HC Deb 13 March 1984 vol 56 cc363-74 9.37 pm
Mr. Gerald Malone (Aberdeen, South)

It is a great privilege to be able to—

Mr. Tam Dalyell (Linlithgow)

On a point of order, Mr. Deputy Speaker. Could it go on the record that the Minister did not reply to our points on the last debate?

Mr. Deputy Speaker (Mr. Paul Dean)

That is not a point of order. It is on the record, presumably.

Mr. Malone

I thought it was about to be a great privilege to introduce this Adjournment debate on the question of the development of North sea oil, but I am at a loss to know how to proceed. I had always understood that debate in the House did not proceed by way of interrogation. I am at a loss because I usually take an example from the hon. Member for Linlithgow (Mr. Dalyell), who is, of course, a much more experienced Member than I. But if there has been any disgrace in the House in the course of the last few moments it has been quite simply in his performance. The House is not a barrack room in which cross-examination is indulged in other than at Question Time. If the hon. Member for Linlithgow had cared to pose his questions in a speech, I am certain that they would have been answered by my right hon. Friend. Indeed, if my right hon. Friend made any mistake, it was to indulge at the beginning of his speech the hon. Member for Linlithgow's eccentricity. This is the first occasion on which his eccentricity has been exceeded by his lack of courtesy. I hope that it will be the last that I shall see in the House.

The question of North sea oil is vital not only for the country but, in particular, for my constituency. That is why I am delighted—

Mr. Robert C. Brown (Newcastle upon Tyne, North)

I am sure that on reflection the hon. Gentleman will agree with me that when he talks about my hon. Friend the Member for Linlithgow (Mr. Dalyell) and refers to eccentricity and lack of courtesy he is making a grave error. Eccentricity I think my hon. Friend would accept, but lack of courtesy is a charge that could never be sustained against him.

Mr. Malone

I might well be prepared to accept that if the hon. Gentleman had listened to the speech of the hon. Member for Linlithgow, but he did not, and I am afraid that in those circumstances I am not prepared to withdraw my comments.

North sea oil is vital not only for Britain but for my constituency. It is worthwhile recollecting at the outset of the debate how important it is. Britain's North sea oil industry now employs directly about 100,000 people. It earns enormous revenues for the Treasury and it has transformed the United Kingdom's economy.

Mr. Geoffrey Lofthouse (Pontefract and Castleford)

On a point of order, Mr. Deputy Speaker. Have we now left the debate on the Wytch farm oilfield?

Mr. Deputy Speaker (Mr. Ernest Armstrong)

Yes. We are now on the second Adjournment debate.

Mr. Malone

Not only has it transformed the United Kingdom's economy but it has transformed the north-east of Scotland. It has crossed the boundaries of technology which had been set by the oil exploration industry in the past and it has resulted in the commissioning of ever more advanced platforms from the United Kingdom. It has given the United Kingdom's industry an opportunity that would otherwise have been absent.

It is worthwhile having a look at the stage at which we have arrived. Up to now, some £30 billion has been invested in the North sea. One third of the proven resources have been exhausted and a difficult future lies ahead. Two thirds of the oil remains to be exploited and one of the difficulties is that the new fields that remain are more marginal than those that were first discovered and the risks are higher—not only the physical and technological risks but also the financial risks that have to be taken by the enterprises that go into the North sea to exploit its resources.

One question that is bound to be asked by any company deciding whether to invest in new fields in the North sea or whether to invest further in fields that are already being exploited is whether further capital expenditure is worth it. There have been times when that might not have seemed to be the case. As more marginal fields have been brought into play, so the returns have been lower. Fields have needed much more capital-intensive investment to exploit them satisfactorily and there have been many doubts, in particular among the major oil companies, as to whether reinvestment, particularly in fields where enhanced productivity is required, would take place at all

Enhanced productivity is important because at least half of the investment in the North sea that will take place over the course of the next few years will be in existing fields where there is an attempt to pull out more oil and companies will be deciding whether to invest in enhanced recovery methods, whether to invest in further drilling programmes from platforms already in place, and whether to develop many small deposits of oil that surround those platforms with some of the more technologically advanced sub-sea well head systems that are currently being developed in Britain and elsewhere.

Stakes are high. When we talk about new fields that are to be developed in the North sea and additional investment in existing fields, we are talking about a figure between £50 billion and £60 billion. It is an enormous investment and it is about twice what has already been invested in the North sea. The House should bear in mind that in the past investment in the North sea has always exceeded expectations, as have the results of that investment. More fields have been discovered and more oil has been brought on stream.

A critical issue in the North sea today which faces not only the Government but British industry is the export of the technology that will be used in the North sea over the next few years. There could well be as much benefit from investment in that type of technology and its export as there ever will be from investment in the North sea itself. Vast offshore oilfields remain in the world to be exploited. There are offshore fields in Canada, Australia, and India, as my right hon. Friend the Minister knows only too well having recently returned from there. Indeed, it is estimated that the majority of the future oil supplies to be found in the world will be offshore and the North sea has provided the test bed for the technology that will enable all that oil to be exploited.

The Government, in two successive Budgets, have raised the curtain on what will now be the second act of the North sea story. Prior to last year's Budget, there was a lack of coherence in the tax structure affecting the North sea and the way in which taxation was collected from oil and gas supplies. It is worth bearing in mind that until last year the average percentage of take from any North sea development was more than 90 per cent.

Many Governments have approached the taxation of the North sea asset on the basis of "Let us see how it goes". Taxes were not introduced on a basis that would encourage a depletion policy; they were not introduced on a basis that oil companies would be encouraged to invest in the future. They were introduced on a willy-nilly basis, one following the other—for example, advance petroleum revenue tax was brought in to meet a certain position as it arose.

To some extent, that is not surprising. When initial investment in the North sea took place, the companies making the investment estimated that they would get a return of about $7 per barrel on the oil extracted. The difference between what they realised and their calculations at the point of decision was enormous. The oil upon which they based their decision to invest capital when they thought it would return $7 a barrel is now fetching about $29.

Perhaps during the first phase of North sea development it was natural that Governments approached the question of revenue raising with something less than a wholly coherent policy. The ground was moving far too quickly beneath them. But the rate of return from the North sea has now changed. I do not think that there will be a return to the days when a barrel of oil will produce anything like the $7 on which previous investment was based. The rate of return will be squeezed, profit margins will be squeezed, and it will be the Government's duty to ensure that the tax regime is such as to encourage continued investment.

The Government's response to that new position has been most encouraging. Last year's Budget included the proposals for the Petroleum Royalties (Relief) Bill, now incorporated in legislation. That has resulted in a vast increase in exploration in the North sea. It is worth making the point that there had been a static period for about two years as oil companies wondered whether they would invest in future. The Government showed their good intentions and introduced that important legislation. I suggest that the current exploration, with the possibility of 19 or 20 new fields coming on stream in the not-too-distant future, is a direct result of that legislation.

In addition, the good news of several taxation changes was announced in today's Budget. I especially welcome the Chancellor's statement that he will consider taxation changes in respect of the incremental oilfields. That is something for which the oil companies have been looking. My right hon. Friend has pledged to discuss the matter with them and to bring forward legislation, perhaps next year. The oil companies will welcome that.

Similarly, capital allowances can now benefit small companies as they can be set against assets when the capital is invested and not when the asset is brought into use. That is especially important in respect of the North sea. It takes a long time to develop an important asset and deploy it in the North sea. The change will make a great difference to small companies which are under-capitalised and which need to get their cash flow right. Both those announcements will be of great benefit to the future of investment in that area.

There have been some disappointments in the past with the performance of British companies and the way in which they have participated in some areas of North sea development. I know that my right hon. Friend the Minister is only too well aware of my slight scepticism of the figures issued by the Offshore Supplies Office about the participation of British industry.

When expressing scepticism about the involvement of British companies in the North sea, I do not seek to set up a protectionist barrier. Protectionism would be fatal for a country which intends to use its industry to exploit the North sea resource and overseas resources. I ask my right hon. Friend to confirm that, no matter how bad the state of British participation in the North sea might be, the Offshore Supplies Office will not try to disguise the true position. It is only by there being no protectionism within Britain and no concealment of poor performance, wherever it may be, that we shall get an industry that will be able genuinely to compete abroad.

Industry was uncertain at the beginning of the North sea story but it is not so uncertain now. British firms are winning many orders and it is reassuring that they are winning them in high technology sectors. It is difficult to select only one or two firms in the Aberdeen area which have been successful because so many of them have enjoyed success, but there are two particular firms which have been successful in the high technology area. One of them is the Wood Group, which will go on to become an important international competitor in that market. An interesting entry into high technology development in the North sea is the partnership between Weir Pumps of Glasgow and an American partner. These two undertakings have developed an example of down-hole technology which they are marketing under licence. It is sweeping the field and taking an ever increasing share of what is a difficult market. They are manufacturing all the items that go into this technology from British products. It is an entirely British product that is going down hole.

Mr. John Maxton (Glasgow, Cathcart)

There is a strike at Weir Pumps.

Mr. Malone

I am sorry to hear that there is a strike, but that does not seem to be holding the firm back in its endeavours to get into North sea developments. I cite the firm as a clear example of the way in which British technology should go.

I ask my right hon. Friend to ensure that the next stage of development sees something further coming from the Offshore Supplies Office. It is important that the highest standards of design and quality should be encouraged in British industry when it is participating in the oil industry in the North sea and abroad. It is a demanding industry worldwide and one in which we shall succeed only if the highest standards are achieved.

We are at the crossroads in North sea oil development. We are probably about to make the largest single investment in any industry that has ever been made by the United Kingdom. It is a success story that we shall win in the second act rather than in the first. At the end of the day British industry will rise to the challenge and we shall have prosperity from North sea developments that will continue long after North sea oil has gone. I believe that the industry will continue to be an export leader in the United Kingdom.

9.58 pm
Dr. Norman A. Godman (Greenock and Port Glasgow)

It is of some interest to me to take up the remarks of the hon. Member for Aberdeen, South (Mr. Malone). He represents an area which I know well, for I challenged his predecessor in the contest for the seat during the 1979 general election. I think that I helped his predecessor to leave the consituency. It is now represented by a man who is very well known in Aberdeen for his dead parrot.

The hon. Member for Aberdeen, South talked about the export of technology, and the Minister knows of my deep concern about export orders in the offshore construction industry. The hon. Gentleman discussed the export of offshore technology from Britain to Canada, Australia and India. and I should like to see that development take place. I believe that British and, particularly, Scottish industrial organisations have much to offer developing offshore industries in other countries.

I am deeply disturbed by recent developments in the industry. One example is the placing of the Sun Oil order with the Gotaverken-Arendal Company of Sweden. This is a matter of regret. We certainly have the capability in Scotland to build the structures that are the subject of the order. Scott Lithgow certainly has the skills, enterprise and knowledge to build such a structure, and there are other organisations in Scotland that could build that rig. Is it riot possible that the placing of this order in Sweden will encourage a trend towards the placing of orders outwith the United Kingdom? That could happen despite the honourable efforts of the Minister to discourage such a development.

What is the value of the work that will come to Scotland from that order, in terms of work subcontracted to a Scottish yard, and will the Department of Energy be ignored in the future where such contracts are concerned? It is essential for the Scottish industry not just in the north of Scotland but on the lower Clyde that the orders should come to Scotland. We have the skills and the knowledge to produce semi-submersible vessels and structures, but now we hear that it is on the cards that the order for the British Petroleum single well oil production system may also be placed abroad despite the fact that both Cammell Laird and Harland and Wolff are keen to acquire the order. British Petroleum's Government-appointed directors—if not BP itself—have an important responsibility to ensure that the order is placed within the United Kingdom. If it is allied with the Sun Oil rig order, are we not beginning to talk about the export of orders rather than the export of technology? We might go in the opposite direction from that pointed out by the hon. Member for Aberdeen, South and talk of importing technology in this important field.

Mention has been made of the massive sums of money that are to be invested in offshore developments. Much of that money will go to the offshore construction industry. What is the Minister's view about the Sun Oil order going to Gotaverken-Arendal, and how will he react if the BP order is placed outwith the United Kingdom?

I should also like to know something about the Department of Energy's view of current developments at Scott Lithgow. To me privatisation is very much the second best alternative, but Trafalgar House and Howard Doris may come to the lower Clyde, and they have between them the capability and nous to build such structures. How does the Minister view developments at Scott Lithgow and elsewhere, in the light of the placing of the Sun Oil order abroad and the likelihood that the BP order will also be placed abroad?

I apologise for intervening in an Adjournment debate, but these issues are vital to my constituency. When the dust has settled around the current negotiations over the acquisition of Scott Lithgow, we want to see orders placed at that yard. We want to see the prospect of employing 4,000 people or more at Scott Lithgow rather than the figure of about 2,000 which has been bandied around by observers and journalists.

9.59 pm
The Minister of State, Department of Energy (Mr. Alick Buchanan-Smith)

I congratulate my hon. Friend the Member for Aberdeen, South (Mr. Malone) on taking the opportunity of a second Adjournment debate to raise a subject that is of considerable importance to his part of Scotland and the rest of the United Kingdom economy. I know that he represents—

It being Ten o'clock, the motion for the Adjournment of the House lapsed, without Question put.

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Mather.]

Mr. Buchanan-Smith

My hon. Friend the Member for Aberdeen, South speaks with real authority as he represents some of the most vigorous firms and individuals that are exploiting the United Kingdom continental shelf to the advantage of the entire country. I congratulate him on advancing his case in such a forthright way. I share much interest in these matters as I also represent part of the city of Aberdeen and many of my constituents are also in the forefront of development.

I am delighted to see that the hon. Member for Oldham, Central and Royton (Mr. Lamond) is present. I am sure he agrees that other cities should follow the example of Aberdeen. I do not intend to reiterate what my hon. Friend the Member for Aberdeen, South said about the economic importance of the industry. We must remember that about 3,000 companies in the United Kingdom are now involved with North sea oil in some way. With regard to what the hon. Member for Linlithgow (Mr. Dalyell) said in the previous Adjournment debate, I should point out that I have considerable first-hand experience of the oil and gas industry. One does not have to be in a position of responsibility in Government to understand these matters. It has come home to me since taking over my job in the Department of Energy that many new and old companies in many parts of the United Kingdom have benefited tremendously from the industry.

Perhaps I shall be excused for mentioning a traditional company—British Ropes—that is to be found in the heartland of Britain that was in the forefront of our industrial revolution. The company was built up on our naval skills in an earlier age and has recently proved to be one of the finest examples of firms that export technology. It is successful against worldwide competition. It scored a world first in technology with the Exxon leader tower guiderope mooring system within 100 miles of New Orleans in the heartland of the American oil industry. It is a fine example of many enterprising companies that are to be found in the United Kingdom.

My hon. Friend was also right to point out that we are moving into a new phase of development that will require the development of more capital-intensive and difficult fields. I am grateful for his welcome of the budgetary changes.

The Chancellor said that he would consider the problem of incremental oilfields, which is vital to the subject. Whatever the decision may be, whether it is a decision to make changes or new proposals, the fact that it will be back dated to today is further proof of the commitment by the Government to this new stage of development of our oil industry and the marginal fields. If we could get greater reserves through better methods of exploitation of reserves, that would enhance oil recovery, which would be to the benefit not only of the oil companies but of the United Kingdom as a whole and would improve the continuity of supplies from the continental shelf.

Mr. Maxton

What effect will there be from the changes in the capital allowances and the reduction in corporation tax? New industries trying to get in new investment need capital allowances, whereas the older companies with high profitability benefit from changes in the corporation tax. How will this benefit the industry?

Mr. Buchanan-Smith

What the Chancellor announced today about these changes will be of net benefit to the offshore oil industry, although the industry will make its own assessment. I have no doubt, from its response a year ago—to which the Chancellor referred in his speech—that it will realise that the British Government are firmly behind the continuing development of the North sea and other areas of our coast.

One thing that my hon. Friend the Member for Aberdeen, South did not mention was the current licensing round that I announced a few weeks ago, which takes us out into the marginal areas of deep water where new technology is required, in waters of depths up to 2,000 m. This demonstrates that we in the United Kingdom industry are at the forefront of the technology and underlines what my hon. Friend said. I hope that we shall make sure that we can export that technology and the hardware that goes with it where it may be appropriate. It is not just technology that we want to export overseas, but everything else that goes with it.

As my hon. Friend knows, my right hon. Friend the Secretary of State has taken initiatives in one of the newest areas, China, where our experiences could be particularly appropriate. A few weeks ago I visited India, another country that is successfully and efficiently developing. Its offshore reserves are important and when it moves into its deeper waters, as it will do, our technology may help. I found out how many people in that country look to the technology developed by British companies.

The significant thing—as in any country with a young industry such as ours was—was that we had to rely initially on the technology of others. We have now developed our own technology and have something to show the rest of the world. This is one reason why I strongly support the export policy and why the work of my Offshore Supplies Office will be directed in that way. It will give a continuity to the industry that will go beyond the exploration and development stage of our oil resources.

If we are to survive in the oil industry we have to be international, as the oil industry is international. We cannot try to develop our industry on a national basis because if we did so we should not be taking the full benefits that it offers us both now and for the future.

My hon. Friend rightly said that he hoped that we would continue our policy of making sure, through the Offshore Supplies Office, that we shall continue to have a good share of the activity on the continental shelf. I give him that assurance. Equally, I accept that the purpose of the Offshore Supplies Office is to give British companies, and to ensure that operators give British companies, a full and fair opportunity to quote and participate in such development.

That is not being done in a protectionist sense, because we would lose the opportunity for our industries to become international and competitive. One of our successes, which I saw in India where British companies are operating, is that we have already demonstrated that we are competitive on the international scene. I gave a few moments ago a striking example of that success in the American offshore industry where we have proved ourselves to be competitive. I assure my hon. Friend that we shall do our best to support our industry so that it can be competitive and take advantage of those opportunities overseas.

My hon. Friend the Member for Aberdeen, South mentioned our assessment of the performance of British companies and questioned whether it was a real one. I believe that it is real because, given that we are dealing with an international industry and that we want British companies' to act internationally, the proper way to make an assessment of British participation in work on the continental shelf is by dealing not with brass-plate companies but with those that base their activities here, are manufacturing here and are creating British jobs. That is the basis of our assessment of the participation of British companies.

I share my hon. Friend's concern that overseas companies are most interested in our development of new technology, such as that carried out by the Wood Group and Weir Pumps, which I commend. the more that we can do to encourage the development of such new technology, the better. I hope that my hon. Friend will be encouraged by what was done in the eighth licensing round, when we required successful licensee companies to discuss with us the research, development and technology that they would use within the newly licensed areas. We have had very successful discussions with companies so far, and I intend that they will be a feature of the ninth licensing round. They will probably be further refined in the light of our experience in the eighth round.

The companies successful in obtaining licences to work on the United Kingdom's continental shelf will require the increasingly important new technology to work in frontier areas. It is important for new technology to be transferred to British companies, as we can ensure continuity only in that way.

I know the difficult time that the hon. Member for Greenock and Port Glasgow (Dr. Godman) and his constituents have had and of their considerable concern, anxiety and worry in recent months. I thank the hon. Member for the constructive part that he has played, which I would expect of him and any other hon. Member in making sure that the long-term interests—I stress that they are long-term—of his constituents are properly served. I am delighted that I and my Department have been involved in trying to find a solution to the great difficulties. I hope, for the sake of Greenock and Port Glasgow and the United Kingdom offshore industry as a whole, that we shall have the capability to build the semi-submersibles required in the next generation of development.

I would have been bitterly disappointed, and would have shared in the disappointment of the hon. Gentleman and his constituents, if we had not been able to preserve and continue the first-class facilities at Greenock and Port Glasgow. I refer to the physical facilities in terms of yard space as well as the capability in human terms, which is equally important. It would be a tragedy if the skills that have been built up over generations in our older shipbuilding industries were lost to the new generation of offshore industries, where our future must lie to an increasing extent.

Therefore, I commend and support the efforts of those such as Howard Doris and Trafalgar House, which have come together to try to find a solution. I only hope that over the next few days and weeks, in co-operation with everyone concerned, not only a satisfactory but a lasting solution will be found. That is in the interests not only of Greenock and Port Glasgow but of the industry as a whole. We need an effective construction and fabrication industry with a semi-submersible capability.

I am optimistic that a soundly based, effective and proper solution will be found. However, that will be only the start, and it will be difficult to reach that starting point. After we have got there, we must remain competitive. I make no apology for preaching this to the House. I think that it is accepted by everyone in the House that, if we are to be competitive, full and fair opportunity should be given. I shall do my damnedest to make sure that our firms and yards are given a full and fair opportunity. However, in being given that opportunity, it is up to the management and the work force to make sure that they take advantage of it by being competitive. This is a highly competitive world. If we are not competitive, we shall be looking only to a short-term and not to a long-term industry that has the export opportunities to which my hon. Friend the Member for Aberdeen, South and I have referred.

Prices are important in competition. That is where the dedication of the work force and the initiative and enterprise of the management have a crucial part to play. However, quality is also important. The industry requires an incredibly high standard of quality of workmanship. I hope that everyone will rise to that. We must also make sure that we can deliver on time—indeed, ahead of time. It is significant that the companies and yards that have been most successful are those that have the best records for delivery and quality.

Therefore, if we can put together a deal for Scott Lithgow, which I hope we can, that will be only the start. I hope that everyone will continue their endeavours in making a start on carrying through the operation to a successful conclusion. The Offshore Supplies Office and I will do everything possible to ensure that those people are given full and proper opportunity to compete. I say that as much in relation to the British Petroleum orders that will be eventually placed as in relation to others.

The hon. Member for Greenock and Port Glasgow referred specifically to Sun Oil and the development of the Balmoral field. I make no secret of the fact that last summer, when the development was coming forward, I welcomed it. It is a marginal field, and I have always appreciated that. However, it was going to use a different technique—a floating production facility—for that field, which was another new development in the North sea. I am sad to have to report to the House—I say nothing that I have not already said to the company—that the performance of Sun Oil and its co-partners in the development has fallen far short of what I would expect from a major American oil company, according to experience in recent years. It falls far short of what I would expect of any company which, through the licence and development approvals that it has been given by Her Majesty's Government, has had the opportunity to operate on the United Kingdom continental shelf. I am sad to have to say that. Some hon. Members have expressed exactly that point of view to the company.

I make no secret of this fact. I have already had two meetings with the company and its partners. I expect to have a third meeting tomorrow. Before the meeting I hope that the company will decide what it will do. I say that not only because I am concerned about its performance—I have made my concern absolutely plain to the company and its partners—but because, although the company has given me an assurance that it will meet a United Kingdom content of over 70 per cent., which other operators in the North sea have met in recent years, I have serious doubts about its ability to perform to that standard. I say that with sadness rather than in anger. It has not given British yards a full and fair opportunity to tender for this work as we expected it would. If it gives the main contract for this work to an overseas yard, I shall have serious reservations about whether it will achieve what it has said to me it will achieve. It told me that it could achieve a United Kingdom content of more than 70 per cent. If it puts the order abroad I, my Department and the Offshore Supplies Office will monitor closely its performance while carrying out its development plans and building the structure during its assembly. Because of my doubts we shall have to monitor the position continually and carefully over the entire development period.

At the end of the day it is vital to me, my Department, the Government, the House and the nation, given our tremendous assets in our continental shelf and given that it is open to the Government through their licensing procedures and the procedures for approving development plans, that we have companies as licensees and approved as operators, that put forward development plans to us, in whose performance we have confidence and which we believe will perform correctly and in the best interests of the United Kingdom.

I have said to the company and its partners that, if the performance falls short of our expectations, I shall scrutinise carefully future attempts by those involved in such developments if they apply for approval, development or licences to explore the United Kingdom continental shelf. It is my duty to make sure that we have companies operating in whose performance we have confidence.

I thank my hon. Friend the Member for Aberdeen, South for initiating the debate and the hon. Member. for Greenock and Port Glasgow for his contribution. We are dealing with one of the most exciting areas of the British economy. My Department and I are committed to continuing development and confidence and to making sure that we develop these resources in the best way possible to the best advantage of the nation, both within the United Kingdom and overseas. I assure the House that I am fully committed to that.

Question put and agreed to.

Adjourned accordingly at twenty-three minutes past Ten o'clock.