§ 11 am
§ Mr. Bob Blizzard (Waveney) (Lab)
It is five months since I last secured a debate on this topic. It could be argued that not a lot has changed, so why we are having another debate? The slow pace of progress is the main problem, and what is happening in the UK oil and gas industry—or, rather, what is not happening—is now clearer. We can now see that it is even more urgent for certain things to happen if we are to maximise opportunities and not witness the premature decline of our oil and gas industry.
I note that my right hon. Friend the Minister for Industry and the Regions will reply to this debate. I hope that she will take back today's central message to her Department and work with the Minister for Energy, E-Commerce and Postal Services on the issues that I raise. Those issues are important to regional economies and manufacturing in the UK—which are both in my right hon. Friend's portfolio, I believe—as well as to energy policy and Treasury revenues.
For any country, reserves of oil and gas are an extremely valuable asset. They represent a huge source of national wealthߞin our case from tax revenuesߞand a source of employment. More than 350,000 people used to be employed in the industry, although that is sadly not so today. Oil and gas reserves also provide a secure energy supply. On any of those counts, it is vital to maximise recovery of our oil and gas, and added together, they demonstrate that it would be irresponsible not to do everything to extract all the reserves that can be economically exploited. However, that is what we risk doing at a time when we need all the energy that we can getߞalthough we could do without last week's exaggerated scare from the BBC.
I intend to argue that, if the Government set the direction, the oil and gas industry could play a huge part in meeting our environmental policy commitments to reducing CO2emissions. However, I want first to speak about the Government's draft allocation plan for the emissions trading scheme. The emissions allowances for the offshore oil and gas sector must be incorrect, as they are not based on business as usual and involve reductions of 30 to 45 per cent. The natural characteristics of oil and gas reservoirs also mean that the pressure in the reservoir falls as the field matures, which results in the need for increasing amounts of power to extract hydrocarbons and deliver them to shore. There is a real problem in the draft plan that needs sorting out, and I hope that it will be.
Our oil and gas is not running out. The industry, the Government and experts such as Professor Alex Kemp of Aberdeen university agree that, as 33 billion barrels of oil equivalent have already been produced from the North sea, between 22 billion and 31 billion barrels are still left. That is enough for significant production to continue well beyond 2020ߞplus that which may yet be discovered. However, the activity survey published in January by the United Kingdom Offshore Operators Association and the Department of Trade and Industry paints a worrying picture. We are simply not on course to recover those amounts. Only 14 billion barrelsߞabout 50 per cent. of what is availableߞare even targeted, and only 70 per cent. of that will be produced by 2010 if all the planned work goes ahead. 95WH Even more worrying is the question of whether the work will go ahead. There are low levels of new activity, even though the oil price is $33 a barrel and has been high for one of the longest sustained periods ever. If there are not higher levels of activity on the United Kingdom continental shelf in that scenario, one can only wonder what might happen if oil prices dropped back to the low $20s or below. The survey reports that forecasts for near-term oil and gas production continue to slip. It concludes:Urgent action by all stakeholders, including Government, is required to increase investment in marginally economic fields, maximise the recovery of reserves in producing (brown) fields and stimulate the exploration and appraisal activity that is essential for future production.
The most significant measure of activity that gives a pointer to the future is drilling, which was even lower in 2003 than the previous low levels of recent years. It was 10 per cent. down for exploration and appraisal wells in 2002, and 20 per cent. down for development wells. Historically, those are pitifully low levels. If we do not drill, we do not find, we do not produce and there is no tax revenue.
The supply chain industry is contracting; thousands of jobs have already been lost, as fabrication yards along the coast have closed or lie idle. The yard in my constituency has been virtually empty for months, although the company is actively pursuing contracts and wind turbines are being assembled there instead. Why is that happening? It is easy to call for tax breaks from the Government; fiscal incentives have a part to play, but we must consider the behaviour of oil companies.
Too often, the prevailing view is that the best that can be achieved is managed decline, but some companies want to explore, and others want to develop brownfields and in so doing invest significant proportions of their capital in new activity. New entrants that specialise in mature provinces are being attracted, and some well-established players want to do more. However, some companies appear to be harvestingߞderiving huge revenues from substantial production levels from existing fields, especially at the record high oil priceߞyet reinvesting only a tiny proportion of those revenues in the North sea, placing most of what is available for investment in other parts of the world to gain higher returns. That may be good business for those companies, but it is not so good for UK plc, although even such minor reinvestment adds up to a substantial amount and it is a large proportion of the reduced total of investment in the North sea. However, that is not a recipe for maximising recovery, tax revenue, employment and energy for UK plc.
A great deal of work has been done in the joint industry-Government body PILOT: excellent initiatives on fallow fields, undeveloped discoveries, progressing partnerships, and supply-chain efficiency. Unfortunately, the end result is as I described: the PILOT vision of maintaining production at 3 million barrels in 2010 will not be achieved if we carry on as we are.
The success rate of exploration drilling has been higher in recent years, but much less has been carried out and, sadly, too often the UK continental shelf is seen as a difficult, time-consuming and costly place to do business. What is wrong? Time and again, oil companies 96WH that are keen to develop the field complain about access to infrastructure or high charges for use demanded by other, usually larger, companies.
There are complaints from companies that believe that they have a good prospect about access to assets and licences owned but not used by other companies. Sometimes, partnerships cannot be realigned because one company is reluctant. Such problems are not unique to the UK continental shelf, but it is unacceptable that it seems to take so long to reach agreement and negotiate the necessary deals. One executive told me recently that what takes 30 days to sort out in Canada or the Gulf of Mexico can take 30 months here.
The Government cannot let the UK's assets be wasted or not fully and efficiently exploited because of commercial interests or lack of interest. Our licensing and regulatory regime suited the earlier years of regular, substantial discoveries, but it is not so appropriate to today's circumstances. We have already had one voluntary code of practice on infrastructure access, which did not work, and another is being negotiated. Will the terms be tougher? Will they be adhered to? Will the new code be any better than its predecessor? Is it taking too long to draw up? It certainly is. New developments need to be taken forward before the existing infrastructure is decommissioned or shut down.
The point is that oil and gas is not running out, but time is. Those who do not use assets must give way to those who will use them, and the Department of Trade and Industry must use its powers to determine price disputes between companies. We must ensure that all assets are made available in one form or another to those best able and willing to invest in and make maximum use of them.
I will say something about fiscal measures; it is Budget day, after all. Last year, the Treasury undertook a major consultation on low levels of activity, involving unprecedented engagement with the industry. The problem was that it was difficult to get a unified view, except that what seemed to be on offer from the Treasury would not make a difference. Unsurprisingly, that view did not appear in the pre-Budget report.
There still does not appear to be much unity of view between companies investing a high proportion and those investing a low proportion of their returns in the North sea. However, we need a fiscal regime that encourages movement from so-called harvesting towards investment in exploration and development. Could that be done at no cost to the Treasury, and without unwanted consequences? I do not know. We have to accept that there are marginal fields that are not economic to develop under the present fiscal regime, but it is obvious that it will be difficult to persuade the Treasury to give anything away unless the industry changes the culture on non-fiscal matters that are preventing the maximisation of hydrocarbon recovery. We have only a two or three-year window to get this right; otherwise, we may enter a decline that it might not be easy to arrest.
There is another reason why we need to act quickly. Our oil and gas industries have an important role to play in wider energy policy relating to our obligation to meet targets on emissions of CO2: carbon capture and storage, and enhanced oil recovery. The idea is to capture the CO2 emitted from gas and coal-fired power 97WH stations fitted with special equipment, pipe it under the sea and bury it by injecting it into oil reservoirs that are nearing the end of their lives. The effect of that will be to enhance the oil and squeeze out more of it—a new chapter in maximising the recovery of valuable assets.
We know that that is technically achievable, and I am grateful to Dr. John Gibbins of Imperial College for the information that he has provided. However, the bigger prize is near-zero emissions in electricity generation. The technology would provide the legal and lower-cost storage that we need for the first few decades, and could maintain and extend the necessary infrastructure for long-term storage for hundreds of years, using aquifers deep beneath the floor of the North sea.
Why do we need that? If we consider the electricity projections to 2020, we see a substantial rise in consumption. Even if we reach the target of 20 per cent. generation from renewables—and there must be some doubt about that—given the reduction in generation from retiring nuclear power stations, the overall projection is that zero-emission generation in the UK will not increase significantly between 2010 and 2020. Therefore, there will be insufficient reduction in CO2 to meet our stated targets, including the target of a 60 per cent. cut in carbon emissions by 2050.
Unless we go down the road of carbon capture and storage, the only answer will be to create another generation of nuclear power stations. Whatever one thinks of nuclear power, a new generation of such stations would present political problems. In any case, it would be sensible to have another option; we may need both. Carbon capture and storage is the only other option. That is why we must move forward with that and with enhanced oil recovery, as detailed in last year's energy White Paper, which recognised the strong case for both and set up a study.
I understand that the DTI is about to publish the report. I imagine that it will state that the market will not deliver carbon capture and storage and enhanced oil recovery, and that oil industry revenues will be too low and too long-term under simple market conditions to deliver them. Their delivery would therefore require some strategic priority from the Government, but so would nuclear build, and that might be even more expensive. If carbon capture and storage and enhanced oil recovery are to be an option, and because of the long lead-in times involved, we must move forward now. Even more crucially, if enhanced oil recovery is not started in the second decade of this century, oilfields will be closed and the opportunity lost for ever. Additional revenue from increased oil production will not then be available to offset carbon capture and storage electricity generation costs.
This is a great opportunity for the UK to take a global lead in these technologies, and to bring future economic success and jobs. The technology is also key to enabling developing countries to participate in CO2 emissions reduction while still using their own resources for the economic and social development that they need and from which they will riot want to turn away.
Time is of the essence. The key point that I want to make is that time is running out and that unless all stakeholders and the Government ensure that action is 98WH taken now, those great opportunities to maximise the recovery of our oil and gas reserves and to pursue new environmentally beneficial technology will be lost, and, along with them, jobs in parts of the country that really need them and much needed tax revenues and energy.
§ The Minister for Industry and the Regions (Jacqui Smith)
I congratulate my hon. Friend the Member for Waveney (Mr. Blizzard) on initiating this debate, which is, as he said, a follow-up to the debate that was held last October and is part of his ongoing work to bring these issues to Parliament's attention, to put pressure—understandably—on Government, and to engage stakeholders more widely. He plays an important role in that. I hope that I can give him some encouragement not only about progress since October's debate, but about progress on initiatives that were instituted before then.
My hon. Friend is right that the energy White Paper, which was published just over a year ago, reaffirms our commitment to maintaining an active and successful oil and gas industry and to promoting the future development of the UK's oil and gas reserves. There are still huge quantities of oil and gas to be produced from under the North sea—potentially more than we have already produced. The Government are committed to working closely with industry, the oil companies and their supply chain to secure the best licensing, environmental and business frameworks to attract the investment activity that is needed to deliver that potential. We believe that, working together, we can explore and produce every economic drop of oil; but there is no room for complacency.
Through the PILOT process and the Government-industry oil and gas forum, we are making progress on providing the right incentives for continued and new investment from existing and new players. In particular, we are continuing enhancements to our licensing processes; considering ways to free up more fallow acreage; working to ensure third-party access to infrastructure on fair and reasonable terms; seeking continued improvement to commercial behaviours; pursuing further innovations; and working with industry to ensure that the UK supply chain remains competitive.
§ Mr. Stephen Byers (Tyneside, North) (Lab)
I know that the Minister is aware of the importance of the offshore industry to employment and the manufacturing sector not only in the United Kingdom generally, but in the north-east of England specifically. We were particularly worried about the failure of AMEC to win the contract for the Buzzard development. In the light of that experience, will her Department reconsider the licensing regime to identify the ways in which it can benefit the UK offshore industry and secure British jobs in British yards?
§ Jacqui Smith
As I said, we constantly update the licensing regime to ensure that it encourages activity. I understand my right hon. Friend's disappointment about the case of AMEC, although the Buzzard field is directly sustaining around 1,000 jobs between Hartlepool and Scotland in companies that won contracts. I assure him that we shall continue to do what we can to support the UK energy industry supply chain 99WH companies such as AMEC to help to build up their competitiveness. That is a key role of the DTI's oil and gas industry development directorate, which works with regional partnersߞnot least in my right hon. Friend's constituency—to ensure that we are in the best possible position to take advantage of the activity that taking place.
The licensing regime must adapt to the changing commercial environment and bring about activity as quickly as possible. That is why, in the 21st offshore licensing round last year, we offered a new form of licence to attract new entrants. The promote licence was offered at a 10th of the cost of a traditional licence, and proved very popular. The response to that round was the best for years: 89 licences were awarded, including 53 promote licences. During last year's debate, my hon. Friend the Minister for Energy, E-Commerce and Postal Services mentioned the Prospect fair, which was a successful event that gave those awarded with promote licences an opportunity to inform industry and financiers of their plans for acreage and to attract investment. We are looking forward to seeing which of the promote licensees will be the first to deliver a firm drilling commitment. As regards progress since last October, earlier this month we announced the 22nd offshore licensing round, which makes available the largest number of blocks since the second round in 1965.
§ Mr. Frank Doran (Aberdeen, Central) (Lab)
My right hon. Friend rightly points to the positive measures that the Government are introducing to encourage activity in the North sea. My hon. Friend the Member for Waveney (Mr. Blizzard) made a powerful speech setting out the disincentives to activity, such as the difficulty in gaining access to infrastructure and the fact that several companies are holding on to acreage. Around 80 per cent. of explorable acreage in the North sea is held by just half a dozen companies, which are investing elsewhere in the world while queues of new entrants are desperate to get access to that acreage. Are the Government addressing that problem?
§ Jacqui Smith
My hon. Friend has made that case strongly before. The 22nd round adds to promote licences the new frontier licences, which allow companies to apply for relatively large amounts of acreage at reduced cost. That will allow more time for exploration arid development, reflecting the additional technical challenges, especially in the Atlantic margin west of the Shetland islands. The change in the licensing regime will help to promote the introduction of new entrants and activity that my hon. Friends the Member for Waveney and for Aberdeen, Central (Mr. Doran) have called for.
There is no doubt that we need to encourage more exploration activity. In 2003, there was a small increase in the number of exploration and appraisal wells drilled in the UK, although if one scans back over the past decade it is clear that the number is still relatively small. Nevertheless, there are some encouraging signs—for example, the recent drilling success of new entrant Oilexco on the Brenda prospect, where good quantities of oil appear to be present. That acreage was specifically identified by the DTI, and it was promoted and awarded in the 20th offshore licensing round in 2002. That is 100WH good news for the UK continental shelf. It gives us confidence that there is sufficient untapped potential to encourage experienced players from overseas and that that can be done within two years.
§ Mr. Salmond
The Minister said that good things are happening, and I accept that there are encouraging signs. I agree with the hon. Member for Waveney that there is huge untapped potential and little sign of firm action to release the substantial amount of fallow acreage. What more does the Department intend to do to secure the release of that fallow acreage and to get the exploration figures to a more reasonable level?
§ Jacqui Smith
I was coming to that. Early indications are that more exploration and appraisal wells need to be drilled in 2004 than last year. Certain fiscal measures, especially the tax change, are designed to stimulate exploration activity in the North sea by companies without current taxable income. The exploration expenditure supplement will increase the amount of exploration and appraisal expenditure that can be carried from one accounting period to the next for a maximum of six years. It is important to set the right climate for investment, and that is what we are doing.
Several hon. Members referred to fallow blocks. We have continued to push hard in dealing with that. For example, 151 fallow blocks are identified on the DTI's oil and gas website, including 109 blocks that were added to the list this January. They must have significant activity planned within one year of being put on the website, or be relinquished. In addition, there are 83 fallow discoveries, including 17 that were added to the list in January, for which a licensee or third party has two years from publication to come forward with plans for significant activity. That drives precisely the kind of emphasis on action on fallow blocks for which hon. Members have argued. In fact, since the PILOT process began in 2002, eight exploration or appraisal wells have been drilled on those blocks. As a result, three new fields are being developed and two other wells have been announced as discoveries. Since 2002, 10 discoveries are no longer fallow because they have had new dedicated seismic, and a further eight discoveries have had appraisal drilling. Thirteen discoveries are no longer fallow because they are included in development plans approved by the DTI or are part of fields now in production.
Despite those outcomes, there is no room for complacency. We will continue to work with the industry to push for even more acreage to be made available. We have taken action to ensure that there can be no more inactivity on licences. All new standard licences issued now have a shorter overall term to ensure that new acreage that is acquired but not worked on is handed back and made available for others to exploit.
On infrastructure, the key issues relate to perceptions about access and the time that it takes for some deals to go through on the UK continental shelf. I am pleased 101WH that the industry has been fully engaged in discussions on that and has reached an agreement to take forward measures to allow the Government to intervene in cases in which commercial negotiations are stagnating. That is a response to concerns that were raised in the previous debate about the unwillingness of those suffering to come forward to complain; it establishes a process for such intervention. That consensus was reached last October, and detailed implementation of the infrastructure work group is progressing well.
In terms of commercial practices, last year the industry signed up to the master deed agreement. The commercial code of practice is also relevant. The DTI and the United Kingdom Offshore Operators Association—UKOOA—are pulling in the results of a code of practice survey for 2003 and intend to report to PILOT in the coming months on trends and industry performance. Action is therefore under way on ensuring access to infrastructure. Work is also being undertaken on the great potential for additional production in our brownfields. The PILOT brownfield work group published its second brownfield benchmarking studies in 2003.
We already have good examples of the industry's commitment not to miss out. UK independents are making significant investments. Those include Paladin; Energy North Sea's recent plans for the Montrose and Arbroath fields, where substantial drilling contracts have just been awarded; and Venture's acquisition, with Dana, of the Kittiwake fields.
More generally, at this stage in the life of the UKCS, a wide spectrum of companies—existing and new players, large, medium and small—must be involved if we are fully to exploit all the opportunities. I have explained how we are making progress through the licensing process and action on access to infrastructure. 102WH My hon. Friend the Member for Waveney asked about CO2 capture and storage. We are aware of the benefits that carbon capture and storage could provide in contributing to our energy White Paper target. Indeed, we recently undertook two studies of the feasibilities of those technologies and concluded that, in time, they could assist us in meeting that target, although in the longer term—beyond 2020. The first study investigated the feasibility of carbon capture and storage; the second considered the possibility of using CO2 for enhancing the recovery of oil from our depleting oil fields as a lead-in to CO2 storage by enabling an infrastructure to be developed. We are about to publish that second report.
Meanwhile, we are developing a carbon abatement technology programme that will provide a basis for a strategy for the use of fossil fuels for power generation. We plan to publish that strategy towards the end of the year. We also have an ongoing research programme—the sustainable hydrocarbons additional recovery programme—that is specifically targeted at identifying areas in the North sea where improved oil recovery techniques might be applied.
There is still a great deal to do. Industry, too, recognises the need for change. Only recently, Alan Booth, Managing Director of EnCana (UK) Ltd., outlined a number of areas in which industry must quickly adopt new approaches if it is to ensure that it gets the full benefits of what the North sea has to offer. This year, PILOT and the Government will focus on concluding the new procedures that will improve third-party access to infrastructure and on finding ways to enhance oil and gas recovery from brownfields. We know that the production gap exists, but the UKCS is still thriving and we are committed to working with the industry to overcome production barriers and to find innovative solutions for the future.
§ Sitting suspended until Two o'clock.