NORTH SEA OIL

HC Deb 05 February 1973 vol 850 cc188-98

11.32 p.m.

Mr. Dick Douglas (Clackmannan and East Stirlingshire)

I wish to raise the matter of the International Management and Engineering Group's report on British industry and North Sea oil and gas. I think that what the House will wish to have made plain is first the background to the IMEG report, secondly the recommendations in the report itself, and thirdly the validity of the Government's actions on the basis of those recommendations.

Essentially, the background is one of disquiet about the performance of United Kingdom industry in the offshore oil and gas market. It could be argued that this was a new market for United Kingdom industry and its potentialities were difficult to assess. But these difficulties, I submit, were made the greater by the policy decision to push ahead as fast as possible with the exploitation of the resources of the United Kingdom sector of the Continental Shelf.

I do not criticise the present Government wholly for that because Governments of both parties accepted this basic policy criterion and failed to alert British industry to the consequences of this decision, failed to establish the degree of support departmentally that was necessary to ensure that industry was alive to the needs of the oil industry and failed to ensure that the Department was alive to the capabilities and deficiencies of United Kingdom industry with regard to these needs.

Broadly speaking governmental policy may have been correct regarding balance of payments considerations, but was manifestly inadequate regarding the deepening and widening of the United Kingdom petroleum technological base. I have considered these matters essentially in a United Kingdom setting. This is not a Scottish debate. This is a matter for the United Kingdom. It is not a matter that is restricted to the resources and dependance of Scottish industry. What we are concerned with is to see how, in United Kingdom terms, we can get the most advantage from this new-found source of supply.

The dominance of the United States oil industry in international terms naturally induced the companies operating in the North Sea to use United States equipment and technology. Arguably, the experience of United States concerns in their own offshore drilling made operations in the North Sea an extension rather than a new development. This might be conceded for the southern sector, but not for the northern area where most of the oil has been found. The technology of exploitation here was new to the Americans and called for a considerable effort on their part and on the part of the oil companies to solve these problems—if, indeed, they have been solved.

In debates and questions I have consistently argued that in the absence of a licence condition giving agreed opportunities to United Kingdom bases, equipment and personnel, the Government had to devise some means to monitor the companies' operations.

I interpose here the new conditions for Norway. The Royal decree of December 1972 states: The licensee shall use Norwegian goods and services in the activity as far as they are competitive with regard to quality, service, schedule of delivery and price. Norwegian contractors shall be included in invitations for tender so far as they produce goods or render service of the kind required. And there is more of the same kind.

This is an important ingredient. If we are to find ourselves with these resources offshore, it is essential not only to monitor but also to cajole or to lean a little on the companies. I understand that the Government have devised some means, albeit belatedly, to monitor the requirements and orders of companies. We are now told that this is being done. But if the meaningful criterion of speed is not to be upset, considerable efforts will have to be made by United Kingdom industry to match the needs of the oil companies.

Let us examine the IMEG report with that in mind. The central recommendation of the report is to establish a petroleum supply industries board. In the considered view of the consultants, this board would he independent and would have its own distinct financial resources. Realising that this would require legislation, IMEG gives a short-run alternative of a unit within the Industrial Development Executive, but only as an emergency arrangement pending legislation.

I accept wholly that finance is the key. IMEG argues for financial independence and collaboration with and not control by the Department of Trade and Industry's Industrial Development Executive. I cannot judge the reasons for this approach on the part of IMEG but I argue that financial independence is not only desirable but imperative if a bigger share of this market is to be won by United Kingdom industry.

The Government's case is that the Industry Act 1972 is a suitable source of finance. I submit that unless vastly different criteria are applied to the offshore industry, this will prove wrong. In operating Sections 7 and 8 of that Act the Industrial Development Executive, the Government agency, will have to work within established rules with regard to regional and industrial assistance and the evaluation of projects. These rules are totally unsuitable for operations in the North Sea.

An independent source of funds is a "must" for such operations. We on the Opposition side of the House, having advanced some ideas for an industrial holding company, shall have to do our homework to see how such a company would have the flexibility required and the public accountability which is desirable.

I have estimated—these may be rather optimistic estimates—that in total terms the flow of funds to the Exchequer from North Sea revenues might be between £250 million ad £350 million annually in the period from 1980 to 1985. This cash flow is a windfall in terms of Exchequer revenues and ought to be devoted to regional development, primarily if not wholly within Scotland. It should be possible to allow a petroleum supply industries board to be financed against anticipated revenues from the North Sea for petroleum technological purposes and to unite if possible both public and private funds in this development. If the assertion made in the Press by the new Government appointee, Mr. J. P. Gibson, is true—that there is an ample source of private funds willing to invest in North Sea operations—it ought to be possible to unite both private and public funds here. This would give more flexibility in operations and a greater chance of speed than the present arrangements.

The Government's response to the IMEG recommendations is inadequate and timid. They run away from the need for new legislation and avoid their responsibility. I take two examples, partially but not wholly covered by IMEG. The first is the construction of liquefied natural gas carriers. On more occasions than I care to remember I have put to the Government the case that this type of ship could be constructed in a United Kingdom yard. On 12th April 1972 I argued the case for development contracts and I received a reply from the Under-Secretary as follows: I think it will be possible to assist the industry by offering to look carefully at the difficult technological sphere which this involves."—[OFFICIAL REPORT, 12th April, 1972; Vol. 834, c. 1402.] There was a promise that if industry came forward with a package, the Government might act.

As I say, I have argued for design contracts to be placed within United Kingdom yards. Nine months later IMEG recommended that an in-depth study should be made of the opportunities for British participation in all aspects of design and equipment supply in the LNG industry, including the supply of LNG carriers. What disturbs me about this is that if one requires a very costly firm of consultants—and I hope the Under-Secretary will tell us the cost to public funds—to say that here is a world market, a growth market in terms of LNG carriers, this causes disquiet with regard to the association between the Government and industry and the capability of civil servants adequately to advise Ministers. It may be presumptuous on my part but I despair of civil servants' knowledge of industry. I apologise for attacking people who are not capable of replying, and I hope the Minister will say something adequate in their defence.

The Government have instruments under their control which, united with industry, could accomplish this, but not within the framework of the Industrial Development Executive. An independently financed petroleum supply industries board could, on a customer-contractor basis, seek to place such a design study with the Naval Construction Research Centre at Dunfermline. This centre has the expertise and could be expanded for such a study, if we could shake out of our minds the view that the study of defence subjects should be undertaken only at defence establishments. Indeed, we have to some extent shaken off this view because this centre's computer study of very large crude carriers is of world-wide repute. It has already given advice to Shell on the construction of LNG carriers. Given that this type of customer-contractor relationship is the correct approach, or given that the IMEG view is right that these studies should be undertaken, how do the Government see the machinery which they have created to fulfil this purpose? We require an answer, if not tonight at some subsequent date.

As regards the construction of rigs and production platforms, United Kingdom-based concerns have already received orders for the construction of these items. When one talks to the oil companies about the standards of construction, the blithe reply is that they have adopted a "belt and braces" approach. We know that the Department has had a committee doing a desk job to arrive at construction standards, but no research and development of an independent kind has been undertaken into the nature of the stresses to be imposed on these devices or, for that matter, corrosion studies related to North Sea conditions. This again might be part of a study which an independent petroleum supply industries board might initiate.

How do the Government see the new body being able to carry out such tasks? I have no great desire to criticise severely the oil companies which are operating in the difficult and new conditions or to be unduly alarmist, but on grounds of safety and the protection of the environment, to say nothing of the technological spin-off, such studies must be undertaken.

Time does not permit an adequate examination of the statistics of the expected flow of North Sea oil and gas in the 1980s. I have argued that the Government have been too conservative in their estimates and to some extent, though not wholly, the IMEG report supports my views. The Government's report sticks very rigidly to the figure of 75 million tons per annum by 1980 and I recognise that that report would have to be updated in the light of the returns of the 1972 drilling programme. But the figure of 75 million tons is much too conservative, especially in the light of the finds announced recently by Occidental.

The Under-Secretary of State for Trade and Industry (Mr. Peter Emery)

indicated dissent.

Mr. Douglas

The Minister shakes his head. I despair of the Government's estimates in view of the IMEG report and the views of independent observers like Mr. Jack Birks who tremble at the Government's figures. But whatever the accuracy of those figures, because of the quality of the finds much oil will have to he processed outside the United Kingdom. A policy must be devised to limit that quantity to a minimum. The BP Forties field will start production in 1974 and is expected to reach 20 million tons per annum by 1980. That flow is more than twice the capacity of the Grangemouth refinery and we had confident expectations that the plans for expansion at Grangemouth would be firmed up by the company. It appears that the company is now looking askance at any projected expansion of refinery capacity in Scotland. There is no time to comment on the merits of refinery expansion in other parts of the United Kingdom, but it is clear that continued delay on expansion at Grangemouth is intolerable. It may fall to Ministers to tell the company that it is in the interests of the United Kingdom economy that it should make a firm decision about Grangemouth within the next six months. They should indicate that permission will not be granted for the export of oil from the Forties field in advance of such a decision. They must insist that the oil shall be landed in the United Kingdom. The Government should tell BP that its arm-twisting tactics will not be tolerated.

Present finds are at depths of between 450 and 600 ft. and I believe that attention will be turned eventually to the prospects lying in 1,000 ft. or at greater depths. These are high-risk ventures for the suppliers of equipment and for the operators. Lockheed Petroleum Services has begun preliminary design work on a sea-bed oil completion system for the North Sea. The company's work in the Gulf of Mexico has convinced it that it is entirely practicable to complete wells on the sea-bed under one-atmosphere conditions. Shell has agreed to embark on joint development with the company. Again, having in mind IMEG's view on such matters, I should like to know how the Government's proposals ensure that United Kingdom industry will break into this market.

Because of the restriction of time, I have not been able to deal as comprehensively with the subject as I should have liked. We have a unique opportunity to redress the industrial inbalance of 100 years or more, an opportunity which should not be lost. The returns from success are considerable, but failure will result only in an extension of industrial and scientific helotry which was so condemned by my hon. Friend the Leader of the Opposition when in government.

11.50 p.m.

The Under-Secretary of State for Trade and Industry (Mr. Peter Emery)

I reject in the strongest possible terms many of the exaggerated criticisms made by the hon. Member for Clackmannan and East Stirlingshire (Mr. Douglas) in his comments on the IMEG report and the carrying out of its recommendations by the Government.

It is misleading industry and the people of Scotland when the hon. Gentleman denigrates the major steps taken by the Government to carry through the IMEG recommendations. It appears that the hon. Gentleman has not yet realised what the Government are providing in the massive aid and guidance to industry to benefit from the potential business and orders arising from North Sea development. [Interruption.] If the hon. Gentleman does not, industry certainly does. The hon. Gentleman is depressingly out of touch with what is happening not only in this country as a whole but in his own Scotland.

As little time has been left to me, I shall quickly go over the action taken before the IMEG report, because that was the subject of part of the hon. Gentleman's criticism. In December 1971 there was confirmation of commercial quantities of oil in the North Sea. From that date until early spring the Government worked out the exact requirements for setting up the framework of a report by a group of experts. The report was commissioned in the spring and was received by the Department of Trade and Industry in late September. The Government have since published it. We hoped to do so just before Christmas, but publication was in mid-January. There were then made known not only the report but the recommendations and Government action to implement them. This involved the creation of an Offshore Supplies Office and a Scottish Petroleum Office and the appointment of the Director, Mr. Gibson.

In addition, in the period between the commissioning of the report and the Government's acting on it there had been definitive action. The Government had demanded from North Sea oil operating companies fair and full opportunities for British firms to obtain orders which might have been placed abroad. In the summer we set out with the oil companies to establish the precise pattern of orders being placed, and a reporting procedure to see that that was reliably carried out was brought into being. All this time we have constantly reinforced the policy that as a criterion for granting new licences the Government would assess the contribution made by the applicants to the economic prosperity of the United Kingdom.

I turn to the position of reserves. The Government stand by the figures we have made public time and time again—that is, the figures taking account of the discoveries that have been announced. It is interesting also to note, in view of frequent criticism throughout the country that the Government are allowing all the benefit to escape to companies outside the United Kingdom, that the British share of the proven oil reserves is 58 per cent. For gas the figure is 35 per cent. The figures for reserves in the public sector are 25 per cent. for oil and 20 per cent. for gas.

In the drive being given by the Government to encourage industry to participate in supply to the North Sea, I do not think it matters one iota whether the Government or IMEG are correct on the exact amount of oil that may be delivered by any given date, whether 1975 or 1978. The Government are urging Scottish and British industry to meet the demands of the North Sea not only because of the potential around the coast of the British Isles but also as a major lead into international markets, a lead-in to trade overseas. Everyone realises now that more and more exploration and development of oil resources will be in areas of deep water similar to that found on the Continental Shelf. Thus experience and knowledge gained from the North Sea will be the entry to the international markets for years to come.

The IMEG report recommended that a special agency to sponsor and assist the development of an internationally competitive British supply and contracting capability should be set up. The hon. Gentleman criticised the fact that that was not being done. As was explained in the House last month, the Government decided that the quicket and most effective way to act upon this recommendation was to create an Offshore Supplies Office within the Industrial Development Executive.

I happen to believe that the hon. Gentleman does not have a full understanding of the degree of flexibility which can be operated within the Industry Act. Only at the end of last week I was trying to ensure that assistance can be given to a Scottish shipbuilder who wants to get into the market of building supply vessels for the North Sea.

The Offshore Supplies Office is within the Government rather than independent because in that way it can be set up with the minimum of delay and with all the advantages of working within the Industrial Development Executive. There will be no overlapping, conflict of interest or crossing of communications. We have already appointed the director. I am taking him at the end of this Week, I hope, to Glasgow so that Scotland can meet him for the first time in his new post.

We have also given special recognition to the importance of offshore developments to the Scottish economy by our decision to establish a new Scottish Petroleum Office through which the Offshore Supplies Office will discharge its responsibilities in Scotland. It is being set up in Glasgow as part of the Scottish Industrial Development Office. It will have at its head a man with experience of oil-related industries. Alongside it in Glasgow we shall put a branch of the DTI Petroleum Division, staffed largely with expert petroleum engineers. That will create an effective Scottish centre for stimulating industrial development relating to offshore oil. The centre will bring together the Scottish Industrial Development Office, the Offshore Supplies Office and the DTI Petroleum Division. It will work in the closest co-operation with the Scottish Office and with the Scottish Economic Planning Board, which now has a new North Sea Oil Development Committee.

This creates an entity within Scotland which hon. Members on the Opposition side too often do not wish to accept. It will create the sort of stimulus for which they have been asking. Now that it has been carried through by the Government, they will not accept the benefits which will arise from it. We hope that the expansion which we will see from this approach will be beneficial specifically to the smaller industries and to the medium-sized industries where the development has not been as great as we might like.

The House should remember when criticism is being levelled about the IMEG report and the British Government's action, which is what the debate is about, that within four years of commercial discovery Britain will be obtaining about one-quarter of her oil from her own resources. By 1980 the figure should have risen to 50 per cent. The exploration programme carried out offshore has taken place in 20 months. It has brought larger discoveries of oil than anybody ever dreamed about.

The British Government have reacted to that and in the massive drive for exploration the British share of the proven resources is 58 per cent. To meet the challenge of providing equipment for development, from January to September 1972 over £60 million has been spent in Britain. In the Forties field development, out of an estimated £327 million, £225 million will come from United Kingdom firms, which is over 66 per cent.

The hon. Gentleman asked me about the Grangemouth expansion. I believe that BP is still entirely intent on going forward with it. But do not let anyone in this House suggest that oil exports are not to the benefit of this country, specifically in the matter of the balance of payments. This whole effort that the Government have been able to stimulate with industry and with the oil companies is worthy of praise and not of condemnation.

Question put and agreed to.

Adjourned accordingly at one minute past Twelve o'clock.