§ 2.43 p.m.
§ The Earl of GOWRIE rose to call attention to the policies of Her Majesty's Government in respect of North Sea oil and with special reference to the document: United Kingdom Offshore Petroleum Production Licensing: Sixth Round; and to move for Papers. The noble Earl said: My Lords, in recent months we have debated the present and likely effects of North Sea oil on our economy, and we 703 have debated our need to use this windfall as an opportunity to concentrate on those alternative forms of energy which will become even more important to us as our oil stocks are depleted. These are of course great national issues and will remain so, and I am quite certain that we shall return to them under the terms of some Motion or another. But in moving this Motion this afternoon, I want to try to narrow the issues just a little, so as to concentrate them and, perhaps, so as to be able to concentrate upon them, because I am convinced that all our attempts to deploy this marvellous national resource to the end of national economic renewal will, in fact, founder unless we get right our policies of extracting and exploiting the oil.
§ I believe that at the moment we are well on the way to getting our policies wrong. Of course, we all have an interest in North Sea oil which is wider and more profound than our individual political viewpoints—energy, in one form or another, is life itself—and we should strive for as wide a political consensus as possible on a resource that affects us all so acutely. But politics are in the end about choices, and in our democratic system choices are about politics.
§ So I believe that the opportunities and chances for our political economy, which the discovery of North Sea oil now offers, are unfortunately receiving the wrong response, and that the response is damaging and dangerous to our national interest. I say that because it seems to me that, if we get our sums wrong, if we make the wrong decisions now, we shall effectively have thrown away what is unquestionably the greatest chance we have had since the first industrial revolution to revitalise our economy and make it more responsive to the needs of our people. I therefore make no apology for trying to narrow, in order really to define, the policies open to us.
§ It would be naive, too, not to acknowledge that a General Election is less than 12 months away. It seems to me—and I do not know whether other noble Lords on all sides share this opinion—that there exists some confusion among the public as to where the two leading Parties stand on this critical issue, and as to what the choices actually are. I hope that one of the effects of this afternoon's debate 704 may be that the Government will have to state a little more clearly what they are up to, and that, indeed, we on this side will be able to dispel a few myths and a few rumours that have been going the rounds about our own position.
§ Let me try, if I may, to give a brief outline of the Government's policies for North Sea oil, as I understand them. I am sure that the noble Lord, Lord Strabolgi, when he comes to speak—whether it is in his opening speech or whether, by leave, it is in his winding-up speech—will, in his usual courteous and always friendly way, tell me that I am over-simplifying, but at least that will give us a chance to get the Government's own account. It seems to me rather appropriate that we should hear the Government's account of their policies on North Sea oil here in the House of Lords, because, of the three principal architects of the policy, two are Members of your Lordships' House and one should be.
§ The fine Hungarian hand of the noble Lord, Lord Balogh, who, unfortunately, through no fault of his own, cannot contribute to the debate this afternoon is, I think, everywhere apparent in the policy. The chief executive of the policy is the noble Lord, Lord Kearton, and in my respectful, but also, as I hope will become apparent, critical view, he is one of the ablest Members of your Lordships' House. And the Secretary of State for Energy, Mr. Benn, is only a "Mr." through his own considerable resources and skill. In case your Lordships think that I may be straying into the minefield of personalities, let me be very clear that there is absolutely no way around this. Her Majesty's Government's policy for the extraction and exploitation of North Sea oil is inextricable from the beliefs and talents of these three remarkable men, and we must at least pay them the compliment of not underestimating their rôle and their importance.
§ The linch-pin of the Government's policy, and nowhere is it more apparent than in the Consultative Document referred to in the terms of my Motion, is the creation and expansion of the British National Oil Corporation. The argument associated with its creation, and with the thinking of the noble Lord, Lord Balogh, is as follows. Britain's considerable oil resources have not been, 705 and perhaps could not be, developed without the involvement of the major international oil companies, including, of course, one and a half British companies—that is, BP and Royal Dutch Shell—and indeed one British nationalised corporation, the Gas Board.
§ These companies are adept at bringing pressure to bear on sovereign States, so the argument goes, many of whom start life, in economic terms, poorer than the companies themselves. They are adept at tax avoidance and they know a good deal more about the fiscal dimension of their activities than anyone from the Inland Revenue. As the noble Lord, Lord Balogh, said on a public occasion, the Inland Revenue is in the tax business; the oil people are in the oil business. They are too useful, the argument goes on, to exclude and they are too powerful—that is, too profit orientated—to tame.
§ The thing to do, therefore, is to join them in a set of partnership or participation agreements. This has precedent on its side because all oil-producing countries, except America, have national oil corporations. Indeed, the great oil companies expect such participation and, with more or less grumbling, have learned to live with it. In addition, only actually working in energy industries gives a nation the necessary expertise to deploy what may be its greatest national asset. That, briefly, but I think accurately, is the economic argument.
§ The political argument is not dissimilar. Indeed, from the Government's point of view there is a certain rather pleasing symmetry to it. A mixture of exigency, the International Monetary Fund and the personal tastes of senior Ministers—as well, of course, as of electoral considerations—has spelled a swing to the point of view of the capitalist end of the mixed economy after our acute inflation and currency crisis of 1975–76. But the Labour Party—as it should be, as it is perfectly respectable and proper that it should be—is a Socialist as well as a national Party, and many members of the Party inside Parliament and outside it were clearly dissatisfied at this swing. So nationalising North Sea oil, whether by the front or the back door, and putting a leading Socialist Minister at the Department of Energy, was a welcome move for the Left. But since nationalisation, in 706 the sense of the overt purchase or the overt confiscation of assets, would be both economically impracticable and electorally unpopular, the rapid rise of a dynamic State-owned corporation, operating to some degree as partner and to some degree as referee of international capital, would do the trick. Therefore Mr. Benn and Lord Kearton went through the international energy industries like Bonnie and Clyde went through the Southern States' banks in the early 1930s. In case again that your Lordships think I may be giving a partial or personal view of this, the latter intention has been clearly spelled out by Mr. Benn and others in political papers and political meetings which I have attended.
§ I need not rehearse in this context the rapid rise of BNOC in response to this partly political and partly economic programme. Certainly it could not have taken place without the formidable talents of Lord Kearton, and again I should like to pay tribute to those talents, if not to the ends to which they are being put. The history of State entrepreneurism in this country is not a particularly happy one. In general, it has been the case that the best men have stuck to the private sector, but Lord Kearton is clearly an exception and Lord Robens comes to my mind as another. Noble Lords on all sides of the House will probably think of their own examples.
§ At present, BNOC has achieved a remarkable left-and-right in emasculating the Department of Energy and the large oil companies simultaneously. The former has lost the real powers of regulating oil activity by co-ordinating what is actually going on. It has also lost experienced personnel to BNOC. The large companies are stuck with a partner who is also a referee whom they declare publicly they trust—because they need the licences—but whom privately they say that they do not trust. As an instance of this anomaly, consider the case of Mr. Bob McAllister of Occidental Oil and Mr. George Keller of Chevron. Mr. Keller was the man who, in the appropriately Coleridge-like imagery of our cold North Sea, called BNOC an albatross hung around the oil industry's neck and immediately had to retract so saying. Mr. McAllister was the man who dared to say that BNOC was a device to put the 707 private oil companies out of business in the United Kingdom. Terrified of ruffling feathers while the sixth round allocations were still a gleam in the Secretary of State's and Lord Kearton's eyes, Dr. Armand Hammer, the head of Occidental, hustled Mr. McAllister off to Canada, rather as Lord Lundy's grandfather sent him off to govern New South Wales.
§ The position, therefore, at present is that BNOC, under Lord Kearton, is a crude oil producer in its own right; that it is entitled to participate as a 51 per cent. partner in all the current or fifth round of licences for exploration and development; that it is entitled to negotiate an option to buy—a straight purchase—51 per cent. of the oil from the fields discovered before round five and, indeed, before BNOC came itself into existence; that it is, under the Secretary of State's announcement of 5th April last and under the present Consultative Document, formally awarded also 100 per cent. ownership of nine more blocks for which no other company is allowed to apply.
Further, if we read paragraph 5 in this Consultative Document we see that:
The Secretary of State will expect BNOC to be operator for the exploration phase in six blocks, the selection of which will be made after applications have been received".
The point of this, surely, is to give BNOC the chance of seeing which are the most popular blocks—that is, which are likely to be the most fruitful—in order to nab them. By itself, that seems to me to be a nice little piece of real politik; but, whatever one thinks of it, it does make rather a nonsense of the 51 per cent. participation of taxpayers' money in what BNOC deems to be less promising fields for exploration.
§ Lastly, the Corporation is at present causing frenzied anxiety about the clash between its role as the manager of the Government's participation interests—as the adviser of the Secretary of State, if you like—and its role as an "eighth sister": a dynamic and growing oil company moving into downstream activities; that is, the refining and marketing of oil in competition with the private sector.
§ At this point I want to make it very clear that on this side of the House our objections to BNOC's growth of powers 708 are not a simple or philosophic matter of the State sector—a nationalised industry, if you like—versus the private sector. Other things being equal, putting the national cat among the multinational pigeons may even be a desirable thing to do. This is not the moment nor the debate for political science, but too often is there confusion between the Conservative tradition and the Liberal or Whig tradition. Tories have always been interventionist, and no doubt they will be again. What we object to is the old confusion generated here between the interests of the State and the interests of a particular State body. In short, the cat is in the process of becoming the pigeon.
§ Britain's interest in her oil is not, in our view, the same thing as the interest of the large oil companies, although it occasionally overlaps with their interest; but nor is Britain's interest in her oil the same thing as the interests of the British National Oil Corporation, which is rapidly coming to assume the character and ambitions of the companies that it deems to regulate. This is the crux of the matter. As we see it, Britain's overriding interest is to use the cut in the oil imports bill—to use improvement in the balance-of-payments position—to obtain the breathing space needed for repairing the damage to her real economy.
§ It is the real economy that makes things, that sells them and that enables us to buy what we need and to give our people the jobs that they need. I contend that nothing in the Government's policy, nothing in the ambitions of BNOC to become a multinational among multinationals—and what a strange Socialist ambition this is, my Lords!—is adding one penny of revenue which could not be achieved in another way more rapidly and which could not be achieved in another way more simply. Nothing that BNOC is doing is adding to the private domestic sector, to British business and British industry which, by the Government's own admission—at least in the person of Mr. Harold Lever—is the only begetter of employment and prosperity.
§ In the last debate that we had on North Sea oil I asked your Lordships rhetorically but not, I think, fancifully, to imagine the situation where Japan had discovered oil on her off shores. I postulated that within ten or twenty years Japanese home-based oil industries would have been active 709 and operational around the world. How on earth is BNOC helping our native oil industries? There is urgent need to restore confidence and open dealing to the oil industry. The industry needs to know where the Government stand—where any Government stand—and how they define their share and their interest in the resources for which they are accountable. This knowledge should not come from a competitor—from a hived-off and barely accountable corporation—but from a Minister in overall charge of a Department of State and accountable for his Department in Parliament.
§ At present, it is incredibly difficult to get information about BNOC's activities or intentions, as anyone who works in the oil industry will tell you. Herbert Morrison's concept of the public corporation as a legally independent entity established by Parliament but not directly responsible to it, and with large but quite unspecified powers of ministerial invervention, is not only, it seems to me, out of date but has a record of proven disaster. Witness the dislike of even Labour supporters for the nationalised industries. Consider British Steel. Remember what happens in this House as well as in another place when anyone asks a question about the Post Office or when someone like the noble Baroness, Lady Burton of Coventry, has a go at the airport facilities. The phrase, "that is a matter for the commercial judgment or day-to-day management of BNOC", is not what one looks forward to hearing from the Dispatch Box, from either side of the House.
§ The oil industry is terrified to criticise BNOC publicly or even to ask it questions for clarification in public because of the Corporation's powers to influence the award of leases. In preparing for this debate your Lordships would hardly credit how many oil "rabbits" I met. I practically had to put on a false moustache and a plain mackintosh to go into some of their company offices.
§ I want to repeat that what is good for a private oil company is not necessarily good for Britain. Uncertainty and delay and the non-accountability of publicly financed bodies is even worse and I must also add that BNOC's association with the Secretary of State—the apostle of open government—seems to us to be a nauseat- 710 ing hypocrisy. There is the urgent need to reduce delays in the exploration of off-shore hydrocarbons. We must not confuse delays with a policy for depletion. I shall be absolutely emphatic that there is no such thing as a free market for a finite and indeed diminishing energy resource. The success of British agriculture, as noble Lords on this side of the House will know, was not built up through free markets. The national interest, and therefore the Government's interest, so long as the Government are properly accountable, are always involved with questions of pricing (which the nation cannot always control) and with questions of depletion and conservation (which it usually can control). But we cannot conserve what we do not know is there. The detailed intervention by BNOC in every operating agreement, the persistent upping of the ante in BNOC's favour once agreement has been reached, so new discussions towards yet another agreement have to take place, have reduced exploration for North Sea oil to the speed of a submarine snail. Under round four, the Conservatives' last licensing round, so often derided by the noble Lord, Lord Balogh, and Mr. Benn, drilling on several blocks had begun within two months of the allocation of licences: the present rate is nearly two years. If BNOC had been in control of round four I think that, as a nation, we should still be snipping around the perimeter of the Forties field. I do not think this is a small or a niggling point. The average size of the 14 oil fields at present in production is slightly over 600 million barrels a day; the projected average size of the next 10 fields is 300 million barrels a day and, as we go on into the 'eighties and' nineties, the average size of field will go down as well as occurring in even deeper water. So we must make it worth while and make it a national priority to find out what we have got. Only then can we decide what we should do with it.
§ I cannot see the case either—but perhaps the noble Lord, Lord Strabolgi, will give it—for the involvement of the public sector in oil speculation and in trading. The noble Lord, Lord Kearton's conception of BNOC as a multinational oil company dealing, albeit on unequal terms, with other multinational oil companies, seems to me to be not merely dubious in 711 terms of commercial morality and constitutional propriety but altogether unnecessary as well. Why should public money be committed to the exploration of fields before we know what is in them? Why do we have to take a 51 per cent. participation in the "dud" fields? Again, there is a fundamental difference here between the concept of the State as a regulator and protector of what it deems to be the national interest and the concept of the State as an entrepreneur. We passionately defend the former; we shall have to be very powerfully persuaded indeed not to put an end to the latter. If I were the noble Lord, Lord Kearton, I should make sure to light a candle for a Labour victory at the next election.
§ At present, BNOC is using public money to buy large quantities of crude oil. It has borrowed 825 million dollars against future oil receipts in money markets here and abroad without Treasury indemnity and therefore without ministerial control. I wonder whether the noble Lord, Lord Strabolgi, can tell us in his winding-up speech what the Treasury thinks of that particular activity. I understand that most of the money is earmarked for the exploration of fields which the oil companies themselves are committed to drill in any case, so where is the sense and where the justification for this? How ironic, too, that the Corporation should be forced by price mechanisms which its own activities are affecting to make distress sales of stock-piled crude. It seems to me that Governments, unlike oil companies, are in a "no lose" position where oil is concerned. When we form a Government we shall put an immediate end to gambling and commercial indisciplines of this kind.
§ Other speakers in the debate will no doubt touch on, and bring their own experience to, other aspects of policy. I am thinking in particular of some of the international and strategic implications of North Sea oil and I am glad to see that the noble Lord, Lord Chalfont, in what I hope is merely an intermediate stage of his Western journey round the Chamber, has put his name down to speak. I am also glad to see that the noble Lord, Lord Vaizey, who has long, in print at any rate, been a mentor of mine has not only put his name down to speak but is 712 also making a step in the right direction. Also, I look forward very much to the maiden speech of the—as yet—still loyal noble Lord, Lord Hatch.
§ For my part, the most useful thing that I believe I can do from these Benches this afternoon is to put an end to the myth that is going about in the Press and elsewhere that in some way the next Conservative Government will not, or will not be able to, put an end to BNOC as it is at present constituted. We shall do so. We shall start by making it immediately and uncontrovertibly clear that the advisory and regulatory section of BNOC's activities will be returned to the Department of Energy; we shall put an end to the large discretionary powers of the Department and of BNOC; we shall see that any powers of participation that remain to BNOC are authorised by Parliament and we shall tax BNOC like the other companies. It should not therefore be taken for granted that BNOC will automatically survive a change of Government any more than the major oil companies should take it for granted that there will be a continuation of the principles of round five when not one of the smaller independent British companies was cast in an operating rôle.
§ We on this side of the House are not beholden to the oil companies and we will not be beholden to BNOC. Our only objective is to see how the resources of the North Sea, which cannot by themselves solve anything, can buy sufficient time to get the industrial economy of Britain on to a sound footing, to restore profitability and incentive and lower unemployment levels, and to give back to the British people confidence not simply in a diminishing asset but in themselves. My Lords, I beg to move for Papers.
§ 3.10 p.m.
§ Lord TANLAW
My Lords, it is always a difficult task to follow the noble Earl, Lord Gowrie, especially when he makes such a brilliant and detailed presentation of the oil industry as he sees it today. It reminds me in fact of a very famous night club pianist whose playing of melodious tunes brought him instant success throughout London. The secret of his success was not so much the notes he played but the ones he left out, which 713 gave him a unique and interesting combination of musical skill. The noble Earl has put a case and put it extremely well. I feel that in some ways the case may be slightly over-biased in favour of the large multinational oil companies, although I am convinced that the noble Earl may well deny this in his winding up.
If we go back in history just a very short period, it is not so long ago when the question of licences came up in your Lordships' House, and these were being given away rather like pieces of sliced bread at a soup kitchen. There was no negotiation. It was the noble Lord, Lord Balogh, and also some noble Lords, including myself, on these Benches, who drew attention to some of the things that were going on. It was out of debates in this Chamber that BNOC was formed and some of its policy was formulated. It has only been the activities of the noble Lord, Lord Kearton, the noble Lord, Lord Balogh, and other noble Lords, as well as others outside this House, that have put the United Kingdom's position in terms of the North Sea oil industry on a basis so that we can negotiate, even now, on only semi-equal terms with those multinational companies which would have wished, given the opportunity, to take a far greater slice of the cake than would have been advantageous for the taxpayers of this country.
It was not just a question of nationalised greed, as the noble Earl implied. The position was that there was a serious lack of knowledge in the Departments in Whitehall involved with energy as a whole. There was not even a Department when I originated one of the early debates in your Lordships' House, and as a result of the OPEC crisis a new Department of Energy was formed. But that was only a few years ago, and I think we should put some of the remarks presented by the noble Earl, Lord Gowrie, in historical perspective before we focus in detail on the main part of this debate, which is the terms of the sixth round licences.
The BNOC is a creature of government and it was established to tame the tigers that had dominated the arena of international oil trade. I take the point the noble Earl made as to whether BNOC will still retain what I believe to be its benign intentions in the years to come when 714 it reaches maturity, or whether it will turn instead into an animal which is almost indistinguishable from those it set out to tame in the first place. I sincerely hope not, and provided that there are adequate financial checks on the way it operates its accounts and on the terms on which it raises its money I see no threat either to the multinational oil companies or to our existence here in the United Kingdom as consumers of energy.
If we look at the terms in which BNOC was created, there is a note in its accounts which says that according to Section 15 of the Petroleum and Submarine Pipelines Act 1975 the chairman is responsible to the Minister for Energy. So I do not share the extent of the fears the noble Earl has that the chairman of BNOC is able to act too much in his own right to the exclusion of the Minister, who is, after all, his master in this situation. I do object, however, that there are no shareholders in BNOC; the annual general meeting, if I can call it that, is replaced by a Press conference. At the same time, the Minister presents the accounts, not at an annual general meeting but on the Table in another place, before Parliament. This offers some opportunity to study these accounts, but in the years to come it may not be quite enough.
I am concerned with only one aspect, which is that it is not that there are not enough masters but there are almost too many masters of BNOC. The detailed scrutiny of the accounts is primarily the responsibility of the Select Committee on Nationalised Industries, which is in this case indirectly responsible to the Public Accounts Committee through its supervision by the Auditor General of the National Loan Fund and the National Oil Account, which are the sole sources of income and finance for the Corporation. I should like the noble Lord who will be replying to the debate to bring some clarification to this. There is quite a possibility, a danger, of overlapping here: when we consider the magnitude of the figures that will be involved in terms of income and royalty income not so many years hence, there could be a danger that these various sources of control will overlap to the extent to allow some funds to get through unaccounted. I do not want to go into details of this, but it was a very similar arrangement that brought about the muddle over the Crown Agents' 715 financial situation. I personally would be much happier if there were some clearer mechanism of accountability than we have at the moment.
If I may turn to the life of the BNOC, I had prepared a note to say that it was a short one, but I did not realise it was going to be quite so short until I heard the noble Earl say that its future would possibly be in doubt if there were a change of Administration. But the life of BNOC can only be about 15 years. If we refer to Cmnd. 7101 we see that the United Kingdom becomes once again a net importer of crude oil, and presumably by that time there will be no more oil to discover and no more licences to be given out or negotiated. What this gives us in this country is 10 more years. And the European Economic Community, according to some calculations, will be forced to import most of, if not all, of its oil requirements by 1985. Bearing this in mind, we should look very carefully at what BNOC's future will be in 15 or 20 years time. I assume that it will then develop and graduate into the distribution business and become a familiar sign on the roadside alongside Shell and Esso and other signs which are so familiar today, in which case I believe there is a very different set of arguments and a very different set of parameters to put to its activities.
But at this point of time we are not concerned with distribution but with exploration and the trading in crude oil. Another point mentioned by the noble Earl was the slowness in giving out these exploration licences. I accept that there has been some slowness, but I am not sure that that is a bad thing. There seems to be far too much crude oil in world markets at the moment. The international oil companies and BNOC itself are awash with crude oil which they cannot sell at the price at which they would like to sell at the moment. I think there is a case for going a little slowly rather than adding to the problem and depressing prices artificially, as they would be if exploration rates were increased rather violently in the next two years. That would create another crisis of its own.
When we consider oil—and I said this four years ago in an energy debate—we are, in terms, considering money or 716 currency. It is, as it were, a form of black currency. If we create an artificial reduction in price at this stage it will have effects far outside the parameters of an energy debate or an energy Minister.
§ Lord ORR-EWING
My Lords, would the noble Lord not agree that the case which he is making out—the case, that there is currently a surplus of oil—makes it all the less desirable that the BNOC should be stockpiling oil at today's prices which it may have to unload at cheaper prices tomorrow and thus cost the taxpayer sorely?
§ Lord TANLAW
My Lords, the point that I was attempting to make was that if BNOC unloaded it now the problem would be a reduction in price. There is a case for retaining it and, hopefully, maintaining the price of oil at the same time.
I should like to revert to some words which were used by the noble Earl when he opened the debate. He used the phrase "terrified oil companies". That, in my view, is a very rare state for oil companies of the size that were mentioned by the noble Earl. These "terrified oil companies" have managed to exercise a control on the President of the United States of America. Some of the major policy decisions of the United States have been greatly affected by the attitude of the oil companies. The power that they have is out of all proportion to the number of people involved. We do not want that situation to occur here. I do not believe that these are small men frightened of a national oil company that has only 750 employees. This is the only time that I have heard of an oil corporation of the size of Shell or Esso being described as "terrified".
The Earl of GOWRIE
My Lords. I am grateful to the noble Lord, Lord Tanlaw, for giving way, but he is misquoting me. I said that the oil companies were terrified to criticise BNOC policies publicly. That is different from saying that they are generally speaking terrified.
§ Lord TANLAW
My Lords, let us get back to the terms of the debate. I still believe that the day is not yet here—and may it never be for anyone on these Benches to say that it will come—when the chairman of an oil company is for one reason or another unable to unburden himself in public in this country. He can do it in Hyde Park if he is frightened to do it in the papers. I simply do not accept the argument.
I am totally against nationalisation but I believe that without the BNOC this country, in terms of its executive and, indeed, in terms of this Chamber and Her Majesty's Government, would not have the expertise or knowledge to know that we were not, in fact, being "done" by the oil companies. We took far too much for granted before the formation of the BNOC. Although I think that we should watch very carefully that as it grows it does not become out of hand and does not enter into the kind of agreements or practices which the noble Earl suggested that it could or might do—I would join him in opposing such movements in that direction—at this stage of the game I think that we should try to help preserve and cultivate it, but at the same time keep an eye on it.
I eventually return to the point that I have been attempting to establish. Very early in his remarks the noble Earl mentioned the worry that these oil companies might have as regards a nationalised agency. It so happens that I heard, I think it was yesterday, that a Chinese language newspaper in Hong Kong put down the fall of sterling relative to the Hong Kong dollar as being solely because the British Government had sold the North Sea assets out to overseas and multinational operators. That is the kind of story that gets around. I believe that it is less likely to get around if the BNOC is given some structure and some guts to take on these giants in the multinational oil field at something like their own level. It is not a perfect organisation and I have already added to the criticisms that have been made by the noble Earl. Indeed, I shall continue to do so, especially in terms of its accountability and money raising facilities. Nevertheless, at present—this being the time of the sixth round of exploration licences—with the reservations that I have made, I, from these Benches, am happy to see 718 the BNOC go ahead, and I wish it well at this stage.
§ 3.25 p.m.
§ Lord STRABOLGI
My Lords, I am very glad that the noble Earl, Lord Gowrie, put down this Motion for debate and has afforded us the opportunity of a wide-ranging discussion on offshore oil policy. It has also provided the noble Earl with the opportunity to show the differences of approach which noble Lords opposite and the Government have to the matter of safeguarding the benefits of this vital resource for the nation. I noted carefully what the noble Earl said and I shall, at this stage, review briefly the policy of Her Majesty's Government and the results of our North Sea policies. At the end of the debate, as the noble Earl surmised, I shall deal with some of the points of detail, like Britoil to which he referred. However, I find myself in much more agreement with the speech of the noble Lord, Lord Tanlaw, who I thought had a much clearer appreciation of some of the difficulties involved.
Our two major objectives were set out in the White Paper of July 1974; they were, first, to secure a fairer share of profits for the nation and to maximise the gain to the balance of payments. There needed to be a big increase in Government revenue from the Continental Shelf, although we recognised then, and continue to recognise, that the companies must have a suitable return on their capital investment. Secondly, it was necessary to assert greater public control in order to protect the public interest.
In pursuance of those objectives, we have introduced the petroleum revenue tax and a "ring fence" to safeguard corporation tax on North Sea profits. The "ring fence" prevents the companies setting off losses unrelated to the North Sea against profits made from the North Sea, and thus protects for the nation its proper share of the profits. These measures were essential to correct the inadequacies of the tax and licensing regime which we inherited from the previous Conservative Administration and which would have led to substantial losses in tax. I should remind your Lordships of some of the remarks made 719 in the 1973 report of the Public Accounts Committee on the loose arrangements which the previous Government had made and the lack of tax and the losses. The measures that we have introduced will help to increase the nation's share of North Sea profits to around 85 per cent. from fifth round licences, when due account is taken of the State's equity share in the licences. I was very glad that the noble Lord, Lord Tanlaw, agreed with the very necessary measures that we took.
We have succeeded in negotiating participation by BNOC in all discoveries made under the first to fourth round licences. We have established a State oil company which in a mere two years' existence has achieved a notable entry into offshore exploration, development and production. In the last year it has, for example, brought into production a major North Sea oilfield—Thistle—and has contributed to over one-fifth of all exploration and appraisal drilling in that time.
The corporation has become a source of valuable advice to the Government on oil matters. That in turn has assisted the Government in the use of their regulatory powers over offshore activity, and I should emphasise to the noble Earl that they are the Government's powers. I should like to repeat what I said in the participation agreements debates: BNOC is not—and I repeat, not—a regulatory agency. We have also introduced into existing licences conditions which enable the Government to exercise a more effective control over operations including such vital matters as development programmes and rates of depletion.
Under the previous Administration there was no effective control; so long as the companies prepared plans which were technically sound they could have drained the oilfields at once, or put down as few platforms as they liked, and have recovered as little oil as possible to give themselves the maximum rate of return. It is the Government's effort which has returned to the State full control over these matters—a control which is vital to retain the essential flexibility to meet future circumstances. These controls were included in the fifth round licences, and we propose that they shall be included also in the sixth round licences.
720 I do not want to go into the question of depletion which was referred to by both noble Lords. The arguments for and against early depletion are set out very fully and interestingly in chapter 7 of the February Green Paper on energy policy and also in annex 2. As the Green Paper points out, these are probably decisions that need not be made until the early 1980s. The point I want to make here is that whatever we decide to do with this very important depletion policy we must be able to control it. The Opposition continue to believe that we can control production in the North Sea through taxation. It seems that they have learned nothing and forgotten nothing.
Having established a rôgime which fully recognises the national interest in licences, we have already moved forward and licensed new territory. In doing so we have adopted a more orderly approach and have arranged that the State shall have an assured majority equity stake in each new licence. What response have the Opposition made to these policies? They have crtiicised and they have fought them. They have declared time after time that we are driving the oil companies away and the noble Earl returned to the charge this afternoon. But what is the true picture? The true picture is that the companies continue to be interested in the North Sea. The fifth round demonstrated that. And in respect of the earlier licences, where our first target is to ensure the development of our resources so that we become self-sufficient in oil, we are well on the way to achieve this by 1980.
North Sea oil production last year amounted to nearly 38 million tonnes, equivalent to almost half our national requirement. This was achieved only two years after the first oil came ashore from the Argyll and Forties fields. Thistle, which came on stream recently, became the ninth oilfield in production and there are eight more oilfields currently under development. This year's estimate of total possible oil reserves from existing finds at 2,620 million tonnes is 120 million tonnes higher than the previous year's estimate. Since the first natural gas came ashore in 1967, gas production from the North Sea has increased to the point where we now take it for granted that the gas industry depends almost entirely on our indigenous natural gas. In 1977 the Frigg gasfield on 721 the median line with Norway became the first Northern basin gasfield to come on stream with gas being delivered by pipeline to a new terminal at St. Fergus which the Queen opened earlier this month.
Our North Sea oil and gas made a major contribution to the United Kingdom economy in 1977, leading particularly to significant improvements in the balance of payments. North Sea oil production last year was valued at over £2 billion and indigenous natural gas production was also worth in the order of about £2 billion. By 1980 our national income arising directly from oil production in the North Sea is expected to be about £4½ billion (at 1977 prices) or rather more than 3 per cent. of gross national product. By 1980 it is estimated that the overall benefit to our balance of payments should be about £5½ billion (at 1977 prices). I submit that all this is evidence of the success of our policy of ensuring the rapid development of our Continental Shelf oil and gas resources.
The Motion before the House makes special reference to the document United Kingdom Offshore Petroleum Production Licensing: Sixth Round, and the noble Earl has made a number of comments about the document which I shall deal with shortly. First, I should like to say that the document has been published by my right honourable friend the Secretary of State for Energy to whom I should like to pay a tribute, together with my noble friend Lord Balogh, who is very sorry that he cannot be here today, as a basis for consultations about the arrangements for the round.
The Opposition allege that the Government do not appreciate the contribution made by the oil companies, both large and small, to the exploration and development of our Continental Shelf. Nothing could be further from the truth. My right honourable friend the Secretary of State has on numerous occasions made quite clear that the Government recognise and indeed welcome that contribution; the expertise and investment they have brought to bear on this exacting task has been invaluable. But recognition of that contribution does not mean that we should refrain from asserting proper and legitimate control over the extraction of these vital resources.
722 The companies are in business and their financial interest is to make as much profit from the North Sea as they can, and the more profit they make the less the return to the nation for the resources that belong to the nation. So clearly the protection of the national interest demands that the Government become involved in and can control these activities in the recognition of that fact which distinguishes us from the previous Conservative Government who, as I have said, were so profligate in dispensing with the rights of the nations' precious oil reserves to the extent indeed of offering these rights on a free-for-all basis, as the noble Lord, Lord Tanlaw, said, and for some fourth round blocks offering them to the highest bidder. It is in this light that the Government's development of their licensing policy should be seen.
We are determined that the new round should be used to strengthen British control over its offshore oil resources. But we have not sought to make numerous or substantial changes to the fifth round arrangements. I should like to demonstrate this by describing the principal features of the proposal. We propose that the round should be of about 40 blocks and should continue our strategy of a more orderly pattern of licensing, with smaller amounts of territory being made available at more frequent intervals than in the past. We have no intention of repeating massive rounds like the fourth; the associated peaks and troughs of activity would be entirely unhelpful to our offshore supplies industry, which is also a very important aspect of this which the noble Earl did not deal with.
There will be no discrimination in regard to the nationality of applicant companies. That is surely right and proper in the light of our international obligations. BNOC is to have a 51 per cent. minimum interest in each licence—except where British Gas is also a partner, in which case the combined interests of the State corporations will he 51 per cent. Thus we can ensure that the nation has an appropriate stake in every licence. It follows that all initial awards of licences would be subject to such matters as BNOC and the private sector companies settling joint operating agreements. There is no alternative to such agreements to regulate affairs between partners in the licence.
723 The noble Earl accused BNOC of being responsible for delays. Of course, settlements take time, but there has been no undue delay in the conclusion of the joint operating agreements for the fifth round. Both sides in these agreements have interests which, quite properly, need to he protected. The arrangements, after all, may have to stand the test of time for nearly 40 years. Our proposal to limit approval of operators to the exploration phase has given rise to some comment by the noble Earl, Lord Gowrie. We have given much thought to the massive demands which the development of discoveries inevitably places on resources of manpower and technical capability. There is no escape from this. It seems only sensible therefore that the decision about the operatorship under the continuing licence—and I would stress this, in view of what the noble Earl said—for the development phase should be left to be decided in the light of resources available at the time; and this could be to the advantage of the smaller companies.
While I am commenting on the matter of operators, noble Lords will know that BNOC has been appointed operator in six fifth round blocks. The Government's view is that there would be a similar arrangement for the sixth round. BNOC will, it is proposed, be operator on six blocks on this occasion, also. We believe it very important that BNOC should have a stake in its own blocks. It may be necessary not to exploit a block, for example, as part of our depletion policy. On the other hand, we might want to exploit it very fully. Those are decisions that we can only really take if certain blocks are given entirely to BNOC. That is the reason for that policy.
Our proposals for the sixth round are that the criteria to be used for assessing applications should, in general, be on the same lines as in the fifth round. They would include such matters as the technical and financial standing of the applicant, his contribution to the British economy, provisions concerning the participation policy and opportunities for British industry to compete for orders for off-shore work, and provisions concerning the proper representation of trades unions off-shore. We are proposing for the sixth round to add a new criterion about applicants' efforts in the important area of 724 training. This would, we hope, lead to an increase in the number of skilled people available for work off-shore, and, through this increase in competence, to an improvement in safety.
The plans for the round include one novel feature— the introduction of optional arrangements. We are proposing—as the noble Earl alluded—that applicants should be given the opportunity under the round of offering to carry the Corporation for all or part of its costs during the exploration and appraisal phase. There would also be provisions enabling applicants to offer to BNOC an equity share greater than the standard 51 per cent. and to offer BNOC the option to buy at market price from its partners a proportion of their oil, or to sell—and also at the market price—a proportion of the Corporation's oil to the applicants, or indeed options on both these matters.
It is our belief that each of these optional arrangements could benefit this country either financially, or in access to oil, or in flexibility for the disposal of oil; and it is for those reasons that they have been included. The assessment of applications would be undertaken by reference to the offers made by applicants under these special arrangements and the standard criteria all taken together.
All these proposals are tabled as a basis for consultation. My right honourable friend the Secretary of State regards this as essential. The organisations chiefly concerned have already been asked for any views or suggestions they may have. Careful consideration will be given to any comment they, or indeed any other interested party, may wish to make. The Government will not take their final decision about the arrangements for the sixth round until the process of consultation and consideration has been completed. I may also say that careful note will be had of all the points made by your Lordships in this debate.
We believe that the Government's North Sea policies show a fair and evenhanded treatment of the public and private sectors. Of course, we recognise that the private sector, with its particular commercial interests, would prefer that the privileged position it obtained under previous rounds of licensing—particularly the fourth, as I have said—should be 725 maintained. However, that is not to be. Her Majesty's Government have not flinched from the policies necessary to redress the disregard of the national interest shown by the previous Conservative Administration.
We make no apologies for continuing to seek ways to increase the national benefit from licences. We note that each step we take has been greeted by complaints that we are being too severe and that we are removing all encouragement. That was so with the introduction of PRT, with the improvement of licence controls in the Petroleum and Submarine Pipelines Act—which was surely a very necessary and essential measure—and with the provision of an equity role for the State in each fifth round licence. Yet we notice that the industry's interest does not diminish. The Government are confident that, when the process of consultation and consideration is completed, the sixth round will demonstrate that the companies continue to regard the United Kingdom Continental Shelf as an attractive oil province, having a licensing regime which properly respects their position, while at the same time protecting the legitimate national interest, which should be paramount.