North Sea Oil and Gas (Employment)

Frank Doran Excerpts

Tuesday 20th January 2015 Westminster Hall

[Mr Frank Doran]

(Aberdeen North) (Lab): It is a pleasure to operate under your chairmanship, Mr Streeter. We are here to discuss United Kingdom oil and gas, which is in severe difficulties, partly because of a substantial drop in the world oil price. In these debates, it is always important to get the facts right. One key thing about the industry is just how important a part it plays in the UK economy. According to Oil & Gas UK, the industry body, the industry supplies 73% of the UK’s primary energy: oil for transport and gas for heating. The UK balance of payments benefited from oil and gas to the tune of £30 billion last year. The oil and gas supply chain achieved sales of £20 billion outside the UK. The total expenditure in services and infrastructure investment from oil and gas companies in 2013 was £20 billion. Since 1970, the industry has invested £500 billion.

In recent years, the expenditure has been particularly high. In 2014, the industry invested around £14 billion of capital investment in UK oil infrastructure, following on from investment of £11.4 billion in 2012 and £13.5 billion in 2013. Across the industry there is a total committed expenditure—that is, projected future expenditure—on projects in production or under development totalling £44 billion. Figures like these have not been seen since the 1980s. They are massive figures: there is no question about that.

The industry claims to support 450,000 jobs in the UK. These break down as follows: 36,000 employed directly by offshore operators; 200,000 in the supply chain, providing goods and services to the industry; 112,000 jobs in services such as hospitality, taxis, and so on; and 100,000 jobs in the export of goods and services. It is difficult to visit any foreign oil base or complex without hearing a Scottish or English accent. We are operating throughout the world.

Many of these jobs are now under threat because of the collapse of the oil price. Major companies—Shell, Chevron and, last week, BP—have announced redundancies. Some of these have been expected for some time and were part of company restructuring as well as the downturn in the oil price. More announcements are inevitable.

I can find no reliable figures showing the numbers so far made unemployed, but I know from union sources, for example, that roughly 600 people have been made redundant in companies where there are recognition agreements. However, most cuts are likely to be made to the self-employed, who comprise a large number of offshore and onshore employees; they are the easiest and cheapest to remove. At the moment it is estimated that there will be around 2,000 job losses in total. I think that is a fairly realistic projection.

How things will proceed from here on is difficult to judge at the moment. Many jobs lost so far have been lost onshore and it may take time before large numbers of offshore jobs are put at risk. Everyone will be mindful of the need to retain skills for when the upturn arrives, whenever that might be.

In the history of the North sea oil and gas industry there have been at least three serious downturns. The worst and most damaging was the downturn in the mid-1980s, when 20,000 jobs were lost in Scotland, most of them in Aberdeen and the north-east. Some 50,000 jobs were lost in the whole country. The fact that the job losses were higher in the rest of the UK than in Scotland reflects the fact that, although the industry is centred in Aberdeen, the supply chain and the work force is spread throughout the UK.

There is a risk that this year’s downturn could be as serious as the one in the 1980s, but I think it is possible to take steps to mitigate that. In the first place, the industry has changed substantially from the industry we had in the 1980s. For example, it is much more widely spread with fewer of the majors involved. I believe that with the right sort of focused support from Government and the industry, this very difficult time will not develop into the tragedy that we saw in the 1980s. Of course, there is very little we can do about the global price of oil, but we can look at the other issues that have faced the industry for some time now and consider how we can soften the blow and minimise damage.

Exploitable oil and gas are proving harder to find, and discoveries that are made are often in places that are difficult and expensive to exploit, particularly if there are issues around access to infrastructure. Some of these problems will be addressed when the recommendations of the Wood report are fully implemented, but that is likely to be some time away, although there are moves to accelerate the process.

Then there is the skills shortage. Until relatively recently, few companies offered apprenticeships in technical skills. In the 1970s and ‘80s, the industry attracted engineers, welders, boilermakers and others from the collapsing smokestack industries: mining and shipbuilding, and so on. That supply has been exhausted and the work force are ageing. Trainee and apprenticeship programmes have been introduced in recent years, but those take time to make an impact. In the meantime, labour costs have risen enormously and companies have poached skilled staff from each other, driving wages to high levels. With my trade union background, I am the last person to complain about that, but it has a serious impact on costs offshore.

Oil & Gas UK says that contracting prices have doubled since 2010. One executive from a major company told me recently that the cost of scaffolding alone—there are 6,500 workers working on scaffolding in the North sea—has tripled in the last two years. It is obvious that a slice of the money that previously would have been spent on research and development, exploration and appraisal, which are all things to take the industry forward into the future, has been diverted into meeting these wage costs.

[Sir Malcolm Bruce (Gordon) (LD)]

I congratulate the hon. Gentleman on securing this timely debate. He is making some important points. Does he agree that if we—the industry and the Government—get this right, and indeed make the industry more efficient, as and when the recovery happens we will be much more competitive than we have been? The point he is making is that we have been in danger of pricing ourselves out of the business.

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[Mr Doran]

That is the sole point that I planned to make in this speech. [Interruption.] No, the right hon. Gentleman is right to raise the issue. It is important that Government and industry work together to try to tackle the problems that we have all identified.

In addition to labour costs, there are real issues about the way in which equipment is purchased by companies operating in the North sea. In Norway, for example, there is standardisation of equipment. The state is a more engaged regulator and Statoil, the state-owned company, has by far the largest stake in the industry, with a share of around 60% of production. Its purchasing powers are enormous and most companies will buy the standardised equipment developed or ordered by Statoil at much cheaper prices than bespoke equipment. Our largest operator in the UK has only 10% of production. There is no company that can lead standardisation in the way that Statoil can in Norway, so everyone purchases to their own requirements.

One example I heard about recently was the purchase of light switches. That may be an odd place to start, but it is relevant. In Norway, the norm is standardised plain light switches. In the UK, company insignia or another unique requirement is demanded by many operators, usually at double or more of the cost. Scale that up through the requirements of offshore operators, from light switches to drilling rigs, and you have very expensive processes that I think are holding the industry back. Of course, this has an impact on Government, too. Every bespoke item has a higher cost than a standardised one, which reduces profits, which reduces taxes paid.

The sooner the Wood review recommendations are fully implemented, the better. I do not think that that will affect the price of light switches, but I hope it sends a clear message. I know that the industry is developing a strategy at the moment, but it will take time to put that in place. Cutting costs that are incurred at present is a must if any progress is to be made.

Probably the major issue for the industry is the tax system. Every Government since oil was first discovered in the North sea have treated the industry as a cash cow. Tax increases, occasionally unannounced, are the norm. The tax system is complex and expensive. The Government are anxious to protect their income from the industry, but that will become more and more difficult if current problems persist. Profits have to be made for taxes to be paid. I understand that in the last financial year the overall performance of the industry was negative—this year might be even worse.

[Dr Eilidh Whiteford (Banff and Buchan) (SNP)]

I congratulate the hon. Gentleman on securing today’s debate, which is on an issue of deep concern to all of us from the north-east of Scotland, where so many jobs are dependent on the oil and gas sector. I want to add to his point about taxation. Does he agree that we need those tax changes now? I have no doubt that we will see more announcements of job losses in the coming weeks. We need changes to the fiscal regime now, not a couple of months down the line.

[Mr Doran]

I think there is a case for what the hon. Lady says, but I disagree with her. We will have a Budget in two months’ time, and announcements will be made then. In the meantime, we know that the Treasury is working on the position. As she will see from the rest of my contribution, I am more concerned about how the tax cuts are made, rather than that tax cuts are made. I want focused and targeted tax cuts, not just a chop off the supplementary charge that was introduced in 2011.

It is important to look at the responses that should be made to the current situation. In the 1980s, there was virtually no Government response. There may have been one behind the scenes, but it was not visible to those of us who were involved at that time and were concerned about what was happening in the industry. We have the opportunity to mitigate substantially the impact of the collapse in the oil price. Members would expect me to say this, but I was pleased when Councillor Jenny Laing, the leader of Aberdeen city council, announced in December her plan to host a summit in Aberdeen to consider the challenges facing the industry. That summit will be held on 2 February. It is supported by Oil & Gas UK and will be attended by the UK and Scottish Governments, as well as by industry experts. That announcement caused the various other bodies with an interest to consider their reaction. Since then, Government Ministers and MPs have been queuing up to visit Aberdeen. My hon. Friend the Member for Glasgow East (Margaret Curran) has made her trip there. The Secretary of State for Energy and Climate Change was there last week. The issue is being taken much more seriously than it was in the 1980s.

To go back to the question from the hon. Member for Banff and Buchan (Dr Whiteford), tax reliefs are back on the table. The Chancellor has made it clear that they are being considered, which suits the oil industry, because it has been asking for them. Since the collapse in the oil price, industry representatives and others have insisted that there needs to be a tax cut. Oil companies are still angry about the increase in the supplementary charge made in the 2011 Budget, and they would like to see it removed completely. The Chancellor has met them a small part of the way by introducing tax reliefs for brownfield sites and for high-temperature and high-pressure fields, and after his much hailed tax review last year the mouse of a 2% reduction in supplementary charge was announced.

Regardless of the 2011 increases, both field reliefs are important and have resulted in extra activity from the industry, even in these difficult times. The lesson from that is that it is in the interest of the industry and the taxpayer that any tax reliefs that are given should be focused and not random. There are many areas where more targeted and focused tax reliefs would create a win-win situation for all sides. For example, an investment allowance would encourage more activity and create more income and thus more tax revenues. Investment in research and development has slowed significantly in the industry, yet that is crucial in the search to find and produce oil and gas, whether by enhanced recovery techniques, better infrastructure to improve recovery or whatever other area that could improve the industry. The Government should also consider targeted reliefs to protect jobs and skills. Health and safety is a major issue for me. For many years, I have been heavily involved in that issue offshore. It must remain a priority. The Government should consider a specific targeted relief to support the continuing maintenance of infrastructure and the improvement of health and safety systems and equipment.

The consequences of the 1980s downturn were not only job losses. All projects that were in progress were stopped. The platforms that were producing oil and gas carried on producing, but many costs were cut to the bone. In particular, areas vital to safety, such as fire safety equipment, deluge systems and others, received little or no maintenance. The consequences of that approach were not immediately apparent, but on the night of 6 July 1988 they were there for the whole world to see. The Piper Alpha platform exploded with 167 deaths. It is still the most serious loss of life from any incident anywhere in the offshore oil and gas industry. If there is slippage in maintenance through the downturn, the dangers for offshore workers will increase significantly.

[Mr Iain McKenzie (Inverclyde) (Lab)]

I congratulate my hon. Friend on securing this important debate. On safety, is he as alarmed as I was to hear from a constituent who runs a business in my area and who came to my surgery on Friday—he offers safety courses to oil firms operating in the North sea—that he has seen a significant reduction in the number of people that firms are placing on those courses and on refresher courses for safety?

[Mr Doran]

I think my hon. Friend is talking about the sort of work on offshore that I mentioned at the beginning of my speech. Those who are self-employed—probably with their own companies where they are often the sole employee—are the first to be removed. I am concerned to hear that people operating in safety are part of that process, and we should all be concerned by that.

For offshore oil workers, working on offshore platforms is dangerous, but the dangers do not stop on the platform. The only realistic form of transport offshore, because of the distances involved, the difficulty of access to platforms and the hostile weather conditions, is by helicopter. In the UK sector of the North sea, there have been 13 helicopter-related incidents, in which 118 people have died. The most recent one, just 17 months ago, saw four deaths. For most of the history of the North sea oil and gas industry, helicopter transport companies have been treated in exactly the same way as other contractors and subjected to often severe cuts in contract costs. That might suit the oil industry accountants, but it makes no sense to companies that have to keep helicopters flying safely. I hope that the oil industry is taking a much more cautious and sensible approach this time round, and that the Government and the regulators will strictly monitor how health and safety standards are maintained on both sides of the industry.

There are difficult times ahead, but they need not be as damaging as the downturn in the 1980s. The industry has allowed costs to spiral out of control and needs to address the problems it has created. Everyone—the industry and the UK and Scottish Governments—should be focused on maintaining employment, jobs and skills. The economic climate will change, and it is important that the oil and gas industry is capable of getting into gear as quickly and safely as possible when that happens. A key player will be the Chancellor, and I urge him to consider seriously further tax reliefs, which, in the interests of the taxpayer and the industry, should be focused on maintaining employment, training in skills, research and development and investment that will ensure the future success of the industry.

[Mr Gary Streeter (in the Chair)]

Colleagues, the winding-up speeches will begin at 3.40 pm. Six colleagues are seeking to catch my eye, and we have 50 minutes. By my calculations, about eight and a half minutes each should do the trick.

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[Mr Doran]

The Minister is apologising for the absence of his right hon. Friend; I should have noted the absence of my hon. Friend the Member for Aberdeen South (Dame Anne Begg), who is with my right hon. Friend the Member for East Renfrewshire (Mr Murphy) in Aberdeen, but would otherwise have been here.

[David Mundell]

I echo the comments of all contributors, who pointed out the importance and timeliness of the debate, given the challenges faced by companies operating in the North sea and all those who work in the sector in the United Kingdom; that was emphasised by my hon. Friend the Member for Waveney (Peter Aldous) and the hon. Member for North Tyneside (Mrs Glindon).

The Government are committed to the long-term future of the sector in the North sea. We recognise that the sustained fall in oil prices presents real challenges for the sector. Announcements of job losses, such as those we have heard about this afternoon, are a real concern and particularly affect Aberdeen and the north-east. The effects will be felt not only in the north-east of Scotland and by big international companies, but by the hundreds of small and medium-sized businesses that are an integral part of the supply chain. Those businesses work across the UK to service the sector, and they play a role in the whole of the UK economy.

We are committed—I hope that the hon. Member for Glasgow North West (John Robertson) accepts this—to working in partnership with others. I welcome the tone of the contribution of the shadow Scottish Secretary, the hon. Member for Glasgow East (Margaret Curran). We are committed to working with the Scottish Government, local authorities and the industry to provide all we can for those affected by job losses. I will pursue the issue that the hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith) raised about the Department for Work and Pensions. My colleague, the Secretary of State for Scotland, has committed to participate in the First Minister’s jobs taskforce, which was announced last week, and the Aberdeen city council’s oil and gas summit in February.