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

Part of the debate – in Westminster Hall at 3:40 pm on 29th October 2009.

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