§ 5.41 p.m.
§ LORD BALOGH rose to call attention to the failure of Her Majesty's Government to assure the maximum benefit for the country from the discovery of oil and natural gas in and around the British Continental Shelf; and to move for Papers. The noble Lord said: My Lords, the discovery of oil and gas in our part of the Continental Shelf has certainly been a dramatic turn of events. After sixty years of unsuccessful search, and after the discovery of the Gröningen field in Holland, we have at last succeeded in discovering oil and gas in vast quantities in our part of the Continental Shelf. In order to give your Lordships an idea of the quantities and the values involved, I must beg for some patience. It is a dreary subject, but a very important one. Also, I must point out that the estimates are still growing daily so far as natural gas is concerned, enormously enhanced by the new fact that gas will be produced not merely as a primary production from the gasfields in the South, but also as an ancillary effect of the working of the oilfields themselves. Indeed, it is probable that these discoveries might be of the same order of magnitude as the gasfields in the South.
§ The estimates for the gasfields have been improving from year to year. In 1965–66, they amounted to between 1,000 million and 1,500 million cubic feet per day. That was then somewhere between one-third and one-half of the gas consumption. The output is now estimated at 4,000 million cubic feet per day assured, and it is likely to rise to 6,000 million cubic feet per day or more, especially if the gas from the Norwegian gasfields, from the Ekofisk and the ancillary fields there, also has to be landed in Britain. This under-estimate of the gas discovery is vitally important, because at the lower level the gas could have been sold on the domestic market for cooking and heating, whereas at the 363 higher level, and especially at the future higher level the gas must be sold in mass markets. The figure of 6,000 million cubic feet per day is equivalent to some 80 million tons of coal and its value, at the most recently fixed price of 1½p per therm, is some £300 million per annum, which is equivalent to £6,000 million over the estimated life of the field. I must say that I think these estimates about the life of the field are generally under-estimates. As I shall show, this has been proved not only here but in other parts of the world.
§ The oil discovery is even more startling. British Petroleum, according to the Sunday Times of May 14, 1972, puts the likely production in the 1980s at 150 million tons per annum. Philips has made a somewhat lower estimate of 100 million tons, and the Department, as usual, has filed lower figures, and these departmental figures must be strictly disregarded. On the other estimates that I have quoted the discovery is worth between £800 million and £1,200 million per annum at present prices, but if the Middle Eastern countries continue to squeeze us they will be worth proportionately more. Taking a duration of 20 years, which is a conservative estimate, we are here concerned with a total natural resource of between £16,000 million and £24,000 million. All experience suggests, moreover, that gas and oil fields of this importance grow rather than diminish when they are explored. That was the case in Texas, in Louisiana, in Venezuela and in the Arab countries.
§ These totals need to be put in perspective. In 1971, our total imports of oil amounted to 108 million tons; that is to say, just above the figure given by Philips and somewhat below the figure given by B.P. They were valued at £960 million. That represented one-ninth of our total imports, and there was a troublesome high rate of increase in oil imports. It is therefore not astonishing that a colossal hubbub and hullabaloo followed, especially in the popular Press, even though the Department and the oil companies for a very long time played it not merely cool but frozen. There has been much written about the bonanzas under the sea; about the Eldorados about to be opened for Britain, but more especially for Scotland.364
§ The B.B.C. showed a television programme about three weeks ago—and a very misleading picture it gave, too. They are at it again to-night. The extraordinary physical feats of rigs moving about and withstanding fearful seas in the mist-covered wastes of the North Atlantic: who can find a better theme to glorify? The dangers to which the men on the seas are exposed obviously made punctilious analysis of the consequences distasteful. Yet little, if any, effect, save for land speculators in Aberdeen, followed; and until very recently—perhaps stimulated to some extent by my persistence in asking troublesome Questions in this House—very little attention was paid to the ways and means by which the treasure would be handled by the Government, and to the advantages which would be reaped by this country.
§ What, then, are the ways by which this country can benefit? There are three distinct ways of gaining. In the first place, there is a possibility of securing a cheaper price for energy than our competitors. This would be of very great help indeed to energy-intensive industries, for these mostly heavy industries have been suffering from grave competitive pressures from abroad. Secondly, there is the benefit to the British taxpayer through payments of taxes and royalties, or through the direct participation of the State or some public sector board in the operation and in its profits. All this would be the more important as it would represent, if home-produced oil were substituted for oil produced abroad, and if the value of the oil remained at home and was not remitted abroad, a great saving in the balance of payments, which is under constant threat. Thirdly, and finally, there could be benefits from secondary activities directly or indirectly caused by the discovery and landing in Britain of oil and gas, either to sustain the production of oil through building rigs, oil pipes, and supplying the needs of everybody manning the oil rigs, or as cheap raw material for the first category; that is to say, in order to make prices in the petrochemical industries cheaper.
§ So far as the first of these gains is concerned—cheap price—we can rule out oil, except, perhaps, for those local regions like Aberdeen. which might benefit from a shift of oil refinery locations and of some ancillary petrochemical 365 industry. Generally speaking, the price of oil in Britain will continue to be determined by the Persian Gulf prices and the cost of shipment from the Gulf, because the demand of the Western European countries cannot be met by the North Sea gas and oil. Thus, any increase in the price of Persian or Iraqi oil, or of gas from Algeria, et cetera, will increase the North Sea gas and oil prices. Hence, any advantage to be gained from oil as against gas can be and must be only through British participation. This is a topic to which we shall return in a minute.
§ So far as gas is concerned, the story is very different. Here, the Continental Shelf Act, probably as a result of the heritage of the more earthy Victorian monopoly condition, makes it obligatory for the producer to offer all gas except that used for chemical foodstocks to the Gas Council, provided the latter offers a reasonable price (Section 9(2) and (3), and especially Section 9(3)(a) of the Continental Shelf Act 1964). In case of disagreement the Minister has the power of arbitration. This is indeed a formidable power. It implies, among other things, the right to ask, as the American Federal Power Commission does in its automatic routine procedure—because they are so anti-capitalist—and as both the Danes and the Norwegians contemplate, for an opening of the books as a proof of costs, to see how those costs, risks and profits work out at the proposed price.
§ This statutory power by implication would seem to me to make it the duty of the Minister to ascertain these facts and account accordingly. This duty does not seem to have been carried out by any recent Minister, as we heard in Answers to a number of Questions posed by me in this House. The Minister admitted that these elementary data, which all countries, from the smallest Arab sheikhdom down and up to the United States of America, get as of right, seem not to be available here. In fact, the Minister does not seem to have been involved in the latest price determination, which jumped the price from 2.875 old pence per therm to 3.6 old pence per therm. This, I think, is a clear dereliction of duty. What is even more astonishing is that the petroleum department of the Ministry of Power, now the 366 Department of Trade and Industry, dared to assert through the Minister that they cannot get these figures, when they know that everybody knows that the Coal Board and the Gas Council are partners in various consortia, and that those consortia, being under American control, have indeed most excellent accountancy facilities. Still, at 2.875 old pence the oil companies had made great concessions, and even at 3.6 old pence per therm the supplies are at a slightly lower price than arc the supplies at the disposal of many other countries—but not all. For instance, Russia gets its oil at a much cheaper price. I shall presently try to show what this means, nevertheless, in terms of profits for the oil companies and their impact on the balance of payments.
§ How about royalties and taxes? The oil companies are expected to pay 12½ per cent. royalty on oil and gas. This is superficially in line with the conditions enforced in the OPEC countries, and this fact has been pointed out by Mr. MacFadzean, the chairman-elect of Shell, who. however, omitted to say that so far as the Arab countries and Venezuela are concerned this was the least important of the provisions. Through the fixing of the posted price above what is claimed to be the actual transfer or selling price, by having direct taxes and participation, the OPEC countries exact a share of profit between 75 and 85 per cent., not 12½ per cent. The OPEC countries discovered the complexity of the problems involved with vertically integrated multinational companies, when British-trained economists took over. They have not yet taken over in the Department. They made effective a posted price more in line with the world situation. Indeed, the oil companies complain that the price is now higher than would be compatible with a legitimate return on downstream operations, though they do not mention the fact that the insensate oligopolistic competition, which takes the form, as we only too well know, of the wasteful proliferation of vastly costly retail points in garages, et cetera, is probably as much to blame as the Arabs.
§ An early recovery from this situation is very difficult to foresee. Existing United Kingdom petroleum regulations are hopelessly inadequate, in respect both to rent and to the surrender of the licence. 367 The rent rises from £25 per square kilometre to £290 per square kilometre. All this is derisory when profits are in the hundreds of millions. It is true that 15 blocks were auctioned and yielded £37 million, but this only highlights the lost opportunities; and, of course, these auctions have been discontinued, and they did not really claw back the whole of the profits. It is true that the companies must surrender half their territory after six years, but the relevant regulations are so lax as to enable the retention by the companies of the valuable territories. A recovery from our mistakes is therefore only possible if there were a complete change of attitude on the part of the Government.
§ There is, of course, the corporation tax, at 40 per cent. That does not sound little. In reality, double tax agreements, plus the fact that profit participation, royalty tax, and so on, paid to foreign Governments are expendable against British taxation, result in the oil companies having to pay very little tax here, although the introduction of the corporation tax by Mr. Callaghan and Mr. Kaldor has at least prevented the scandal that repayments of income tax paid by the oil companies to the Arabs were made to the British shareholders by the British Treasury. The profits of the North Sea are, therefore, pure gold to most of them.
§ There was therefore from the outset an overwhelming case for some sort of State participation in the operation. 'This has been increasingly done in Europe. It is being done in Holland and France; it is about to be done in Norway and Denmark. How is this to be managed? I leave aside, of course, confiscation without or with only insufficient compensation. The State could physically obtain part of the output and sell it itself. It could participate in the direct profits. This would have to be policed both as to price and as to costs, because arm's length sales, sales in the open market, are a rarity in the oil business. It could finally obtain a share in the syndicate or go into the business itself. All these forms have, at one time or another, been practised in Europe and outside.
§ In this country the Gas Council and the National Coal Board had, until the 368 change of Government in 1970, an increasing share in the syndicates. This was accomplished only under the most tremendous pressure by the central economic Departments, the Treasury, the D.E.A. and the Cabinet Office, on the Petroleum Department, which was forced to permit the participation of the Coal Board in a few of these consortia—the process is described by the noble Lord, Lord Robens—and the Gas Board has also been a member of the consortia. This participation started, so far as the Gas Board is concerned, at 31 per cent. in the case of the Leman Bank, and it increased to 50 per cent. in the face of the indefatigable consortia. Later on the Irish Sea was completely reserved for the public hand, and generally preference given to consortia having at least 50 per cent. participation by the British public hand. Although some of the new licences in the most interesting Northern territories have British participation and even British public board participation, the British share of the total has lamentably fallen and the condition that all consortia have participation has been tacitly waived.
§ What was the consequence of these hesitations confounded by amateurishness? The first contract of 5 old pence per therm for a field which was very advantageously situated in the case of B.P. was at least excusable by lack of practice and lack of knowledge; and anyway it was half recovered by the B.P. being half owned by the public hand. It also had a re-negotiation clause which has disappeared from the rest of the contracts. This fact is very important because if, as the oil companies assert, they were doubtful about the size of the fields, they would not have shown such bitter resistance against short-term contracts allowing re-negotiation of the price. As the cost of production is far higher on small fields than it is on the large fields, if indeed they had expected very small fields they would obviously have opted for short-term contracts in order to re-negotiate the contracts at a higher price. They seem to have been very optimistic indeed about the prospects and, as usual, rightly so.
The oil companies, secondly, assert that the investment is very heavy and therefore they cannot give up part of the profits or accept price regulation for
gas as has been laid down. In particular, Mr. MacFadzean refers to a one-in-twenty ratio of the number of successful wells out of the total number of wells. Yet the Petroleum Handbook published by his own corporation in 1959—that is to say. when the technique was very much less developed—states on pages 71–72:
…no scientific exploration successful, ratio one in thirty; geological and geophysical exploration successful, ratio one in five.
§ These are based on U.S. figures. If those from the world outside, and particularly the Middle East, were available they would put modern exploration ratios in an even more favourable light.
The share prospectus of Oil Exploration (Holdings) Limited, of which we shall hear more in a minute, says:
The U.K. sector of the North Sea is now regarded by the oil companies as one of the most attractive and promising areas in the world.
And rightly so! The Conoco Company published two weeks ago a success ratio of 6 out of 9 wells. This is very different from 1 in 20. In my recollection the total success ratio, certainly at the time when I knew the figures, was below 1 in 10.
§ All experts outside the charmed circle suspected that even the Labour Government's price for North Sea gas would yield exorbitant profits payable mostly in foreign exchange to foreign companies. But both the Labour and the Conservative Governments have successfully resisted efforts to obtain precise information. Lately, however, there have been two indications which confirmed the suspicions of those who were sceptical. Lord Robens in his autobiography, which I have already quoted, boasted that the Coal Board, on its half share of the Conoco Consortium, stands to gain £200 million over 25 years on what then was stated to be a one-sixth share of the supply. This means that the total profits over 25 years on the Conoco basis for the whole country at the lower rate of supply will amount to profits of £2,600 million—and this on an investment which has never been stated to be higher than £200 million! These figures are confirmed by the prospectus of Oil Exploration (Holdings) Limited which I am not going to quote.370
§ So far as oil is concerned, the situation is worse. Sir David Barran, the retiring Chairman of Shell, estimated that as much as £2,500 million would be spent in a decade, £of which £1,000 million will be in operating expenses, for the total of the oil field. This sounds formidable. If we take his more detailed break-down, things look different. The total investment for a decade for a field of 12.5 million tons per annum (250,000 barrels per day), a field much like the Forties (but Forties might become very much bigger) represents £250 million, of which £100 million is in platforms and production facilities, £70 million in production wells, £65 million in off-shore trunk lines and £15 million in shore facilities—Scotland please note!
§ It is likely that the cost will fall as experience increases and output grows. But if you look at the value of the output of this sort of field which cost £250 million to develop in the first decade, it is between £80 million and £120 million per annum. On a 20-year basis—and of course in the second decade the whole investment would not have to be repeated—it would mean something like £1,600 to £2,400 million; which, I must say, on £250 million invested is not bad going. It will certainly last much more than a decade. The end result is that the investment will be amortised in a very small period indeed; and we do not yet know whether in one way or another some of the investment will not be paid out by the Government in terms of grants. The whole capital expenditure, needless to say, is completely free of tax and new proposals for the reform of corporation tax will mean the distribution of profit will be encouraged rather than the "plough back".
§ Mr. Waddams, who was with Shell and then was a successful advisor on oil questions, estimates that on a production of a billion barrels a year, Government revenue in Britain will be between £80 million as against the £800 million which would be exacted by Libya under the same conditions. I think from what I have said before on the basis of balance figures, that this is an underestimate.
§ I do not have to emphasise that a very large part of this minimum saving of £700 million per annum will be exported to America, thus reducing the saving on the 371 import of oil as a result of the discovery of oil in our own territory to very modest proportions indeed. Thus doubts about the future of our British balance of payments and the desire by Britain to receive from this splendid gift of Nature as much as possible, and certainly as much as politically unstable sheikhdoms were able to obtain, cannot be laughed off (as Mr. MacFadzean has done in an article) as an attack of xenophobia. In any case, I am a "xenos" I cannot hate myself; and I do not.
§ In the case of these, mostly North American, oil companies, the old saying that what is good for General Motors is good for the country, applies even less. What is regrettable is that Mr. MacFadzean's assertion was not generally greeted with the Homeric derision evoked by the more justifiable comments of Engine Charley Wilson, the President of General Motors, who became Defence Secretary, when he made this heroic statement.
§ What about the consequential boom; this terrific boom? Up to the end of 1970 (we do not have any figures after 1970) 26 platforms involving 60,000 tons of steel were placed in the North Sea. Of these, 96 per cent. had been fabricated in the Netherlands and 4 per cent. in Germany. Of these, U.S. contractors erected 74 per cent., Italians 15 per cent. and Dutch 11 per cent. There were 177 miles of pipeline laid—mostly 30 inches in diameter—weighing 75,500 tons. Here again, the contractors were 95 per cent. United States and 4½ per cent. Netherlands; 83 per cent. of the pipe was manufactured in Japan and came round the world 9½ per cent. manufactured in Germany; 7½ per cent. in France. The total investment amounted to £375 million, of which the United Kingdom share was insignificant. These melancholy figures have been given by the Society of Underwater Technologists and they have never been contradicted.
§ My Lords, to end, I do not believe that this happened as a result of wickedness or corruption. In a way, I wish that it had. We could then find a quick, if radical, remedy. No; it happened as the result of the wrong organisation of the Government; as a result of ignorance and a desire to please. Civil servants have been called on to perform duties for which they were not trained and which would have 372 made their relations with the industry with which they are supposed to work very difficult. They have chosen on each occasion the wrong way, because it was the easy way out. They hoped to give a good example to OPEC and we lost out both to the Arabs and also to the Americans. The system of frequently changing Ministers is a second great obstacle to progress. These are complicated matters, not learned in a few weeks. They are also deep-seated matters, and very unlikely to be remedied in the short-run. I must therefore, my Lords, sorrowfully conclude that the outlook for our prosperity, for our balance of payments, is indeed sombre; and if any of your Lordships has any doubts about the ultimate causes of this unpleasing state of affairs, I fear that I have none. My Lords, I beg to move for Papers.
§ 6.12 p.m.
§ LORD TANLAW
My Lords, I must welcome this opportunity given by the noble Lord, Lord Balogh, to speak in this debate. It is quite difficult to follow the noble Lord because of the technical knowledge and expertise that he has in his subject. It is a bit easier for me, because I am going to speak on only one aspect of the matter: regional development and its effects following the new discoveries of oil and natural gas round the British Continental Shelf. The noble Lord, Lord Balogh. mentioned Scotland. I think that everyone in Scotland is conscious of what is going on and what is about to happen. He also raised a 64,000-dollar question—or is it a 64 million dollar question? The Government must now be in a position to clarify some of the issues he raised and everyone in Scotland, regardless of political affiliation, is waiting for the answer.
As has been said by the noble Lord. Lord Balogh, the discovery of oil and natural gas in and around the British Continental Shelf is one of the most important economic factors to be considered when anticipating the future prosperity of our nation. Let us not lose this golden opportunity. A great deal has been spoken in your Lordships' House and outside it about the future of Scottish development with this new source of potential wealth. There was the debate last November initiated by the noble Lord, Lord Polwarth, on the Scottish economy and the conference on 373 oil and Scotland's future held at Aviemore this year, when the subject was covered adequately. Men, dedicated men, working through Government bodies, the Scottish Council, the Highlands and Islands Development Board—all have plans by the basketload awaiting the go-ahead, although the dust may already be beginning to settle on some of them, such as the Hunterston and Oceanspan projects.
Hunterston emerged only briefly to-day from the gloom of uncertainty which surrounds it, with the publication of the long-awaited Interim Report. This was referred to in your Lordships' House during the debate on the Scottish economy. Unfortunately, this Report, about which I have seen only a brief newspaper article, appears to raise more questions than it solves. I wonder why? Can it be that the anticipated revenue might be debatable, or might not be as large as the Government have initially indicated. I hope not. And assuming for the moment that this is not the case, there is no definite commitment yet by the Government to improve the infrastructure to match the investment by the oil companies in Scotland. Port facilities on the East Coast remain inadequate and the deep water terminal at the Greenfield site is still a dream. New airports are still unbuilt and traffic north of Perth is governed by the pace of the slowest caravan trailer, as anyone knows who has been on those roads. And there are still the unemployed.
It does not add up, my Lords. There is a huge unfulfilled public works programme to provide work and a huge source of revenue to pay for and exploit it. Yet nothing appears to be happening. The only practical reason that comes to mind is that besides the apparent lack of resources to finance these projects there is a lack of communication between the various Government Departments involved in them, due to the centralised policy pursued by Whitehall. If I may, I should like to give one or two examples. Perhaps they are well known to your Lordships.
Scottish policy for infrastructure is mainly governed by the Scottish Office, which, in turn, is limited by the annual allocation of funds from the Treasury and the Department of Trade and Industry. 374 Manufacturing companies and oil companies have to rely on the Department of Trade and Industry for financial and other aid. Investment in improved port facilities depends upon the Department of the Environment, with help and advice from the National Ports Council. Investment in airports rests with the British Airports Authority, but the regulation of air services with the new Civil Aviation Authority. Research and development is through the Department of Trade and Industry; training and employment is with the Department of Employment and its various advisory bodies. There are more examples. In every case they look at Scotland and other under-privileged areas through the eyes of their own Departments.
This is not to say that nothing is happening. Far from it. It is rather that, when dealing with the regions, Government Departments can mistake activity for achievement. This frame of mind is often brought about in Government or commercial organisations when there is not enough money to implement the projects on which they are working.
I believe that the remedy for this misapplication of effort and control must lie first with the Government who should recognise the need for decentralisation; and secondly, that regions such as Scotland should have their own development authorities, with powers from the various Ministries concerned, to implement policies for infrastructure and an integrated regional development programme. Some of your Lordships may recall that Dr. W. S. Robertson of the Scottish Council called for just such a body in his excellent Paper, entitled Issues for Scotland, at the Second Industrial Forum at Aviemore, discussing the theme which I mentioned earlier, oil and Scotland's future. Mr. Russell Johnston, the Liberal M.P. for Inverness, followed up this suggestion at the same Conference when he urged the need for a development bank to finance these projects managed by the development authority. This also has been established Liberal policy for a considerable time.
Finally, my Lords, I doubt whether the Government are as blind to these opportunities as they like to appear. Surely they have not forgotten the "Declaration of Perth" made by the Prime Minister of the day in 1967; or 375 the promise of a White Paper on the subject during this Parliamentary Session. I would quote Russell Johnston again. At the Scottish Liberal Conference last weekend he called for support from all political Parties, and also the Scottish T.U.C., for a Scottish Movement, the aim of which would be to attain a Scottish Legislative Parliament which could deal with all the items I have mentioned, and especially the position of the foreign oil companies operating from Scottish bases. As recently as to-day, forward-looking Tory Members of Parliament have published a booklet advocating a policy of decentralisation. and they conclude by saying that the regions will never thrive if they have to depend on Whitehall for stimulus.
There is still hope that something will be done soon. I think that the appointment of the noble Lord, Lord Polwarth, must be an encouragement to all, regardless of Party, who are interested in the future welfare of Scotland. The views that he expressed in a memorable speech in a debate on the Scottish economy in your Lordships' House last November must be the guideline of a policy which he is now in a position to implement, be it on the application of oil revenues or Scottish regional development. If he finds himself powerless to bring this about because of Whitehall control, I trust that he will say so, and I think he may find new friends from many quarters in Scotland if he does.
In conclusion, my Lords, only by calling for integrated regional development can the maximum benefit be derived from these new discoveries of oil and gas off our shores. It is not parochialism to say so, nor is it sterile nationalism: it is just plain economic sense.
§ 6.20 p.m.
§ THE EARL OF LAUDERDALE
My Lords, in following the noble Lord, Lord Tanlaw, I should like just to reply to him on this one point. So far, no oil royalties have been earned. Some £6 million or so has been earned by way of royalties on gas delivered to this country. It may therefore be a minute or two premature to attempt to spend in advance the oil royalties to which we look forward. I would only make the point to the noble Lord before passing 376 on that if we are going to press the Government to make an allocation of oil royalties for development, the prudent thing would be to do this on a United Kingdom basis. We do not yet know where all the oil is to be found. There is the Celtic Sea to be considered, and there are other areas to be considered which have not so far been explored at all. I would only press for this to be regarded on a United Kingdom development area basis rather than on a purely Scottish basis.
I should like to join the noble Lord, Lord Tanlaw, in thanking the noble Lord, Lord Balogh, for introducing this Motion. I congratulate Lord Balogh on his success in the ballot, and say how much I enjoyed his speech, based on such wide experience. I know the noble Lord will forgive me if I say that on one or two points I could not quite follow his figures. He quoted a figure from the Continental Oil Company for the number of dry wells found out of the total number drilled. I can only say that that is a quite different figure from the one I was given when I visited their jack-up drilling rig, the "Off-Shore Mercury", a few weeks ago. Be that as it may, surely the real issue is whether the oil industry is to be treated as a goose fat enough for the roasting, or whether it is to face a strenuous diet to build up its strength and that of the energy-hungry economy around it.
I begin by drawing attention to the Hougardy Report to the European Parliament's Committee for Energy Research and Nuclear Questions, which was accepted by the European Parliament in April. It concludes:Governments should be concerned more with obtaining maximum performance from the oil companies than in maximising tax receipts.Even in the British sector there have not been a great many takers for the blocks that have been on offer. Of the total areas offered for licence, covering about 250,000 square miles, only one-fifth—some 50,000 or 60,000 square miles—are being operated under licences that are now in effect.
There are three alternative approaches to licensing. The first method, widely canvassed, is by auction. This was tried on 15 blocks to test the market last summer, and one hopes, for reasons 377 which will become clear in a moment, that that auction will not be repeated. The auction system gives the auctioneer no control over subsequent operations. It provides no check on the worthiness of the highest bidder. It provides no check on subsequent sub-letting or re-sale. It provides no check on the sheer financial speculation that could arise—for example, some Middle East sheikhdom buying into North Sea oil as into the London property market. Above all, the auction system provides no means of coercing the major companies into exploring the less attractive areas, although this is a long-established method in British administration, applied, for example, in the public transport and airlines licensing. Finally, the auction system syphons off capital which it is in the British interest to see invested in exploration.
The second method that can be used, and which I understand has been advocated by the noble Lord, Lord Balogh, is to impose, or at any rate very strongly induce, nationalised industry participation. This was tried out in rounds 2 and 3 of the licence issues in 1965 and 1970. In round 2, in which the Liverpool Bay figured largely, nationalised industry participation was made an absolute requirement. The result was that, for lack of applicants, little more than one-tenth of the area on offer could be licensed. There were 1,106 blocks; there were no more than 21 applicants. In the end, 127 blocks went, which works out at about 10 per cent. of the area on offer. That is at least one consequence, I submit, of imposing the condition of nationalised industry participation. In round 3, when this condition had been relaxed somewhat, there were a few more applicants willing to have a go. This time there were 157 blocks available. Some 34 applicants appeared, as against 21 previously—that is to say, half as many again—and in the end 106 blocks were licensed, which comes to more than 60 per cent. of the area on offer.
It has been suggested here and there in the Press, and also (I believe I did not mishear him) by the noble Lord, Lord Balogh, that this requirement of nationalised industry participation was in some way quietly dropped by the Government. Not a bit! The criteria have been pub 378 1lished for each round. In round 4, with that requirement dropped overtly and openly there have been 92 applicants, instead of 21 or 34, and something like half of the 42,000 square miles offered has in fact been licensed.
That builds up the case for the third method, which is licensing by discretion against known defined criteria. The objective—and surely this will be common ground—is that Britain should aim at a spread of interest to bring technology and finance to the United Kingdom; that it should be a British interest to impose a work programme to secure maximum exploration; that it should be a British interest to exclude mere speculators, and a British interest to obtain a reasonable British involvement. The noble Lord, Lord Balogh, just now made a reference to the system by which licences, or parts of them, must be surrendered after six years; and he remarked, as I understood him, that this enabled the exploring companies to hold on to the best hits. But, my Lords, that is the purpose of the surrender provision: it is to make it worth while for companies to explore their area thoroughly so as to decide which are in their interest the best bits to surrender and which are not.
The accomplishment of the British policy of discretion compares very well with that of our neighbours who have chosen to press for national public sector participation. Out of more than 500 holes drilled in the North Sea no fewer than 380, or 76 per cent., have been drilled in the British sector; no more than 70 have been driven in the Norwegian sector, despite the very attractive geological conditions. No more than 70 in the Dutch; no more than half a dozen in the German, and fewer than half a dozen in the Danish. These figures may not tally exactly, because they may be taken at points in time which are separated by a month or two, but they are approximately correct.
Thanks to the extensive exploration which has been encouraged by British policy in the last six years, at least 20 offshore geological structures have been identified. No fewer than six oil or oil and gas fields have been delimited in Northern waters, quite apart from the gasfields off the East Anglian coast. The orders of magnitude have been referred to and hardly need restressing, but it 379 may be worthwhile to illustate by saying that a jack-up mobile drilling rig for exploration of gas, off East Anglia—which is easier because the water is shallower—is about half the size of a small London square when your helicopter lands on top of it. Its legs are each about equal to the girth of a church tower and the multi-well development platform is substantially larger. The production and the manifolding platform is as large as a very large London Square and about twice the size of the Square in which I live. They stand in about 100 feet of water; they stand about 100 feet above the water, and they may be on piles going anything up to 100 feet into the seabed. That, my Lords, is in the gasfield off East Anglia, which is relatively easy.
In the Northern reaches of the North Sea where oil is to be found, a production platform will be taller than the Post Office Tower and will contain about as much steel as almost two spans of the Forth Bridge. It will cost the best part of £10 million. Much of the investment is abortive. Whether or not the figure is one or eight dry holes out of ten, I have not the technical knowledge to say, but I am told by a number of different oil companies, oil men and drillers alike, that the average is about eight dry holes out of ten. Each hole needs anything from three to nine weeks to drill and will cost anything up to a million pounds. To develop a single field is not just a question of finding one prolific well: many trial and development wells are required, and to secure the balanced use of a field it may be that half a dozen production platforms, each with a dozen wells, may be needed, to say nothing of the central platform and point for collecting the oil. Quite a number of holes, although oil-bearing, have been sealed up, pending the discovery of other and sufficient reserves nearby to justify a common-user pipeline ashore.
Going back for a moment to the figures quoted by the noble Lord, Lord Balogh (which came, I think, from Sir David Barran), if one is thinking that a field is going to cost something in the order of £250 million to develop, that is about the price of one moon shot. The scale is so great. When one speaks of £1,500 million over ten years and another £1,000 million—not £100 million, as he suggested—for 380 development and exploitation, even nationalised industries under a Socialist Government might quail. The scale is so vast that traditional competitors have been forced to combine.
The taxpayer comes out remarkably well. His only cost is the long familiar practice of allowing United Kingdom losses to be set off against overseas profits. There is the same enjoyment of investment allowances, and so on, as other industries have, and all this at no extra direct cost to the taxpayer. In return, a major resource is unearthed and a potential £400 million a year saving on the balance of payments is uncovered; and even if the oil is exported, that will still ease the balance of payments. A whole new range of industrial development is opened up. To take one case at Nigg Bay, in Scotland, at the Brown & Root site there 700 Highlanders are being trained as riggers, fitters and welders and in skills which they could never before have had a chance of learning. There is the development whereby Marathon is coming into U.C.S. to develop a completely new kind of shipbuilding—if "shipbuilding" is the word.
I believe that successive Governments deserve congratulation on a sophisticated and imaginative policy which is already within sight of bringing great advantages to Britain. I believe that one should name a retired civil servant who has so far gone unsung. He has master-minded a great deal of this from the start; his impartiality has been recognised by all the oil companies that I have spoken to and that have competed with one another for his attention. He is a man whose single aim has been the national advantage. I refer to Mr. Angus Beckett, of the former Ministry of Power. One trusts that his services will be well recognised in due time.
My Lords, one or two constructive interrogatives. Do the Government yet have a policy which will have regard to the possibility of developing common user pipelines on the North Sea bed? When will the report of the study by the International Marine Engineering Group, into the reasons why British industry has been slow to hitch on to the oil opportunity, be published? I should also like like to ask: can outside bodies such as the Scottish Council or the Council of Manufacturers of Petroleum Industry 381 Equipment help or provide information in any way, and will the IMEG report be published? I could not give my noble friend advance notice of this question. and no doubt he will let me know later if he is unable to answer me now. Some members of the Society of Underwater Technology have been complaining that the Committee on Marine Technology suffer from too restricted resources—a quarter of a million pounds over the whole field in three years. Will the Government get in touch with the Society and consider any representations that they have to make? Finally, will the Government take a look at the quite widely expressed need of short-term finance for many small firms which are trying to get in on the supply business and which inevitably find the N.R.D.C. machinery cumbersome and slow?
Once more, my Lords, I believe that we should thank the noble Lord, Lord Balogh. for introducing the subject to us this afternoon. I suggest that his approach is a challenge to common sense. I would say:To its own impulse every creature stirs. Live by thy right and Earth will live by hers
§ 6.37 p.m.
§ LORD SHACKLETON
My Lords, I think this debate has justified quite strikingly the system of mini-debates which was one of the recommendations of the Committee of which, I think, the noble Lord, Lord Aberdare, was a member. This is a classic occasion. There is not a very full House at the moment, but certainly all noble Lords have listened with the greatest interest to my noble friend Lord Balogh, and to the noble Lord, Lord Tanlaw, who declined to associate himself with any deep knowledge of the subject. Let me hastily associate myself with that lack also, because I am quite sure that he knows much more than I do. Of course we have listened to the noble Earl, Lord Lauderdale, who is always formidably briefed. But I would especially congratulate my noble friend Lord Balogh, because I think his speech represented a great deal of very detailed research. His mastery of his subject and his persistence in pursuing Ministers in search of information has now led to a debate in which the Government, as a result, have a lot of questions to answer. We have at least another 382 hour—I shall be only five or ten minutes—so the noble Earl will have all the time in the world to answer every point that has been made. To help him, I should like to pick out certain points, and I should be most interested to hear what he says about these. This, however, certainly does not remove from him the obligation of answering all the points of my noble friend.
The basic question—indeed, this was fundamental to the Motion—is: have the British had the best possible deal or have successive Governments (whether the Labour Government or the present Government for that matter) failed to look after the interests of the British people in an area which can reasonably be called the public domain, an area in which licences are granted and in which clearly, if enterprise, be it private or public, is to operate, we have to be satisfied that the right return will be attained? I acknowledge that Governments have experimented in their ways of dealing with this issue. I was very interested in what the noble Earl, Lord Lauderdale, had to say about the system of auctioning, though I do not quite see why, even with auctioning, it is not possible to impose conditions. But I myself would not dream of advocating any particular approach to this matter, because I simply do not know enough about it. The noble Earl, Lord Limerick, I have no doubt will be entirely sincere and honest in what he says and will probably claim that we have had as good a bargain as could be reasonably achieved. I hope he will be able to substantiate this claim by giving answers to some of the specific points.
I should like to deal with some of the figures mentioned by my noble friend, particularly in relation to the return on capital. In listening to what was, if I may say so, a difficult and complicated speech, I had no time when listening to my noble friend—I am no economist—to work out what the right d.c.f. return over the period should have been. I would be interested to know whether the Government have views on the return because my noble friend produced evidence, which needs to be accepted or controverted, that we are doing a lot less well than the Libyans. I sense that one of the reasons for this is that we have been trying to set a good example to the rest of the world. If that is really so, quite frankly 383 Governments have not been pursuing the national interest. I do not believe that our setting a good example is necessarily going to improve our position with regard to the OPEC countries, and certainly not with certain of the North African and Middle Eastern countries. We would he interested to know what the return is and how it compares with that of other countries.
This leads me to another point of interest, one which is sensitive. My noble friend questioned whether the Minister has been operating his discretion. As I understand it, this would be in finally arbitrating with regard to the price that is paid for the product. My noble friend asked whether he has been doing this with full access to all information that is available. In particular my noble friend pointed out that even in the United States, as well as other countries, the operating companies are required to open their books. My noble friend implied that where American companies are concerned their accountancy was so much better that it would be particularly worth opening their books. I would not necessarily accept that the accountancy is not adequate: but is it a fact that books are normally opened in other countries? The noble Earl, with a great deal o! experience as a banker, is particularly well qualified to comment on this, as he is on the appropriate returns from investment. If my noble friend's figures are correct—and they seem to me to be impressive—the return has been higher than is warranted and the return to the British taxpayer has been lower than it should have been. That is very much the burden of what he said and it is clearly important that we should get answers on this. I will not go into the matter of taxation, partly because I tend to get lost in overseas profits but it would be interesting if the noble Earl would comment on this particular matter.
The noble Earl, Lord Lauderdale, suggested that the British system of licensing and less emphasis on State participation has led to a much greater degree of exploitation than has been achieved by other countries. Considering that State participation had, as I understand it, been obligatory at certain stages, I am not sure whether his figures are justified. But the question still remains 384 as to whether it was right to press ahead in this way. There are many possible explanations. It may be that the noble Earl has the answers as to why there has been heavier exploitation in the British sectors. The noble Lord, Lord Tanlaw, made the point that we have gone rapidly ahead, but in order to do so a great deal of the capital equipment had to be purchased from abroad. This was another point which my noble friend Lord Balogh made. The Norwegians have deliberately followed a different policy in this matter. I will quote from Mr. Gulnes. They decided not to have a speedy exploration, "as the British authorities had decided to do". They have sufficient petroleum to cover their needs from one find and they think that it ismore important for Norway now to gain experience to try to educate our own industry as soon as possible so that they can take an active part in the further development, and because of this, and because we want to have sufficient experience before we go on to a new round, we have decided that we should work slowly".Then he goes on to say,Coming now to Government participation, we have decided that this is the best way to get know-how for Norway as to the way the Norwegian industry can best benefit from this.This is the idea behind direct participation. It is not enough just to boast that there has been a greater expansion in the British sector. It may well be that there ought to have been greater stimulus. Perhaps now the Government arc taking a more rational approach to the support of industry, and have got over some of their earlier doctrinaire ideas in this matter and British industry will be able to play a bigger part.
§ THE EARL OF LAUDERDALE
My Lords, I am much obliged to the noble Lord for giving way. Would he agree that, first, the case for most rapid development has been made very effectively by the European Parliament whose authority I know he will regard highly—probably more highly than I do myself? Secondly. would he also agree that, having accepted that as a reasonable policy, right or wrong—and others think it is reasonable—the necessity to go overseas for equipment, and so on, is because the equipment is not available here? But now it is becoming available, and this is a new industry that we are hastening to develop.
§ LORD SHACKLETON
My Lords, since the noble Earl quotes the European Parliament, I must say that I do not necessarily regard them as the authority on what is at this moment a national question. My noble friend's question related to whether at this moment the British were getting the best advantage.
The Norwegians have tried to stimulate Norwegian industry to take part in service activities. They have in fact asked for a gentlemen's agreement. But it is no use asking for a gentlemen's agreement if you are not in fact at that moment producing the equipment. This brings me back to the point that the noble Lord, Lord Tanlaw, was making. It is a fact that Mr. Reid, in Upper Clyde Shipbuilders, the chief shop steward, has probably done more to try to lead to a development of this kind than anything the Government have done in the matter. And it is a fact—the figures were given, and this is a subsidiary argument of my noble friend—that British industry has not benefited as much as it should have. I am not going to criticise either the previous Government or this Government on these particular terms, but there are questions that need to be answered. I am making this argument in reply to the arguments of the noble Earl, Lord Lauderdale. As he knows, I always take his arguments extremely seriously; he is always very well informed in these matters, but I do not think his argument on this particular occasion is necessarily a decisive justification of Government policy.
There has been some criticism of Departments and civil servants in this matter. I am always myself slightly sensitive when noble Lords such as the noble Lord, Lord Tanlaw, speak about Whitehall control. I do not doubt that there are some good Ministers in this Government—I am told that the noble Earl is a most promising Minister—but I do slightly object to it all somehow being blamed on the Civil Service. We ask the Civil Service of this country to undertake the most astonishing range of subjects. They do so and it is quite miraculous how well they do when sometimes they are in fact unprofessional in these matters. Of course, a lot is going on and I do not propose, tempting though it is after hearing my noble friend Lord Balogh, to go into the 386 whole question of the structure of Government. We might have another mini-debate on that subject another day. But there is no doubt that the civil servants—and I acknowledge the tribute that the noble Earl, Lord Lauderdale, paid to one senior civil servant—undertake a wide range of tasks. It is true that we do not know what their performance is, but one of the things that struck me when I was a Minister was the astonishing responsibilities that comparatively small numbers of civil servants carry in a particular area.
§ LORD TANLAW
My Lords, I was not criticising the Civil Service as such. I was perhaps suggesting that there were not enough Scottish civil servants.
§ LORD SHACKLETON
All I can say is, my Lords, that when I first became a Minister in London I was surrounded by Scottish civil servants—my Permanent Secretary, my private secretary—and I wonder how many English civil servants there are in St. Andrew's House. None the less, I take the point of the noble Lord, Lord Tanlaw, and I do not want to distract from the main question.
There is a case to answer here, and I am sure that the noble Earl, Lord Limerick, will make as convincing a reply as possible but at the end of it (and I am not prejudging what he will say) I suspect that because of the time available there will be questions left unanswered. I am wondering whether, in an issue of this kind, there is not something more we can do to bring the facts into complete clarity and away from possible political criticism. My noble friend Lord Balogh, although more critical of the present Government, did not allow the previous Government to go unscathed. I would ask in this connection why it is that the Government do not allow, as I understand it, or will not allow under new legislation, nationalised industries actually to market the oil if they are members of a consortium. I am told that there is a completely doctrinaire discrimination against nationalised industry. This always strikes me as quite extraordinary, if it is so. Why private and public enterprise cannot compete, I do not know.
Unless the Government are prepared to hire the noble Earl, Lord Lauderdale, actually to advise the Civil Service, or 387 somebody from OPEC—it may be that we should ask them to come and help us on this—may I suggest that there is one factor the Minister might consider; that is, that some form of inquiry should be made. I am very nervous about Inquiries, especially after the V. and G. Inquiry, and I dislike intensely the idea of a tribunal approach. My noble friend made not the slightest criticism of the integrity of anybody who was dealing with this. But if we could have an Inquiry it would be easy enough to get a leading firm of accountants and assessors—Cooper Brothers—or merchant bankers, Kleinwort, Benson, and there are quite a number of others, to judge whether or not we had had a good deal. Alternatively, the time will come, I trust, when the Public Accounts Committee might look at this. I think this would be within their remit, at least with regard to the action of the Department. Perhaps they have already done so and it has escaped my notice.
My Lords, there are questions to be answered and now the noble Earl has plenty of time in which to answer them. My noble friend Lord Balogh will himself have a few minutes afterwards to answer the answers. Meanwhile, I congratulate him and I congratulate noble Lords on producing an interesting debate and on allowing someone who knows absolutely nothing about the subject to take part in it.
§ 6.57 p.m.
§ THE PARLIAMENTARY UNDERSECRETARY OF STATE, DEPARTMENT OF TRADE AND INDUSTRY (THE EARL OF LIMERICK)
My Lords, we indeed welcome the opportunity afforded by the Motion of the noble Lord, Lord Balogh, to debate this subject this afternoon. It has permitted many views to be expressed, ranging wide over the subject, and a broad spectrum of opinion. I have some reservations on the terms of the Motion itself and it is my task to seek to establish that the overall picture is by no means so bleak as the noble Lord, Lord Balogh, suggests. We pay the closest attention to what he says and what he writes. In an article in February he offered some criticism of the minuscule Ministerial complement at the Department of Trade and Industry. I can tell him, having taken note of his representations, that since that date we 388 have increased it by no less than 28 per cent., and I stand here representing 14 per cent. of that increase.
§ LORD SHACKLETON
My Lords. could the noble Earl translate that into actual manpower? Is that a quarter?
§ THE EARL OF LIMERICK
Certainly, my Lords, we have added two Ministers to a team of seven.
I should like, if I may, to spend a few minutes in painting a general picture of the situation as it now stands and then to return to specific points which have been made in the course of this debate. I think the first thing we should remember is that we are talking about a very short span of time. All the matters which we are discussing this afternoon have happened in only eight years, since 1964, when the United Kingdom became the first North Sea coastal State to provide the legislative framework for operations on the Continental Shelf. The possibilities in 1964 were virtually unknown; the environment was difficult and a very large risk investment was then required. The guiding principle which was then adopted and agreed by successive British Governments was to achieve a rapid and a thorough exploration and development of potential resources. This was regarded as the priority task, and it so remains to-day.
I think we can say that this policy has been remarkably successful. Gas was discovered in the West Sole field in October, 1965, just over 12 months from the issue of the first production licences. Commercial production started in April, 1967. Four more major gas fields were discovered between 1965 and 1967. In October, 1970, oil was discovered in the B.P. Forties field, followed by an announcement in February this year that commercial quantities of oil had been found in Shell/Esso's Auk field. To date. there are recoverable reserves of gas of 32 trillion cubic feet—and to avoid any possible ambiguity that is 32 X 1012 cubic feet. Oil is expected to be produced at the rate of 25 million tons per annum by the mid 1970s, and could perhaps reach 75 million tons per annum by the mid 1980s. The benefits to the country are of great importance. Not only will our balance of payments be improved—to the extent of perhaps £500 million a year by the 1980s—but energy supplies will 389 be made more secure by relieving our current overwhelming dependence on imported oil.
In order to achieve the main objective of rapid and thorough exploration, it was decided in 1964 that licences would be issued at Ministers' discretion rather than by the alternative method of selling them to the highest bidder. In some parts of the world, for example the United States of America, concession areas are often put up to auction. This has advantages, such as administrative simplicity, impartiality and financial return to the State whether or not petroleum is found. After study, it was decided that such a system would not be suitable for the United Kingdom on the Continental Shelf at that time. Under an auction system there could be no assurance of British participation, and we did not really want a situation where all the licences might be acquired by other countries. Moreover, North Sea potential was still unproven and could be tested only by imposing work programmes on licensees, which would be difficult to control under an auctioning system. For these reasons the allocation of licences by discretion was continued in the second and third rounds of licensing.
When we came to the fourth round, last year, it was decided, as in the case of earlier rounds, to abide by the discretionary system, placing greater importance on the rapid and thorough development of our Continental Shelf while reducing our dependence on Middle East and African oil, than on the immediate cash receipts to be had from auctioning. At the same time, it was recognised that the gas and oil discoveries which had already been made and were numbered were taking the Continental Shelf out of the initial exploratory phase and that an experiment in an alternative system of licensing could be tried out. It was decided, therefore, to carry out a limited tendering exercise to gain experience in this method for later rounds and to test the market by offering blocks which, though all in areas where hydrocarbons had been discovered, ranged from the superficially very attractive to the very indifferent. As there was a risk of a poor response which might have discredited the territory for the future, the number of blocks was kept down to 390 15. The results of tendering were unpredictable but extremely interesting; one block was valued by the highest bidder at £21 million and in all a sum of £37 million was obtained for the 15 blocks, so that a total value of £16 million was placed on the other 14 blocks. This experience will of course be studied and taken into account in the planning of future rounds of licensing.
No doubt more cash could have been obtained by offering all or most of the blocks for tender, but it is impossible to say how much. Certainly we should have seen nothing as big as the Shell/Esso bid of £21 million, and many of the blocks where we are anxious to see exploration might well have gone entirely without bids. Instead, we have achieved comprehensive exploration programmes over a very wide area, involving the drilling of 220 new wells at a cost exceeding £200 million. Forty-three per cent. participation by British companies has been achieved, and we now have involved in the North Sea oil search almost every oil company of world standing.
With regard to revenues, thus far about £56 million has been paid into the Exchequer arising from royalties and rents derived from the exploration and exploitation of our gas and oil resources. Other benefits have accrued from activities on the United Kingdom Shelf: new industries will have to be created to cater for the oil companies' many needs. The oil industry will for the rest of this decade spend on the United Kingdom Continental Shelf probably as much as £300 million per annum.
British industry, which has not had an impressive record of securing orders for the plant and equipment associated with the development of the gas fields (mainly because a home market did not exist) is now becoming increasingly aware of the opportunities and should be able to play a significant role. For the development of the recent oil discoveries companies are developing sites in Scotland and the North of England on which the massive fixed platforms can be fabricated prior to floating out to the oil field. Offshore drilling operations require wide supporting services ranging from the supply of materials such as drilling mud and fuel and water for use on the rigs, to bulk catering supplies. And now that the operations 391 are extending to other parts of the North Sea the scale of the operations is increasing.
In short, the exploration and development of North Sea hydrocarbon resources has provided a stimulus to various sectors of the economy and, through displacement of imported fuels, will be of very great benefit to the balance of payments. The policy adopted by successive Governments has meant that in the short space of eight years, working in the hostile environment of the North Sea and with no assurance at the outset of any commercial quantities of oil or gas whatever, we have already found enough gas to supply over 90 per cent. of our needs and are well on the way also to meeting a substantial part of our oil needs. Attempts to achieve early gains for the Exchequer by imposing very high licence fees, or by offering territory to tender, would in the Government's view have slowed down this process, and thus frustrated our main objective. Though we are confident about North Sea oil resources, the actual oil fields will be discovered only by intense and sustained exploration efforts and by an immense commitment of risk capital. The foundations have been well laid.
I now turn to the points that have been raised, and I shall do my best to satisfy those who have raised them. I think I face here a formidable task because so much expertise has been displayed. If I deal inadequately with any of these points, I assure you that they will be most carefully studied after this debate, and if there is anything to follow up we shall do our utmost to follow it up. Perhaps I migh0.t take first some of the points raised by the noble Lord, Lord Balogh, in his opening speech. He suggested that the size of these oil fields has been underplayed—perhaps deliberately underplayed—by industry. Mentioning gas first, I think the size of the gas fields is not in dispute. The Government and the oil industry itself, and the Gas Council, all agree that the recoverable reserves of gas to date stand at just over the figure which I mentioned of 32 trillion cubic feet. In the case of oil it is too early to be definite about discoveries or potential. We only have one field currently being developed—the Forties field—and here production is not due until late in 1974. As I mentioned earlier, production has been estimated at 25 million tons rising, we hope, 392 to 75 million tons by 1980; but of course the latter figure is highly speculative and will remain so at least until the end of this year's drilling.
The noble Lord, Lord Balogh, also mentioned the exploration success ratio and questioned the figure of 1 to 20. I am no expert and I should hate to bandy figures here; but I wonder whether in quoting 1 to 5, he was referring to all hydrocarbon discoveries during drilling operations. The ratio of 1 to 20 is, I believe, generally accepted as a confident ratio of discoveries which are commercially worth exploiting, and we might remember that it costs just as much—or perhaps more—to drill a hole which reveals insufficient oil or gas as it does to drill a dry hole.
§ LORD BALOGH
My Lords, can the Minister give the precise numbers of holes that were drilled and how many were commercially viable? Unfortunately, I think the Minister seems to be misinformed if he says that in the case of the North Sea complex the ratio is 1 to 20. That is very high. It is certainly surprisingly high. There was no suggestion whatsoever of that sort of figure in the recent literature about the subject.
§ THE EARL OF LIMERICK
My Lords, without notice, I am afraid I cannot give the precise number. I was not suggesting that that figure applied particularly to the North Sea. It was quoted, I think, as a general figure. I will, however, make a point of looking into this matter and letting the noble Lord know.
The noble Lord's next point concerned public-sector participation, and I think he referred particularly to the Irish Sea. On the third round of licensing the criteria were that applicants for blocks in the Irish Sea should offer participations—here the percentages have not been quoted—to the National Coal Board or to the Gas Council. The Irish Sea was not reserved for public corporations although the Gas Council, as it turned out, were granted one exclusive licence, and they or the National Coal Board were participants in all the licences granted. This, of course, did not affect the Gas Council participation in the North Sea gasfields, a point that had been suggested; and the public-sector participation now is approximately equal to 393 2l per cent. of known gas reserves—that would include the shares held by the National Coal Board, the Gas Council and through the Government shareholding in British Petroleum.
The noble Lord also raised a question—which was repeated by the noble Lord, Lord Shackleton—about the examination of accounts and the requirement to keep accounts. There is no legal requirement for this because the licensee does not dispose of the petroleum, the gas or the oil to Her Majesty's Government. The Government may intervene in the matter of price only when there is a dispute between the licensee and the Gas Council as to whether gas is being offered at a reasonable price for industrial purposes. The basic philosophy that has been followed by three successive Governments has been that they arc content to !cave the negotiations to the Gas Council without checking on the profits made specifically in their North Sea operations. There is, of course, the overall check on all their activities in the accounts they produce for the purposes of their shareholders and the Inland Revenue, but this is not broken down to identify the figures. This is a philosophical point which has been taken by all the Governments. I understand that the Gas Council have shown themselves to be pretty tough negotiators, but so far agreement has been reached in all cases on the appropriate price of gas and no cases have gone to arbitration.
On the question of whether the price is too high it is always difficult to be dogmatic. The Gas Council, as I say, are reckoned to have driven a hard bargain. They are a monopoly buyer with a first-hand knowledge of costs of producing gas on the Continental Shelf through their participation in some of the syndicates. The noble Lord in another context has expressed some complaint that gas prices were fixed by a contract for a term of years. Again this is something that could cut either way; but against a background of steadily rising prices—not only generally rising prices, but rising prices of gas throughout the world—the fact that we have had a fixed price for a number of years is surely more a matter for congratulation by the consumer, although possibly a matter of regret for the producer.
394 We then come to the question of the returns that may be expected on these investments. My Lords, I find this an extremely difficult question. I speak here as one who years ago was an accountant. It is difficult to measure these returns; but even more, it is extremely difficult to decide what one would regard as a proper return in planning the way these areas are handled. You start with a position where nothing is known to exist at all. You invite people to come and search for it. They are putting a great deal of money at risk. If we try to relate a profit which a company makes in a given year on a single successful borehole to the capital which has been invested in that particular operation, this does not produce anything like a reasonable computation of what would be a fair profit for the industry; what they would need to induce them to undertake the exploration which we want them to undertake, always remembering that our first priority has been to persuade the concessionaires to get on with the job. I should be very wary, therefore, of bandying figures. Only the market place will show what is the right level here.
I am not aware of any evidence that these exorbitant profits have yet been earned. It is possible to extrapolate figures and to show that there is the prospect of very large profits. Here I should like to look with some attention at the figures quoted by the noble Lord when I have a chance to read the debate. He will forgive me if I do not comment in detail now on his figures. I might just say that one case has been fairly widely cited. One of the oil-exploration companies put out a prospectus. They were a small company who happened to strike lucky first time and sought capital to develop this find. It was suggested that this showed on the forecast of earnings that they would make a very high rate of return on their capital. I think they would expect in the circumstances to make a reasonable rate of return on their capital, but to attempt to relate that forecast profit, as attempts have been made, to the nominal or initial paid-up capital of the company without having regard to the very large sums that will be required to bring the oil ashore and market it, are highly misleading, and to say that there would be a profit of 70 per cent.—or any other 395 Figure—on paid capital at the time the prospectus was issued really would have no more meaning than saying that shares purchased in the market carry a rate of dividend of 70 per cent., or 200 per cent., or any other figure, on their nominal value without having regard to the price of purchase. I do not want to seem to duck this issue, but it is almost impossible to say that we think the right rate of return is 10 per cent. or 15 per cent. before or after tax—whatever you take as your criterion. If we accept this point that our main object is to get on with the job, then we have to plan our strategy to fulfil that aim.
My Lords, I turn now to the contribution of the noble Lord, Lord Tanlaw, who made some most interesting points about Scotland. I shall be referring later to several specific benefits to the Scottish economy from exploration and exploitation which is shortly to take place. If he will forgive me for saying so, the noble Lord strayed a bit far at times from oil and gas, and I will not follow him in all he said. But, of course, careful note will be taken of his remarks.
In his reference to a Scottish development fund, if I heard him aright, he suggested that there should be some direct diversion of revenues to this fund. This is a difficult question and, if I may say so, a double-sided question. It is very much a matter of where everything comes ashore. It is also a matter of the amount of pre-investment needed in order to achieve these benefits. I should be inclined to doubt at least the initial solvency of any such fund were it to be examined.
§ LORD TANLAW
My Lords, may I interrupt the noble Lord? I did not say "fund". He may have misheard me. It was a development bank that I was referring to. The funds for the development authority could be found through the establishment of a development bank. I did not suggest a development fund. There may have been some misunderstanding.
§ THE EARL OF LIMERICK
I am sorry if I misunderstood the noble Lord. I will certainly look carefully at what he said.
I listened with great attention, indeed admiration, to the speech of the noble 396 Earl, Lord Lauderdale, who showed himself to be, if I may say so, a master of this question. His contribution was an extremely valuable one and one which I very much enjoyed. I followed him particularly in two arguments, one of which I think he made so well that I need not repeat it, which was the argument in favour of allocation rather than auction of licences. I do not think one can accept that argument, although it was most persuasively put, as being necessarily of universal validity. Therefore there was a limited experiment on what is known as the fourth round of licensing in auctioning a part of the blocks which were on offer, and the results of that will be most carefully analysed. He also dealt most skilfully with the objects of the surrender provisions. I should like to add one remark to what he said. which I think reinforces the object of this policy. Several areas have already been returned under the six-year rule from the first round of concessions granted in 1964. Some of these have subsequently been relet. and one of those which has been relet has in the hands of another concessionaire shown a gas find, which I think is quite a vindication of the procedure.
The noble Earl fired a number of specific questions at me and I shall be able to answer two of them specifically. He asked about common use of pipelines. This matter is certainly under study. Secondly, he was interested in the timing of the study report which, as announced on May 26, is being undertaken by an international management and engineering group. It has been asked that this report shall be completed by the autumn. We certainly take note of his questions about the other bodies with whom we might be in touch and will examine them.
The noble Lord, Lord Shackleton, then asked me a number of questions, and I am aghast at the prospect of the time that I should have to fill if I took up his invitation to deal with them all exhaustively. I will do my best in a limited way. The first question he raised was the return on capital, and I think I have covered that in an earlier reply to the noble Lord, Lord Balogh, and also his point about access to information. He raised an interesting question as to why it was that we had more exploitation in 397 the United Kingdom sectors than elsewhere in the North Sea. I think the explanation is probably that this has been our policy and it has been successful. We have placed a different priority on this policy than have some of the other countries bordering the North Sea, and are looking at the resources to be found there. Particularly he asked about the Norwegians. I am in a position only to hazard an uninformed opinion on this matter and that opinion is that the Norwegians have only a fraction of our domestic demand for power, so their incentive to accelerate the rate at which it is brought ashore is much less strong than ours. We are looking at the balance of payments question, on which we take an overall view, and we are also seeking—and I think events in the last few months, indeed the last few days, have shown the relevance of this—to reduce our dependence on petroleum imported from Middle Eastern sources. The noble Lord asked some other questions which, in so far as I have not dealt with them earlier on, I will certainly look at carefully.
What I should like to do in conclusion, having started with a statement of where we stand now, is to show what we see happening at present and in the future. It was, of course, not until gas was first discovered in Holland, as recently as 1959, that the potential of petroleum on our shelf was recognised at all, and only recently has the technology of underwater exploration been developed. We in this country have developed a licensing arrangement, and this represents, as I have already said, a deliberate selection of priorities designed as a compromise to achieve two main objectives, the first being the rapid and thorough exploration, under control and with adequate British representation, of the area which showed this potential, and the second to achieve a reasonable price for the end product. This applies to gas only, and B.P., acting on their own, were the first to find gas and the first to bring it ashore. They were also, which is very good fortune, the first to find oil, and deliveries here will start from the Forties field at the end of 1974. So I think it is fair to say that the whole operation has been an exercise in discretion, balancing long and short term considerations against those 398 two objectives. I concede at once that it would be possible to increase the short-term benefit to the balance of payments by going out more to auction than by the allocation of licences in the future when another round comes along. I think it would need very careful consideration whether this, which is in our short-term interest, is in our long-term interest. But, as I say, the experience which has been gained on the earlier rounds and the discoveries since May will be evaluated in arriving at that decision.
This whole exercise has been conducted with the public interest well in mind, so that the benefits will accrue to the economy as a whole, without frustrating the effort by both public and private enterprise in an entirely new venture. As regards the acreages, there are about 45,000 square miles currently under licence out of the 170,000 square miles which are designated for the purpose. The fourth round has stimulated activity, and the best measure I can give of that is that whereas earlier in the year there were three mobile drilling platforms operating offshore there are now 13 in operation, in this very short period of months, and by late summer the number should have gone up to 20.
There are other benefits accruing to the economy, both direct and indirect, and I can give a few examples of these. A number of them relate specifically to what is going on in Scotland. First, the capacity of the Grangemouth refinery is to be redoubled to deal with oil expected from the Forties field. Secondly, new oil loading facilities are being created in the Forth and pipelines are being laid from offshore to Grangemouth. There are developments to Peterhead, Aberdeen, Dundee and other ports on the Scottish mainland and in the Shetlands. On the Clyde, Marathon have built mobile platforms, as others have done before. The noble Earl, Lord Lauderdale, referred to the size of these platforms. I would remind the House of their cost. The fixed platforms, of which two are being fabricated in Scotland for the Forties field, cost up to £25 million each—I am sorry; one of these is being made in the North East. With all this activity comes increased demand for ancillary oil drilling equipment, supply vessels, electronic equipment, helicopters, pipe, cement. chemicals; and British industry has thus 399 been encouraged to enter the market by a big increase in the demand arising from this acivity on the United Kingdom shelf.
The Government place so much importance on the economic implications of all this that they have just commissioned a consultant study, already referred to by the noble Earl, which was announced only a fortnight ago, to assess in detail the scale of the industrial opportunities which will arise and the ability of British industry to meet them. Just in the last few days, or few weeks, we have seen the discoverey of an extension of the major Frigg field, gas field, which exends from Norwegian into United Kingdom waters. This is likely to make a significant contribution to our gas reserves. We now see a situation where well over 200 companies are engaged in the search for oil and gas on the Continental Shelf. Ranger Oil have discovered gas in a southern basin block which was recently reallocated after surrender in 1969.
My Lords, as I say, so many points were raised that I am afraid I may not have dealt adequately with all of them, but I will look at them carefully when I have the record of this debate. I hope I have said enough to show that the Government attach great importance to this subject, as previous Governments have done; that the policy is consistently directed to achieving a rapid exploitation of these most important resources, and that this policy is being most carefully and reasonably carried out.
§ 7.32 p.m.
§ LORD BALOGH
My Lords, in winding up this debate I thank the Minister for his reply and would also express my thanks to noble Lords for their participation. I must confess, however, that I feel a kind of disappointment. The House of Lords always strikes me as being a mixture of idealism and realism which is unique. Idealism is mainly represented by hare coursing and ponies; and the realities of life by the great vested interests of the realms, and from Stormont, fishing to oil companies. It is certainly a good thing that we have a Chamber in which so many of the great vested interests are represented. provided those vested interests declare themselves.
I fear that, so far as the Minister's reply is concerned, I am awestruck at his capacity for stonewalling, which has not 400 been paralleled since the noble Lord, Lord Butler, scored his triumphant defensive game in the far off days, which I remember but which the Minister probably does not, of the Spanish Civil War. It was the noble Earl's maiden effort in this respect and I must duly congratulate him because, as a maiden effort, it was masterly. I congratulate him also on his mastery of the mathematics of the powers of ten. I never know what a trillion means—a thousand million million or a million million—but I do not think we need to inquire into that too closely because it is of little importance and exhausion will only take place in our children's time.
I hope the Minister will forgive me if I say that he has not answered any of the questions, and I must also confess that I did not expect him to answer them. After all, when I was inside I could not get these Questions answered either, and as I was in Lord Rothschild's shoes in those days, that is something. All I think we are here concerned with is the part of bureaucracy which is extremely persuasive. The main explanation of why we followed this policy which minimises the advantage which Britain is going to derive from the oil may be the rapidity of development. This would be the case if home-produced oil could completely displace the mid-Eastern or Nigerian oil. This, unfortunately, is not the case. At no point shall we be less dependent—it is the margin of dependence which is important—on mid-Eastern oil than we are now. The logical fallacy which is involved is colossal, but it is persisting and I do not think that in this short reply I shall change it. I must, however, emphasise that anybody who has a clear view of the situation could not possibly put forward the view that because of the rapidity of the exploration we ought to give up the advantages—and of course we have given up the advantages.
Both the noble Earl, Lord Lauderdale, and the Minister were concerned about the options and about the safeguarding of British interests. British interests have been reduced—and this includes the B.P. interest—from 50 per cent. to 21 per cent., so where is the advantage? The Minister boasts that all oil companies are in the North Sea. But do we want them there? We do not want them there. My 401 case against the Government was that all the oil companies there were not mainly British.
§ TILE EARL OF LIMERICK
My Lords, may I be permitted to come in on that figure? Twenty-one per cent. is the figure of the public sector participation in the proven gas reserves. The overall British share in the exploration in the North Sea is 43 per cent.
§ LORD BALOGH
I am glad to hear it, but that figure was not given. The Norwegians give preference to home supplies but we have no such provision.
§ LORD SHACKLETON
My Lords, in fairness to my noble friend, he perhaps did not hear the noble Earl. I do remember him saying 43 per cent. of British participation. I was interested in knowing how much of the public participation of 21 per cent. was B.P.—but perhaps I must let my noble friend go on.
§ LORD BALOGH
My Lords, the Minister says that platforms are going to be manufactured on the Clyde. That will mean an enormous subsidy to America again. The Minister said that the ratio is one in twenty. I quoted the figure from the oil handbook of the Shell Company, where it is said that the ratio for geophysical and geological investigations is one in five, so certainly his figure is not correct.
§ THE EARL OF LAUDERDALE
My Lords, I am sorry to interrupt. The noble Lord speaks of geophysical and geological exploration. That does not necessarily mean drilling.
§ LORD BALOGH
In point of fact I know that the figures were well below ten, and I have very good reason to believe they are still so. If there was no disagreement between the Gas Council and the licensees there was a dereliction of duty, because obviously the Gas Council ought to have disagreed with the licensees. A trade unionist who went home saying, "I have not disagreed with my employer" would be sacked. The Minister has not given us profit figures and returns. His argument that the Oil Exploration (Holding) company prospectus gives an unfair picture is not quite correct, because the Oil Exploration 402 (Holding) company had a pro rata figure of profits on investment. Everything was on a pro rata basis of 2.4 per cent., or whatever the figure was—I do not remember now—so I cannot see how he can protest that 70 to 80 per cent. profit is not a very typical one.
If I were younger and still a tutor, I should regard 'the speech of the noble Earl, Lord Lauderdale, as a test for my pupils' capacity to spot non sequiturs. So far as Britain is concerned, the oil should not be exhausted as quickly as possible but should help our balance of payments as much as possible. The noble Earl pictured fatal consequences for auctions. Unfortunately, he mixed up the lack of regulations with the method of auctioneering. The fact that he mixed them up is shown by Alaska. Very strict regulations are imposed there in addition to there being auctions.
I now come to participation. The Norwegians are participating. When the noble Earl correlated the territory offered and the territory taken up to the amount of participation by the State or the public in the proceedings, he again mixed up geological knowledge of good areas with the problem of participation. Obviously, companies will be keen when good areas are offered, and those areas which have been offered on the last occasion have been known to he among the most promising. But perhaps the most interesting and least comprehensible of his objections against my case is this. No matter where the profits are remitted over the balance of payments, nevertheless the fact that oil imports go down visibly relieves the balance of payments. This is double-counting of a major order, which I should not want to follow. There is no doubt that there are people who have been led to believe that exploitation for exploitation's sake is the order of the day. I simply do not understand it.
Finally, I have carefully refrained from naming names, but the noble Earl, Lord Lauderdale, has done so and I shall with great diligence follow the future career of that individual. I ought to ask your Lordships to divide on this matter, because obviously the answers were completely unsatisfactory. This is a terrible problem for Britain and we have lost a large pact of our heritage. But I have been told by my elders and betters, or perhaps I should say my youngers and betters.
403 that I should not do so. Therefore, my Lords, I beg leave to withdraw my Motion.
§ Motion for Papers, by leave, withdrawn.