Energy BILL [ Lords ] (First sitting)

Clive Lewis Excerpts

Tuesday 26th January 2016 Public Bill Committees

[Andrea Leadsom]

The clause, which was added to the Bill by the Opposition in the other place, rewrites the OGA’s principal objective to maximise the economic recovery of UK petroleum, as originally introduced by the Government, in three significant ways. First, it removes the Wood review’s central premise to maximise the economic recovery of UK petroleum within part 1A of the Petroleum Act 1998, replacing it with an objective to maximise the economic return of UK petroleum. Secondly, it imposes on the OGA an obligation to retain oversight of the decommissioning of oil and gas infrastructure. Thirdly, it imposes an obligation on the OGA to secure oil and gas infrastructure for reuse for the transportation and storage of greenhouse gases.

As we have discussed, the OGA has important functions in respect of decommissioning and the storage of carbon dioxide. However, the change to the principal objective that was advanced by the Opposition in the other place is damaging, self-defeating and unnecessary. It is damaging because not only does it introduce significant uncertainty about the principal objective, but it could also be interpreted as requiring industry to meet substantial and uncapped capital expenditure to secure and maintain infrastructure—potentially indefinitely—prior to decommissioning and until such time as a carbon capture and storage project is ready to use it. Our oil industry is understandably concerned about the significant liabilities and costs that that would impose at a time when it is already facing profound challenges.

The clause is also self-defeating, because it would be likely to damage the prospects of carbon storage facilities being developed in the North sea. By removing the OGA’s focus on maximising economic recovery, we risk degrading its ability to provide the support to industry that is so urgently needed, and that in turn risks the premature decommissioning of the UK continental shelf, which would result in a loss of assets, infrastructure and skills, including those that could help to promote the longevity of the industry through carbon storage projects.

The clause is unnecessary because the Government tabled substantive, meaningful amendments in the other place to reflect the OGA’s important functions in respect of decommissioning and CCS. Measures in the Bill will ensure that the OGA will have a strong role on decommissioning to ensure that costs are controlled, and that the reuse of assets, including for CCS development, is given full consideration before decommissioning is decided upon or takes place. The Government have also brought forward amendments to ensure that the OGA must have regard to the storage of carbon dioxide and how that may assist delivery against climate change targets when carrying out its functions. The Government have also made it clear that the petroleum-related information that the OGA will have powers to acquire includes that which is relevant to the storage of carbon dioxide.

Crucially, this approach is sensitive to the current economic landscape of the North sea. It strikes the right balance and does not dilute the OGA’s focus on maximising economic recovery. It is worth underlining to hon. Members that the Carbon Capture and Storage Association has strongly welcomed the Government’s amendments to ensure that the CCS industry is given due consideration and that it can access the information that it needs.

It is essential that we restore the OGA’s focus on maximising the economic recovery of oil and gas from UK waters at a time when the industry urgently needs a regulator with a laser-like focus on that objective. The OGA is already working closely with the Government and industry to do all that it can to support the North sea. It is focused on delivering key pieces of work in 2016 with the aim of making the basin more attractive to investment, including stimulating exploration in both frontier and mature areas, making new seismic data freely available, introducing regional development plans to protect key hubs and infrastructure, and progressing a technology strategy to make new fields more viable. We must support the OGA’s crucial mission to protect our domestic energy mix and support hundreds of thousands of jobs, but that can be achieved only by supporting and restoring to the Bill the OGA’s principal objective to maximise economic recovery. I hope that I have provided hon. Members with a logical reason why the clause should not stand part of the Bill and that they understand why I will vote against it. It is my strong desire to see clause 8 removed from the Bill.

[Clive Lewis (Norwich South) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Bailey. This is my first time as a member of such a Committee and as a shadow Front Bencher.

I thank the Minister for her statement on clause 8. Since the clause deals with the question of maximum economic recovery, I need to start by opening up the question of what that actually means. The term “maximum economic recovery” was introduced by the Wood review in 2014. The first full statutory stage of implementing that review was carried out via the Infrastructure Act 2015, which inserted a new part 1A into the Petroleum Act 1998. Section 9A(1) of part 1A defines the “principal objective” as “maximising the economic recovery”, but it does not actually set out what MER means. Section 9A(2) requires the Secretary of State to formulate a strategy for maximum economic recovery. Offshore licensees are obliged to act in accordance with the strategy. For licensed operators, acting in accordance with maximum economic recovery is easy: they simply follow the strategy as opposed to the underlying principal objective.

To know how “maximum economic recovery” will be defined, we need to look at the Secretary of State’s strategy, but we do not know exactly what the strategy is, since as yet it is only a draft. It is called, “Maximising Economic Recovery of Offshore UK Petroleum: Draft Strategy for Consultation”. The final strategy is not due to be published until April, so to understand what “maximum economic recovery” is, all we have is that draft strategy, which sets out a series of conditions for operators that, taken together, can be understood to express “maximum economic recovery”. In the draft strategy, the Secretary of State describes the OGA as

“an independent, expert regulator and asset steward, empowered and equipped to bring industry together to drive common purpose and good outcomes for all”.

Who exactly is “all”? It also states:

“All of this will deliver a regulator and asset steward with a clear focus, real expertise of the sector and the remit to work collaboratively with companies to deliver the best outcomes for both the industry and the UK tax payer.”

The Bill and the Acts that go with it—including the Petroleum Act 1998, as amended by the Infrastructure Act 2015—seek to make the principal objective a best overall outcome for everyone, and that will be achieved via the OGA. As the UK continental shelf is on the downhill slope of its productive life, the interdependence of different installations and infrastructure in the UK upstream oil and gas industry is such that if each relevant person seeks only to optimise their financial position, the performance of the industry as a whole—its ability to extract the most of what is realistically possible from the basin—is likely to be sub-optimal.

The key question for the draft strategy to answer is how and to what extent businesses are to be induced to compromise their interests for the greater good. We all understand that there is a need for a body like the OGA—that is why there has been broad support for it and for the Wood review—but I return to the draft strategy, which describes the OGA as an “expert regulator and asset steward”. It is an unusual hybrid. Its job is far more than that of a mere regulator overseeing industry that can be broadly left to make its own decisions. Will it have to intervene deeply in some of those decisions? It will be empowered to sit in meetings between companies that are usually commercial rivals.

In fact, the OGA is much more like an asset steward, seeking a highly proactive role in the management of the UKCS. One quote from the Wood review is especially illustrative, because it states that a licence holder will be

“required to act in a manner best calculated to give rise to the recovery of the maximum amount of petroleum from UK waters as a whole, not just that recoverable under their own licences.”

That is a long way beyond mere regulation.

In light of the collapse of the oil price, the OGA is in some ways more like an insolvency practitioner that has come to extract the last bits of value from the UKCS and manage the process as effectively as possible, and that is the context of clause 8. It is clear that the OGA’s stewardship role is its critical function, with its regulatory role very much secondary to that. In fact, the OGA bears no resemblance at all to any other regulator, which is why we want to include carbon capture and storage as part of its principal objective. CCS is a crucial element of the long-term value that can be yielded from the UKCS.

The UK has the opportunity to become a leading global player in the CCS sector. We have abundant offshore CO₂ storage capacity in depleted oil and gas fields, and that is in combination with enhanced oil recovery and storage in deep saline rock formations beneath the North sea and the eastern Irish sea. Experts estimate that geological formations beneath the UK section of the North sea can store almost 80 billion tonnes of carbon dioxide, which is more than enough to meet the needs of UK CCS projects for the next century. That advantage is made even greater when coupled with the fact that many of the UK’s largest carbon emitters—power and industrial facilities—are already clustered together around major estuaries, such as at the Humber, Teesside and Merseyside, which are close to offshore storage capacity in the North sea and the eastern Irish sea. Many of those very energy-intensive industries have no long-term viability without CCS if the UK is to have a chance of reducing its greenhouse gas emissions.

--- Later in debate ---

[Andrea Leadsom]

I am grateful to the hon. Members for Norwich South and for Aberdeen South. Like the hon. Member for Aberdeen South, I reject the suggestion by the hon. Member for Norwich South that somehow the OGA will be an insolvency practitioner. That is absolutely not the case. Sir Ian Wood’s proposal is based on maximising the economic recovery, which is what we want to do. We see the industry as an ongoing success story for the United Kingdom, with more than 350,000 jobs throughout the supply chain. It creates enormous benefit to the economy and we hope that it will continue to do so for decades to come. The OGA is absolutely not an insolvency practitioner.

I also agree with the hon. Member for Aberdeen South that, given that more than 20 billion barrels of oil and gas are potentially left in the North sea, it is not a sunset industry. We need to be clear about that. The OGA is both the regulator of an ongoing success story—we want to get the costs of production down and to encourage new exploration and we want the sector to continue to thrive—and an asset steward, as the hon. Member for Norwich South rightly pointed out, with an important role in the strategy for maximising economic recovery.

The strategy is out for consultation. We have worked closely with industry, through industry workshops and close co-operation between the OGA, industry and the Government, to define maximising economic recovery. We hope to provide the Government response to the consultation as soon as possible. It is important to be clear that the OGA is the asset steward and the regulator for an ongoing success story.

I will try to reassure the hon. Member for Norwich South about the OGA’s role in CCS. The OGA will be responsible for issuing carbon dioxide storage site licences and for approving carbon dioxide storage permit applications. We expect the OGA to have subsequent involvement in monitoring, review and possibly enforcement activities as set out in the regulations, which are transposed from the requirements in the EC directive on geological storage of CO₂. The OGA is proactively considering the role of CCS in the technology and decommissioning strategies that it is developing. The Wood review acknowledged the potential benefit of CCS to the UK continental shelf and, as recommended, the OGA will work closely with DECC to examine the business case for using depleted reservoirs for carbon storage.

Under MER UK, CO₂-enhanced oil recovery is being considered by the OGA as part of its wider enhanced oil recovery work. CO₂-EOR could make a substantial contribution to lowering the cost of CCS projects as well as benefiting North sea revenues and jobs. However, more analysis is needed on the timing of future CCS projects and how that could affect CO₂-EOR development, and on the viability of redeveloping abandoned fields as CO₂-EOR projects. The OGA will collaborate with the CCS industry to foster innovation in EOR technologies.

As the hon. Gentleman may know, the OGA’s planned work includes advancing the next tranche of EOR technologies, developing a framework for their economic implementation and developing a CO₂-EOR strategy and five-year plan this year. I hope that that gives him some reassurance, but, again, I urge Members to vote against the clause

[Clive Lewis]

I thank the Minister and my hon. Friend the Member for Aberdeen South for their input. I emphasise that I meant no insensitivity to the industry or to the people of Scotland—or to the people of the UK. It was just a frank, realistic assessment of the economic and industrial situation.

We support the clause because, instead of having a strategy whose primary goal is to maximise the quantity of petroleum profitably extracted from the North sea, we should have one that maximises the return on investment—investment in infrastructure, for example—in the North sea. If and when activity such as CCS can be carried on economically in the North sea, the OGA should be given the job of promoting that as well. The OGA’s powers to push the industry to collaborate are extensive and we applaud some of the points that the Minister made previously. However, it clearly makes sense for the OGA also to think about the wider uses and potential reuses of the infrastructure, information and skills that are there, which other industries could deploy on the UKCS later, and CCS is a clear example of that.

The clause would, first, simply ensure that the OGA keeps its eye firmly on CCS and builds into that policy. Secondly, it is clear that some of the biggest players on the UKCS are still making profits and paying out dividends—Royal Dutch Shell and Total certainly are. Fluctuations in the price of oil are normal, and it is likely that the price will go back up at some point, although it is not wise to make predictions as to when.

Thirdly, the industry has yielded huge profits in the past to companies and individuals—Sir Ian Wood, of Wood review fame, is reportedly a sterling billionaire. As we know, there was no long-term state investment in a sovereign wealth fund that would have helped us achieve the kind of energy transition we now need. To borrow a phrase, we did not fix the roof while the sun was shining, and it could be argued that Governments of all political stripes are guilty. However, the OGA’s creation is an opportunity to think long term and to escape from the short-termist, cash-in mentality of the past. The Opposition therefore seek to defend the clause.

Question put, That the clause stand part of the Bill.