Oil and Gas Industry

Alan Whitehead Excerpts

Tuesday 9th October 2018 Westminster Hall

[Dr Alan Whitehead (Southampton, Test) (Lab)]

We have had an excellent debate, with informed contributions all round, and I congratulate the hon. Member for Falkirk (John Mc Nally) on securing it. As hon. Members have said, this is a very important debate because the Budget is so close and because there are wider issues relating to the role that the oil and gas industry will play in a substantially decarbonised future. There are a number of assumptions about how oil and gas will be used in the future. As hon. Members have said, the debate is taking place literally the day after the IPCC published its report on global warming and its effects, and discussion about that report is just beginning. That must be the context for our discussions about the future of oil and gas.

As hon. Members, including the hon. Member for Kilmarnock and Loudoun (Alan Brown), have said, although the oil and gas industry in the North sea has recovered substantially from the miserable predictions and prognostications of 2014-15—it is estimated that production will be up 5% over the coming year, exploration is picking up, and various other indicators show that the industry is in a better shape than it has been in for quite a while—we must nevertheless be extremely wary of assuming that happy days are here again, and that the industry can be the cash cow for the Budget that it has been perceived to be in years gone by. The industry’s long-term future is of a different order from anything that has happened in the past, so we should strike those thoughts from our minds. Although it will make a good return for the Exchequer in years to come, it should not be seen as a cash cow in the future.

I say that because we face a period in which the lessons of the downturn, up to the recent upturn, must be put in place to ensure the long-term future, prosperity and health of the industry as a whole. There has been a recent efficiency trend: development drilling has fallen substantially, but the costs of drilling have reduced substantially, and the average unit operating costs have halved from about $30 a barrel in 2014 to $15 a barrel now. Those tremendous efficiency gains will stand the sector in good stead for the challenges that lie ahead. We can use them to exploit small pools, which will be one of the staples of exploitation and development in the future.

It is unlikely that any new Brent fields will be discovered. In that context, we need to understand, as hon. Members said, that the North sea is not just a mature field but a very mature field: 43 billion barrels have been extracted, and there are perhaps about 10 billion to 20 billion barrels left to extract. Its future therefore needs to be in the best possible hands.

I commend the creation and operation of the Oil & Gas Authority and—hon. Members have mentioned it—“Vision 2035”, which the OGA is putting forward for the future of the industry. In that vision, it does not just talk about continuing business as usual, but looks at the much longer-term future, even beyond the point at which the very last reserves have been produced. One of the OGA’s missions is to create a sustainable energy service and technology centre long after the final economic reserves have been produced. We need to look not just at business as usual, but at a range of other things that the industry can start to develop, and is developing, as the North sea field becomes even more mature. Of course, one of the things it can do is develop decommissioning skills on a worldwide basis, so that we can ensure not just that the decommissioning in the North sea is done in the best possible way, but that those skills can be exported across the world.

We also need to contemplate a future of carbon capture and storage in the North sea and the use of decommissioning as a possible way forward to a position in which the North sea is not only producing oil and gas, but storing the carbon that comes from those processes and creating an industry so to do.

We need to be mindful of the fact that, as I mentioned at the beginning of my contribution, the IPCC report on global warming and the future of the world has just come out. It is pertinent to our discussions today, because it underpins what kind of long-term future there is for oil and gas. I consider that the long-term future involves looking at how oil and gas can be used in a range of ways that are not entirely familiar to us today but will be essential for the sinews of British industry. Oil and gas will have a substantial role to play, for a very long time, in those areas of activity. I am thinking of chemical products for which oil is irreplaceable and of alternative vectors such as hydrogen, if the CCS implications of the formation of hydrogen can be managed. All those things imply that there is a substantial future for oil and gas from the North sea.

We know—I am not talking off the top of my head here, I am referring to BEIS’s updated energy and emissions projections—that the demand for oil and gas in the UK economy is likely to go down substantially. Indeed, we can see that from looking at the 1990 figures, when there was a primary demand for oil of 87 megatonnes of oil equivalent and for natural gas of 97 megatonnes of oil equivalent. In the year when “Vision 2035” comes to fruition, the demand is projected to be something like 70 megatonnes of oil equivalent for oil and only 28 megatonnes of oil equivalent for gas.

There will be a substantial decline in demand, but that means, it seems to me, that the North sea can provide a secure UK supply for the declining demand over that period. It is surely best, for energy security purposes and many other reasons, to ensure that our supplies for the future come from the UK. That is the future that I want to see for the North sea oil and gas industry, by means of efficiency and by means of the innovative techniques mentioned this morning—the ways of managing a mature field so that it works in the best way possible in the national interest and in the interests of having very different future for oil and gas from what we have seen hitherto. We must ensure that it works for the UK and that it has a secure future. I hope that the Government will be able to join in that vision and provide support where necessary to underpin that innovation and those new methods of doing things, so that the oil and gas industry can be in the best shape possible to face that very different future.

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Richard Harrington)]

It is a great pleasure to serve under your chairmanship, Mr Hollobone. Indeed, I congratulate you on the discipline that you have brought to these proceedings, although curtailing the shadow Minister, the hon. Member for Southampton, Test (Dr Whitehead), to 10 minutes is a clear infringement of his human rights and of the normal way he behaves. In fact, some would say that it is a crime against humanity that his erudition, which is never known to be brief, was curtailed. I look forward to hearing him, as I did today, on many other occasions.

I genuinely congratulate the hon. Member for Falkirk (John Mc Nally) on not just securing the debate, but the thoughtful way in which he made his contribution. That sums up today’s debate. There is general consensus, and I hope hon. Members do not think I am saying this out of complacency, but the fact is that, as the hon. Member for Aberdeen North (Kirsty Blackman) said, most things to do with oil and gas are done on the basis of consensus. I wish there was the same attitude towards other debates in which I have the pleasure of speaking.

When I became Energy Minister, one of my first visits, in August of last year, was to Aberdeen—several hon. Members were with me that day—where I met industry leaders and visited Robert Gordon University to see the dynamic advanced response training simulator. That is relevant today because of the comments from the hon. Member for Falkirk about Piper Alpha. I saw a lot of the virtual reality equipment there, and I felt that I was actually on a rig. Everything was about health and safety and preventing the kind of incidents that happened at Piper Alpha. It is a tribute to the area that academia, industry and Government work together. I was most impressed by what I saw.

I understand the hon. Gentleman’s constituency interest because of the Grangemouth industrial site, which I visited as an A-level economics student in 1975—many hon. Members here were not born then, and some of their parents were probably only just born. However, I do remember the industrial site; I remember the scale of it. I think of it when I hear figures such as 8% of Scotland’s manufacturing base and 4% of GDP; I will never forget that visit, so I do understand the issue, and so do the Government.

In a very thoughtful speech, the shadow Minister expressed how important oil and gas are for the UK economy. I am not paid to promote the shadow Minister; I just cannot help but compliment him at various times. He talked about the mutual vision for the future. In fact, I kept looking up at him and seeing him reading from a document with blue print, which I thought was a Conservative party document, as the colour appeared to be the same, but which I then realised was, of course, “Vision 2035”, the authors of which at least had a good idea of which colour it should be in. But it does show no complacency; the serious point is that it does show a vision for the future, from what many people, out of ignorance, believe is a clapped-out former industry—they think that because they remember the boom days. One has only to visit it to realise that that is far from the case.

The upstream industry alone supports more than 250,000 jobs. Then there is the supply chain, supported by the sector, in key clusters all over the country. The hon. Member for Strangford (Jim Shannon), who has been at every single Westminster Hall debate I have ever spoken in, contributed extremely well. He mentioned the importance for Northern Ireland of the supply chain. I am very pleased to say that it is a United Kingdom supply chain and is not restricted to the specific area that many hon. Members have spoken about today.

The hon. Member for Aberdeen North mentioned Brexit, which came up in a few of the contributions. I do not take it lightly, I assure you, Mr Hollobone—none of us does. Many of the good things that have happened in the past couple of years have happened in a time when things have been written off because of Brexit, but I want to say to the hon. Lady and others that the Government fully understand the need for frictionless trade, on which the oil and gas industry has long depended, whether in the movement of goods, services or people. I assure her and other interested Members that my Department has made that matter very clear to other parts of Government—it is our job to do that, and we have. We are fully aware that the sector has paid more than £330 billion in revenue to the Treasury, which is phenomenal. I know of no other single sector that has been as beneficial to the Government over the past half-century.

The end-use facility mentioned by my hon. Friend the Member for Waveney (Peter Aldous) and by the hon. Member for Falkirk relates to customs procedures. I assure Members that Her Majesty’s Revenue and Customs continues to discuss with the sector the possibility of future mitigations being available, and which ones. The issue is complex, and I cannot claim to understand the full detail.

Since 2014, it is fair to say that the industry has had a torrid time as a result of the collapse in the price of oil. From that point of view, I am pleased that the price has gone up, but what I realised on my visit to Aberdeen was that, despite the decimation of the industry and its contraction—a statement of fact about the number of employees and so on, as was explained to me—good things resulted as well, such as some new technologies.

I remain optimistic for the future. I feel that the tripartite approach between the OGA, industry and Government, which hon. Members mentioned, is particularly important. I am pleased that, since its establishment, an extra 3.7 billion barrels have been forecast, and production has risen by 16% since 2014 figures, with a reduction in the production costs. The issue was forced by what happened to the price, but those cost reductions will remain and be improved on.

Optimism is returning to the North sea. My hon. Friend the Member for Gordon (Colin Clark) mentioned the amount of mergers and acquisition activity over the past couple of years—about $8 billion-worth last year—with some significant investment involving new players to the basin. Divestment by some of the supermajors does not mean that they are losing interest; it is part of the natural order of a mature basin, with newer, smaller companies coming in. Shell is investing in new frontier areas, and BP’s development is moving well. There is huge potential.

To determine the industry’s potential, we obviously need responsibly regulated exploration, and the Government support that. There are a lot of challenges, and we understand that. The Government all realise that exploring and drilling for the upper reaches of the remaining resources is more difficult than doing so for the original resources—that is a statement of fact—and the measures that we have put in place since 2014 will contribute significantly towards that.

The focus of the debate is on the future. My hon. Friend the Member for Ayr, Carrick and Cumnock (Bill Grant) asked me to comment on the IPCC report, and our clean growth strategy is clear. We are focused on meeting our Paris agreement climate change targets, and we have asked the Committee on Climate Change for advice on our targets in the light of the new evidence.

Whatever happens, oil and gas will be part of the energy mix for decades to come. We know that we have to reduce demand to meet our climate targets, but this industry has a lot going for it. Gas can play an important role, and so can oil. My Department’s main interest will be to continue the security of the energy supply, which means that we have not seen the end of hydrocarbons.

I am running out of time, and I will do my best to talk briefly about the sector deals mentioned by several hon. Members. One of my responsibilities is the implementation of sector deals. We have had a lot of discussion with the industry, and I am confident that these will proceed. As my hon. Friend the Member for Banff and Buchan (David Duguid) pointed out, this is an ambitious sector deal to support the industry’s “Vision 2035”. We have not yet reached the final stage of the process, we will do so quite soon. It is a question of assessing the value for money of the amount of contribution expected in the deal from Government, which takes more time than people think.

This is a complex industry with a great future. My hon. Friend the Member for Banff and Buchan said that it is an industry with a lot going on, and we know that the Government, the industry and the Members who have spoken today will be an important part of its future.

[Dr Whitehead]

On a point of order, Mr Hollobone. I may have misled the Chamber inadvertently by quoting a statistic erroneously. On the estimates for natural gas usage in 2035, the figure should be 59 megatonnes of oil equivalent and not 29, as I believe I said in my speech.

[Mr Philip Hollobone (in the Chair)]

Thank you for correcting the record.