of the House of Commons, Opposition Whip (Commons)

What is causing consternation is that people are still being quoted the same price even in the downturn. It may be that the rig market needs looking at to see how it operates and whether it feeds through the benefits of the downturn, by which I mean the cost structure.

Photo of Michael Weir Michael Weir Shadow Spokesperson (Trade and Industry), Shadow Spokesperson (Environment, Food and Rural Affairs)

That is a very good point. From the evidence, it seems that much of the difficulty stemmed from hurricane Katrina and other hurricanes in the Gulf of Mexico. Huge damage was done to the infrastructure, which will take a long time to rebuild. None the less, it is fair to say that there is a serious difficulty with cost.

The Minister and others have already spoken about infrastructure, but we questioned many witnesses about the infrastructure difficulties with regard to exploitation, particularly for smaller companies. There is a great deal of infrastructure in the North sea, most of which is owned by the major oil companies. If we are to have any chance of maximising extraction from the more marginal fields within the area, we need to have a system that allows smaller operators access to that infrastructure. That was an issue on which there was some agreement between the independents and the large suppliers. The Oil and Gas Independents Association told us that

"increasingly, we are finding smaller accumulations in the North Sea, and they cannot support their own dedicated infrastructure, so they have to be able to tie them back to existing infrastructure, which has to be there. Ultimately, it drives exploration. If you are expecting to find relatively modest pools, you have to know there is an efficient way of getting it to the shore."

As the report states:

"The Association has serious concerns about the operation of the industry's Code of Practice relating to infrastructure access, which they believe is hampering their ability to operate."

It is fair to say that there is a difference of opinion on that point between the independents and the large operators. Even the majors conceded in evidence to us that that part of the code had not been working particularly well.

As I pointed out in an intervention, that issue comes into sharp relief when considering the future exploitation of the resources west of Shetland. We are told that there is considerable potential there, but many were very cautious about the viability of much of that. Clearly, the hostile and difficult environment was an important factor, but one of the principal factors was the high cost of production and the lack of infrastructure and the cost of providing it.

We took a great deal of evidence on infrastructure. Again, there were clear differences between the smaller players and the major companies. Oil and Gas UK made the fair point that it was difficult to see how a common carrier system could be funded because it would be a disincentive to the first in the field if that company had to meet the upfront costs with no guarantee of payback, and it was unlikely that the Government would want to fund the system. Inevitably, it suggested that the Government might have to look at the fiscal incentives.

In the Gulf of Mexico, there is a common carrier arrangement, which shows that such arrangements can work in a basin such as that, so the Government must look more closely at the idea. Although I appreciate that there are enormous difficulties with this issue, it is a nettle that we need to grasp. We are all agreed that exploitation of the resources west of Shetland is important for our energy security, and it should not be put at risk by a lack of agreement on the infrastructure necessary to exploit it. Again, I urge the Minister to consider that issue and engage with both the major and smaller companies to establish a system that will ensure that we can exploit those important resources.

I listened carefully to what the Minister said about infrastructure, but I am afraid that I struggled to understand the difference between what is now being done and what has been done in the recent past. It seems to me that there has been discussion between everybody, but no real movement forward.

Again, as I mentioned in an intervention, if we are considering carbon capture and storage, it is vital that we sort out the problem of infrastructure. Much of the infrastructure in the North sea is now fairly old. It needs to be maintained, which is expensive. There is a real danger that, unless there is agreement about how the infrastructure will be used in the future and how it will be used for carbon capture and storage, it will simply no longer be maintained or it will be decommissioned. That will undermine our efforts to capture carbon and store it for our own climate change reasons and to create many new jobs in north-east Scotland.

As I said earlier, I represent a constituency in the north-east of Scotland, which, in the past, has benefited from the presence of North sea oil-not perhaps to the extent of my parliamentary neighbour, the hon. Member for West Aberdeenshire and Kincardine. None the less, it has had a significant influence. Many of my constituents have worked, and continue to work, in the oil industry. Their employment illustrates how the industry has evolved and changed over the years. Many of them had originally worked in the North sea, but now they could just as easily work in any area of the world. Indeed, I have recently met constituents who work in Ivory Coast, Nigeria, Kazakhstan, Norway and many other countries. The skills developed in the North sea have allowed an industry to develop that can export skills to other areas of the world, and that bodes well for employment in north-east Scotland, as oil and gas reserves inevitably wind down. We must look to the export of skills in the industry in the future.

Another point we touched on was the future, as we move away from oil and gas. We must consider diversification because, however much we may regret it, oil and gas are, inevitably, finite resources, and they will go down over the years.

We have touched on carbon capture and storage, which is obviously very important. I do not want to go over the whole story of the Peterhead project yet again, but that was a missed opportunity for the Government. The project, which was ready to go, linked our power station with an offshore installation. It was a great tragedy that, due to dithering on the part of the Government, it did not go ahead. I understand that it is now going ahead in Abu Dhabi. The project could have given us a world lead in this technology. However, there are other projects, particularly Scottish Power's proposal to link into the Longannet power station in Fife, which could then link into the North sea.

As others have stated, the continuing delays on the carbon capture and storage competition are causing a great deal of concern. The hon. Member for Sherwood put it very well when he said that it was a contest without a finishing line. Far from being world leaders in carbon capture and storage, we could end up lagging behind everyone else.

Along with the hon. Member for West Aberdeenshire and Kincardine, I visited the Total plant in the south of France. I suppose that I should declare that in the Register of Members' Interests and I should also declare an interest as vice-president of the all-party oil and gas group within the House. That visit demonstrated to us that others are now pushing forward and developing carbon capture and storage. There are various different types of CCS. The ones concerning the North sea are particularly interesting for Scotland and the UK, but there are others coming up, and we have to ensure that we are not left behind in that important technology. It is not just about carbon capture and storage. Other renewables are now being placed offshore, in particular wind farms. The Crown Estate recently announced the grant of exclusive rights for the development of wind farms around the coast, including two off the coast of my own constituency, at Inchcape and Bell Rock. That offers a huge potential for green jobs and for those skills that have been developed in the North sea oil and gas industries. Many wind farms will be built in areas where the oil and gas industry has operated for the last 40 years, and many of those skills will be needed.

In previous years, the port of Montrose in my constituency had a considerable oil and gas business, although that has wound down to some extent. It is looking to take advantage of the potential for the construction and subsequent maintenance of the wind farms. That is good for the future. There is a future for oil and gas, both immediately and through diversification in the long term. However, Government action is needed to ensure that the fiscal regime is correct, that continuing development is encouraged and, crucially, that the infrastructure remains for the new industries and that a new infrastructure is developed. We must ensure that we get the maximum possible from west of Shetland.

Photo of Simon Hughes Simon Hughes Shadow Secretary of State for Energy and Climate Change 4:01, 29 October 2009

Like other colleagues, I welcome this significant report. It is the first report from the Committee on Energy and Climate Change, and I thank Paddy Tipping and his colleagues for the work that they have done. It is a solid piece of work. We have not yet heard from Charles Hendry, who speaks for the Conservative party, but as he also served on the Select Committee, I doubt whether he will have changed his views.

There is a consensus: we sing from the same song sheet about what the priorities for the offshore oil and gas industry are in the UK. I hope that those who take an interest or work within the industry are aware of the attention that the House gives to these matters. We salute the contribution that those people have made to the UK economy, not only now but over the past decades. We salute their vision and innovation, and the bravery that they have shown-and continue to show-in doing work that is often very difficult.

As a London MP, I can say not only that the industry is significant in places such as Aberdeenshire or Angus, but that there are probably people in all our constituencies who work within it in one way or another. Last year, I was on a Thameslink platform at Blackfriars station very early one morning. I was going on a sad mission to the funeral of our late lamented colleague, Russell Johnston, in Inverness cathedral. The Thameslink train was delayed, which made the chance of catching the plane to get to Inverness slightly more precarious-as it happened, it just arrived in time to make the connection. On the platform, people were talking to each other, even though it was early in the morning. I was talking to and sharing my concern with someone who commuted once a week from the east end of London to Aberdeenshire to work in the industry. He came from London but was of Asian extraction, and he had made that journey for years. Even though he and his family were based in London, he had just as much of a commitment to the industry as people in the north-east of Scotland. This is a UK enterprise and we should recognise that.

I pay tribute to my hon. Friends who, as one would expect, have taken a huge interest in and greatly supported the industry over the years. My hon. Friend Sir Robert Smith is an eminent member of the Energy and Climate Change Committee, and he has often engaged with the industry. My right hon. Friend Malcolm Bruce has previously spoken for the Liberal Democrat party on such matters and has served on Select Committees in many guises and incarnations. He continues to sustain his interest.

I acknowledge the expertise and interest of Mr. Weir. Owing not only to his place of birth and university education, but to his constituency, he rightly takes a deep interest in the oil and gas industry that is valued and appreciated. Whatever the differences between parties in Scotland, from what I have heard and read today, I do not think that there is a significant difference in the general thrust of what we say.

I have two other points, one of which is relevant to the debate and has already been mentioned. The issue is to do with Shetland. Both my hon. Friend Mr. Carmichael, and his predecessor, now Lord Wallace of Tankerness, have ensured that the rest of us understand these issues. In the past, I have been to both Orkney and Shetland in somewhat inclement conditions, and I have realised how precarious life is onshore, let alone offshore. It is important that we remember that it is not all about comfortable, modern technology and flying people out in a helicopter and bringing them back again. The Liberal Democrats also have the great guru, my hon. Friend Dr. Cable, who is our shadow Chancellor. He was the chief economist for Shell and has ensured that we all understand these issues. I shall return to him in a moment.

I will not repeat the points that have been raised, but I want to put this debate in context. The Liberal Democrats take an interest in these issues. There was a debate in the House a fortnight ago, precipitated by Mr. Doran. It was mostly about the health and safety issues in the industry. We have taken an interest in the UK industry, but as the hon. Member for Sherwood rightly reminded us, the issue needs to be looked at in the context of Europe and the world. The security of energy supplies is an absolute precondition, not only for economic success but for peace in the world. If there are two issues that could lead to the risk of conflict now and in the future, they are disputes over energy and water supplies.

I have just returned from a second visit to Ukraine and a conference about freedom and democracy. The hon. Member for Sherwood hinted at this issue, and it will not surprise anyone to hear that one of the issues uppermost in the minds of everyone in Ukraine-where they are starting a presidential election campaign-is the future of energy security. Ukraine had a precarious time both earlier this year and three years ago when Russia effectively turned off the tap.

As the Select Committee report says, in 2007, thanks to the UK oil and gas industries, we were self-sufficient in oil and we produced three quarters of our gas. However, with declining supplies, both Britain and, more importantly, Europe have and will need to look outside the continent. We believe that it is central to the security of UK and European energy supplies that we continue to exploit what nature has given us with the UK oil and gas industries, as well as building a secure European energy policy. I will not be diverted far down that road, but I make a plea to the Minister and his colleagues that, during the remaining period of this Government and Administration, at both ministerial and prime ministerial Council meetings, we must work towards an energy policy that is part of an European energy policy.

I am always nervous about the fact that the Conservative party has never seemed as willing to see a UK energy policy that is part of a wider European energy policy. If we are to ensure that we can not only export materials such as oil or gas, but import them, we must have a European super-grid. As well as the east-west supply, we need secure supply pipelines that run from north to south throughout Europe, not only for fossil fuels but for renewable energy sources. That is the great debate to do with Gazprom and the pipelines that come from the former Soviet states. Unless we have that context for our energy security, we are all in trouble.

Russia, which is now the world's largest producer of natural gas and the second largest oil producer after Saudi Arabia, is a hugely dominant supplier. Its state-owned companies are dominant suppliers, and that is a dangerous and precarious position for the rest of the world. That is why what we do at home is so important.

The other part of the backdrop to the issue is topical. Just the other day, on 14 October, the eminent report by Lord Turner of the Committee on Climate Change was published. The report included predictions of what might happen to oil and gas prices over the years. My hon. Friend the Member for Twickenham has always argued that we need a stable pricing regime to avoid spikes and the peaks and troughs of uncertainty. The hon. Member for Angus said that we do not want any unexpected surprises in the Chancellor's autumn statement. The world cannot easily cope with unexpected or steep variations in the price of oil and gas. If we are to have some sense of energy security, we must ensure that the supply is secure, so that prices can be secure.

It was encouraging that the projections by the Committee on Climate Change show a gradual increase in annual gas prices over the next decade, as that provides hope for security. Projected annual oil prices also show a gradual and not too steep increase. From our constituents' points of view, any significant increase in gas and oil prices, irrespective of what use the suppliers make of them and whether they add a fair or an unfair amount, will have a huge impact on domestic budgets, particularly for poor people in this country. It is imperative that we have the best security of supply.

My hon. Friend the hon. Member for West Aberdeenshire and Kincardine said that we very much sign up to the Committee's key recommendations that we must decarbonise the UK economy quickly, while keeping our oil and gas supplies and incentivising maximum opportunities from them, and that we need sustained investment. Like the hon. Member for Angus, I am slightly troubled that the Minister, partly as we might have expected, gave us an inscrutable answer about what the Government might do. The Committee was clear about it. Recommendation 5 says:

"We welcome the Government's recognition of the difficulties faced by oil and gas companies in accessing affordable lending and the fact that DECC, through BERR and HM Treasury, is engaging with banks to ensure that the UK continental shelf 'is at the forefront of the minds of the banks'. However, given the problems oil and gas companies are having in achieving affordable borrowing, it does not seem that such engagement is having any conspicuous success. DECC Ministers should set out, with their Treasury and BERR counterparts, what steps the Government is taking specifically to help oil and gas companies access affordable credit from banks and keep under review the availability of such credit."

The Government's response, dated 14 October, basically says, "We're doing things across the board," but says nothing about specific assistance. That ties into the two specific points that have been made, which I want to reinforce as strongly as I can.

First, it seems to me that, if we have a lot of well-established, well-used and fairly old plant that needs replacing to gain new generation investment, that would need some helpful banking finance up front. It might not be enough just to have general Government support for the banking industry. I ask the Minister specifically, if he can respond when he winds up, to confirm that he will take away what I think he has heard from every speaker so far: because oil and gas is one of the UK's most important industries, it is crucial that it should have the opportunity to obtain the credit and finance that it needs to be able to put the necessary infrastructure in place.

Secondly, there is a clear benefit to that, for the reasons that we have all discussed. At the moment, there are 350,000 to 400,000 jobs in the industry. Unemployment is rising, and we need people with engineering and technical skills in particular. It is vital that we use opportunities to give people training and work, particularly work, not just in the conventional activities of oil and gas exploration and bringing it home but, as colleagues have said, in developing opportunities in carbon capture and storage.

Again, will the Minister confirm in winding up that he has heard that message? We have a tough line in our party that the next range of coal power stations should all be carbon capture and storage from the beginning. That is increasingly the advice of environmental and climate change experts. If that is the case, we must be ahead of the game, not behind it. Given that we have a great country with a great engineering and scientific tradition, there is no reason why we should not be. The Americans in California have done a lot of work. Companies that come to see me say, "We have no technical problem; it's about taking it from the pilot scheme to an operating model."

This is also about jobs-new jobs in new skills. As the hon. Member for Angus said, the opportunity to continue to employ people in new things in the North sea, along our east coast and around the coast of Scotland, is as important as it is in old activities. That includes carbon capture and storage, but it also includes renewables: offshore wind, tide and the like. Those are what the Prime Minister might call green jobs-the jobs of the future. The Government get into a muddle about that. The Prime Minister says, "We're going to have all these green jobs," and then another Minister says, "There's no definition of a green job," so there is a problem, but the general argument is that they are job opportunities.

This is not special pleading; it is a point made by other colleagues. I am trying to reinforce the two last points that come up in the report. The point about access to infrastructure by small companies is clearly understood. The Government said in their reply, "There's a voluntary code, and we're keeping an eye on it," but colleagues from the region, particularly from Scotland, are saying that it does not appear to be working well. Smaller companies are saying that they do not find it easy to negotiate the deal. The law is in place; it should work. If it is not working, it needs to be revised, but if it is not working because it needs to be oiled as a bit of machinery, the Government need to produce pressure to get the oil working down the pipeline.

On the Shetland point, the Government say in their response to recommendation 20:

"The frontier area for the UKCS"- the United Kingdom continental shelf-

"is West of Shetland-one of the most challenging operating environments in the world."

Anybody who has seen it, even from the shore or flying overhead, rather than by living and working in the west of Shetland, must understand that point. That is a fantastic opportunity, and the Minister has accepted it.

My hon. Friend the hon. Member for Orkney and Shetland, Tavish Scott and others are keen to press on the Government that the field allowance regime has not yet delivered. I understand when the Government say, "We can't have a regime that produces additional money where it doesn't need to be spent"-that is not good public expenditure-but the system must be flexible enough to ensure incentives where there is no activity currently. I am told that the application of the field allowance system announced in the Budget this year, though welcome, does not work for some of the technologies needed for the west of Shetland. If we are to explore there, that is important.

My last point is one that I made in an intervention. Some activity is bound to be very near the edge of our territorial waters. It makes absolute sense to collaborate with the Faroese authorities, as we have done in other things with Norway. Colleagues in Shetland would wish the result of the exploration to come directly to Shetland, rather than having to go all the way to the Faroes and come all the way back. I hope that the Minister will make it clear that he understands that. If he has the time-I know that it would mean an extra flight after his visit to Aberdeen-is he willing to visit Shetland and talk to colleagues there? That would be much appreciated.

There is absolute commendation of the value of the oil and gas industry in this country and its contribution. We want to express our collective gratitude to both those who work in the industry and those who come here to brief us, particularly Oil and Gas UK, which is very good about keeping us well informed, answering any queries and ensuring that we understand the issues. I hope that in both the autumn statement and the Budget next year-the last Budget before the general election-the Government will do all that they can to be even more helpful, so that our oil and gas industries, which are two jewels in the crown of UK plc, have a successful future. It is not at all incompatible with saving the planet and averting the climate crisis to ensure that we intelligently and responsibly exploit the natural resources that we have been given, and they are two of the most important.

Photo of Charles Hendry Charles Hendry Shadow Minister (Energy and Climate Change) 4:20, 29 October 2009

May I begin by referring on the record to the visits and conferences that are in the Register of Members' Interests? I also went to Moscow this week to speak at the international energy week conference that was organised by the Moscow chamber of commerce.

This has been a useful and constructive debate. The Select Committee's work in creating the report has been valuable and useful. I speak not only as the Conservative Front-Bench spokesman on this issue, but as a member of the Select Committee. It is a young Committee, but it has hit the ground running. It has already done valuable work. It is extremely well supported by the Clerks and officers, who have given some outstanding briefings. It has shown it is prepared to deal with the difficult issues. Many easier issues than this could have been adopted for the first report, but this is one of the most important issues for energy policy in Britain, and in Scotland in particular. It is to its credit that the Committee has put forward a report that is unanimous and meaningful. Sometimes it is difficult to achieve those two together.

The North sea and the oil and gas sector are often the forgotten element in energy policy. For all involved in this report and all those in Parliament, the oil and gas sector has been there for the whole of our political lives. It is sometimes taken for granted that, because it has worked well and has been successful, it will inevitably go on doing so. We must recognise the massive contribution the sector has made. In total, it has paid £271 billion in taxes. This year, it will pay £7 billion in taxes, which will account for a quarter of all the corporation tax collected in the UK. It provides between 65 and 70 per cent. of the country's primary energy demand. We all join the Minister and Simon Hughes in paying tribute to the industry for its achievements, for driving forward investment and for the exceptional courage of all who work in the sector.

One of the most extraordinary visits I have ever made was with the British-American parliamentary group to BP at Houston in Texas. We saw the way in which new technology is being applied to an established industry. It is identifying potential new deposits under 10,000 feet of water and 20,000 feet of rocks using sonar equipment that is dragged across the top of the Gulf of Mexico. That can pinpoint to an area much smaller than the size of this room where should be drilled to give the best opportunity of success. This is not an old industry but an incredibly modern one. It is at the cutting edge of research and development. It is to the huge credit of Britain that British companies are the global leaders that are driving the industry forward.

The industry has been a great source of wealth for the country and an important element in our energy security, but we must adapt to a new world. Gas output is declining, bringing new challenges. We have discussed gas storage, which is one of the big challenges that the Government have to face. This country is critically short of gas storage. We have capacity for only a couple of weeks, compared with about 100 days in Germany and 120 days in France. Lord Hunt of Kings Heath, the Minister of State, Department of Energy and Climate Change, said recently that if all the projects that were planned to be built by 2012 were constructed on time, our gas storage would be increased by just five hours. That brings home how much more must be done.

We will inevitably become increasingly dependent on imported gas. The involvement of Russia has been mentioned. We currently import about 2 or 3 per cent. of our gas from Russia. That will almost certainly rise. We need to get a better understanding of the importance that gas will have in the mix in coming years. In his excellent introduction, Paddy Tipping said that 60 per cent. of our gas could be imported by 2020. In "The UK Low Carbon Transition Plan", the Government say that the figure will be only 40 per cent., whereas others say that it could be as high as 80 per cent. That is a wide range. The answer has important implications for the amount of gas storage that the country will need. We have facilities and areas where gas can be stored, but we must drive forward the investment.

There must be a normalisation of the relationship between Russia and Ukraine. The transit and domestic supply issues must be separated. Eventually, a proper market price must be paid in Ukraine for the gas it receives. We agree with the hon. Member for North Southwark and Bermondsey that there must be new pipelines to market. Nord Stream, South Stream and Nabucco can all contribute to ensuring that a smaller proportion of Europe's gas comes through Ukraine.

From what I heard in Moscow this week, the co-operation being sought by the Russian Government is encouraging. Prime Minister Putin himself has recently worked with the heads of energy companies actively to seek their involvement in developing the potential for liquefied natural gas facilities on the Yamal peninsula. He has set out clearly the terms of investment, the local expectations and the benefit to the Russian economy from technology and jobs. That element must not be taken for granted, but should be taken into consideration in this debate.

Photo of Simon Hughes Simon Hughes Shadow Secretary of State for Energy and Climate Change

Russia has always sought bilateral arrangements with individual European countries such as Italy and France. Would the hon. Gentleman support a much more effective European Union energy strategy that challenged the dominant state positions of some EU countries, which have gone unchallenged in the history of the EU?

Photo of Charles Hendry Charles Hendry Shadow Minister (Energy and Climate Change)

It is important that energy policy remains as a retained power that is set at a nation state level. In January, we saw the extent of our interdependence in European energy policy. In response to a crisis thousands of miles away, we saw gas being pumped out of Britain at an alarmingly high rate when we were approaching our coldest winter for 18 years and should have been building up our gas storage. There is inevitable interdependence, but that does not stop me believing that the fundamental principles of energy policy should be decided at nation state level. We should decide the best way to meet our low carbon obligations and to ensure our energy security.

We have heard about the need for maintaining output at high levels. The report says that there is scope for between 11 billion and 37 billion barrels of oil in the future. Oil and Gas UK gives the figure of 25 billion barrels, which is roughly in the middle of that range. For that potential to be realised, there must be a greater strategy than we have at the moment. I join others in paying tribute to the work of PILOT. However, that has been more about setting targets than delivering a road map. To contrast this sector with the nuclear sector, the Office for Nuclear Development has a month-by-month plan of who should do what so that new nuclear plants can open within a decade. Everybody knows whose responsibility it is to keep that programme on track. We do not have the same road map in oil and gas. It is important that people know whose job it is to do what if we are to realise the potential of the sector.

The hon. Member for Sherwood was generous in his opening remarks-he is always very generous-in saying that the Government had responded favourably to the report. I felt that the Government response was a bit complacent and bland. It was full of warm words that suggest that everything that needs to be done is being done. It did not contain enough on recognising the extent of the challenges and the dropping off of investment activity, which is crucial for future development.

We have had a discussion about what more could be done to ensure that small and medium-sized companies that are still pretty big in the sector get access to the finance that they need, because a real struggle is going on with that. It would be interesting to hear more from the Minister on that.

We understand that the Minister is having discussions with the Treasury, but I must emphasise that the whole fiscal regime could not be more important. My hon. Friend Mr. Osborne, the shadow Chancellor, has asked Tim Eggar-a distinguished former energy Minister-to look at the fiscal regime and report back to him early in the new year. We can then set out in great detail exactly how we would try to ensure that this sector prospers.

As Sir Robert Smith said, if one does not get the fiscal balance right, there will be no exploration and, without exploration, the relevant taxes will not come in. We all have a vested interest in ensuring that exploration work is continued as much as possible. It is important to have enhanced oil recovery in this area, and that work is done to invest in the declining fields. Again, those policies will be of fundamental importance to such areas.

The companies involved in the sector do not just look at the opportunities in the United Kingdom; they look globally. If, at the end of the day, they think there is a better regime somewhere else in the world, that is where they will invest. So we are truly in a competitive market in trying to secure that crucial investment in the United Kingdom.

We have had a discussion about the carbon capture and storage element. Again, the hon. Member for Sherwood talked gently to the Minister about there being no finishing line. I would put it slightly more robustly: the Government scheme is in chaos. We have seen the scheme changing over time and, as we have heard, the best opportunity, in Peterhead, closed down as a result of the delays. Initially, the scheme was to be only for post-combustion technology, even though for many of us the most exciting opportunities were in pre-combustion and oxy-fuel combustion technologies. However, they were ruled out at the outset.

In response to a lot of pressure from all parties, the Government decided to extend their scheme. So we now have one competition for a single post-combustion project, and potentially three other projects. While the delay has been going on and there is the lack of a finishing line, we are being overtaken by other countries-for example, the United States, Canada, Abu Dhabi, Germany, Norway or Australia. Around the world, companies and countries are moving ahead of Britain in an area where we could not have had a better opportunity to lead.

We have hundreds of years of coal supply, we have the technology and the skills base from the North sea sector, and we have the depleted oil and gas field. There could be no country with a better opportunity to lead the debate, so it is disappointing that we have slipped in terms of the leadership that Britain could have shown in that area. I know that the Minister is relatively new, but I hope that his enthusiasm-I always think of him as a sort of Duracell bunny Minister with boundless enthusiasm and energy-means that he can kick-start and drive the whole approach forward. If Britain does not take advantage of the situation now, in 20 years' time, we could be saying, "How did we lose out and why did we get it wrong?"-as in relation to the wind and other sectors. The leadership on this has to come from the Government.

The report also refers to the global opportunities that are in the UK. The companies that are leading in the North sea are those that have fantastic opportunities globally. However, the real reason why they have such unique opportunities is the maturity of our own industry. Such companies have had to do more on energy efficiency, more on eliminating flaring and more to ensure that they get the final remaining elements possible from the declining assets. Therefore, such companies can offer particular skills to countries that are behind the curve in that area. Through UK Trade and Investment and our embassies, I hope that we will advocate the opportunities for those British companies to try to deal with that.

Again, I go back to the issues in Russia. Prime Minister Putin has said that he wants international involvement and we must be foremost among the countries looking to take advantage of those international opportunities.

Photo of Simon Hughes Simon Hughes Shadow Secretary of State for Energy and Climate Change

I endorse that by saying that there are new opportunities in parts of the world that are traditionally supportive of us, with which we have good links-for example, Ghana is looking at oil exploration offshore and potentially even Sierra Leone could do with some new investment coming in. There are plenty of places where good British people are already out there doing the work, bidding and getting some of the contracts. The opportunities do not stop at trying to do deals with places such as Russia; we have a good traditional base of support in continents in other parts of the world.

Photo of Charles Hendry Charles Hendry Shadow Minister (Energy and Climate Change)

The hon. Gentleman is absolutely right. There is astonishment in some of these countries that, when they realise the potential and the size of the market available there, heavier weight representation is not made by the British Government. Such countries find that companies from other countries arrive with their energy Ministers, their Prime Ministers and a whole raft of ministerial support, while our representations are left to our very able diplomats on the ground, without that high level of ministerial support and representation. Again, that is an area where we need to step up to the plate more. If we take things for granted, some of those countries will simply look to other opportunities and businesses to help develop those assets and potentials, because they do not believe it matters enough to us.

We have heard from the Minister about some of his discussions with the Treasury, which are always challenging and interesting. In those discussions, I hope he will also consider some of the other aspects of Britain's national interests in this sector. The oil that we develop in Britain is particularly good for refining for petrol, but the declining market for petrol and the growing market for diesel means that we end up having to export a huge amount of petrol, particularly to the United States. However, we import phenomenal amounts of diesel, because the oil that is appropriate for that is found in other parts of the world. In the Minister's discussions with the Treasury, I hope that he will also look at that tax regime, because the tax regime on diesel vis-à-vis the tax regime on petrol will have an impact on the extent to which we can use our own resources.

In conclusion, the most important thing that we can say-this has come through clearly in the debate and in the report-is that this is a crucial industry that cannot be taken for granted. We have seen warning signs that investment is declining sharply, which means that in a few years' time, production will decline sharply, too. We have a vested interest in trying to make the best use of the natural resources that we have. We understand fully the challenges of climate change and of moving towards a low-carbon society. However, I agree with the hon. Member for North Southwark and Bermondsey that a distinction does not need to be drawn between those two approaches. We have a crucial need for energy security, and we have seen reports, even from the Government's own expert scientists, that say we could have power cuts in just a few years' time because so much plant is coming offline. When we have on-or under-our own doorstep such an extraordinary resource, it would be madness to allow it to dwindle unnecessarily fast. Clearly, that resource is finite in its nature, but it has a tremendous potential and it is vital to this country. The Government must respond by ensuring that that potential can be delivered.

Photo of David Kidney David Kidney Parliamentary Under-Secretary, Department of Energy and Climate Change 4:38, 29 October 2009

With the leave of the House, I should like briefly to respond to the points made by hon. Members, several of whom mentioned the dispute between Russia and Ukraine. Although we rely on Russia for 2 per cent. of our gas annually and were relying on it for none at the time of the dispute, we were hugely affected by the diversion of our gas to other European countries who had been caught up in the dispute themselves. That tells me that there is a need to press on with the liberalisation of markets in the European Union. Certainly, we should have the kind of co-operation that Simon Hughes talked about, if not the full-blown EU energy policy that he called for today.

Photo of Charles Hendry Charles Hendry Shadow Minister (Energy and Climate Change)

I am sorry to intervene so early in the Minister's speech having just had the opportunity to speak, but at the time of that dispute, we were pumping out 25 million cubic metres of gas a day through one of the interconnectors. Through the interconnector next door, we were pumping in 26 million cubic metres of gas a day. The market was working perfectly-the molecules were following the money-but we were down to two or three days of gas storage. Our national security was therefore jeopardised because of how the system worked. Other countries say that, once gas storage is below a certain level, there should be restrictions on exports. Is the Minister exploring that issue and does he think it could be a way of ensuring our energy security?

Photo of David Kidney David Kidney Parliamentary Under-Secretary, Department of Energy and Climate Change

I disagree with one part of the hon. Gentleman's analysis: the market was not working perfectly, because artificial arrangements in some European Union countries attracted gas that was destined for this country at a fair price before it was diverted. That brings me to the point that he made in his speech about gas storage. Historically, and even today, storage has not been a major issue for this country, because the giant supply of gas on our doorstep has meant that we could simply turn the tap if we needed more. As the gas supply from our home sources declines, we will need to give more attention to storage and alternative resources. The Aldbrough storage facility in east Yorkshire has recently opened, and there are 19 other projects currently in play. This month, I attended an official dinner with the Qatari Energy Minister to celebrate the start of the flow of liquefied natural gas into this country through south Wales. On that night, he talked about how his country could supply us with liquefied natural gas for the next 100 years. We are taking serious steps to address this issue, but the liberalisation of the market in the European Union is still a key policy aim for this country.

Photo of Robert Smith Robert Smith Shadow Deputy Leader of the House of Commons, Opposition Whip (Commons)

On our indigenous gas supply, it is important for the Minister to recognise that, as the North sea changes, a lot of the gas that we get now comes not from pure gas fields but from gas associated with oil. We no longer have the ability simply to turn the tap off and on, even from much of our own supply, because it comes at the speed at which oil production will allow it to come.

Photo of David Kidney David Kidney Parliamentary Under-Secretary, Department of Energy and Climate Change

I am grateful to the hon. Gentleman, and I accept that point.

Most Members have mentioned carbon capture and storage. I remind hon. Members that, in the Energy Act 2008, we set out the legal framework for carbon capture and storage in this country, including on long-term liability, which was a very important issue for those who were considering developing policies and investing in future projects. We then established our policy on no consents for old coal in this country. In future, there must be carbon capture demonstration from the outset and an ability to retrofit 100 per cent. once the technology is proven. It is worth reminding ourselves that there is as yet no end-to-end commercial carbon capture and storage project in operation in the world. We also secured agreement in the European Union for access to 300 million emissions trading scheme credits from 2013 to support the development of the demonstration project across the EU. We have completed our consultation on the framework for clean coal.

Photo of Paddy Tipping Paddy Tipping Labour, Sherwood

What the Minister says is exactly right, but he must take the industry and the sector with him, whether that is BP, UK Coal or E.ON. Let me say to him very gently that there is real despair in the industry about the lack of progress. Unless the industry is confident that the Government are fully committed and will stick to the timetables that they have laid down, he will find that willing players will walk away to areas where their investment can pay higher dividends.

Photo of David Kidney David Kidney Parliamentary Under-Secretary, Department of Energy and Climate Change

I am in the middle of a list of the things that we are doing to ensure that we remain at the forefront of developments in carbon capture and storage. I stand by those things and continue the list, which includes the current consultation on the licensing structure for the future storage of carbon dioxide.

My hon. Friend asked about competition and where the finishing line is, but the next stage in the competition is the spending of the £90 million that my right hon. Friend the Secretary of State for Energy and Climate Change has announced for some of the bidders to design their projects. That is the so-called FEED-front-end engineering and design-stage of the development. Let us remember that they will be big-money projects. We have established the policy on how we intend to pay for them, and we hope to legislate soon-the Queen's Speech permitting-to make that scheme come about. This country is still at the forefront of such developments. Indeed, this year's Ernst and Young index has ranked the UK second, after the US, in its list of most attractive countries for near-term investment in coal capture and storage. In this instance, near term means that the index takes a view until 2015 on the attractiveness of investing in CCS demonstration projects.

Let me add a footnote to the debate on CCS. As a new Minister, in the summer, I walked around the Department to meet all the officials and to get to know who does what. In doing so, I came across the European Union team for our collaboration with China on its first CCS project, NZEC-the UK-China near-zero emissions coal project. So, I am proud to say that we have here in the UK, in my Department, the team that is developing the first commercial scheme in China, and I have to say that China is no further forward with its scheme than we are here.

Many Members commented on taxation and finance, but at least they helpfully acknowledged that I am not a Treasury Minister and therefore will not be let off my lead to talk about those matters. At this stage, I simply want to thank Sir Robert Smith for his comment about the positive engagement that the field allowance has brought with the sector. Like others, he wants it to move further forward quickly, but the engagement is there, and I certainly want to encourage that on both the Government side and within the sector. He made a good point about why we want to tax that important resource-so that we get our fair share of the value of a UK national resource. That was a good point for him to make and for me to reinforce.

Photo of Simon Hughes Simon Hughes Shadow Secretary of State for Energy and Climate Change

Before the Minister leaves that subject, let me ask him about his Department's response to the Select Committee report. The response points out that the new survey of companies' investment intentions, which is what this is all about, is due this autumn. Will he tell us whether he has received it yet, or if he knows when it is coming? Will he ensure that it is shared robustly with Treasury Ministers as soon as it appears?

Photo of David Kidney David Kidney Parliamentary Under-Secretary, Department of Energy and Climate Change

It is coming, but it has not arrived. I take the hon. Gentleman's point about sharing it robustly.

Let me say a little about the availability of finance for projects to go ahead. As I mentioned in my speech, there are still good projects and they are still attracting finance. For example, there was a recent announcement about a smaller company-Hurricane Exploration-and a new development by that company. If my comments on Government support have not been explicit enough, let me mention the enterprise finance guarantee scheme for smaller companies and the working capital scheme for larger companies. Those are the kinds of Government funds that are available for companies seeking investment.

We cannot get away from the issue at the heart of this matter-the price that can be got for oil and gas. Again, the hon. Member for West Aberdeenshire and Kincardine recognised that point in relation to the price of gas. The price of oil went to a high of $146 a barrel last year and then slumped to between $30 and $40 earlier this year. It currently stands at between $70 and $80. Given that the costs of delivering to the market oil from the North sea are between $40 and $50, which bank will look sympathetically at a project when the price of oil is below that amount? An important factor in making finance attractive for investment purposes is the idea that there will be a reasonable price for a product that has been won despite harsh and difficult circumstances. We have to bear that in mind as a practical issue.

I want to say something about the west of Shetland. First, my hon. Friend the Member for Sherwood asked about environmental studies and surveys, and I have said that there have been comprehensive surveys in the past. I am confident that we are in a reasonable position in that regard, but it is still the case that detailed and area-specific assessments would have to be made for any new development. That is usual practice.

Another point about the west of Shetland is that it brings into focus the issue of access to infrastructure. We are working with Total and its partners regarding the Laggan and Tormore fields, which we believe will bring much needed gas infrastructure to the basin. We are working with the industry to improve its code of practice, and we are also working on our own guidelines. I have already made that point to Mr. Weir, but I want to stress that there is a mechanism for any small or large company to seek a determination of access conditions, price and terms from the Secretary of State. It is important that that is used in any case where a company does not feel that it is getting fair and reasonable terms.

I was asked about discussions with neighbouring countries over their territories. I am aware of no ministerial discussions with the government of the Faroes but am assured that discussions on co-operation are ongoing at official level. If fields were found in the Faroes, we would certainly seek ways to co-operate to the benefit of both sides, but at present we have heard of no discoveries there.

While we are on the subject of hearing nothing, the hon. Member for West Aberdeenshire and Kincardine asked me about replies from the statutory environmental bodies, and I have been told, "None so far," so that is obviously a point for me to take away and investigate.

Several Members followed my lead, if I may say so, by praising the skills and innovation of the sector. What the industry is able to do is of global significance, and I agree that we all need to get behind it to maximise the jobs, investment and energy security we get from the sector. The hon. Member for West Aberdeenshire and Kincardine asked me to speak up for the industry. We work well with the industry, as I hope the next meeting of PILOT in November will show. We speak up for the industry, and I do not think that those are warm words or the result of complacency.

At the beginning of the debate, I paid tribute to the industry and to the courage of those who risk their lives for it, and we were reminded of the dangers of the work by the reference that the hon. Member for Angus made to the tragic helicopter crash earlier this year and the many lives that were lost as a result. I spoke not from words drafted for me by a civil servant, but from my heart, expressing my appreciation of the industry, which we should be proud of, and the work that it does on behalf of this country. Hon. Members will judge me not by my words today, but by my performance and that of the Department and the Government. I welcome that scrutiny and reiterate that I am determined that we will perform to get the best out of the industry for our national interest.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

I congratulate all Members who have participated in this important debate on their positive and informed contributions and the Minister on his durability in opening and finishing.

Question put and agreed to.

Sitting adjourned.