HC Deb 15 July 1985 vol 83 cc101-9
Mr. Rowlands

I beg to move amendment No. 2, in page 2, line 18 at end insert— '(1A) Agreements entered into under subsection (1) above shall include the provision that the Agency shall lift royalty oil in the relevant chargeable period or where it is unable to do so no later than the end of the following chargeable period.'.

Mr. Deputy Speaker

With this, we may take amendment No. 4, in page 2, line 18 at end insert— `(1A) Agreements entered into under subsection (1) above shall include the provision that, at the request of the Agency, on behalf of the Crown and after consultation with the Secretary of State, the Operator shall reduce production in the field by—

  1. (a) the amount that would otherwise have been supplied to the Agency on behalf of the Crown as royalty oil; and
  2. (b) an equivalent amount of petroleum that would otherwise have been supplied to the licensees
such amounts to be left in the ground and the operator shall not produce such petroleum until requests to do so by the Agency, on behalf of the Crown and after agreement with the Secretary of State.'.

Mr. Rowlands

Although the two amendments are being taken together, the only thing that they have in common is a reference to royalty oil. I divide my contribution into two parts and I hope that the Minister will do the same when he replies. The debate will be better if we do it in that way.

Amendment No. 2 picks up a substantial issue which I raised in Committee and which does not arouse partisan feelings. I drew attention in Committee to the difficulties that the OPA may face in managing royalty-in-kind oil. Provisions governing the collection of royalty oil dictate that the agency must take all its entitlement within each six-month chargeable period. If it does not collect the oil within six months, it forfeits the right to collect, and royalty oil is paid subsequently in cash.

Collecting royalty oil within the chargeable period was a problem even for BNOC. I understand that the lifting of royalty oil is a shambles. Irrespective of our views on other aspects of the Bill, we all wish the agency to be as efficient and effective as possible in managing and trading oil. The problem will arise for the OPA if, in any six-month period, the amount of royalty oil does not justify sending a tanker to collect it. The problem was less serious for BNOC, because it could aggregate royally oil, participation oil and commercial oil to make up a decent cargo. Therefore, in most cases, it was able to collect the royalty oil on behalf of the state.

The OPA will not have the other sources of oil to make up a decent cargo. We tried to persuade the Minister of State to give the agency a more expansive role and allow it to enter agreements to purchase commercial oil, but the right hon. Gentleman turned his back on that. Therefore, the agency will face difficulties and the shambles involved in collecting royalty oil at present will get worse.

Amendment No. 2 suggests that there should be a rollover period, in which royalty oil that was not collected in one six-month period could be rolled over into the next period and help to make up a decent cargo so that the oil could be delivered to the market efficiently. The amendment proposes a system which I gather is the practice in Norway. It offers a practical solution to what will become an increasingly difficult problem for the agency. How does the Minister think that the agency will be able to handle that problem?

Amendment No. 4 raises a different issue connected with royalty oil. I touched on it briefly in Committee. Amendment No. 4 suggests that we should have the power to bank royalty oil. That is an option which should be available to the Government, especially if trends in the market make it commercially and nationally sensible. Here we could be looking at a different scenario from the one that we discussed earlier or the one that we may discuss on Third reading, when we could be facing oil shortages.

9.30 pm

In the coming months, we could see a dramatic fall, even a free fall, in crude oil prices. It is being talked about widely in oil circles, and the shambles that OPEC is in fuels the speculation that there could be a substantial if not a free fall in prices. If a substantial fall occurs, it will have conflicting impacts on our economy. Many aspects of a substantial fall in price could help to develop our economy, but they will also raise genuine questions of oil production policy.

In such a case, would it make much sense to drain as rapidly and as rapaciously as possible our largest, cheapest but declining oil supplies from the Ninian, the Brent and the Forties, or would it make more sense to leave the oil in the ground until a better price could be obtained? It might make honest, commercial common sense to bank a percentage of the oil, especially that in the most mature fields in the North sea. It might also serve as a modest form of depletion policy.

Banking our royalty oil in the mature fields would have no consequence for the development of our new fields. It would have little or no major effect on jobs in the exploration for and development of new fields. Therefore, I am interested to know whether the Minister has any thoughts about banking royalty oil.

Since our Committee stage, the issue of banking royalty oil has been raised. I read with interest in the Daily Telegraph of 1 July the report of an interview between Mr. Roland Gribben and Mr. Peter Holmes, the new chairman of Shell Transport and Trading. Mr. Holmes said: Lower oil prices are bad news for Britain but if Britain could it should be doing something like banking royalty oil. We do not necessarily agree with his concept that lower oil prices are bad for Britain. We have heard conflicting views about the impact of lower, stable or higher oil prices on our economic and industrial prospects, but the issue of banking royalty oil will again be raised if we see a substantial fall in prices. Although I do not wholly subscribe to the view of the chairman of Shell Transport and Trading, there may be a case for the Government at least to have the option of banking royalty oil.

If that decision is taken, there may also be a case for saying to the oil companies that if royalty oil is to be banked they, too, must bank oil barrel for barrel. In a period of dramatically falling oil prices, there might be a simple, common-sense, commercial reason for the Government to consider banking royalty oil and asking North sea operations to do the same barrel for barrel.

That is the idea that we float in the amendment. The amendment also gives us the opportunity to ask what powers the Minister already has to bank royalty oil. Would it require new legislation to do it or would it simply be the subject of sensible, commercial negotiation and temporary arrangements between the oil companies and the Government?

Given the speed with which oil markets change and trends in development occur, it might not be a bad idea for the Government to have the option which the amendment would provide and which, to borrow some words from the Minister, would be flexible, pragmatic and sensible.

Mr. Bruce

I intervene briefly, if only in the interest of being even-handed and to let Labour Members know that I do not just have it in for them tonight. There is some merit in the amendment. It is flawed in its drafting, as the hon. Member for Methyr Tydfil and Rhymney (Mr. Rowlands) acknowledged. He moved it as a constructive contribution to considering how we handle royalty oil in the most flexible way in the national interest.

The amendment raises a wider issue, to which I referred earlier—the extent to which we are overproducing oil, in the sense that the United Kingdom has 1.6 per cent. of the world's reserves and is producing 4.5 per cent. of the world's production. Do we have it wrong, or do others have it wrong?

To the extent, therefore, that the amendment represents a sensible contribution in considering how we might be more flexible in the use of royalty oil, and perhaps help to modify production in a way that is acceptable—we are, after all, referring to the Government's oil—the Minister might consider whether what is proposed, or a variation of it, is worth exploring in terms of an extra option which the Government might wish to employ in future.

Mr. Dalyell

We must be flexible about onshore production. In what was my constituency is the town of Bo'ness, which is a mining area containing a number of shafts where subsidence problems in recent years have proved extremely serious. Houses were built on ground which, because of coal production, has since proved to be unstable.

So much for coal. Some people are concerned about what the extraction of onshore oil may mean in built-up areas, and at this stage I register a constituency concern, though I wish to broaden the consideration of an aspect of oil production.

I heard recently, as did many of my hon. Friends, of worries that had been expressed about one of those great glories of medieval English architecture, Salisbury cathedral. I gather that the great spire of the cathedral is built on a base which, along with the chapter house, has a depth of only 4 ft. It is a marvellous engineering construction. In view of the proposal to extract oil in the Salisbury area, I am told that the friends of Salisbury cathedral believe that there could be sufficent destabilising of the surroundings to render the spire dangerous. I do not wish to exaggerate the point, and I put it no higher than that. Reports are available. Should the Department wish to inquire into the matter, it could undoubtedly obtain more facts.

How flexible are the environmental arrangements if it is found that the extraction of oil would create environmental hazards to what we might call the built-in environment? I do not know whether tonight, in considering this amendment, is the right time to raise this issue. It is clear that a substantial and major problem has arisen and that thought will have to be given to it.

Mr. Buchanan-Smith

While the hon. Member for Linlithgow (Mr. Dalyell) acknowledged that the point he raised was not wholly relevant to the amendment, I appreciate its importance. Every aspect of the application for production with which I am concerned is subject to the full rigours of planning conditions, and at that stage the considerations that he mentioned would be taken into account. I will send him information which may help to describe the procedures that must be gone through and which, I hope, provide the necessary safeguards in such a situation.

Mr. Dalyell

It might be found that the geological knowledge was incomplete. In any event, conditions can alter. What would the Government do if permission were given in good faith by all the parties concerned and it was later found that the geological conditions were such that the built-in environment was threatened?

Mr. Buchanan-Smith

Of course, planning permission can be given subject to certain conditions where special considerations might apply. I shall certainly give the hon. Gentleman more than an outline of the exact procedures involved. I hope that that will be of some reassurance to him, but, if not, he is welcome to come and discuss the general issues with me.

The two amendments are important and interesting, and I do not fault them on any drafting ground. The intention behind them is quite clear. I wish first to deal with amendment No. 2 and then to move on to amendment No. 4, because they raise two separate points.

As background to the matter, it is important to understand the Government's right to take royalty oil, which arises from the conditions of the model clauses under which licences are granted. Therefore, if we wish to change the manner or timing of the taking of royalty oil, it is necessary to amend the appropriate model clauses. It would not be possible to amend the contractual relationship between the Secretary of State and licensees by inserting provisions in an agreement between the Secretary of State and the agency, as the amendments seek to do.

The agency will have no contractual or any other entitlement to lift royalty in kind. It will do so as the Secretary of State's agent. I mention that not in any way to knock down the principles behind the amendments, but because it is important to get that perspective right in relation to their practical application. We discussed the principles underlying amendment No. 2 in Committee on 18 June. The hon. Member for Merthyr Tydfil and Rhymney (Mr. Rowlands) said that there could be problems with roll-over entitlements of royalty going from one chargeable period to another. However, he was wrong to say tonight that the whole of royalty oil is in a shambles—it is not. I acknowledge that there can be problems on roll-over, but not to the extent of disadvantage suggested by the hon. Gentleman. The problem has been with us for some time and BNOC has largely overcome it. I believe that the agency should also he able to overcome it.

In practice, when BNOC has accrued a substantial portion of a cargo of royalty oil near the end of a chargeable period, it has been able to purchase oil from other licensees to make a whole cargo, which it has then been able to lift. There is no reason why part cargoes of royalty in kind should not continue to be aggregated with part cargoes of crude accruing to licensees in the field, either through the agency purchasing the latter—which is why we proposed that the agency should have powers to trade on its own account—or by selling the part cargoes of royalty in kind to the other licensees. There are practical ways in which the agency should be able to deal with that.

It is important to get in perspective the scale of the issue that we are considering. If royalty-in-kind oil could not be aggregated with other oil to make complete cargoes, my Department has made estimates that indicate that royalty in kind oil not lifted would currently be less than 0.4 per cent. of United Kingdom continental shelf production, so the gross scale of the problem should not be all that great.

However, I acknowledge that aggregation has given rise to problems in the past and could give rise to problems in future. I assure the hon. Gentleman that if operational difficulties arise in aggregating part cargoes in the way that I have described, I shall consider the issue again when other changes in the model clauses—which are the correct way to deal with this matter—are next considered. We have no intention that this should be a difficulty, nor do we want it to be a difficulty. There are practical ways around it.

Amendment No. 4 is more fundamental and I cannot accept it. If we have to use the depletion power, the Secretary of State should have the right to use it, not the agency. If it were decided to impose cuts, the responsibility should rest with the Secretary of State.

9.45 pm

It might be helpful if I clarify the Government's depletion policy. The United Kingdom is not able to influence the world oil market through the manipulation of the volume that it produces. We are a medium-sized producer. We produce about 2.6 million barrels a day compared with the United States, which produces 10.5 million barrels, and the Soviet Union, which produces about 12.5 million barrels. We export about 1 million barrels a day net. Any reduction that we made would have little effect on the global oil market.

Anyone who has studied OPEC members or other oil producers will know that any reduction that we made would almost certainly be taken up by others. Any move to cut production would result in clear losses. I am uncertain that we would benefit.

I say that because of the practical and physical nature of our offshore production in the North sea and other areas on the continental shelf. Given the high risk and high cost nature of our production compared with most other offshore areas, and certainly with the big onshore producers, companies would be less inclined to invest in the future if the Government were to restrict production arbitrarily.

One could argue that the arrangement proposed in the amendment puts more of a financial burden on the nation's oil revenues and therefore less on oil companies' returns. However, one must remember that whatever is put in must come out. That applies to any stockpiled commodity. If we are to regain the royalty oil in due course, production would have to be cut to make way for its production. Our production is small in world terms, particularly our production for export. United Kingdom production is soon likely to decline. Our production facilities are designed to produce according to profiles agreed with the Department, and after careful study of the characteristics of the reservoir and other matters. Therefore, any cut in current production would, of its very nature, interfere with those carefully designed plans and could lead to production being prolonged beyond the design life of the facilities, and in those circumstances could be lost for ever. That is a peculiar feature of the offshore developments in the harsh environment that we have. Some of those who talk about depletion sometimes ignore the physical nature of the production from our offshore industry.

I would not, for the reasons that I have given, be happy to accept the amendment, not only for technical reasons but as a matter of principle. For certain fields, the powers that the hon. Gentleman seeks in his amendment would cut across other assurances that have been given, and understandings that have been reached between licensees and my Department during the consideration of development plans. In any case, if we ever wished to restrain production, the necessary powers to do it would be available under the model clauses. Therefore, powers along the lines of the amendment would not be required.

I repeat the point with which I opened the debate. If we were contemplating such powers, which we are not, they should be exercised by the Secretary of State and the Government and not by the agency.

I hope that this useful debate has helped to explain Government policy and to put into perspective the reason for the policy. In those circumstances, the hon. Gentleman may not feel it necessary to press the amendment.

Mr. Rowlands

In view of the way that the Minister responded to amendment No. 2, I accept his assurance that he will look closely at the situation as it develops in the practical way that I suggested.

On amendment No. 4, I have a sneaking suspicion that before too long it may be the oil companies themselves that will be coming to the Government to suggest ideas along the lines that I raised. I shall just wait and watch this space.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

9.52 pm
Mr. Buchanan-Smith

I beg to move, That the Bill be now read the Third time.

We have had good and long debates on the Bill on Second Reading, in Committee, and tonight on Report. I pay tribute to my hon. Friends who have supported us throughout proceedings on the Bill. I also pay tribute to Opposition Members—particularly those who have led for the Opposition—for a useful series of constructive debates in an important area of our economy and on very important issues. I am grateful for the generally constructive way in which they have approached the subject, although I have not always been able to respond by agreeing with them.

To go back to where we started, what we are doing in the Bill is very much based on a change in the structure of the world's oil market. It is that change in the structure and what is happening in the world of industry, business and commerce that caused my right hon. Friend and myself and the Government to look at the activities of BNOC, and particularly its main activity in the trading of participation oil. We were forced to the conclusion that, because of those changes in the market, the corporation had reached the end of its useful life.

I emphasise that the abolition of the corporation does not represent an application of any degree of dogma to the public sector. Rather, it represents the flexible way in which we have endeavoured to respond to the change in market circumstances. At the same time, it provides for a welcome reduction in the size of the public sector, where interference was not needed, although I think that Opposition Members have acknowledged that I have not sought to make that a major part of my arguments in the debates on the Bill.

This has been a useful debate. We have again debated the question of security of supply in times of shortage, a subject to which I attach great importance. If necessary, the agency can exercise certain powers. In our arrangements in relation to participation agreements, international matters and refineries, we have ensured that we retain all those important powers.

In recent years BNOC has been successful in operating as a pipelines agency. I hope that the work of the Oil and Pipelines Agency will carry on and be commercially successful.

I hope that the agency's work will prosper. BNOC has shed all its pure participation supplies in co-operation with the licensees. It has shed also, with their co-operation part of the supplies that it has been obtaining under long-term contracts. I hope that the remaining suppliers will quickly find satisfactory alternative purchasers. The remaining term supplies which the agency can trade freely are now only one tenth of the level before my statement of 13 March. The price paid by the BNOC is what the corporation can realise in the market. To that extent, BNOC has already detached itself from setting a price. That is a good base on which the agency can start.

I pay tribute to BNOC's staff. Things are now different. I wish the new agency and its staff every success.

9.56 pm
Mr. Rowlands

I thank the Minister of State for his kind words about the way that we have conducted our affairs. He has been unfailingly courteous to the Committee and to all hon. Members who have participated in the debates. I am sorry that we were not able to persuade him that in many ways he is fundamentally wrong. It remains our charge and case that, by abolishing the British National Oil Corporation, our oil supplies will be weakened. We do not believe that the right hon. Gentleman's paper assurances from the oil companies, paper participation agreements, and the stripped-down agency which is set up under the Bill provide an adequate alternative form of security of supply. I have charged the Minister of State more than once with the utter complacency behind the way in which he has argued the case for the Bill and the way in which the Government have chosen to pursue the abolition route—abolishing a successful, vibrant and productive corporation.

I am sorry that, despite our efforts, the agency that will be born in the Bill will be a pathetic stripped-down version of what we need. The new agency will be a declining organisation from the start—trading in declining amounts of royalty oil. I do not believe that the Minister will attract people of the necessary calibre and quality to work in that agency, as opposed to those who might reluctantly be forced to go to it from BNOC.

The agency is basically self-extinguishing, as the right hon. Gentleman said. Already in oil circles the Minister's "GOPA"—Government Oil and Pipelines Agency—has been treated with contempt and derision, because everyone knows that it is not the real thing. We shall therefore vote against the Bill because we know that it is not the real thing. We look forward to the day when a Labour Government will establish a real British National Oil Corporation serving the nation's need and especially the challenge of the North sea in the 1990s.

9.58 pm
Mr. Portillo

I have had a number of opportunities to make known my views on the Bill, and I shall not weary the House by going into them at great length again.

I am disappointed that, when the Government took the opportunity to abolish BNOC, they felt the need to set up an agency in its place. My principal worry is that the setting up of an agency means that the Government will continue to be involved in the oil market. There is still a danger that the Government will be seen as a price setter, although I understand the points made by my right hon. Friend the Minister of State. There may still be turbulent days ahead in the oil market. In the past, when conditions on the oil market have become turbulent, someone has taken the blame for unsettling the oil price. As we enter the turbulent days ahead, some countries may again be looking for a scapegoat. I hope that my fears are groundless. Nevertheless, I harbour them.

My hon. Friend the Member for Bedfordshire, North (Mr. Skeet) and I attempted to persuade the Committee of the value of two amendments. One would have paved the way towards the privatisation of the oil pipelines and storage system, but we were unsuccessful in convincing the Committee of the merits of that scheme. I understood my right hon. Friend's argument that the time was not ripe for such a move. I was pleased——

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