HC Deb 14 March 1985 vol 75 cc462-91

Relevant document: Energy Committee Fifth Report, House of Commons Paper No. 234, Session 1984–85.

Motion made, and Question proposed, That a supplementary sum not exceeding £20,000,000 be granted to Her Majesty out of the Consolidated Fund to defray the charges which will come in the course of payment during the year ending on 31st March 1985 for expenditure by the Department of Energy in connection with the energy industries including related research and development, selective assistance to industry, energy conservation, oil storage, and certain other services including grants in aid and an international subscription. —[Mr. Buchanan-Smith.]

4.58 pm
Mr. Ian Lloyd (Havant)

When my Committee presented its fourth report on the Winter Supplementary Estimates, we indicated as clearly as we could that we should be most concerned were another Supplementary Estimate to be placed before the House, unless the Government made a more frank statement on their policy of using BNOC's participation agreements to support the price of oil.

That forms the main basis of our fifth report, which I have the honour to present today. In doing so, the House will expect me now to alter the emphasis which I would otherwise have placed on our further analysis and the conclusions we reached in the light of the statement made by the Minister of State yesterday afternoon.

In that context, I shall make three preliminary observations. The first is that my Committee, in its report, did not recommend the abolition of BNOC, and I think that is clear. My personal judgment is that the Government's action is fully justified by the evidence presented to us and that it resolves an awkward dilemma, though I fully understand that some members of my Committee on the Opposition Benches will not share that judgment or conclusion. They march to a different drummer on this issue, although I like to believe that, for the most pan on most energy issues, we march in step.

Secondly, the House will waste a valuable opportunity this afternoon—one that is rarely granted to us—if we are tempted to indulge in what I can only describe as an ex post facto, yahboo debate in which we endeavour to score party political points on the basis of who said what, when and where. There is, alas, all too much opportunity to do that, and no doubt we shall have further opportunities when the BNOC legislation is eventually placed before the House.

Thirdly, I hope the House will take note of the fact, which is not without significance, that the Government have responded directly, rapidly and unequivocally to a Select Committee report. It may be, as one City editor described it this morning, a "milk and water report," but I hope I may be permitted the ironic reflection that if this is the action that follows a glass of milk and water, heaven knows what the Government might have done had we presented them with a stronger drink. Although our recommendations may have been limited, if not muted, the evidence was of outstanding interest and significance, and the analysis was rigorous and effective, despite the limited time in which we had to work.

We have been considering the tip of a large and substantial iceberg, and, to a large extent, the size and significance of the iceberg beneath the surface of the two Supplementary Estimates compelled the Committee to examine it. In relation to modern national budgets, when Treasury officials can cheerfully lose £100 million in what they describe as a rounding-up procedure, £70 million may be small beer—

Mr. Ted Rowlands (Merthyr Tydfil and Rhymney)

Rounding down.

Mr. Lloyd

I would say that rounding in either direction is unforgivable. We considered a significant manifestation of energy taxation policy, and it is that to which I shall direct the bulk of my remarks.

Before doing so, however, the House may find it useful if I summarise the essential findings of our report—the milk without the water. First, the procedure still imposes sustantial strains on my Committee, and I pay credit once again to its members and staff for the speed with which they worked. The time compression is simply too severe and it must be reconsidered.

Secondly, it became clear, despite strenuous denials to the contrary, that the de facto position was one in which the Government, paying BNOC's piper, were calling the tune. How could it be otherwise? BNOC, while it continues to buy at a regulated price and sell below that on the spot market, could be losing up to $1 million a day. We saw no easy escape from that dilemma while the current policy prevailed. Indeed, we said precisely that.

Thirdly, it was evident that, despite strenuous demands, whatever the mechanics of the consultation process may have been, the Government took the view that price stability meant stability at a price which was acceptable to them and to OPEC. Of course, that is and always has been the highest obtainable price for oil. The Government's interest is at its most manifest in the fiscal sphere, where they admitted that direct taxation on North sea oil would produce about £12 billion in 1985–86. They admitted further, but not without some pressure, that this was merely the first bite at an extremely succulent cherry, for by the time the oil is further refined, distributed, sold and, of course, taxed, in normal circumstances it would provide a further $45 a barrel, which would be divided roughly into $37.50 to the Government and $7.50 to the companies after their costs have been met.

I know from experience long ago that the concept of economic rent is puzzling not only to the vast majority of the public but to many economists and others. I recall an occasion when the late Sir Dennis Robertson—one of the three wise men appointed by Prime Minister Attlee — in his celebrated lectures on economic rent at Cambridge, drew on the board a temple similar to the Greek diagram Pi, and next to it a rather forlorn figure looking like Winnie the Pooh after a night out. He used to say, "This is what I mean when I say that rent may not enter into costs." It was a vivid illustration, but what we know is that the economic rent concealed by this process is vast and that, from the nation's point of view, it certainly enters into costs.

The calculations are complicated by the detailed fiscal effects of oil trading, and as we are net exporters of oil —almost all of which is defined as landed for fiscal purposes — the total taxation produced by about 2.8 million barrels a day from the North sea cannot be far short of $37 billion, or about £34 billion per annum. That will continue substantially unchanged whatever happens to BNOC. The price of oil would have to fall a long way before that large figure was affected significantly.

Fourthly, the Committee concluded, and the Government admitted, that, despite the size of that sum—perhaps I should say that fiscal plum—the national interest of the United Kingdom must be determined by much broader criteria. That is certainly true of the OECD as a whole, for within the OECD only Norway and Britain are partial beneficiaries of the OPEC umbrella under which we shelter. The American domestic economy does not choose to shelter under a high energy cost system. The charts and figures—I wish I could display them to the House — in the massive document entitled, "Energy Prices and Taxes", published by the International Energy Agency, are both revealing and important. If we take the year 1980 as an index of crude oil import prices, expressed in national currencies as 100, by October last year—a mere four years later—the figure for western Europe was 160 and that for the United States had fallen to 85.

The result is seen most clearly in petrol prices and taxes. All have increased, but the United States and Canada remain by far the cheapest at about 30 US cents per litre, while Britain has slipped down the league table to 53 US cents per litre. Indeed, it is noteworthy that the tax on petroleum in the United Kingdom alone, and in most western European countries, is greater than the total cost of petrol in the United States and Canada.

It is no wonder that our economies are, by comparison, sluggish and unresponsive. We tax energy generally and oil in particular to the point where we create a major disincentive to economic development. The knock-on effects of this policy are not confined to oil. Oil sets the ceiling as the premier and most flexible fuel. Priced at its current level after tax, it enables other forms of energy to be sold at prices far above those which the market would otherwise determine and sustain. The result is that the entire energy base of western Europe, including ours, is distorted not only by the oil taxation mammoth that it must carry but by the artificial relationships between other forms of energy, such as coal and natural gas, and industrial costs generally.

That is a deeply entrenched policy, and its influence and scope will not disappear overnight with the transformation of BNOC. The Government's welcome abdication from the oil price market is, nevertheless, a step in the right direction. The Government have no more right to interfere with or influence the price of oil than they have to influence the price of tin, rubber, steel, coal or any form of energy. The transformation of the pattern and scale of energy supply in response—that response must be rapid and effective—to changing technologies, demand, costs of supply or changing conditions of any sort, is best achieved if rigidities are not inserted into the market mechanism either by the bureaucratic procedure of the cartel or by the bureaucratic procedure of the state. Inevitably, there is interference by both sectors, and that distorts real costs, investment and demand, and it does all that in the interests of so-called stability, which, on close examination, merely proves to be a euphemism for high prices. The economy becomes sluggish and unresponsive, unemployment is higher than it need be, and the optimum distribution of energy supply between different systems and different markets is distorted, sometimes beyond all recognition.

That is often described in an even more exaggerated and tendentious euphemism as "an energy policy." It is nothing of the kind. Essentially, it is a policy to distort and often to inhibit development and change. To put it another way, it is the wolf of political opportunism and reaction parading thinly disguised in the sheep's clothing of a spurious economic rationality.

It is now clear that North America and Japan, which we properly watch carefully, are pursuing policies designed to achieve low real energy costs. That may not be a sufficient explanation of their undoubted economic growth and success over the past decade, but it is certainly a most vital condition of that success.

That is the iceberg beneath the Supplementary Estimates. It is large, significant and, above all, dangerous. We ignore it at our peril. Our industrial survival, especially in manufacturing industry, in a starkly competitive world, demands low, competitive real energy cost levels. In turn, that demands two things. The first is unfettered industrial efficiency in the energy industries — they must be enabled to respond quickly to the futures that they individually perceive—and the second is a healthy fiscal self-restraint on the part of Governments. They would be wise to let energy fructify within the system and let the economies of the West get up speed. If they do that, there will be a plethora of future fiscal opportunities for avaricious Chancellors. If they do not, they will have only themselves to blame, and no other policies will enable them to compensate, for the consequences. We have proved that throughout Western Europe.

5.12 pm
Mr. James Wallace (Orkney and Shetland)

We all welcome this debate. When it was announced that the debate would take place, it was thought that it would concentrate entirely on the Select Committee report, which has been unfairly described as having milk and water proposals. However, I am sure that hon. Members will take the opportunity to comment on and question the announcement made yesterday by the Minister of State, Department of Energy about the future of BNOC.

As the first hon. Member who is not a member of the Select Committee to speak in the debate, I thank the Committee, as no doubt the whole House will wish to do, for the speed with which it undertook its worthwhile work and the detailed evidence. The Committee has also reported speedily, thus enabling us to have the report when we debate this matter.

The report raises some highly pertinent questions about the operations of BNOC and Government policy, particularly in the two-month period since the last report on an almost identical Estimate, although with different sums. On that occasion a number of hon. Members said that there would be considerably more disquiet than that which they were expressing if, within a short time, the Government had to return to the House for sanction for further funds to subvert BNOC. Although the hon.

Member for Havant (Mr. Lloyd) made a spirited speech in which he made a number of pertinent points, the atmosphere of the debate, particularly on the Conservative Benches, might have been more hostile if the Minister had not made his statement yesterday.

No doubt hon. Members will take the opportunity to examine the merits of the abolition of BNOC, but this was done with great haste and I wonder why it was done now and not three months ago or at some time in the future. When he wound up the debate in December last year, the Minister said: The Government's policy on oil prices has been stated more than once. It is to avoid destabilising moves in the short term. To the limited extent BNOC can influence events, its aim has been to promote stability." —[Official Report, 18 December 1984; Vol. 70, c. 232.] Just before time cut him off, the Minister went on to emphasise that at that time there was a firming-up of oil prices, and he referred to the winter weather. With spring approaching, is this the most appropriate time, from the point of view of securing stability, to announce this measure? What is more, in the immediate aftermath of the miners' dispute, we all expect that the demand for oil will be decreasing.

If it is the Government's policy, as stated by the right hon. Member for Kincardine and Deeside (Mr. Buchanan-Smith), to ensure stability, at least in the short term, once BNOC has been abolished, it will be interesting to see whether stability will be better secured through the auspices of the agency. If there is a policy, we are entitled to ask whether we should now expect that same policy to be implemented without BNOC. Three months ago the Government were looking to BNOC to carry cut their policies. What method will they now propose to achieve that end?

At the time of the legislation that put BNOC into its present position, the then Secretary of State for Energy, now the Chancellor of the Exchequer, said that the trading corporation would exist for the specific purpose of security of national oil supplies: I noted in the statement yesterday that the Government consider that it is essential to retain powers which would enhance security of supply if that proves necessary. What mechanism do the Government propose to use in the absence of BNOC if there were a need to ensure security of supply by activating participation agreements or calling in royalties in kind?

Why was it necessary to wind up all BNOC's operation? If the Government think, with some justification in the light of the report and of the market in recent months, that BNOC was not maintaining a worthwhile role as a trading operation, why did they have to throw the baby out with the bath water? Would it not have been possible to maintain BNOC and redefine its terms of reference to undertake those matters which the Government will now give to a newly created body? Why do we have to go through the rigmarole of winding down one body and setting up another when a change in the terms of reference might have been a more appropriate way to go about it?

Yesterday's announcement could be used as a smokescreen to divert our attention from some of the other important points raised in the Select Committee's report. The hon. Member for Havant, who is Chairman of the Committee, has not allowed himself to be diverted by that. I look forward to the Minister's reply to his pertinent questions. However, there are still fundamental issues on which we have not had a clear answer from the Government.

The first one, which has already been mentioned, is price. The Committee considers that matter in some detail at paragraphs 7 to 15, 21 and 22. In response to the hon. Member for Bedfordshire, North (Mr. Skeet) last June, the Secretary of State for Energy said that the Government's attitude to oil prices was that they would be determined by the law of the market. For some time the Government have sheltered behind the excuse that they are in no position to influence prices or long-term trends. I accept that many complex factors determine the price of oil, but in paragraph 21 the Select Committee concluded that the United Kingdom, as the world's fifth largest oil producer, was a substantial player in the oil market and, to some extent, a price maker rather than a passive price taker. Many of us share that view.

If the Government are able to influence prices, the debate should be about whether they should influence prices and, if so, to what extent. As the hon. Member for Havant said, we should consider how much taxation adds to prices. I agree with him that our industry deserves lower energy prices. We were all told about, and looked forward to, the great advantages of North sea oil. For all the benefit that our industry has gained, that asset could have belonged to any other nation. British industry has had to pay as much for oil as anyone else. Indeed, some of our competitors on the continent have obtained North sea oil more cheaply.

We have also had to bear some of the penalties of North sea oil. Now that the sterling exchange rate against the dollar is so low, we tend to forget the years when sterling was high because we were a petrocurrency. That caused problems for British industry in terms of international competitiveness. A reduction in taxation—which is not a subsidy—would benefit British industry.

Pricing oil highly brings revenue to the Exchequer, but the Select Committee concluded that lower prices would assist our manufacturing industry and, to some extent, help to create jobs. This is not an issue on which the Government can afford to be neutral. They cannot say that it is a matter for the law of the market. The price of oil has important consequences for many aspects of our economic life and we should welcome the Government coming clean and telling us what they believe oil pricing policy should be.

We are also unclear about the Government's policy on the level of oil production and, indeed, whether there is one. The prospect of benefits from North sea oil coincided with the Yom Kippur war of 1973. We looked forward to being self-sufficient. We are now producing more than 120 million tonnes annually and are probably 30 per cent. above self-sufficiency. The decision to go to that level of production was taken without any debate in the House, and perhaps without any debate in the Government. The management of oil is so important to our economic wellbeing that there should have been a much more open and constructive debate on whether that policy was in the nation's best interests.

There has been no discussion of the consequences of restraining production on the exchange rate or the balance of payments. There is a feeling that the Government have quietly allowed themselves to be committed to a policy of maximum production, for Exchequer ends. As the Select Committee said, although the PSBR is important, it should not dominate Government thinking on oil pricing. Nor should it dominate their thinking on the level of production. People are increasingly questioning whether we should impose limits on production to extend the life of North sea oil. The time has come for that debate.

It is regrettable that the only genuine chances that we have had to debate this important subject recently have been the two Supplementary Estimates debates, lasting three hours each. No doubt we shall have another opportunity in debates on legislation concerning BNOC, but I do not believe that they will enable us to debate the wider issues. I challenge the Government to present a White Paper on their oil management policy on pricing and depletion so that the House, industry and the country can have a proper opportunity to discuss how we manage the nation's most important asset.

5.25 pm
Mr. Michael Portillo (Enfield, Southgate)

Like the hon. Member for Orkney and Shetland (Mr. Wallace), I congratulate the Select Committee and my hon. Friend the Member for Havant (Mr. Lloyd), who presented his case clearly today, on a capable report. With the announcement yesterday of the abolition of the British National Oil Corporation, we shall never quite know whether the Government jumped or whether they felt the push of the Select Committee in the small of their back.

I have taken a close interest in BNOC for a long time, and I recall that when the Conservative's came to power in 1979 two arguments for retaining BNOC were put forward. The first was that the Government needed an insider in the oil industry because oil production was new to Britain and, it was argued, the complexities of the industry were such that the Government could not understand the industry without being a player on the field. I always distrusted that argument. The complexities of the oil industry are not so much greater than any other as to require the Government to be involved in it. The second argument had more merit. It was that BNOC might play a role in protecting our security of supply. That is an important matter, but the more I considered the proposition, the more I concluded that the participation agreements of BNOC could not achieve that security of supply.

The participation agreements are simply not flexible enough. BNOC is committed to buy or sell oil many months in advance, but a supply crisis in oil can arise in a few days. Moreover, the participation agreements cover about half of the nation's oil, and yet it is possible to have a shortfall of about 5 per cent. and for that to constitute a major problem. Furthermore, the participation agreements cover only crude oil, and the substance that we need to power our cars and factories is not crude oil but the products of oil. BNOC never had control over the supply and movement of products of oil.

Fortunately, as the security of supply is so important, the Government have adequate powers to take any steps that they need to take in an emergency under the Energy Act 1976. BNOC never added greatly to the Government's powers. Indeed, its existence made Britain more prone to oil disruption, because we came to rely on it to take care of us during supply crises. During the problem of the summer of 1979, when there was a world-wide shortage of oil products, especially petrol, and when my right hon.

Friend the Member for Guildford (Mr. Howell) was Secretary of State for Energy, the Government relied on BNOC to keep things ticking over smoothly. For the reasons that I have just given, BNOC was not able to achieve that, and I suspect that the Governments of France and Germany took more direct action to ensure that their oil companies kept them supplied. Although other European countries had no BNOC and no oil of their own, there were fewer petrol queues on the continent, and it was oil-rich Britain which seemed to bear the brunt of the problems.

As soon as that security of supply argument lapsed and was discredited, another argument arose in its place. It was that it would be difficult for the Inland Revenue to levy taxes on oil unless there were a reference price clearly established by BNOC. I never believed that argument, either. It seemed to me that other countries, such as the United States of America, had no need of a national oil corporation and were still able to levy taxes on their oil companies satisfactorily. It seems that that argument has now fallen from sight.

I do not intend my following remark as in any way an aspersion on the staff of BNOC, who have performed their duties with great dedication and distinction. However, BNOC was not only an unnecessary invention but was rather harmful in its effects on this country. It was trading about half the oil being produced in this country. Therefore, it was the price setter for North sea oil. At the same time, it was state-owned. We cannot altogether blame foreign Governments who were confused by that. I accept the assurances given by Ministers that the Government did not set the price of North sea oil, but where a state-owned company is also the oil price setter it is unreasonable to expect foreign Governments to understand that fully. The subtleties of the relationship between the Government and BNOC are sometimes puzzling enough to people in this country, and clearly they can be perplexing to people in other oil-producing states.

In fairness to BNOC, one must say that it was put in an impossible position. If its prices reflected market conditions, it would be accused of forcing the pace—either forcing prices upwards when the market was moving in that direction, or being the leader in bringing prices down. If, on the other hand, BNOC held back and lagged behind the market, it was liable to run up the losses on which the Select Committee has just so ably reported.

Therefore, Britain was also put in a difficult position. It seemed that we were being invited either to join in an international price-fixing cartel or to hold back from joining in that cartel and risk incurring the wrath of other oil-producing countries if we did so. We were being drawn into either collusion or collision with OPEC. It is interesting to note that much more important oil producers than ourselves, such as the United States, were never so embarrassed, because they never had a national oil corporation to put them in such a position.

Therefore, I am sincere in extending congratulations to my right hon. Friend the Minister of State on the courageous decision that he announced to the House yesterday. It is a courageous decision, and the right one, too. I hope that he will not mind if I say that I have three reservations about his decision. The first is that in his statement yesterday he seemed to lay great emphasis on the recent change in oil trading conditions. The reason why that concerns me is that there were deeper flaws in BNOC. which go back much further than the past few weeks or months. The reason why I stress that is that if the trading conditions change again, as well they may, I hope that there will not be a clamour, to which the Government might accede, for the BNOC, in its old form, to be reinvented.

My second reservation or disappointment is that the Government will continue to take royalty in the form of oil. I understand the oil taxation reasons for that, but it means that the agency that replaces the BNOC will still trade about 250,000 barrels a day. Is my right hon. Friend sure that in those circumstances the agency will not: still be regarded as the market maker in the oil industry, with all the problems that can flow from that?

Thirdly, I should like to ask my right hon. Friend why he feels that he needs to retain the participation agreements at all. My own strong feeling is that he will never reactivate them. If one day we find ourselves in a supply difficulty, I am sure that he will wish to use much more direct means to ensure security of supply in this country, and will not have the time or leisure to reactivate the rusty mechanism of the participation agreements.

Finally, I congratulate my right hon. Friend on his sense of timing. I should have thought that almost any time during the past six years would have been an easier time to abolish BNOC than the day on which he chose to announce it—yesterday—with the pound low against the dollar, with oil markets weak and just a few days before the Budget. That reassured me that the Government retain a highly developed sense of theatre.

5.35 pm
Mr. David Howell (Guildford)

I join other hon. Members in congratulating my hon. Friend the Member for Havant (Mr. Lloyd) on his chairmanship of the Select Committee that produced the report on BNOC as well as on his robust call for a strategy of lower energy prices on a market basis, for which I believe world conditions now allow. I hope that we shall hear more support from hon. Members for the development of such a strategy. We have left the unpleasant era of constant upward pressures on all energy and fuel prices. A positive policy should now be developed for lower prices of all fuels. That is possible, and I look to my right hon. Friends in the Government to develop such a policy as from now.

My hon. Friend the Member for Havant said that he hoped that this would not be a yahboo debate. The "yah" may be here but the "boo" is not. There is not one Back-Bench Labour Member here. The only person from the Labour party who is here is the hon. Member for Merthyr Tydfil and Rhymney (Mr. Rowlands), who is on the Front Bench, to join us in saying goodbye to BNOC. Perhaps that will enable us to have a better discussion. Certainly we have heard some interesting contributions, including the excellent words of my hon. Friend the Member for Enfield, Southgate (Mr. Portillo), who some years ago was an invaluable assistant to me in the Department of Energy.

I cannot remember the name of the hon. Member who, at the time of the resignation of Dr. Dalton as Chancellor of the Exchequer, shouted out, "They shot our fox." However, the phrase came to mind yesterday when I heard my right hon. Friend the Minister of State announce that BNOC, which, I am afraid, has come in for a good deal of criticism, has got into considerable difficulties and is beginning to cost the taxpayer awkward amounts of money, was to be no more. As I said yesterday, it is a right decision, that what is BNOC today—it is a different body from the BNOC of the early 1980s and the late 1970s —should be brought to an end. My only query is why we are doing it so late in the day.

My view was that the trading arm of the old BNOC should be kept on for an experimental period to see whether we needed a body in Government that could influence oil movements, and until we were sure that there were fundamental changes in world oil market conditions. That became apparent a long time ago. The case for ridding ourselves of an organisation that shaped official prices and made us vulnerable to foreign criticism and foreign pressures was a strong case a good while ago—at least a year ago. The delay in introducing the new policy has been a matter for regret. It has been costly and has meant that the taxpayer has had to bring forward valuable and scarce funds. It has not done us any good diplomatically either as it has created a great deal of acrimony and difficulty with other nations — obviously those within OPEC.

It is not the replacement of BNOC by the new agency which my right hon. Friend the Minister of State mentioned yesterday which is the most important matter. I do not have strong feelings on whether we should have a new agency of the sort that was described. I suspect that such a body may be useful if we have another sudden violent interruption in world oil supplies and have to influence movements in oil at an early date before we can even take steps under the Energy Act. It may be useful, but I do not believe that that is the most important part of what the new announcement implies.

I should also like to echo the words of my hon. Friend the Member for Southgate who referred to the staff of BNOC. They have worked with great skill under very difficult conditions, but gradually they have found themselves fulfilling a role which was never designed for them. Not merely were they shapers of the entire price structure of North sea oil but finally they were the instrument, apparently, of official wishes to keep in line with the surface activities of the OPEC cartel on pricing. When the BNOC trading arm was originally left in place, it was not intended that it should be involved in shaping prices. It certainly was not intended that it should be used as an instrument for supporting the OPEC cartel. The intention was that its role should be to influence major oil movements, both imports and exports, if and when another crisis occurred.

Even at that role it had not, frankly, been very good. As my hon. Friend the Member for Southgate reminded us, in the summer of 1979 the Conservative Government inherited an organisation which had, unfortunately, been committed, in a previous period when there had not been a crisis to substantial oil exports. Therefore, the managing of oil markets in the summer of 1979 was made very much more difficult for the Government.

If I may correct my hon. Friend the Member for Southgate, the Government did not rely on BNOC to see things through smoothly. It could not do that. BNOC was too committed elsewhere. That created severe difficulties and brought home the need for an organisation that was different from the BNOC which we had inherited. Therefore, the real gain resulting from the announcement made by my right hon. Friend the Minister will be not so much a change in the institution but the end of price intervention and the end of the attempt to run an official price mechanism for North sea oil. I hope that we shall be assured that this will happen. I have strong views about this. In an era of soft oil prices, which has been the normal state of the oil market since oil was first discovered, with the single exception of the past 13 or 14 years, the kind of intervention that appears to have been practised over North sea crude has, far from stabilising the market, destabilised it.

I should like to know whether the Minister and other hon. Members agree with the assessment that has appeared several times in the excellent journal Petroleum Intelligence Weekly. In its issue of 14 January it said: Far from upsetting fragile world markets, the abolition of a BNOC sales price, or slashing it to spot market levels, might reduce the volume of potentially de-stabilizing spot trading in North Sea crudes. Aligning BNOC with spot market prices could largely eliminate the incentive for integrated producers to sell their availabilities on the spot market … and replace with supplies bought from others on a spot basis. That is an expert and shrewd inside view of what was happening in the oil market as a result of BNOC continuing to pay an artificially inflated price for its participation. The effect was to drive more and more people on to the spot market in order to establish a lower reference price, which led to the destabilising of oil markets.

Because of this and many other decisions that have been taken by OPEC, it greatly saddens me that during the last year there has been prolonged agony while oil prices worldwide have been adjusted to more normal levels. International crude oil prices have not yet settled down to the level at which I believe they will settle, but that pattern could have been achieved much earlier, which in turn would have helped the pound to settle a good deal earlier if we had not intervened and if there had not been the destabilising consequences of that intervention. I believe that it was a very great mistake. It has prolonged our difficulties and has led to the the commitment of public funds not, by the standards of the overall budget, on a huge basis but nevertheless on a significant basis — funds which are desperately needed in many other areas.

Furthermore, the policy of maintaining an artificial price made the United Kingdom a scapegoat and a point at which OPEC pressure could be applied. As my hon. Friend the Member for Southgate said, without the BNOC official price we should not have been subjected to these considerable pressures. In the United States of America, which produces three or four times more oil than this country, there is no American national oil corporation. Therefore, it is not forced into this embarrassing position.

The losses that we are discussing, for which the taxpayer will have to pay, could, I believe, have been avoided. We are considering a tale of error. That tale of error has now been redeemed by this belated decision of the Government to dismantle the oil price structure and do away with the residual BNOC which was the instrument of that price structure. However, I do not believe that such a position should have been allowed to continue for as long as this. It is regrettable that we should have to authorise the use of taxpayers' money to make good the deficiencies. This should not have been allowed to happen. Nevertheless, I am glad that my hon. Friend has now made a decision that will prevent this country from getting into such a very difficult and unwelcome position in future.

5.46 pm
Dr. Michael Clark (Rochford)

I welcomed yesterday's statement by my right hon. Friend the Minister of State, Department of Energy and I should like to support the comments that have been made by my hon. Friends. As a Government agency, the British National Oil Corporation tried to maintain oil prices, but it tried to do so without many tools at its disposal. It had no storage facilities. It was faced with the difficulty that output from the North sea was inflexible. Furthermore, it did not sell oil forward.

I believe that oil prices should be lower. The British economy would benefit from lower oil prices. Therefore, I welcome the departure of BNOC. However, I understand the need of the Chancellor of the Exchequer for the revenue from North sea oil. Furthermore, the oil companies need a proper return both to pay for their past investment and to allow them to continue with present and future exploration.

On 6 December 1984 I had the opportunity to ask the chief executive of the British National Oil Corporation this question during a hearing by the Select Committee on Energy: is it not true to say that this Government has a policy of free enterprise and market forces and therefore would you not agree that these aims can best be served by not having a BNOC organisation? The reply of the chief executive was: Your question should be directed to the Government and not to us. The Government have now answered that question, even though they did not answer it during the further evidence that was taken at later sessions. However, witnesses appeared before the Select Committee who defended the existence of BNOC, notably my right hon. Friend the Minister of State, and also witnesses from the Treasury and BNOC. Therefore, I was very surprised yesterday when I heard the statement, because some of the arguments advanced for the retention of BNOC seemed to be convincing. At least I thought that those witnesses who gave evidence to the Select Committee had convinced themselves that the organisation should remain in being.

May I look briefly at some of BNOC's objectives and examine to what extent they have been met during the last few years. First, although not necessarily in order of importance, BNOC seeks to trade profitably. During its last full trading period its turnover was £ 7 billion and it made a profit of £500,000. The return on turnover was 0.007 per cent. — hardly a licence to kill. During the last six months when BNOC was buying at term price and selling more than 75 per cent. of its oil at the spot price it made a loss of £65 million. In fairness, if the aim of the corporation was to keep up the price of oil, which it will not admit was its aim, perhaps it should take some credit for doing so, because the Treasury evidence was that if the dollar price of oil fell by about 1 per cent. it would cost the Exchequer £150 million a year, and that the oil price might fall by 6 or 7 per cent. with the demise of the BNOC. Therefore, £65 million in half a year, or £130 million in a full year, is a small price to pay for keeping oil prices up and maintaining the price. But since the corporation will not claim that its role is price maintenance, it is difficult to give it credit for having achieved that. It claims that it should sell at a profit, and in that it has clearly failed.

The second objective is to provide maximum benefit to the United Kingdom economy. Many of my hon Friends would agree that the United Kingdom economy can benefit best by having cheaper oil. High raw material and fuel costs adversely affect companies' trading positions. If the price is too high, companies can be driven out of business and they will stop trading. It is far better to have lower raw material and fuel costs and to retain companies in business, allowing them to export and to employ people in Britain. If the Exchequer wants revenue, as my hon. Friend the Member for Havant (Mr. Lloyd) said, there are other ways of getting it. We can tax the profits that companies make rather than price them out of business by high prices.

The manufacturing sector of our economy has suffered greatly over the past 10 years, and perhaps longer, as a result of high fuel costs. Over the past 20 years manufacturing industry has lost 3 million jobs and its contribution to the gross domestic product has fallen to 25 per cent. Lower oil costs for the manufacturing sector would make it healthier. I hope that even at this late hour the lower oil prices that will follow from the abolition of the corporation will be an encouragement to Britain's manufacturing sector.

The chemical industry has done moderately well over the past few years and that would also benefit from lower oil prices. It will have greater opportunity to compete, export and expand.

But we must remember that even if the price of oil should fall from now on, with the present exchange rate there will be quite a windfall in sterling terms. I hope that the Chancellor will take advantage of that next week when he is setting our Budget. However, I doubt whether the existence of BNOC helps the United Kingdom economy in many ways. In that respect, it is perhaps as well that it is going.

The third objective of the corporation is security of United Kingdom oil supplies—a point dealt with by my hon. Friend the Member for Enfield, Southgate (Mr. Fortino). It is vital that we have secure supplies in Britain and that we have the participation agreements that give the corporation the opportunity to exercise its right to buy 51 per cent. of the output of North sea oil. But those agreements will remain even when the corporation has gone. The security of supply that the corporation was able to give was not a physical security of supply; it was one based on the legislation of the participation agreements. That legislation will still exist when the corporation has gone. There is no need to have the corporation just to have security of the supply of oil in Britain, as my hon. Friend the Member for Southgate said.

We are left with only two objectives that will have to be achieved by the new agency that takes over from the corporation. The first is the sale of oil—oil provided in kind for royalties. That will continue to come from those fields that went on stream before April 1982, but it will dwindle and ultimately the agency replacing the corporation will not have that responsibility.

Secondly — the fifth and final objective of the corporation — there is the management of the Government pipeline system. That is a proper duty for a Government agency. Therefore, I am pleased that the new agency will take on that role.

BNOC has had to operate between a free oil market and OPEC. The corporation has tried to influence prices but has set term prices for shorter periods than were directly related to market values. The fact that the corporation has made a loss proves that it cannot determine prices, nor can it achieve their stability. In practice, OPEC sets the prices by varying output in a way that the corporation cannot, due to the inflexibility of North sea production.

At the same time that OPEC has been setting prices it has been blaming BNOC for either undercutting prices or overproducing. It seemed that whatever the BNOC did it was subject to criticism from OPEC. The free market has now come into being in the North sea and that is a good thing. It is a good thing that the corporation is going, and I congratulate my right hon. Friend and the Government on their brave decision yesterday.

It is important that North sea oil should be free from price fixing or price maintenance, whatever we wish to call it. I wish the new agency well, but in doing so I hope that it will not be called the Oil and Pipeline Executive Committee because its initials will lead to a lot of confusion.

5.56 pm
Mr. Peter Rost (Erewash)

I pay tribute to my hon. Friend the Member for Havant (Mr. Lloyd) for his distinguished leadership of the Select Committee on Energy. I am enjoying the opportunity which seems to come rather too rarely these days to the Back Benches of being able wholeheartedly to congratulate the Government on a measure which appears to meet with unanimous and enthusiastic support from the Conservative Benches.

The decision of my right hon. Friend the Minister of State is surprising, paticularly because it is such a prompt response to the Select Committee's report. We hope that it will establish a precedent. We welcome the response, particularly bearing in mind that the Select Committee did not even recommend the abolition of BNOC, although one or two of us would have liked to do so. We felt that it was not necessary to recommend its abolition. Simply by trying to establish its role in an impartial way, and emphasising what we discovered, seemed to speak for itself.

It was apparent from our inquiry that the corporation no longer had a role which was worth keeping. We have performed a function which Select Committees should try to perform more often. Rather than trying to draw dogmatic conclusions or make powerful recommendations, they should simply emphasise and draw attention to the facts in as impartial and informed a way as possible. That should produce in a responsive Government the right sort of response. That is what appears to have happened here. There has been the realistic recognition that what was after all a relic of Socialist bureaucracy no longer has a role, even if it had a role in days gone by.

In saying that, I, too, wish to emphasise that there is no criticism of the BNOC management. I, like my colleagues, have had many opportunities of meeting them. One almost felt sorry for their impossible role. They were expected to operate in a straitjacket of statutory and political knots. It was unfair that people with tremendous expertise and ability should have been without a role in which to develop their talents. However, I have no doubt that each and every one of them will find new opportunities in their specialist field of oil and energy. I wish them every success.

There can be no doubt that BNOC was originally given a role to protect this country's security of supply. One can perhaps understand the Labour Government's reasons for trying to do that. Circumstances were then quite different in the energy market. However, it became increasingly clear that there was no need for BNOC if that was its only function, as security of supply was adequately protected by other legislation. The Government have sufficient powers to protect security of supply should that ever prove necessary.

Once that role had become obsolete, there was very little left for BNOC to do until it was suddenly discovered that the oil price was weakening, that there was a glut rather than a shortage, and that Britain was a major producer and thus under some moral obligation to help OPEC support the artificial price. Therefore, BNOC was given a new role in life—to attempt to hold up the price of oil, together with other producers. One can understand the Government's thinking, even if one does not quite follow their logic. That was the role that BNOC was given, even if it was never openly admitted.

During this inquiry and the previous inquiry the Select Committee could not find any evidence to show that BNOC had any influence over the price of oil. We tried hard to probe and to find evidence that BNOC influenced the price of oil in world markets. On the contrary, it became clear, at least to me, that, far from helping to prop up the price of oil in recent months, BNOC had contributed to its weakness.

I maintain that in the role that it had to play BNOC had a destabilising effect on the price of oil. Indeed, I very much agree with the theme developed by my right hon. Friend the Member for Guildford (Mr. Howell). We would probably all agree that oil companies, with decades of experience, are far better at marketing oil than BNOC could ever be, not only because of their experience, but because they have the marketing resources that are needed. They have the financial resources and the storage facilities to store rather than sell immediately. They also have the downstream marketing pipelines which can absorb, at least in the short term, a temporary embarrassment of surplus oil.

On the other hand, BNOC was placed in the ludicrous position of having to buy the oil at a fixed price and sell it almost simultaneously on the spot market in Rotterdam, regardless of the price or of how weak or strong the market. Therefore, BNOC was a major factor in contributing to the short-term collapse of the spot price in Rotterdam and to the widening differential between that and the fixed OPEC price.

The weakness in the oil market in the past few months has been entirely due to that differential. The spot price went down, and that had a destabilising impact on the whole pricing structure. The forced sales of BNOC on that spot market largely contributed to that collapse. If BNOC had not had such a large quantity of oil to sell, and if, instead, the oil companies had been left to market their own, there would still have been sales on the spot market, but they might have been managed more discreetly. They might even have held off, if only for days, and tried to judge sales so that they met demand more effectively. But of course that did not happen.

The Government have recognised that in a realistic and sensible way. I congratulate my right hon. Friend the Minister on having taken a courageous and prompt decision to abolish BNOC. It is no longer required in order to maintain security of supply, and its role in helping to maintain the price of oil was never proved and could have been counter-productive. I hope that BNOC's successor will be able to perform the role that it is given more effectively, and that the marketing of oil in a free competitive market will produce a more stable market. Only time will tell whether we are right, but the Government's courageous decision will no doubt be fully justified.

6.6 pm

Mr. Rob Hayward (Kingswood)

The nature of this debate has been changed somewhat because of the announcement made to the House yesterday afternoon. Had the statement not been made yesterday, there was a danger that the members, of the Select Committee would have told my right hon. Friend the Minister that his evidence to the Select Committee both before and after Christmas reminded them of the Shakespearean comment: The Lady doth protest too much, methinks. We were not really convinced that there was a genuine case for the Government to intervene, nor for BNOC and the Government to intervene. Indeed, I am also reminded of that same Shakespearean comment when I look at the Labour Benches. Yesterday the hon. Member for Merthyr Tydfil and Rhymney (Mr. Rowlands) said: We shall oppose this legislation tooth and nail." —[Official Report, 13 March 1985; Vol. 75, c. 306.] I believe that that phrase was also used in another place. May I ask whether the hon. Member for Merthyr Tydfil and Rhymney is the tooth or the nail?

During the debate, several hon. Members have paid tribute to the services of BNOC. Again, I am reminded of a quotation which is perhaps appropriate. It comes from Tacitus, and I hope that is summarises the feelings of hon. Members. Tacitus said: You were indeed fortunate … not only in the distinction of your life but also in the lucky timing of your death." The timing of BNOC's death may also have benefited my right hon. Friend the Minister. Yesterday, Opposition Members expressed anguish and surprise at the announcement, but I think that that was due to the fact that in the past 12 months we have been distracted by the coal industry dispute. Consequently, we have failed to address ourselves to the changing nature of other energy resources available to the United Kingdom as well as to other parts of the world. Whereas a Minister could reasonably, some 12 months ago, have argued that there was an acceptable role for BNOC, the circumstances have changed markedly. The change has lasted over a protracted period. That justifies reviewing the circumstances in which BNOC is operating.

I am surprised that we have heard so few quotations from the report of the Energy Committee. I should like to draw the attention of hon. Members to some comments in the report. These comments were made prior to yesterday's statement. In paragraph 22 it says in bold type: "it is clear to the Committee that stability currently is a euphemism for action to impede a fall in the price of oil and that the distinction between 'stabilisation' and 'shoring-up' is merely semantic".

Later it says: The Committee recommends that the Government come to the House prepared to define stability and to answer the fundamental—and non-hypothetical—question of for how long they are prepared to try to achieve short-term stability while oil prices are falling when it has not even been proved convincingly"— here I refer to the comments of my hon. Friend the Member for Erewash (Mr. Rost)— that BNOC is an effective mechanism for achieving this purpose. The House cannot be asked to continue to vote Supplementary Estimates which have provided substantial tranches of public money in an attempt to achieve stability, or, in our view, to impede the fall in the price of oil, unless the Government makes clear what its policy is and provides more convincing evidence that it has achieved a measure of success. Inherent in those statements are the contradictions which the committee identified in the operation of BNOC in its relationship with the Department of Energy. The Committee was making the point that the contradictions could not and should not continue. There had to be an alternative solution open to the House.

As my hon. Friend the Member for Erewash said, the Committee did not put forward specific recommendations. Some members of the Committee asked several of the witnesses whether BNOC as it stood, in the light of the state of the oil market, had a realistic future. I share the view of my hon. Friend the Member for Enfield, Southgate (Mr. Portillo), who said that as the Government had announced their intention to abolish BNOC we should not in a rash moment return to that organisation because it would seem appropriate for a short time. We should continue to have the courage of our convictions, as announced yesterday, that it is worthwhile operating continuously without BNOC.

The conclusions of the Committee in relation to BNOC as a potential agent were highlighted in a series of paragraphs beginning with para. 23, which says: In the light of all the evidence the Committee feel that so far as the setting of the official price is concerned the Government has been playing the key role and that it should openly acknowledge doing so. Paragraph 26 says that the Committee is not convinced that as presently constituted and as it currently operates BNOC can perform this role. More crucially, in paragraph 28 it says: Under a more flexible, market-related approach to pricing … the chances of losses being incurred are greatly reduced." It was those losses which we were originally to debate this afternoon, because the Committee felt that it was not acceptable that in Supplementary Estimate after Supplementary Estimate the House should be asked to approve the expenditure of £45 million, £20 million or whatever, without a clear statement of the policy that the Government were pursuing. That is summarised in paragraph 29, where the Committee says: Only if clearly defined national issues are at stake should taxpayers' funds be employed for this purpose. That goes back to the comments of my hon. Friend the Member for Southgate that it is necessary to act in such a way only when there is a national emergency. Participation agreements will not provide a satisfactory option in those circumstances. We will have to operate in the oil market as we do in other markets such as defence procurement, where we call on national suppliers to cope with national and international emergencies. There is no point in asking for participation agreements to be effective in a few months or a few weeks. We go to defence suppliers for immediate supplies of whatever equipment they are able to provide in a national emergency. There is no reason to believe that we cannot do the same with the oil companies.

In fact, the Committee commented at the beginning of paragraph 29: The risks of short-term fluctuations in the oil market are risks which should generally be borne by the oil companies and not by taxpayers. We were of the view throughout the taking of evidence that it was not a justifiable reason in current circumstances for not putting the burden of fluctuations in the oil market on to the oil companies, since they seemed to cope effectively with other aspects of the industry.

We heard yesterday during questions, some of which I could reasonably describe as vitriolic, from Opposition Members now absent that the abolition of BNOC would be a disaster, that the pound would slump and that spot oil prices would go up and down like a yo-yo and would go out of control. What has happened in the last 24 hours? The pound has been virtually static. If anything, oil prices have risen marginally, despite the announcement of the proposal that BNOC should be abolished. If there were to be a problem, one would have expected that in the first hours of uncertainty after the announcement there would have been great fluctuations. If the fluctuations that have taken place are the worst that we shall have to face, I am more than satisfied with yesterday's announcement of the intention to abolish BNOC.

I accept the request that has been put to the House for the granting of the Supplementary Estimate. I believe that it will be the last one that will be put while we are Members of this Parliament. I hope that the changes announced by the Minister of State yesterday will reflect the changing circumstances of the last few months and years and that we shall see a sensible operation on the spot oil market, borne by the oil companies and not by the Government.

6.17 pm
Mr. Ted Rowlands (Merthyr Tydfil and Rhymney)

The temptation to break into the cosy unanimity is too great to resist. There was a reference to tooth-and-nail opposition by the hon. Member for Kingswood (Mr. Hayward). I hope that he will persuade his Whips to include him in the Committee which will consider the necessary legislation so that we can demonstrate how it will be fought tooth and nail. I assure him that we shall fight it in the most vigorous way imaginable under the procedures available to us.

I should like to pay a compliment to the Chairman of the Energy Committee and his team for the report, although I have found the comments today of hon. Gentlemen who were members of the Committee rather strange. With respect to the Chairman and to the members of the Committee, the evidence in the report does not lead one to the conclusion that the British National Oil Corporation should be abolished. Not only does the evidence not come to that conclusion, but almost all the witnesses who were called before the Committee did not produce evidence to that effect. Let us go through them.

The Committee first called a distinguished academic from Oxford, Mr. Mabro. I have read his evidence. What did he recommend to the Committee? He recommended that Britain should have an integrated national oil corporation with upstream activities, and with production and exploration responsibilities as well as the role of a state trader. I think I am right in saying that. I do not think the Chairman could deny that that was the evidence that Mr. Mabro gave to the Committee.

None of the Treasury witnesses—Mr. Cassell, the deputy secretary, or the assistant secretary—gave any indication that BNOC should be abolished. I have read their evidence avidly; I have read it word for word. I do not think that one could draw such a conclusion from their evidence.

Of course, the star witness was the Minister of State himself. He may say that it was his guise to keep a straight face and not let on to the Committee that what he was up to was the abolition of BNOC. I have always believed him to be an honourable and open man in most respects. Not only did I read the Minister's evidence, but I listened to him giving it and to his cross-examination. I challenge the House to quote a single word of his which gave any serious sign that the Government believed that there was a case for the abolition of BNOC.

Written evidence was given by the oil companies. Britoil ummed and aahed in a weasly way. Shell said neither one thing nor the other. The small oil companies — Westar, for example — submitted a eulogy full of glowing praise for BNOC. Little evidence was given to the Committee to justify the decision announced yesterday.

We must remember the Minister's remarkable speech on 18 December. The market has not changed dramatically since then. The problems faced by BNOC at the end of December were not that different from the problems that it was experiencing in January and February. The best testimony of the role, purpose and important functions of BNOC was the Minister's speech to the House on 18 December. In three months that position has not altered fundamentally. The Minister then allayed my fears that he might have been up to no good and that he might announce the abolition of the corporation within three months.

Mr. Hayward

Does the hon. Member accept that when evidence was taken in November and December the oil market had changed dramatically since the summer? The Committee debated whether the actions that were taken were justified in view of the timescale. It is three months since that debate, and we can now see a direct pattern which is more consistent than it appeared in December.

Mr. Rowlands

That is just possible. In January and February prices were firming up and creating less of a problem. The OPEC deal was also made. The Minister's case to the House on 18 December was that BNOC's important function did not depend on the market at any one time. His statement was one of broad support for BNOC's basic role and function. Why has he suddenly taken this decision?

Some aspects of yesterday's statement were spurious and they have been referred to by Government Members. The argument has gone something like this: Because BNOC failed to stabilise the price of oil and the markets were not likely to change in the near future, BNOC has to be abolished.

The argument is that BNOC failed to stabilise the price of oil. BNOC's job was never to fix prices. When we debated the Petroleum and Submarine Pipelines Act 1975 and the Oil and Gas (Enterprise) Act 1982 and discussed the section under which money is transferred to BNOC, not one comment was made by the then Secretary of State to suggest that BNOC should be in the game of price fixing or trying to top up prices, as it has done particularly in the last six months — twice last summer and again in January and February this year. BNOC is condemned and is to be abolished for failing to achieve something that it was never set up to achieve. That is one of the spurious reasons given in yesterday's statement.

Mr. Rost

Is not the hon. Member being a little naive by suggesting that the Government did not want BNOC to play that role, although I agree that it might have been embarrassing to admit that publicly?

Mr. Rowlands

That might have been its role in the last few months, but it was never a declared function. I shall deal later with what BNOC got up to and why. On behalf of BNOC's professional staff and in general terms I have a right to say that that is a spurious reason for abolishing it. I hope that the Minister can give us a more detailed reasoning.

One of the arguments is that the markets are unlikely to change in the near future. Apparently the corporation is to be abolished, but not because the Minister believes the present market trend to be permanent. He is too cautious and coy to put on record that the glut and lower oil prices will continue for long. It is to be abolished because the markets are not likely to change in the near future. The corporation is to be abolished because of a possible temporary movement in the markets. That is a spurious case.

Much resentment is felt about certain aspects of the presentation of the decision. Some comments by hon. Members and the press gave the impression that we were dealing with yet another lame duck state-owned corporation which was losing money because of its own inefficiency and failings and that we had to abolish it so that it did not lose any more money. The Minister did not try to correct that impression.

We should ask ourselves exactly what happened and why BNOC lost money. Until last summer BNOC had not lost any money. It had conducted a remarkable exercise in buying and selling large volumes of oil. Its turnover was enormous and it managed to make a modest profit.

The first loss was in the last quarter of last year. It also lost money in the first two months of this year. From the way in which the case was presented yesterday the inference is that this was the responsibility of BNOC. I challenge the Minister directly. Many times yesterday Government Members said that they were glad that BNOC was to be closed because it was losing money and had engaged in the fixing of oil prices when we want lower prices. Let us put the blame where it lies. The Energy Committee tries to do that in its report.

BNOC started losing money suddenly after trading successfully since the Oil and Gas (Enterprise) Act was passed because the Government last summer and autumn, and in January and February, chose to intervene in the market to hold up the price.

We went over this ground before Christmas and I listened to the Minister's evidence. I suspect that in the autumn of last year there was an inclination on the part of both BNOC and the Government to try to create a pause in the market—that was the phrase used in the evidence given to the Committee.

What was BNOC's advice to the Government in January and February? I ask the Minister this in the light of the draconian action which has now been taken in abolishing BNOC and because it has been blamed for losing money. After the problems in the last quarter of last year, what did Mr. Goskirk and his team advise the Government to do about oil prices? What was BNOC's judgment in this regard? Is it not a fact that, generally speaking, BNOC wanted to move towards a market-related price to avoid incurring a further loss of the kind it had incurred in the previous year? Will the Minister tell us in his reply what BNOC's judgment and inclination were in handling the problems of the first two months of this year and what part of it was a decision by Government?

I do not know whether it was a slip of the tongue because the Minister of State was weary, but I nearly fell off my chair when, in the course of cross-examination by the Committee, he said that the Government fixed the price after consultation with the corporation. I think that that was pretty close to the truth in January and February. Therefore, why should BNOC take the rap for decisions that were taken basically by the Government?

It is not difficult to see why the Government decided that BNOC should lose money in January and February. It was not Mr. Goskirk or the corporation that spilled the beans on this matter to the Committee. It was the Treasury deputy secretary, Mr. Cassell. We have been invited to read the report, and I have done so. The deputy secretary said on 28 February in evidence to the Committee—this is on page 37 and is in answer to question 120: …OPEC have reached some sort of agreement on price, nobody can tell whether it will stick, or I do not think anybody can tell whether it will stick in the long run, but at least we are in a position where it would be rather rash of us to do anything that undermined that agreement which OPEC have made". The Government and the Department of Energy were in the direct game of boosting and supporting the cobbled-up arrangement made by OPEC at the end of January. It was not BNOC's judgment or advice that determined the policy. It was a decision between the Treasury and the Department of Energy to back OPEC in January and February of this year.

Mr. Michael Morris (Northampton, South)

Is the hon. Gentleman seriously suggesting that Governments, particularly through the Foreigh Office, have not consulted with OPEC?

Mr. Rowlands

That quotation was not a statement about consultation; it was a very specific and clear conclusion concerning the attitude taken by the Treasury to the whole OPEC arrangement. It was what the Committee suspected — that there was some form of cahoots between the Government and OPEC in propping up the prices.

This is very revealing of the attitudes and positions we have taken in our now rather schizophrenic nation, split between a traditionally industrial economy and some kind of all-type economy. It shows the kind of dilemmas that we are facing. The Minister did a lot to try to disabuse the Committee of the idea that this relationship existed, but here is a senior Treasury civil servant making it very clear why the Government were in the business of trying to prop up the price in January and February—to back OPEC. This £20 million is our fee for becoming at least an associate member of OPEC, as far as I can see.

I resent the way in which the abolition of BNOC has been presented, as if it were a losing state trading organisation like some others we have seen in the past. It is not fair. The loss was entirely the result of the Government commitment and decision to try to prop up the price. Curiously enough, I share the views of most hon. Gentlemen who have spoken tonight. I do not think that we should have been in the game of trying to prop up the price. In the long term there is a great need for a lower price to help the rest of our economy to start to regenerate and grow again. I represent a community that needs that. The Government should be honest about it and say that that is what they have been up to and not allow, either incidentally or accidentally, the blame to fall on what has been a successful trading organisation.

I do not think that the losses of the past few months can or should be used as an argument for abolishing BNOC. I share the sentiment of the Committee that the decision to prop up the price was wrong. I suspect that, certainly in January and February, it was against BNOC's professional judgment. Behind the kind words, the speech of the right hon. Member for Guildford (Mr. Howell) was a pretty damning one.

Who has paid the penalty for the pretty big errors in this regard? Has it been the Ministers who made the decisions or has it been the skilled professional people who will lose their jobs as a result of the decision to abolish BNOC?

We were told yesterday that the decision had been taken because of a major change in the structure of the oil market away from term contracts and towards spot and that this trend is unlikely to be reversed in the near future".— [Official Report, 13 March 1985; Vol. 75, c. 305.] I have already commented on the fact that this seems to be a very temporary statement, to say the least, in terms of its assessment of the trend.

There was no reason why BNOC could not have moved to a spot-related, market-related price instead of being abolished. Statoil has been doing it since the end of last year. The Norwegian state oil company has been doing it and has also gone on to a one-month or two-month contract basis. BNOC could have done that and adjusted its position and trading to deal with the market trends that we face in the near future. The corporation was perfectly capable of adjusting its affairs and I rather believe that it wanted to, but for some of the reasons that I have mentioned it was not allowed to do so in January and February of this year.

I think that most hon. Members who took part in the discussions in December thought that that was the last time that we would be discussing this matter. I know that I did, but perhaps I was more gullible and naive than most members of the Committee. I rather assumed that BNOC's judgment would be endorsed and that we would move in January and February to adjust the situation. It was not adjusted, and more losses occurred, but it was not BNOC's fault.

The other major aspect of the abolition of BNOC is the question of security of supply. As the right hon. Member for Guildford and many other hon. Members have said, from the beginning the case for BNOC state trading—made not by Socialists but by successive Secretaries of State—was that it had a function and a role to play in security of supply. I shall read out later the passionate speeches of the then Secretary of State for Energy in support of the fundamental role that BNOC should play in ensuring security of supply. It was not the Socialists but the present Chancellor of the Exchequer who decided to maintain BNOC. The Minister of State referred yesterday to an experimental period, but that is not the way in which it was described in all the debates on the Oil and Gas (Enterprise) Bill.

On many occasions the present Secretary of State for Energy has reaffirmed BNOC's fundamental role as an instrument to secure supply. It was argued during the debate on the Petroleum Royalties (Relief) Bill that we could afford to abolish royalties in kind on all new fields because we had 51 per cent. of the shares and a national oil corporation that ensured the security of our supplies. I do not need to justify the basic role BNOC has played and should continue to be allowed to play in ensuring the security of our oil supplies. The speeches of the present and former Secretaries of State for Energy and the Minister of State will suffice and, no doubt, we shall consider them in due course.

I should like to examine more closely the argument of Conservative Members that BNOC has no real role and that our supplies will still be secure because of our participation agreements. I do not agree that BNOC has no physical control over oil. In 1979 BNOC brought oil into Britain. The right hon. Member for Guildford said that he found BNOC inflexible about bringing oil into Britain. I believe that, understandably, he made adjustments to ensure that the corporation could act more flexibly in the future. I recall the right hon. Gentleman making such statements at various times during those crucial months in 1979.

The corporation has physical and financial control over a considerable quantity of oil. BNOC finances cargoes weekly and monthly. It is involved in the game of buying, selling and moving cargoes of oil. A quantity of 800,000 barrels of oil a day is not small beer. The corporation has had the means by which it could, in an emergency, bring oil into Britain, and that is why successive Secretaries of State have supported it.

Dr. Michael Clark

Does the hon. Gentleman agree that BNOC has no storage facilities, that it has a statutory duty to preserve the national interest in relation to oil and that that duty will still be vested in the Government after the corporation has disappeared?

Mr. Rowlands

BNOC does not have storage facilities, but it has something that is much more important —the ability to buy cargoes. BNOC has some control at any particular time over a percentage of its oil. I remember the Select Committee on Energy discussing at some length the reason why Mr. Goskirk and company were so keen not to reduce the large volume of oil in which BNOC was trading. The reason was that the larger the volume of oil, the larger the amount to which BNOC would have easy access. BNOC trades in 800,000 barrels of oil a day— 350,000 barrels of participation oil, 300,000 barrels of oil received as royalty in kind and another 150,000 barrels of commercial oil. BNOC is involved not just in paper agreements; it physically buys and moves such quantities of oil. The Minister of State gave the impression that, although the Government will no longer exercise their options on the 350,000 barrels a day of participation oil, they will still have oil received as royalty in kind. The oil and pipelines agency will not have that royalty in kind. Will the Minister confirm that the agency will not trade even in the royalty in kind oil? The agency will merely have the same option to buy at a future date as BNOC had.

What are the terms and nature of the participation agreements? Will the Minister explain about the rights to opt for royalty in kind oil? Am I correct in thinking that every participation agreement requires a minimum six months notice before the option to acquire rights can be enforced? Up to 12 months notice may be required under some of the participation agreements before the option can be exercised.

The House was given a misleading impression yesterday that we can have, as an alternative to a national oil corporation, pieces of paper called participation agreements which will be lodged in an agency in the Department of Energy, which means that we can implement the agreements when the crisis comes. I hope that the Gulf war will wait six month while notice is served. I hope that the crisis will hang on while participation agreements are enforced under this new arrangement.

Yesterday the Minister told us about the new alternative arrangements, which meant that we could go back last night and sleep happily in our beds because the right hon. Gentleman had his participation agreements and royalty in kind oil. How quickly will the Minister be able to implement the participation agreements if a crisis arises? If the Minister cannot give a satisfactory answer, he will be offering a totally misleading impression that there is security when there is none.

Mr. Portillo

Does the hon. Gentleman believe that the Energy Act 1976, which was enacted by the Labour Government, is defective in this respect?

Mr. Rowlands

The legislation envisages a much more serious and draconian crisis than the types of crisis about which we have been talking. That Act was available for use in 1979, but, rightly, the then Secretary of State did not use it. There is a differece between crises that have concerned the International Energy Agency arrangements and normality. Sometimes—as in 1979—the shortages are artificial but have a dramatic effect on the market and fears about running out of oil. The 1976 Act is a major piece of emergency legislation.

BNOC could play a much more valuable role in stabilising the market and ensuring security of supply. I think that there has been common ground on that point. In December the Minister of State agreed with our proposition that the Energy Act was not the weapon to deal with the types of crisis in which we envisaged BNOC could assist us.

Yesterday we were told that our oil supplies were secure because of the combination of participation agreement and royalty in kind. Will the Minister describe what will happen if the agency wants to exercise these rights? About what sort of time scale are we talking? What sort of action will the agency take? Secondly, will the Minister confirm that he will not have any royalty in kind oil and that he will only retain the option and not trade in it?

The abolition of BNOC will have serious consequences. Many of the smaller independent British oil companies have used BNOC as an important form of trading for their oil. They have sold 100 per cent. of their oil to BNOC. As evidence to the Committee showed, many of them do not want to set up alternative sales organisations and do not want to come under the umbrella of the major multinationals. They found BNOC a helpful means of marketing their small amounts of oil. It offered them some security. That has been thrown out of the window overnight. What consultations took place with Brindex and the small British independent oil companies about his proposals?

Mr. Hayward

The hon. Member is talking about the nature of small oil companies and the spot oil price negotiations. Given the dramatic change that has taken place and the increasing use of the spot market, is it not likely that the spot market will become much more sophisticated in buying large and small quantities of oil? That is one of the key factors that justifies the changing circumstances in relation to BNOC.

Mr. Rowlands

I do not know any more than the hon. Gentleman does. The Government are too coy to suggest that it might be a permanent trend on the spot market. We have been talking about trends in the near future. That is about the best that one can say. We know what is happening at the moment, but we have no clue as to whether the trend will be permanent. The Iranians and the Iraqis are hotting up their war. We do not know what impact that may have on the oil markets in the coming months.

We seem to have short memories and quickly to forget the lessons that we have learnt. BNOC was established to ensure security of supply and the destination of North sea oil. It was found useful by successive Governments. The problem created partly by the Government trying to fix the price of oil and the changing market due to the oil glut is not the basis upon which to do away with an organisation that has served a useful purpose and could continue to do SO.

That is the vital point that the Opposition wish to make. We believe that the alternative to BNOC that is offered is a pathetic substitute for a proper national oil corporation fulfilling its proper duty. It will fatally weaken our control of our oil supplies. When the public's perception of this matter begins to grow I do not think that it will receive its agreement or the cosy unanimous support that the Minister has had from the Conservative Benches tonight.

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

It was nice to hear the hon. Member for Merthyr Tydfil and Rhymney (Mr. Rowlands) speak in more moderate terms than he did yesterday but a general without troops is not in a strong position.

Mr. Rowlands

I thank the Minister for the compliment.

Mr. Buchanan-Smith

I give the hon. Gentleman credit for being a general, but I shall not comment upon how strong a general he is. We should perhaps wait and see.

The hon. Gentleman raised a number of interesting and relevant points. A night's reflection, perhaps having read the comments of those who understand such matters in the oil industry, the newspapers and, on the evidence before us, the fact that other Opposition Members do not appear to support his views, may have helped his overnight change of tone. It is a change that I welcome. I am delighted to debate the matter with him in the terms in which he introduced it today.

I should like to express my thanks to my hon. Friend the Member for Havant (Mr. Lloyd) and the members of his Committee for the way in which they conducted their inquiry and reported. They had to report within a short time. I apologised to him and through him to his Committee that I was unable to help him more about timing during the previous debate, and I am left in a similar position today. I certainly accept what the Committee says. Adequate time is desirable when liabilities have to be notified to Parliament. My hon. Friend and the members of the Committee will realise that neither the liability nor the need for an Estimate arose until the decision was made to maintain BNOC's price in January and February. Once that decision was taken, we immediately notified Parliament.

In accordance with the undertaking that I gave to the House in our previous debate, I ensured that all the information was made available to my hon. Friend and his Committee immediately. I hope that my hon. Friend will accept my apology and understand the reasons behind it. As in December, the Committee had little time in which to work, but it produced a thorough and detailed report. I am grateful for that.

The Committee's report and the way in which it took the evidence raises the issue of BNOC's role. I want to make it plain to the House, as I have previously, that, having considered BNOC's role, I saw it as related solely to the short term. I tried to make it plain to the Committee that I did not see BNOC being able to influence price movements in the long term. The Government have a policy on prices, as I told the Committee, and I wish to make that clear also to the hon. Member for Orkney and Shetland (Mr. Wallace).

The Government's policy has been that BNOC should at all times avoid doing anything to destabilise the market. That is what it has done. The Government do not have a view on the long-term price of oil. We have no way of achieving a price. Such a policy objective would be academic, because we have no means of achieving it.

I take issue with the hon. Member for Merthyr Tydfil and Rhymney because if he believes, as he seemed to say today, that BNOC has had no influence on the market in the past, I wonder what he thought BNOC's role in fixing prices was. That was the thrust of his remarks. No Government have seen BNOC as being able to prop up prices. It cannot do that. What it can do, and has done successfully, is in the short term to provide a bridge between one position and another. When there have been risks and the possibility of a destabilised market, it has been able to act to the United Kingdom's benefit.

The hon. Member for Merthyr Tydfil and Rhymney asked me to comment on the advice that BNOC had given, particularly in January and February. BNOC indicated ways in which potential losses could be minimised, and that was a perfectly proper action for it to take. It then sought the views of the Government on wider national issues. Thereafter it made its proposals for the period in question. There is no secret about the views of BNOC. As hon. Members have pointed out, one of its objectives is to trade profitably.

Mr. Rowlands

The right hon. Gentleman made the important observation that BNOC put proposals to the Government, who then had to consider the wider implications. Presumably the proposals would have saved BNOC money, but the Government believed that there was a broader national reason for not implementing them. Is that a reasonable conclusion to draw from what the Minister is saying?

Mr. Buchanan-Smith

There was absolutely no difference on this occasion from what occurred previously. BNOC discusses its views with the Government and thereafter, taking into account the wider interests, makes its proposals. That happened on this occasion. There was no difference between what happened then and what happened, say, last summer, in 1983, or on other occasions. Indeed, the chairman of BNOC made that point plain. When he gave evidence to the Select Committee just prior to last Christmas, he said that there had been no change in the procedure.

A central part of the Select Committee's report rests on the recommendation that BNOC should move towards a pricing system better related to the market and better suited to the long term. I very much take that point because it underlines what I said in my evidence—namely, that if one does not have the abilitiy to influence in the long term, one can only follow market and spot prices.

That was a major factor to be taken into account, and in my announcement yesterday I pointed out what happens if one finds oneself in the situation simply of following the market. That was in line with the Select Committee's recommendations. I was concerned, because if that was to be our policy for the future BNOC would have to make more frequent price changes, and those changes would be related to the spot market. That would cut across the objective, to which I referred, of trying to maintain stability in the market, so stabilising market trends.

More important — particularly in relation to the comments of the hon. Member for Merthyr Tydfil and Rhymney—we had to consider what would happen if in future BNOC simply reacted to, and followed, market prices by means of a formula, and there are a number of means by which that could be achieved.

We have moved one stage beyond the recommendation of the Select Committee. We must consider what purpose there is in having a body of that nature, particularly if it is simply operating a formula. If it is operating only by that means, its ability to make a choice is severely limited. That, therefore, calls into question the point of maintaining a body whose job is simply to follow the market.

Mr. Rowlands

Has that not been the position all along?

Mr. Buchanan-Smith

That has not been the position from the start, because, as I have explained on a number of occasions, BNOC has acted effectively and properly in short-term situations to try to avoid the market being destabilised.

Another point in the decision to abolish BNOC, with which I dealt in my statement yesterday, was the question not of making losses but of the change that has taken place in the market. That change has affected BNOC to the extent that we have had a considerable movement towards spot rather than contract sales.

That is not a United Kingdom phenomenon. It is happening worldwide. The pattern of spot sales has changed from there having been 500,000 barrels a day of such sales in 1979 to over 6 million barrels a day in 1984. Most of that growth took place in 1984. In other words, the change has taken place recently.

BNOC has lost its contract sales and it has increasingly had to operate on the spot market. When operating in that market, without the means of contract sales, BNOC's ability to influence the market in the short term has been diminished because its previous influence was related to its contract sales. As I say, it has lost those contracts.

Mr. Rowlands

The Minister must be fair. BNOC lost many of its contracts because the Government did not allow it to adjust prices downwards to keep its contract sales.

Mr. Buchanan-Smith

That is flying in the face of the facts. As I pointed out, what is happening is not a United Kingdom phenomenon. Were the hon. Gentleman's remarks correct, the situation would have tended to confine itself to the United Kingdom market, whereas it is a worldwide movement which has been commented on by many journalists and others. It was shown in evidence to the Select Committee to have arisen as a direct consequence of the surplus of oil in the market. With that surplus, contracts are less attractive because customers for oil no longer require the security that contracts give. At times of shortage of supply, contracts are built up. When we move into periods of surplus, there is a move away from contract prices.

That view was put to the Select Committee not only by me and by other Government representatives but by witnesses from outside Government. When the market moves from contracts to spot, we find ourselves in a totally different situation. That change in the market is directly reflected in BNOC's activities.

I have pointed out that BNOC had a limited ability to influence prices in the short term, and I have given credit to the corporation for the way in which those who have been responsible have worked successfully, efficiently and professionally when they have been able to have some influence. That occurred as recently as last summer, although the market was rapidly changing.

I agree with my hon. Friend the Member for Erewash (Mr. Rost) that we have accepted and reacted to the reality of the market, knowing that BNOC has outlived its ability to have any influence on the market.

It is important to remember that BNOC has many other functions. Indeed, the latter part of the speech by the hon. Member for Merthyr Tydfil and Rhymney emphasised its function in relation to the security of supply.

Mr. Wallace

The Minister said on 18 December, and again today, that the Government's policy on prices is to avoid destabilisation in the short term. He explained to the House why, having regard to the change towards more dealing on the spot market, he does not believe that BNOC is capable of fulfilling that role. If we assume that it is still the Government's policy to ensure stable markets in the short term, how does he see the Government implementing that policy?

Mr. Buchanan-Smith

That opportunity is no longer available, because the market has changed. Unlike the hon. Member for Merthyr Tydfil and Rhymney, I live in the present and look to the future, not to the past when different factors obtained. That is why I said that we are facing reality and making sure that we have the correct machinery to deal with the future position.

I believe strongly that the security of supply should be the responsibility of the new agency. The retention of our participation agreements means that we can underpin all the other measures that are already in place for security of supply. However, it must be remembered that participation agreements are not the only factor in ensuring security of supply. Our main line of defence will be our agreements with the oil-refining and marketing companies. The Select Committee examined that matter earlier. Our ability to have access to participation oil and to royalty in kind underpins our immediate security measures. The hon. Gentleman was right to say that participation agreements can be exercised only at six months' notice. I did not claim that we would have immediate access to participation oil. However, if the Government believe that they will need such oil in the medium term, they can activate the participation agreements. That is why we have retained that function and given it to the new agency.

The hon. Member for Merthyr Tydfil and Rhymney also asked me about royalty in kind. As one of my hon. Friends said, that provision will remain in effect for all fields that came on stream before April 1982. The provision will give us a substantial amount of oil. Between now and the end of the decade, it will average 10 million tonnes a year. The agency will sell that oil on the Government's behalf.

Mr. Rowlands

At what price?

Mr. Buchanan-Smith

In accordance with the market. It will have to sell the oil in accordance with market prices. The retention of the power to participate and the provision for royalty in kind, together with our other measures, will ensure the security of supply.

Dr. Michael Clark

Will my right hon. Friend assure the House that when the agency sells the oil that it gathers from royalties it will sell at such a price that we shall not need Supplementary Estimates for the agency in the future?

Mr. Buchanan-Smith

The agency will handle royalty in kind simply as a marketing agency on behalf of the Government in order to obtain the best price that the market can offer at the time. The reason why we propose legislation on this matter—this answers a point raised by the hon. Member for Orkney and Shetland—is that it is a convention of the House that, where the character of an existing body is changed considerably, it is proper to proceed by way of legislation. Since the character of the new body, as its title shows, will be very different, we believe that it should be seen as an agency, nor as something more.

Mr. Rowlands

The Minister has made an important point about how royalty in kind will be treated. It means that the new agency will be trading in 300,000 barrels of oil a day. What percentage of the existing BNOC staff will be transferred to the agency to carry out that function?

Mr. Buchanan-Smith

It is too early to say precisely how many staff will be needed to carry out that function. Because of the sensitive nature of the announcement that I made yesterday, discussions with the chairman of BNOC started only yesterday. The facilities and staff needed for the new agency will be discussed urgently and quickly with the chairman and those responsible. At this stage, 24 hours after the announcement, neither the hon. Gentleman nor the House would expect me to be able to answer that question.

The debate has been extremely useful in two senses. First, it has rightly given us the opportunity to debate an important report from the Select Committee on Energy. Secondly, it has given us a wider opportunity than the statement gave us yesterday to consider the reasons for the change that we propose. As several hon. Members said this afternoon, there is a direct link between the two. The recommendation of the Select Committee that BNOC should move towards a market-related price system is sensible and understandable. I believe—I hope that this point is on the 100 per cent. tick list mentioned by my hon. Friend the Member for Rochford (Dr. Clark)—that we have achieved that. Although we are going beyond what the Select Committee recommended, we are facing reality. In the changed market circumstances, we do not need a body of the nature or size of BNOC to carry out the limited functions recommended by the Select Committee. In that sense, I am grateful to the Select Committee for recommending that, in the short term, the Supplementary Estimate should be agreed by the House.

Question deferred, pursuant to Standing Order No. 19(2)(c) (Consideration of Estimates).