HC Deb 25 November 1986 vol 106 cc236-44

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

10.40 pm
Mr. Charles Kennedy (Ross, Cromarty and Skye)

I am grateful for the opportunity this evening to raise some of the dramatic and important concerns, not just in my constituency and in the Highlands and Islands but of the Scottish economy as a whole which have been caused by the decline in the price of oil and the attendant collapse in much of the oil-related activities in those communities heavily dependent on such activity.

The back-drop to the debate is obviously the quite unimaginable effects of the unexpected collapse that has taken place in oil prices during 1986. The Minister, as he has responsibility for industry at the Scottish Office, will be the first to appreciate the importance of the oil industry to the whole of the Scottish economy. It is especially important in those parts of the country where entire communities are dependent on the well-being of one particular industrial concern which, in its turn, is almost entirely dependent on the well-being of the oil and oil-related industries.

In my constituency we have already witnessed some of the catastrophic effects engendered by the present position. The Howard Doris yard at Kishorn has recently gone into receivership and the potential achieved by that yard in days gone by for employing thousands of people and the potential which, until recently, it still hoped to realise, of employing hundreds of people—which the Minister would accept is a significant number for the west coast of the Highlands and for the Skye and Lochalsh district—has disappeared, at least for the foreseeable future. The difficulties of that company and of that yard in particular, are clearly directly attributable to the difficulties of the industry in which they are operating.

Equally, it must be said that the other oil yards on the mainland of the Highlands—both Highlands Fabricators at Nigg in my constituency and McDermott's at Ardersier in the constituency of my hon. Friend the Member for Inverness, Nairn and Lochaber (Sir R. Johnston) must face an extremely uncertain and therefore dispiriting time over the months and years ahead for the simple reason that, with the decline in prices, there is a great deal of uncertainty, a lack of forward planning and a dearth of orders for which yards of that magnitude can bid. That in turn is further reflected in the case of the Lewis Offshore yard at Arnish which at present, thankfully boasts a healthy order book but which clearly cannot, without an upturn in the industry, expect further security of contracts and employment in future.

Those big fabrication yards, which have become crucial to the economy of the Highlands and Islands, to varying extents from receivership to a reasonable order book—although with a question mark above it—and the gradations in between all face uncertainty. More crucially, the communities and the jobs that are so dependent on their well-being also face uncertainty.

Obviously, that spills over to the onshore related sectors of the oil industry in supply, servicing and support. I know that that is of concern to my hon. Friend the Member for Orkney and Shetland (Mr. Wallace), who is present tonight—

Mr. James Wallace (Orkney and Shetland)

My hon. Friend has mentioned the problems that face the construction yards, not least in his constituency. Does he accept that oil supply bases in my constituency have been threatened and redundancies announced because of the recession? In addition, the inspection, repair and maintenance base at Lerwick that was opened in the summer by the Prince and Princess of Wales has not had work since. I do not want to anticipate what my hon. Friend wishes to say about what should be done, but it must be in the area of action that will stimulate further exploration and activity offshore.

Mr. Kennedy

I am grateful to my hon. Friend. I know that he has been active both in his constituency and in this House with me in pursuing the claims and concerns of his constituents and the industries located in Orkney and Shetland. He mentioned some examples in his brief intervention. I agree with him that that is one aspect of the industry that is especially hard hit, not least in his constituency. Some of the measures that I wish briefly to outline tonight would advantage and benefit his area and mine.

As a result of the quite drastic downturn in activity, in a fragile economic area at the best of times—such as Skye and Lochalsh, Wester Ross and the Highlands and Islands as a whole—there has been a severe contraction of the economic base. Hard on the heels of the hammer blows of the closure of the pulp mill at Corpach and the closure of the aluminium smelter at Invergordon, the further decline in oil-related activity has placed quite intolerable strains on an economy which, at the best of times, is liable to be even poorer or slightly weaker because of its geographical location than other parts of Scotland.

The working assumptions for the levels of unemployment—as opposed to the travel-to-work assumptions—by the Manpower Services Commission and others in the towns of Invergordon and Alness are about 40 per cent., which underlines how drastic and severe are the economic problems associated with the decline.

Throughout the year several hon. Members, including myself and my hon. Friend the Member for Orkney and Shetland, have pressed the case for tax changes to stimulate North sea oil exploration and development work. We were pleased to welcome the change that the Chancellor of the Exchequer introduced in his autumn statement two weeks ago. It will be of assistance to that hard-pressed sector. However, we want to go further and say that any further fiscal stimulae, any further tax incentive that is given to the oil companies, must be very carefully tied to a commitment by them that such extra revenue that comes in through cash flow will be geared towards further development and exploration work. The only safe way to ensure that the extra money that the Treasury is willing to forgo to help the industry will see its way to the front line of the industry, with further contracts open to bidding by the fabrication yards and the support, supply and servicing sectors.

I hope that the industry Minister at the Scottish Office and his opposite number in the Department of Energy will confirm that they will be making the case to Treasury Ministers to introduce the necessary changes to encourage further development.

I am especially interested in a report that appeared just over two weeks ago in the Sunday Telegraph which suggested that, in addition to, or even in place of, tax incentives, the Government were considering the possibility of equity arrangements for the oil companies as an alternative means of encouraging further development. I appreciate that that is perhaps more the responsibility of the Treasury or the Department of Energy, but I hope the Minister will confirm that he will pass on our interest in these arrangements, which suggest that they may have the right blend of public and private sector capital to make them worth while.

What further steps can be taken for the sake of the Highlands economy and the communities in it in the wake of the fall in oil prices? First, I would make a plea on behalf of all of us who represent Highlands and Islands constituencies. We want to see regional development status restored as fully as possible to those parts of the area which lost it in the redrawing of the regional development map two years ago. It is surely the case that an area of the country which has great difficulty competing on an equal basis, as it does because of its distance from markets, is bound to be more severely disadvantaged and face even more unfair competition when it is not able to offer companies the same level of inducements as they are able to attract or receive elsewhere within the Scottish economy. I hope that the Minister, despite the reticence, that he has shown on this issue in recent weeks in the House, will be able to say that he is willing to look again at the matter, because the present situation is a strong disincentive for a potential inward investor in the Highlands and Islands.

Secondly, we have recently seen the boundaries of the Highlands and Islands Development Board extended to include the Moray area, but, sadly, and not in line with the recommendation of the Select Committee on Scottish Affairs, that increase has not been met or matched by a requisite increase in finance. I believe that the Budget should be increased by at least £1 million. I hope that the Minister will consider that.

Thirdly, despite the overall economic gloom, there are still some exciting economic projects being mooted within the Highlands and Islands, in which the Highlands regional council—particularly the planning and development departments of the council—and the Highlands and Islands Development Board have been involved. One is the Dornoch crossing, which could be an important addition to the infrastructure, and indeed to the entire lifeline of the northern community, stretching right up through Ross-shire, Sutherland and Caithness and to Orkney. My hon. Friend the Member for Orkney and Shetland will confirm the importance of this project to the passage of goods and people. I hope that the difficulties which that dual road and rail crossing, which we want to see in the Highlands, ran into earlier this year can be overcome by the Scottish Office dealing with ScotRail and with the help of the European regional development fund.

I would also say in passing, as one is talking about bridges, that I am sure that in the coming weeks and months the Minister will see more material on his desk on the proposed bridge to Skye, about which the Highlands regional council has recently had a further consultant's report delivered to it. It seems an exciting project and one which could do a great deal to open up again the economic potential of the west coast and of the island itself.

Equally, on the tourism and leisure side, there are two skiing developments—one at Ben Wyvis, in my constituency near Strathpeffer, and the other at Aonach Mhor in Lochaber, in the constituency of my hon. Friend the Member for Inverness, Nairn and Lochaber, both of which I know have been brought to the attention of Ministers by the local authorities concerned, by private developers and by others, and both of which I think deserve careful consideration by Ministers as a possibly valuable contribution to the leisure orientation of the Highlands economy.

All those who wish to support the development and further stimulation of the Highland economy can only shake their heads in disbelief at the current difficulties faced by a valuable project which would be a unique facility, not just for the Highlands or for Scotland as a whole, but for the British economy. It is not the Minister's fault. Indeed, perhaps it is no Minister's fault. It is the fault of the bureaucratic inertia which envelops the British planning system. The Land and Marine Company has a strong desire to open a subsea facility near Tain. As it breaches a site of special scientific interest, a public inquiry has had to be held. The Scottish Office is considering the matter further. The company will clearly have difficult in tendering effectively for an international contract when it is faced with such planning blight.

If I say that the amount of the site of special cientific interest which is affected by the proposal is less than one quarter of 1 per cent. and that a petition signed by hundreds of people in the area has been sent to the Scottish Office, saying that they want the project because of the jobs that it will bring, it seems crazy that, against the generally gloomy backdrop, and with an exciting project which is wanted by the Department of Energy—it is the sort of project which any Government would want—the planning procedures of the Scottish Office are such that it is taking a long time to come to fruition.

There are opportunities on the horizon, but I should leave the House and the Minister in no doubt that there are great difficulties, too. The oil decline has been largely to blame for the problems that we are encountering and for the excessive and unacceptably high unemployment. Although it is an international problem which ultimately will demand international solutions, none the less the Government could take some steps. The Opposition have been urging them to take those steps during this year, and I hope that tonight the Minister will confirm that some of those steps will be considered and carried out.

10.56 pm
The Parliamentary Under-Secretary of State for Scotland (Mr. Ian Lang)

I congratulate the hon. Member for Ross, Cromarty and Skye (Mr. Kennedy) on his success in affording the House the opportunity to consider the economy of the Highlands and Islands and how it is affected by reduced oil prices. The Government are conscious of the benefits which have accrued over the years to the Highlands and Islands from the development of the United Kingdom continental shelf, and we share the understandable anxiety of those who live in the area about the impact of the downturn in some oil-related activities on communities, especially those where local employment is heavily dependent on the fabrication yards.

I shall consider several aspects of the current position, but, first, I shall try to set it in perspective. The difficulties of achieving consistently high employment in the Highlands and Islands are well-known to successive Administrations; and they have not proved amenable to any single all-encompassing solution. The discovery of oil in the North sea led to a surge of activity, and from the early 1970s until 1981 oil-related work provided a noticeable and welcome boost to employment. Much of this was related to the construction of the oil terminals, with a high proportion of incoming workers, at Sullom Voe and Flotta. As these were completed, there was a corresponding reduction between 1981 and 1985, leaving about 1,200 permanent jobs at the oil terminals. Added to these were about 3,500 jobs at the end of 1985 in the fabrication yards.

Against that background of an inevitably reducing construction-related work force—it is important to recognise the distinction—the number of jobs wholly associated with North sea oil in the Highlands and Islands has not shown a dramatic change of late. For example, the June 1986 figure of 5,783 was slightly up on the 5,573 recorded in December 1985. However, I recognise that the fabrication yards face a very difficult ordering position. I am aware that the McDermott yard at Ardersier has notified redundancies of more than 500, and the problems of the Howard Doris yard at Kishorn, to which the hon. Gentleman referred, are widely recognised.

But it is important to keep the matter in perspective. Low prices inevitably give rise to short-term difficulties for oil supply industries. The oil industry is by no means all doom and gloom. It will not help to talk down its prospects, as is happening in some quarters. There will continue to be opportunities for tough, competitive companies that are willing to face up to the challenges. We need to consolidate and to sustain the United Kingdom's leading position in this industry, especially in developing new, cheaper means of exploration and development.

Oil exploration activity is holding up well this year, and oil and gas production continues at high levels. My colleagues at the Department of Energy have approved 12 new developments this year worth over £2 billion. The forthcoming tenth round of offshore licensing will help to maintain the momentum of exploration activity.

Mr. Michael Forsyth (Stirling)

Does the Minister agree that, if the Government were to follow the prescriptions of alliance policy, as announced by the hon. Member for Gordon (Mr. Bruce), and limit the output from the North sea, unemployment in the Highlands and elswehere in Scotland would be a good deal worse?

Mr. Lang

My hon. Friend has made an important point. I shall refer to that point shortly. There is good reason to have confidence in the future.

It has been suggested—it is precisely the point that my hon. Friend made—that the Government should intervene to cut the rate of oil production as a means of forcing up the oil price and thereby increasing development activity. This is not a practical or desirable proposition for a variety of reasons. United Kingdom production amounts to only about 6 per cent. of the world total. Any action we take would therefore have a negligible effect on world markets. Activity in the offshore supply industry depends on the level of current production being maintained. Any cutback could have disastrous effects. In any case, it must be remembered that lower oil prices benefit the wider economy and help to create jobs.

The Government are well aware of the need to maintain the right fiscal regime in the United Kingdom continental shelf. The system created in 1983 is generally responsive to oil price fluctuations and does not inhibit worthwhile new activity. But the position is kept under constant review, and I am aware of the various suggestions for change which have been put forward. Of course, we recognise that some operators are facing cash flow problems as an immediate result of the fall in oil prices. It is for this reason that my right hon. Friend the Chancellor intends to accelerate the repayment of some advance petroleum revenue tax. Again, the hon. Member for Ross, Cromarty and Skye referred to it. This will inject over £300 million into the United Kingdom oil economy and will, I hope, be reflected in an increase in offshore activity.

Turning to a more general consideration of the area's economy, we are taking positive steps. The Highland and Islands Development Board is the Government's principal agency for improving the Highlands and Islands economy and social conditions. The board is very well aware of the difficulties that the oil industry is facing. The board has already identified the Invergordon area and Stornoway as priority areas and has expressed concern about the effect of the impending closure of the Kishorn oil rig yard on the local economy of Lochalsh and Wester Ross. The board is constantly seeking new developments and projects which will be suitable for the Highlands and Islands, and particularly those which will make use of the natural resources and the natural advantages of the area.

Direct financial assistance to businesses is available in the form of loans at below commercial rate, interest relief grants, equity participation and relocation grants. The board can provide assistance for capital projects and for working capital. In special circumstances, for example, when a project faces high start-up costs and offers particularly good economic potential, special grant assistance towards the cost of buildings and for other capital outlays can be available from the board. The board is empowered to assist all types of projects that would contribute towards the development of its area, and these are divided between its four functional divisions—fisheries, industrial and commercial development, land use and tourism.

In 1985–86 the HIDB provided over £20 million in assistance for 1,891 projects. The board expects, during 1986–87, to approve total assistance of £18 million to about 1,600 cases, providing around 2,200 jobs. In addition, it may also give financial assistance to projects which have social or partly social objectives but which may not be commercially viable.

Therefore, the board's activities are already geared to improving the economy and creating new jobs, and any adverse effects of the oil industry difficulties will be taken into account. I mention these points to demonstrate that action is already being taken as part of the board's normal functions, without the need for new incentives. The board is not short of funds, and it has been successful in attracting £3 of private sector investment for every £1 spent by the board. The total investment in 1985–86 from both sources was an impressive £85 million. My right hon. and learned Friend the Secretary of State has already told the board that its powers of assistance can be supplemented as necessary through regional selective assistance when major projects are at stake.

The board has had considerable success in attracting new developments and this can be measured by the number of new jobs created in projects which the board has assisted. The estimated number of jobs created in 1985–86 was 2,500 and this was an increase over the 2,000 jobs created in the previous year. I am satisfied that the board is doing all that it can to stimulate the Highlands and Islands economy and encourage private sector investment in its area. Naturally, I hope that it will be even more successful in creating jobs in the years to come. I was glad recently in Committee to move a motion relating to an order to extend the HIDB area to include parts of Moray within its borders.

I draw the attention of the House to Invergordon, where we have set up an enterprise zone. I recognise that the number of new jobs in the zone is small in absolute terms, but nevertheless progress has been reasonably encouraging. There are now almost 400 jobs in 50 firms in the zone compared with 100 in eight firms at designation three years ago. It would, of course, be wrong to compare Invergordon in its rural setting with the other Scottish enterprise zones. It is not in direct competition with them over projects for which a central Scotland location would be appropriate. There are still seven years of the enterprise zone to run and infrastructure, such as the link road at Alness, is now virtually complete. Considerable opportunities remain for further development and employment at the zone. Indeed, only yesterday, my hon. Friend the Parliamentary Under-Secretary of State for Scotland—the hon. Member for Argyll and Bute (Mr. MacKay)—was in the area opening BP's £3.3 million fish farm food manufacturing plant and subsequently returning to Edinburgh down a now quite excellent A9 road.

On the positive side, the Invergordon area is benefiting from oil developments. The Cromarty Firth is now firmly established as the United Kingdom's main centre for the inspection, repair and maintenance of oil rigs and has made excellent progress in attracting a large share of the IRM market. Other assistance available within the HIDB area includes that provided by the Scottish Development Agency. The agency can and does operate within the HIDB area, principally through its land renewal and environmental projects but also in respect of major industrial projects. In certain instances, such as Highland Craftpoint, the agency provides support for the venture's operational budget alongside assistance from the HIDB.

Under a special arrangement, the European Commission has accepted the whole of the HIDB's area as eligible for assistance from the European regional development fund, notwithstanding the fact that parts of it are now non-assisted following the 1984 changes. Since 1975, some £98 million of ERDF assistance has been provided to the area. Selective financial assistance may be available to projects which operate, maintain or safeguard employment in manufacturing, mining and construction industries within assisted areas. In addition, assistance may be given to meet training expenses associated with start-up or expansion.

The Scottish Development Agency contributed some £700,000 towards the upgrading of facilities at the Invergordon support base in 1984 and is now contributing a further £1 million towards a new wet dock there. A further £1.5 million is being provided through the European regional development fund and the Highlands and Islands Development Board. The temporary downturn in the oil industry will obviously affect trade at the base, but I am confident that the provision of the new dock will leave the base extremely well equipped to compete for available work.

The hon. Member for Ross, Cromarty and Skye suggested that changes should be made to the existing assisted area status in parts of the Highlands and Islands. I know that that is a favourite theme of his. As the House knows, the present assisted area structure was established after a comprehensive review of regional policy and the assisted area map. It must be remembered that the designated status of an area is based on an assessment of relative needs across the United Kingdom as a whole. Changes to the status of particular areas inevitably have implications for others and it is by no means certain, even given the difficulties in the oil industry, to which reference has been made, that a review now would result in the changes which the hon. Gentleman seeks. It is important to achieve some stability in the present arrangements which have been in place for only two years. I do not believe that the time is yet ripe for considering a change of status.

The drop in oil prices has brought about some retrenchment by the operators. Inevitably, there is an initial reaction to review spending programmes and this has led to some companies reducing or delaying development projects. However, current production is largely unaffected. Delays in new projects have hit most severely orders to the fabrication yards, and with four of them—at Nigg, Ardersier, Kishorn and Lewis—the Highlands and Islands area has been particularly affected. The hon. Gentleman has rightly referred to the concern over the Howard Doris yard going into receivership and the redundancies announced at McDermott, both in areas where unemployment is already high.

I would not attempt to argue that the present oil price climate makes the short-term prospect for major new fabrications other than difficult, but it is wrong to look only downwards at the present trough. The oil industry is essentially cyclical by nature and the operators essentially realistic in approach. The industry will now be looking to the smaller less capital intensive developments in both gas and oil, to methods of enhanced recovery from existing fields, and at technological and work practice improvements to enable it to continue production and bring new developments on stream at costs which make these profitable. It is essential that the oil-related industry in all its aspects, in the Highlands and Islands and throughout Scotland, gears itself to respond to these requirements and that it recognises the existing and potential markets not only on the United Kingdom continental shelf but elsewhere in Europe and further afield.

Question put and agreed to.

Adjourned accordingly at ten minutes past Eleven o'clock.