HC Deb 16 May 1995 vol 260 cc195-221
Sir John Hannam (Exeter)

I beg to move amendment No. 40, in page 68, line 19, leave out from 'register' to end of line 22 and insert— 'and (b) subject to that and to the provisions of any contract entered into before the passing of this Act shall be binding on all persons.'.

Madam Deputy Speaker (Dame Janet Fookes)

With this, it will be convenient to discuss amendment No. 41, in page 68, line 27, at end insert— '(7) No provision such as is mentioned in sub-paragraph (4) above shall apply to any contract entered into before the passing of this Act.'.

Sir John Hannam

The amendments deal with the assignment of rights and liabilities. Like so many of my hon. Friends, I welcomed the Bill when it was introduced in March. Consumers in the industrial and commercial gas supply market have already benefited by substantial savings of up to 20 per cent. as a result of competitive marketing. In April 1996, when the domestic gas pilot project comes into operation in the south-west, my constituents in and around Exeter will be some of the first domestic users to benefit from the liberalisation of this market.

The anticipated price differential from which my constituents will benefit can be compared with the reductions that occurred in the telecom market when increased competitiveness forced British Telecom to become more efficient, allowing it to narrow its margins in line with the rest of the market. That has been the experience in the supply of gas to the industrial market, almost to the point at which the independent suppliers are now finding it hard to realise a respectable return on their investment in such a competitive marketplace.

When the industrial market was opened up, the composition of the initial supplier or producers of gas from the North sea remained unchanged, as did the size of the marketplace, creating the demand for a supply of gas in factories, smelting works and brick works throughout the United Kingdom's industrial base. Similarly, exploration and production companies will continue to produce gas from the fields that they have been operating for as long as 15 years, and the domestic market will remain constant, or its size and the demand for gas may increase.

For those reasons, I am concerned at the precedent that is being set in paragraph 2 of schedule 5 to the Bill, which effectively invites the renegotiation of gas supply contracts at the well or production end just because the gas supplier at the street or consumer end will possibly change at some time between 1996 and 1998 or beyond.

Historically, most gas sale contracts have been long-term arrangements, typically for the projected life of a field, and they were concluded between the field owners and British Gas. For example, the Hewett field principal agreement was concluded in 1968 and still survives.

Gasfield owners require some certainty that the buyer will buy a certain amount of gas in each contract year, and British Gas required some certainty that the seller would deliver those same amounts each year. Gas sale contracts have been concluded in that way for a number of reasons, principally that, first, gas is not a commodity which can be easily moved around the world like oil. Therefore, a seller's choice of buyer is restricted and for many years the only customer has been British Gas.

Secondly, the cost of offshore operations is such that, as soon as the field is brought on stream, it cannot be economically suspended. The decision to invest hundreds of millions of pounds in a particular asset has been taken on the basis of a secure long-term contract to sell the gas that is produced. I should mention that the capital investment going into that hundreds of millions of pounds development has been raised to commission exploration and development projects, and has been offered by banks on the understanding that repayment would be achieved from a steady revenue stream arising from one long-term contract and one long-term customer: British Gas, which, one would assume, has an exceptional credit and status rating in corporate lending circles.

Paragraph 2 of schedule 5 as currently drafted would permit British Gas to assign gas contracts, without counter-party assent, to an affiliate that may not have the financial means and structure necessary, or even the inclination to meet commitments that British Gas made on freely entering into those contracts, such as take or pay contracts. As written, that could and would include existing gas supply contracts. As the hon. Member for Clackmannan (Mr. O'Neill) said: If the going got really rough, British Gas could allow those smaller operations to founder as companies and its obligations would then disappear. The gas suppliers would be left to pick up the tab."—[Official Report, Standing Committee A, 27 April 1995; c. 327.] If the provision were enacted in its current form, it would have profoundly damaging consequences, both in relation to the future development of Britain's offshore oil and gas resources—and hence longer-term gas supply security—and internationally to the sanctity of contracts, a principle that is fundamental to the interests of a country whose offshore sector enjoys such extensive international investment.

By applying the schedule in a retrospective manner, there is a strong chance that the sanctity of contracts, an essential prerequisite of long-run international business, will be threatened. Let us not forget that those contracts were freely entered into by two responsible and consenting parties.

I know that this matter has been discussed to some extent in Committee, when my hon. Friend the Minister likened the guarantees for gas contracts to other items "of varying magnitude" which British Gas purchases. He mentioned everything from computers, to telephones to office cleaners. With all due respect, it is not quite appropriate to compare gas contracts worth millions of pounds with cleaning contracts.

As we know, liberalisation is happening in a phased manner, commencing with a trial area of approximately 2 million homes in the west country around April next year. I can find no valid reason why the assigning of rights and liabilities should not apply to gas contracts negotiated and agreed after the Bill has received Royal Assent.

My proposed amendments avoid the provisions of schedule 5 applying to contracts in existence before Royal Assent. Amendment No. 41 makes the transfer binding on everyone, subject to the consent of anyone whose consent would otherwise be necessary under the terms of the contract. That serves to clarify the position that the amendments, grouped together, attempt to preserve only existing contractual positions.

Any gas supply contracts negotiated after Royal Assent would be subject to liabilities being reassigned, but then at least both parties negotiating would be aware of that extra dimension during negotiation.

In that way, sanctity of contract would be maintained and the future development of Britain's offshore oil and gas resources, and hence longer-term gas supply security, would no longer be threatened. The United Kingdom continental shelf would continue to receive the extensive international investment that it enjoys.

I know that my hon. Friend has had meetings with the United Kingdom Offshore Association in recent days and over the past week and that he is fully aware of the concerns of the gas supply industry. I hope that he will respond to those fears today.

Mr. O'Neill

The amendment is broadly the same as the amendment that we debated in Committee, and it is being considered at roughly the same stage in proceedings as that amendment. It is unfortunate that such an important matter should be considered at what is, to all intents and purposes, the fag end of proceedings. It is important, however, that we debate it again, because, in Committee, the Minister did not fully appreciate the concerns that were expressed by the other parties, as it were, in the liberalisation process: the suppliers of gas in the first instance.

Discussions have taken place. It would be useful if the Minister reported on them this evening. I am not sure whether they will necessarily be accepted by everyone in the industry. Like the hon. Member for Exeter (Sir J. Hannam), a number of people from a variety of companies have come to see me. Although there is always a degree of special pleading in these matters, tonight I shall focus only on one important point: the sanctity of contract.

6.15 pm

I can well imagine that, perhaps in about 18 months' time, if a Labour Government were to introduce utilities regulations or changes in arrangements that were seen to favour a major employer who had a fully unionised work force and to whom it was considered the Labour party might be sympathetic, and if some attempt were made to nudge a piece of legislation slightly in that employer's direction, that tilting would be regarded with great suspicion and as something akin to the end of western civilisation. People would say that the Labour party was seeking to distort the law of contract, on which the whole of our business system seems to rest. As a consequence, we would be the subject of opprobrium from the press and everyone else.

The Government may be lucky that they have not attracted such attention, and that the United Kingdom Offshore Operators Association and bodies such as Brindex have been adopting a softly, softly approach, but contracts that were entered into before the original privatisation, which have been running, as has been said, for the best part of 25 years in one or two instances, still have some time to go, and a number of considerations must be taken into account.

We would like to think that the good name of Britain would not be the subject of international disdain. The United Kingdom continental shelf has still some time to operate as an active oil and gas field. We want to ensure that companies will come to the North sea and to the west of Shetland in the certain knowledge that, when a deal is struck, it is struck in all good faith, and that abrogations will not take place.

We recognise that circumstances have changed and that British Gas does not require gas in the quantities to which it once subscribed. When it entered into some of those contracts, it did not have the Morecambe field at its disposal. It does not need all the gas that it is contracted to purchase, but it might be able to purchase more if it were not taking so much of its gas from the Morecambe field. That is an internal matter that must be the subject of negotiation.

It will be helpful if the Minister tells us what the state of the negotiations are. As was pointed out by the hon. Member for Exeter, in the initial consideration of this matter, the Minister's response was not fully considered or wholly adequate as he drew analogies with other pieces of privatisation legislation that, frankly, were not directly relevant. He also, in relation to British Gas's operation, drew internal analogies that were not appropriate because, as has been pointed out, agreements for office supplies and the like are different from agreements that are entered into on a large financial scale and that relate to important contracts of an international character. I hope that the Minister will be able to give some hope that there will be stability and that negotiations will be entered into, with all sides being able to reach a satisfactory compromise.

It has been argued that the amendment would perhaps tilt the balance too much the other way. In many respects, and quite deservedly so on occasions, the Minister is damned if he does and damned if he doesn't. On this occasion, he has shown favour to a British company for reasons that were not fully appreciated, and that favour could rebound on other British companies at other times. As I said, if a Labour Government had introduced the provision, we would have had the coals of hell heaped on our heads, and probably correctly so, because it would have suggested a degree of favour for one company against another and would undermine the sanctity of contract law.

It is incumbent upon the Minister to tell us now, in terms that he was not able to use in Committee, where he stands. We also need to know, through their trade associations, how satisfied the oil and gas companies have been with some of the undertakings that he has suggested might be the way out of this difficult problem.

Mr. Robert Banks (Harrogate)

I congratulate my hon. Friend the Member for Exeter (Sir J. Hannam) on tabling the amendment and on the way in which he presented his case. He has drawn support from the Opposition Front Bench, which usually strikes a chord of alarm, but the hon. Member for Clackmannan (Mr. O'Neill) stressed the sanctity of contracts, and that rings true with me because it is why I support the amendment.

As far as possible, I have always resisted retrospective legislation. I believe that contracts undertaken, particularly in this instance, should always be honoured as best as is possible. I support and fully respect the merits of the Bill. It is a great Bill. It frees up competition and will do a remarkable job in reducing prices for the consumer. It makes British Gas a wholly different animal with the separation of gas supplies from the monopoly over the gas pipeline network.

Although there is full justification for the new arrangement, those companies with long-term investments based on supply contracts with British Gas are disadvantaged because British Gas is not held to the original contracts, as has been expressed, and because gas companies are having to renegotiate from a position of weakness. In the past, British Gas has benefited from the continuity of its supplies at prices which were set under the contractual agreements. As has been said, in some cases those agreements go back over 20 years or more. At the same time, gas companies have had the opportunity to plan and raise finance on a long-term investment programme on the basis of the contracts that have been given.

Mr. Michael Clapham (Barnsley, West and Penistone)

Is it not a fact that all those contracts are indexed to either the retail prices index or the price of oil?

Mr. Banks

I do not know the answer to that because I do not have that information. I imagine that some of the contracts would be indexed and some would not. That is a matter that we could check at a later date.

We must bear in mind not just the on-going revenue that arises from the contracts and the assuredness of the programme of investment that the companies have made and must continue to make, but the dismantling of the gas rigs when they have exhausted their fields. There is a big question mark about how the rigs are to be disposed of. Considerable costs will be involved, and the contracts will become all the more valuable because that must be borne in mind.

The fact that these companies will have to renegotiate the pricing levels of gas while British Gas will have a free hand to place the contracts with one or more of its affiliate companies causes some concern because, as I understand it, those companies do not have the right to voice their opinions as to the viability, competitiveness, competence and financial stability of the affiliate companies. All in all, a great deal of work has to be done to arrive at a position that is fair to the companies that supply British Gas and which will ensure that they get a fair deal in the future. Those companies will naturally want assurances about the companies that will take over the contracts that they had, hitherto, with British Gas. That should be fully understood by British Gas and I should like to see it woven into the legislation in some way.

The length of the contractual obligations and the price structures in the original contracts should be taken into account in the negotiations of new terms which will be necessary as a result of this legislation. We must look carefully at the situation because some companies with substantial infrastructure investments will suffer considerable losses. I accept that we are facing changed circumstances, but there are obligations that must be fulfilled if we are to see the contracts honoured.

Gas companies achieving a high price structure—higher than the market at present—as a result of some of the old contracts could be placed in a more favourable position for the price cutting of the surplus gas that they have available to put on the market. That causes a problem—I recognise that the Minister accepts that—because it would be unrealistic for a company to benefit in that way; to cut out competition and achieve a greater share of the gas market as a result of an overgenerous new price structure.

I hope that the message that will be recorded in Hansard will be taken account of, and that their Lordships in another place will take note of our debate on this subject.

I believe that, where decisions have been made on the basis of contracts that have been entered into, those contracts must be recognised and there is an obligation to ensure that those companies do not suffer unnecessarily from the new terms and conditions that will now apply and which will have to be renegotiated.

Mr. Bill Michie (Sheffield, Heeley)

On a point of order, Madam Deputy Speaker. I wish to inform the House that some members of the Select Committee on Members' Interests have walked out after two votes—

Madam Deputy Speaker

Order. That is not a matter for the Chair. If the hon. Gentleman wishes to raise this matter, he must do so in another way. It is not a point of order.

Mr. Michie

On a point of order, Madam Speaker.

Madam Deputy Speaker

Is it a different point of order?

Mr. Michie

It is the same point of order—

Madam Deputy Speaker

Order. I have already ruled on that. That is enough.

Mr. Eggar

I am grateful to my hon. Friends the Members for Exeter (Sir J. Hannam) and for Harrogate (Mr. Banks) for raising this important subject. I am grateful also for the contribution from the hon. Member for Clackmannan (Mr. O'Neill). Over the past week or so, I have been involved in detailed discussions with individual producer companies as well as with British Gas, UKOOA and Brindex—the trade associations of the independent producers and the offshore operators. They are aware of the general thrust of what I am about to say.

Suggestions have been made that the provisions of schedule 5 would encourage the abrogation of commercial contracts and give an unfair commercial advantage to British Gas. That was the thrust of the remarks of the hon. Member for Clackmannan and was behind the concerns expressed by my hon. Friends. I do not accept that view, but it would be helpful if I described how the Government see the position.

I have said consistently that the successful establishment of a competitive gas supply market will require some adjustment to the contractual arrangements under which gas is produced and delivered to suppliers. British Gas will no longer hold a monopoly and will, inevitably, lose market share to the new suppliers. Some adjustment to the previous contractual arrangements appropriate to a monopoly supplier will be necessary. However, there is no reason why that process should result in disruption of the market if it is carried out in an orderly manner between the commercial interests involved. I want to see British Gas and the producers developing the new contractual framework on an even-handed basis.

I recognise that many companies have made significant investments to support their gas contracts—that was the point made by my hon. Friends—and that they have a legitimate interest in maintaining an acceptable overall position. That in turn should assure the continuation of offshore investment in future gas production, which is extremely important to the United Kingdom.

Schedule 5 closely follows similar provisions in several other statutes so there is ample precedent for the wording of schedule 5. A key feature of the arrangements proposed in the Bill is the separation of the functions of gas transportation and supply. That is to ensure that competing suppliers, including the supply arms of British Gas, use the pipeline network on the same basis.

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It follows, therefore, that provision must be made for a scheme under which British Gas will allocate its various rights and obligations among the different legal entities that it will need to create in order to carry on its business. That is integral to the Bill. I can, however, assure the House that it is not the Government's intention that the provisions should give any commercial interest an unfair advantage over any other. Schedule 5 emphatically does not create a right for British Gas simply to walk away from contracts.

The Government's objective is to ensure a framework for a competitive gas industry in which all can participate on an equitable basis. The Government will be watching the developing commercial discussions very carefully to ensure that this overriding objective is met.

I hope that what I have said has allayed the fears of my hon. Friends and answered some of the points raised by the hon. Member for Clackmannan. It is an important and sensitive matter. Large sums of money are at stake and the future of the gas industry—onshore and offshore—is greatly affected by the terms of the contracts. We do not take the matter lightly, and I know that the producers and British Gas—do not do so. I am confident that, in the light of what I have said, the producers, British Gas and other entities will be able to reach a satisfactory commercial conclusion to the benefit of all involved.

Sir John Hannam

I thank my right hon. Friend for his comments which will assist in reassuring the gas supply industry. Certainly, the issue needed to be debated today and will no doubt be debated again in another place. However, in the light of my right hon. Friend's helpful remarks, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 13, in page 69, line 19, at end insert— '( ) As soon as practicable after making a scheme under this paragraph, the Secretary of State shall publish the text of each licence which by virtue of the scheme is treated as granted under section 7 or 7A(1) or (2) of the 1986 Act; and any text so published shall be treated as authoritative unless the contrary is shown.'. No. 78, in page 70, line 19, at end insert—

  1. 'Transfers under paragraph 6: corporation tax 361 words
  2. c202
  3. 'Transfers under paragraph 6: petroleum revenue tax and gas levy 62 words
  4. cc202-3
  5. 'Transfers under paragraph 6: consequential modifications of rating provisions 479 words
  6. c203
  7. 'Recovery of gas charges etc. 231 words
  8. c203
  9. 'Use of antifluctuators and valves 98 words
  10. c204
  11. 'Restoration of supply without consent 223 words
  12. c204
  13. 'Failure to notify connection or disconnection of service pipe 92 words
  14. cc204-21
  15. 'Rating provisions 9,502 words, 1 division