§ Mr. Bob Blizzard (Waveney)
I am pleased to have secured this debate, particularly at a time when the United Kingdom oil and gas industry is at a crossroads. Oil and gas is not a sunset industry, either in this country or the rest of the world. In energy debates in Westminster Hall and in the main Chamber, hon. Members often argue that we are running out of oil and gas. That is not true in the world. Vast reserves remain and many remain to be discovered. I am sure much more oil and gas will be discovered following advances in technology and innovation.
We are not running out of oil and gas in the UK either. Production reached an all-time high only last year or the year before. We will be a net importer of gas in about five years, but we should also remember that this country is the fourth largest gas producer in the world and the 10th largest oil producer in the world, making us a substantial player on the world stage. We will continue to be so for a good while to come.
There may be as much oil and gas left yet to be extracted as has already been produced to date, which means that we are probably half way through. In the early 1960s when gas and oil were discovered, it was said that reserves would last 20 years. We are still saying that they will last 20 years. What has changed in the meantime is the huge technological advance, which exposes another false perception about the oil and gas industry. It is not a dirty, dinosaur industry but a high-tech industry involving leading-edge engineering solutions. That image needs the well-paid, high calibre jobs that are on offer.
My final introductory point concerns the sheer scale of the industry and the magnitude of its impact on our economy. We all know the huge amount of money that was involved in building the channel tunnel. The oil and gas industry is equivalent to a channel tunnel each year in terms of spend. It supports approximately 265,000 jobs and has generated £190 billion in revenue for the Treasury through taxation since the 1960s.
Why do I say that the industry is at a crossroads? For the past few years there has been little new exploration. Few wells have been drilled. Only about 16 were drilled in the United Kingdom continental shelf last year and some of those were not particularly exploratory. That has to be a concern because if we do not explore we will not find; if we do not find we cannot produce; if we do not produce we will not maximise the extraction of the oil and gas that we need for our own energy needs and for Treasury income through taxation. It has been said time and again that undiscovered fields pay no tax at all.
We also need to maximise extraction for jobs and the economy, especially in oil and gas areas like my own constituency. A recent study of the East Anglia oil and gas area concluded that there were about 6.2 jobs in the local economy for every operating job in an oil company through contractors and the supply chain. That is a telling statistic. Many of the issues relating to low levels of exploration have been focused on by Pilot. Pilot is a model of industry-Government co-operation. More than one incoming American chief 46WH executive officer to whom I have spoken has complimented us on how accessible our Government are and how they are listened to much more than their Government.
In spite of all Pilot's good work, we still have low levels of exploration. The Chancellor was wise when, earlier this year in the Budget, he announced a review to examine the issues and identify measures to stimulate and encourage more exploration.
It is not the case that nobody is interested any more in exploration in UK waters. It is true that our oil and gas province is in its mature stage and that most—although certainly not all—of the big discoveries have been made. We have a healthy number of new companies—they are often smaller, but are still big companies in themselves—which have been entering the United Kingdom continental shelf with exploration ambitions. Some are showing a keen interest in wild-cat exploration and some are interested in doing more exploratory drilling around the margins of existing fields. It is noteworthy that there are 53 companies involved in the latest licensing round under the new promote rules, which encourage the kind of risk taking that we want to see. I congratulate the Department on coming forward with that promote round.
We could be on the verge of a new era in the North sea. However, a number of obstacles need to be tackled as part of the review. For a start, there is access to infrastructure—the existing platforms and pipelines needed to get new reserves and finds ashore. I have heard of numerous complaints from companies both large and small about unreasonable charges demanded by some of the majors who own the infrastructure. Those charges, based purely on avoidance costs, block developments or delay them while long-winded negotiations take place. That kind of problem discourages the new culture of exploration and risk taking that we want to foster in the United Kingdom continental shelf.
The Department of Trade and Industry has powers to intervene if it receives a complaint but, of course, no one has ever made a formal complaint because people in business—often small players—do not complain to the Government about people with whom they want to continue to have some kind of business relationship. The DTI must not wait for complaints. It must establish an interventionist regime and an independent watchdog to determine fair rates. I urge the Minister to be strong when formulating the proposals under the review. We cannot allow our country's natural assets not to be exploited because of individual companies' positions in the marketplace of infrastructure use. We have tried voluntary codes of practice, but I do not think that they have worked sufficiently, and they certainly have not worked fast enough.
Time and pace are the key issues. If the stacked-up drilling rigs around this country are not commissioned soon, they are likely to move to other parts of the world and it would be prohibitively expensive to try to get them back again. Also, some necessary infrastructure—the hubs and platforms—is getting older. The longer it is left, the more expensive its maintenance becomes, adding to cost in marginal fields. If it is decommissioned, we will lose 47WH opportunities completely. That is why access to infrastructure must be taken seriously and why the Government must be strong about it.
There are similar problems with access to seismic data. Again, complaints have been made that it is difficult and sometimes costly for smaller companies to obtain such data. In the interests of the whole country, we need a national archive of that information that is open to all. We need a shift away from a culture of confidentiality to a culture of openness and co-operation and we need to recognise that there is a shift going on in the North sea from a small number of dominant players to a diversity of many more smaller companies.
Another, even more basic, obstacle to the exploration that we want to see is that some licences are retained by operators who are, not doing anything with them. I understand that about half the North sea licences were awarded in the first four licensing rounds and, with oil company mergers, about two thirds of those licences are operated by just three companies. We need a robust process whereby operators agree to relinquish licenses for areas where they are not active. That should apply to blocks with no discoveries as well as those where a discovery may not have been developed. Good work has been done on that in Pilot, but such work and discussions must come to a crunch. We must apply a new, tougher regime to all such licences in the national interest to maximise the recovery of oil and gas. Companies that are willing explorers must have early access to blocks; time is of the essence.
Another problem is the alignment of partners. Many potential developments involve several companies, some of which may want to make progress while others do not, because that does not fit their global investment plan. I do not know what the Government can do about that; it is a difficult situation but we need discussions. Some companies are frustrated at not being able to proceed with what they view as an excellent opportunity because another company has different priorities. Time is running out.
Another obstacle is the fiscal regime. The Treasury has set a regime for existing production, much of which is derived from bigger and easier past discoveries. We must have a different regime for future fields and finds, which will be riskier, harder to find and smaller. We can learn lessons from other regimes around the world, where the mature phase has been reached. No tax is payable on undiscovered fields, so the Treasury has an interest in stimulating developments. I emphasise that we must not look at the issue solely in the context of a narrow equation on offshore taxation. We must consider the wider economic benefits that can flow to communities around the country, both locally and nationally, from the employment and supply-chain activity, and the tax that the Treasury can levy on that.
We must concentrate on measures applicable to drilling that would otherwise not take place, possibly including appraisal wells, which occasionally have to be drilled. We are considering not only outer margin wildcat drilling, but sometimes satellite drilling of existing fields, which may require an incentive to make it viable. A fiscal incentive is needed if we are to realise 48WH the potential and enter a new era with new entrant companies. We must listen to the experiences of those companies and their ideas. We do not have to accept everything that they say, but if we do not listen there is a danger that we adopt a mentality of managed decline.
The other side of the deal must come from the companies, whether new or old, large or small. The gain to the UK from the measures I have described will be jobs and economic activity flowing from discoveries. That will be realised properly only if the work goes to competitive contractors in the UK. It was sad that most of the fabrication of the last big development—the Clair development—went to Norway. Sadly, we now recognise that we no longer have the capacity to fabricate large jackets. However, UK companies are competitive for other parts of the platforms, and I hope that there is no repeat of the Clair scenario for any other big developments. I am sure that my hon. Friend the Minister shares my concern.
The process of the ongoing review is impressive. The DTI, the Treasury and the Inland Revenue have worked closely together and engaged widely and thoroughly with the industry. I cannot believe that the Government can undertake that kind of task every other year. This is the final opportunity to get the taxes and regulations on the industry right for the future to ensure that the new era occurs. Time is of the essence and the window of opportunity will close if we do not act decisively.
The key to maximising oil and gas extraction, which has always been the first aim of all policy through Pilot, is the pace of activity in the North sea. We need a positive announcement in the pre-Budget report. The problem is not that oil and gas are running out. The critical issue is the time left in which to exploit those resources. Time need not run out, and I hope that this timely review will deliver results.
§ The Minister for Energy, E-Commerce and Postal Services (Mr. Stephen Timms)
I start by congratulating my hon. Friend the Member for Waveney (Mr. Blizzard) on securing this debate. People working in the industry have told me how much they appreciate his support and constructive lobbying.
The Government and the UK oil and gas sector have two main objectives. First, we must ensure that oil and gas resources within the UK continental shelf are fully and effectively exploited. Secondly, we must maintain the UK's pre-eminent position as a centre of expertise for the oil and gas sector.
I agree with my hon. Friend that to maintain that world-class reputation, the Government and the industry must work together. I also agree that Pilot—the oil and gas industry task force—has been an extremely valuable collaboration. In particular, a lot of work has taken place to ensure that the North sea remains vibrant and continues to attract investment from around the world.
My hon. Friend rightly made the point that the region is maturing, but he is also right to point out that there are still a lot of opportunities. The recent success of the Buzzard discovery—the largest UK offshore oil find in the past 20 years—is evidence of that. The scale of the 49WH find caused some surprise, but, as my hon. Friend said, huge quantities of oil and gas—potentially greater than the amounts that have already been extracted—can still be produced from under the North sea. We must ensure that those opportunities are fully taken up.
We are keen to attract new players to the North sea, and I am glad that a number of the companies that have come here have had some important successes. It was excellent news to hear last month that Venture, which is comparatively new to the North sea, has made a successful discovery at Annabel in the southern North sea. That well has been tested at rates exceeding 50 million cu ft of gas per day and could deliver its first gas in 2004–05. I look forward to receiving a development plan for that field in the near future.
We want to encourage new entrants into the UKCS and to make things easier for those companies that are already here. That is why we have introduced the new master deed through Pilot, which brought in a streamlined system for licence and assets transfers. I was pleased recently to announce consent to the first transaction under the new system, namely BP's sale of its Bacton area assets to Perenco. I hope that others will now take advantage of the new system's benefits.
In the long-term, some 15 other north American companies are undertaking strategic assessments of the UKCS. They include US companies such as Apache, ATP, Challenger Minerals, Palace Exploration, Newfield Exploration and EOG, and Canadian companies such as Talisman, EnCana and CNR. We welcome their interest, which we want to reach fruition.
§ Mr. Frank Doran (Aberdeen, Central)
Does my hon. Friend the Minister accept that all those new entrants, which we welcome to the North sea, face the fundamental difficulty—spelled out by my hon. Friend the Member for Waveney (Mr. Blizzard) in his important contribution to today's debate—of the control that the existing operators have over infrastructure? My figures are slightly different from those of my hon. Friend, but I understand that about 60 per cent. of the acreage left for exploration in the North sea is owned by four individual companies. We have reached the stage in North sea development in which the interests of those companies that first developed the North sea are perhaps running counter to the national interest. Most of the new incomers see access to the infrastructure and the unexplored acreage as fundamental, but it is far too expensive.
§ Mr. Timms
My hon. Friend raises important issues. I know how much his support for industry, particularly that part of it that is based in Aberdeen, is welcomed by leading players in the industry. We need to make much more progress in addressing the problem of fallow fields that are not being exploited at present and I will say in a moment what we are doing in that respect. It is important to stress that we want the major North sea players to continue to take an active role and I am glad that they showed a continuing interest in the 21st offshore licensing round.
My hon. Friend the Member for Waveney talked about the promote licences, which have been very successful. On 18 and 19 November, the Department 50WH of Trade and Industry and the Petroleum Exploration Society of Great Britain are jointly hosting UK Prospect Expo 2003, where there will be a good deal more information about what it is anticipated will come out of those plans.
My hon. Friends raised the issue of fallow assets. During the last 18 months, the fallow initiative, which has been taken forward through Pilot, has been aiming to stimulate more seismic activity and drilling on blocks and discoveries that have seen no activity for four or more years. We continue to push the industry hard to relinquish fallow acreage because, as my hon. Friends rightly said, we cannot afford to have assets sitting idle—in a number of cases, for a very long period.
There have been some successes. We have targeted more than 300 fallow blocks and discoveries for action and there has been significant renewed activity on more than 60 of them. More than 40 blocks have been relinquished and have been, or soon will be, offered for re-licensing. The next major release of fallow blocks will occur early next year and will contain many blocks from the first to the fourth round of licensing. As a result, I hope that there will be progress in opening some fields that have not been active for some time.
We must continue to work hard to increase exploration levels. Like my hon. Friend the Member for Waveney, I welcome the work being done by the Treasury. We have been looking closely at the two issues highlighted by my hon. Friend—access to existing infrastructure and access to seismic data. I agree with my hon. Friend that the offshore infrastructure on the UK continental shelf is one of our most valuable assets. It provides a basis for the continued exploitation of our offshore reserves, which might otherwise be uneconomic. We have looked closely at the issue through the Pilot working group, which has agreed to a new level of transparency on the deals being done in aspect of access to infrastructure and also on the potential of a new process of intervention by the Secretary of State, who is automatically brought in when negotiations are unsuccessful. The Secretary of State also has access to legislative regulatory powers and to the Competition Act 1998. We have reached agreement on those points through the Pilot working group, and that is an important step forward in addressing the issue that my hon. Friend raised.
My hon. Friend also spoke about access to data, and I agree with him. A great deal of data have been gathered in the United Kingdom during 30 years or more of oil and gas activity. During Offshore Europe in Aberdeen last month, I announced two significant initiatives to improve access to that collection of data. Those initiatives are the result of close collaboration between the Government and the industry through the Pilot forum. I am pleased that UK companies have helped in that process by agreeing to allow the Department of Trade and Industry to publish exploration data after four years, which is full year earlier than previously.
In addition to exploration, we should not forget brown fields. Those that are already in production have the potential to yield prizes in terms of activity, investment and jobs. New approaches and new technology often allow operators to increase recovery 51WH from a field far beyond the levels originally predicted. I am delighted that in the past couple of weeks Tuscan Energy in Aberdeen has achieved the first oil production from its Ardmore field—formerly Argyll—bringing the UK's first field back into production 11 years after it was abandoned. That is an important illustration of the remaining potential on the UKCS.
Tuscan Energy has successfully redeveloped the field with the use of modern, long-reach drilling technology and production is expected to peak at 40,000 barrels per day in the first quarter of next year. Achieving further production from the field is an important achievement and a tremendous boost for the North sea. That shows just what is possible with new thinking and new technology and it is good news not only for the oil and gas industry, but for the economy as a whole.
§ Angus Robertson (Moray)
On new thinking, will the Minister confirm that a number of initiatives are being considered to boost exploration., which is the main issue facing us in the oil and gas industry? When are the Government likely to make public the conclusions of those initiatives and how will they ensure that the initiatives have the desired effect of boosting exploration?
§ Mr. Timms
The industry is optimistic that the measures that we are discussing will achieve the objective. I have spoken a little about progress on the non-tax issues and in due course my right hon. Friend the Chancellor will make announcements about progress in the Treasury and Inland Revenue. I know from my discussions with the industry in private and when I was at 52WH Offshore Europe at Aberdeen last month that there is a lot of optimism about what we can achieve with the industry and Government working together.
Another important area is co-operation across the meridian line in the North sea between the UK and Norway. The energy White Paper heralded the forthcoming UK treaty with Norway to facilitate continued supplies of gas and followed last year's Pilot and Kon-Kraft report—Kon-Kraft is the Norwegian counterpart to Pilot—on North sea co-operation, which recommended that a new treaty be put in place to clarify the regulatory framework for a range of commercial projects across the boundary. That includes pipeline projects transporting gas across the meridian line, field developments that straddle that line and the use of host facilities for developing reservoirs from one side of the line, using infrastructure on the other.
The week before last marked a key milestone in the future partnership between the UK and Norway when both Governments signed up to principles that will underpin future cross-boundary oil and gas co-operation between them. These are to be incorporated in a new framework treaty. The agreement of principles to go into that treaty constitutes the most comprehensive energy co-operation yet between Norway and the UK and will facilitate the delivery of 20 billion cu m a year of Norwegian gas to the UK, which is equivalent to 20 per cent. of UK gas demand from 2006 and around the same proportion of Norwegian gas production. That is key to unlocking the remaining reserves within the median corridor and it will set us on the road to realising the $2 billion co-operation prize identified in last year's report. Pilot and Kon-Kraft are holding a joint meeting in London next month where I hope that we can further explore the opportunities for co-operation.
We must work together to maintain the UK as a centre of excellence for the business.