NORTH SEA OIL: LICENSING

HL Deb 22 May 1978 vol 392 cc730-98

Debate resumed.

3.59 p.m.

The Earl of LAUDERDALE

My Lords, reverting to the debate initiated by my noble friend Lord Gowrie on the policies of Her Majesty's Government regarding North Sea oil, with special reference to the document, United Kingdom Offshore Petroleum Production Licensing, et cetera, may I first express an apology. I was informed that this debate was coming on only in the middle of last week when I was clogged up with engagements which had long been established. Therefore, my own attention to preparing the speech has had to be short, hurried and sketchy. I ask your Lordships to be even more indulgent than you normally are when I speak because what I have to say is correspondingly disjointed, and I apologise. Secondly, for the same reason I am afraid that I shall have to leave the Chamber at about half-past five to fulfil a previous engagement. Once again, I apologise because if there is one debate more than another that I should like to have sat through to the end it is certainly this one.

It is always a pleasure to hear the noble Lord, Lord Strabolgi, in good heart and good voice. He was in good form this afternoon. In fact, I do not think that I have ever heard him speak so well, so effectively—I might almost say so boisterously. At any rate, he was not slow in claiming for the Government the benefits that have accrued to our country through the discovery and development of hydrocarbons beneath the North Sea. I think perhaps it might have been as well had he tempered his criticism of Tory disregard of the national interest in the past by some recognition that the benefits we now enjoy are the results of work begun many years ago.

It is not my purpose to tease or taunt the noble Lord, Lord Strabolgi—not that he minds that, because we frequently do it to one another. This is a serious debate, but I confess that I must confine myself largely to matters that puzzle me very much indeed. The noble Lord referred to the balance of payments. I shall be reverting to that. He referred to the inequities, as he described them, of the tax situation which the Government inherited. To that also I shall refer.

I am obliged to him for having referred to the Third Report of the Public Accounts Committee because that gives me the text which I otherwise lacked for referring not to the Third but to the Eighth Report of the same Public Accounts Committee. There is a reference there which it is perhaps worth while bearing in mind as we come to the 51 per cent. participation proposals that are outlined in the Discussion paper before us. The Eighth Report of the Public Accounts Committee concluded with these words: It would be more in keeping with the concept of Parliamentary control in relation to the taking of a State share in oil resources, and with the spirit of the Act, if an Order were laid in respect of the broad financial effects of any agreement providing for State participation with existing licences". Then it goes on, and I continue: We recommend therefore that the Department should reconsider the desirability of laying such Orders before concluding the agreements". One of the factors in the Paper before us that requires some examination is of course the automatic assumption of a 51 per cent. participation on an equity basis by the BNOC in the future licences.

There is only one other matter to which the noble Lord referred that I think I also must mention before I pass on, and that is that he said there had been no effective control of our oil developments hitherto. Well, I think one must say that of course the stimulating sea breeze of an oncoming general election has clearly had its effect on the noble Lord, as it certainly is having on our Benches, because as we look forward with zest and eagerness to this conflict, so they as well as we are naturally deploying our arguments as well as we can. If we have a chance of perhaps understating the position of our opponents, we occasionally fall for that temptation.

With regard to this document I am befogged and puzzled; indeed, I am reminded of that saying of the British, "They never draw a line without blurring it." So far as the policy that is laid before us is concerned, I recall the late Sir Winston Churchill's words in 1936. He said: So the Governments go on in strange paradox; decided only to be undecided; resolved to be irresolute; adamant for drift; solid for fluidity; all-powerful for impotence". When we look at this whole subject we must consider what is our overall object. Our wealth—our position as a great industrial power—was built up on the availability of cheap energy. Today, something like one-eighth of the national effort—12 per cent. or 13 per cent. of the GNP, if one likes to use that crude measurement—is actually spent on providing the energy to fuel the rest. That is a very different situation to the one on which our industrial greatness was built up. But of course with the prospect that many of us can foresee—and that many great experts in energy policy worldwide foresee—that in 15 to 25 years' time there will be a net shortage of available energy at anything like current prices in the western world, we must also pursue the consequential danger that instead of spending one-fifth we might well have to spend up to one-quarter of our total national effort generating the energy on which the rest depends. If anything remotely like that is in prospect (and I believe, seriously speaking, that that is the case), then our object at this time in looking at the North Sea as a whole should really be quite simple.

May I say here that although—I might almost say for a bit of fun—we throw political balls and brickbats at one another, what we ought really to be concerned with, and what I certainly am concerned with and I am quite certain that the noble Lord, Lord Strabolgi is concerned with, is this: that the policy that emerges is one that will survive at least half a dozen General Elections. That is what is important. I am not concerned, beyond the bit of fun which we have between ourselves, to make Party points. I am concerned that, as we come into a run-up to a serious energy situation anything from 15 to 25 years hence, we should try to approach this without too much Party bias, and with an endeavour to bring together thinking that will survive a good half-dozen general elections.

Taking that as my basis, I believe that our overall object must be not so much to secure now as much energy as possible but to secure and establish the means for it when it is needed, consistent of course with a prudent depletion policy, which is another matter. Where hydrocarbons under the North Sea are concerned our real concern must be to encourage the maximum amount of exploration.

The Government are to be congratulated on the general approach of going for smaller and more frequent rounds. One effect of the smaller and more frequent rounds is to step up the pace of progress towards completion of programmes already agreed under previous rounds. It is also prudent—and again the Government are to be congratulated for it—that there should be taken into consideration an applicant's record in regard to providing training for technicians trying to learn about the industry. Those are positive, serious and real improvements.

However, I find that the document has certain shortcomings because on the face of it—the noble Lord may be able to correct such misunderstandings as have fallen my way—three clear points stand out. First, it would seem that BNOC will have a 51 per cent. equity share in each licence. As I read the document, however—I am thinking in particular of paragraph 9(b)(1)—it would appear that the applicant provides the capital. I may be wrong about that, and if the Minister wishes to correct me I will gladly give way. If it is the case that BNOC gets a 51 per cent. equity share and the applicant provides the capital, that would seem a very serious disadvantage.

The second disadvantage seems to follow, in that the policy for operating each licence is to be determined by an operators' committee. That is fair enough, but, as I read the document, that operators' committee is to reflect not the paid up capital of the participants but the equity interest including BNOC's unpaid 51 per cent. That is how I read the guidelines and I should like to be told I am wrong; I hope for the Government's sake and Britain's sake that I am wrong. If, however, I am right, we shall have BNOC not only enjoying a 51 per cent. equity share for free but also a 51 per cent. vote in the policy operating committee. That is a very serious difficulty indeed and I put it no worse than that.

Then we come to the third difficulty, and the noble Lord alluded to this in passing—I would say sideways—and he may say more when he replies. It appears that there is no certainty that a successful exploration operator will be accepted as licensee for the subsequent development, once again, if I have read the paper wrongly I am ready to be corrected. Thus, there would seem to be three straightforward difficulties: first, BNOC gets a 51 per cent. equity share for free; secondly, consequent upon that they get a 51 per cent. say in the operation of the licence; and thirdly, the operator, if the exploration is successful, will not necessarily be successful in getting a subsequent licence for development.

I mention another point in passing: the document tells us that the operating committees must meet in Glasgow. I am all in favour of Glasgow; it is a wonderful, great and beautiful city, a wonderful city in which to get drunk if not quite such a good city in which to be sober. It is also a great city in which to have friends. But I cannot for the life of me see why all the operating committees have to meet in Glasgow, where BNOC has 230-odd employees, rather than in Aberdeen, where it has more than 300. That may be a detail which will come out in the wash. It is not a major point but it puzzles me.

Whatever else the Consultative Document about the next round does, it shows how to make history. When I was a newspaperman I was told that one must have a nose for news and that if a dog wags a tail that is not news, but if a tail wags a dog that is news, and that is what is happening here; a 51 per cent. unpaid subscriber to the equity will control the policy. In this case the tail is wagging the dog.

So far as incentives for greater exploration are concerned, there is nothing said in the document to foreshadow any change in the taxation approach. The noble Lord is proud of the Government's tax policy. I would only say that I can see nothing whatever to be proud of and, apparently, if things go on as they are, each field is still to be taxed as a separate taxable unit, so that if one loses badly on one field one cannot set that off later against success on another. That in itself is a disincentive and has been so described by the companies many times.

Apparently also there is still to be no relief enabling interest payments to be deducted in computing company profits. Yet a great part of the funding of any exploration or development operation is loan capital. Moreover, it is largely funded by the operator, not by BNOC. But, if the heavy interest charges on those loans are not to be set off against profits, then we have yet another disincentive. My complaint therefore is that not only is this a project where the tail wags the dog, but it is a project where exploration will enjoy no greater incentive than hitherto.

The noble Lord told us with some pride—he reminded me of a father with his first child; our first child is always the best baby ever—about BNOC, almost as though it were his own baby. He said that BNOC had contributed to one-fifth of the appraisal drilling—I take it he meant over the past year—and that it had brought the Thistle field on stream. But unless I am completely mistaken—and I may be wrong because I have not had as much time as I should have liked in which to prepare this speech—The fact is that what BNOC has done is to take over the assets of Burmah and the National Coal Board oil development enterprise, and those are the ones that have been effective. In fact, the amount of drilling that is attributable to what I would call BNOC pure and simple—the corporation that has been built up in the last 18 months—is virtually nil.

When I put a Question to the noble Lord earlier this year about drilling in 1977 it emerged then that some 55 per cent. of the drilling in the British sector of the North Sea was by major companies on their own account, some 45 per cent. by majors on farm-ins, and nil per cent. by BNOC. Thus, whether BNOC has any drilling experience of its own, other than that acquired through the assets of Burmah and the ex-NBC interests, I do not know. One might enquire whether BNOC—so active, so zestful, so youthful, so full of enthusiasm for exploring on behalf of British interests, so full of enterprise and headed by such a magnificent capitalist pirate as the noble Lord, Lord Kearton—has drilled any of the blocks that were not taken up in the last round. What, for example, of 83/24 South West of the Scillies, or 86/12, 14 and 15, 88/2, 95/27, South of Lands End? Has BNOC drilled on any of these? They were all excluded by other companies in the last round. BNOC, which is full of energy and full of zest, might perhaps have had a go at them, but I understand not. In any case, for the future, when BNOC is to be the operator, will it be an operator in the sense of ex-Burmah or ex-National Coal Board oil interests being the operator, or is BNOC going to contract either with the major, or with other companies to do their drilling for them?

I shall look forward to reading (because I shall not be here) and I am sure that the House will look forward to hearing, what the noble Lord says in his reply about the increased opportunity which he forecasts for the smaller companies. This is another feature of the noble Lord's speech which I found good as far as it went, and I hope that when he replies he will be able to say more about that. But the fact of the situation now is that the pressures of taxation and the difficulties of raising funds have meant so far that the majors become more important and the minors become less important because the minors have been found to farm out their interests to the majors as being the only ones who could raise the cash and face the taxation difficulties that are now adding to their problems.

The tax burden is a penal burden, and when the noble Lord previously says that there is still interest in the North Sea, I should hope that there is. If there is oil underneath it, or natural gas or coal—and we believe that all those are there in varying amounts—of course the oil companies are interested. But having applied for licences to take them up, whether there will be as much competition for licences as before will depend very much on the state of the game in other parts of the world and on the competition in other parts of the world for the limited number of exploration rigs and teams that are available.

This business about the smaller companies is very serious from the viewpoint of our national interest. I have in front of me now a report compiled by Gaffney, Cline and Associates, well known consultants in the oil business. Some time ago they wrote the following: The cost of these uncertainties"— they are referring to tax and other uncertainties— is felt in many directions. The industry as a whole is well able to quantify these risks, but the sheer exposure to drilling and development costs in the North Sea is forcing out many exploration companies. The absence of the smaller companies will deny the United Kingdom much of the imaginative and entrepreneurial flavour which is so essential to the world wide industry. Reliance on purely the major companies will merely polarise North Sea developments towards a handful of groups. It is regrettable that 1977 may well see a significant reduction in the holdings of smaller companies as they farm out portions of their interests to the larger concerns, given the overall record of these companies in completing their exploration commitments. Notwithstanding the continuing excellent discovery ratio, it is important that the widest spread of drilling is maintained for many years to come so that a thorough appraisal of the potential offshore North West Europe and the United Kingdom in particular can be under, taken. Only in this way can the optimum energy policies for the region be adopted". My Lords, I have spoken longer than I intended and I must apologise for the fact that I did not notice the clock until now. I wanted to ask one or two questions about refining. There is no reference in the document to the Government's refining policy. The noble Lord will be aware that there has been a certain amount of boasting on behalf of BNOC that it has or it can look forward to having about 14 million barrels of oil a day in a few years' time. Of course, anyone with 14 million dollars a day can have 14 million barrels of oil a day. That is simply a question of money. But under existing agreements BNOC already has the right to acquire about 10 million tons (200,000 barrels a day) which would be enough to fuel a large refinery. This is a serious point on which I hope the noble Lord may be able to comment when he winds up. With about 200,000 barrels a day (10 million tons a year) of oil available to BNOC, that is enough to support BNOC's own refinery. With its own refinery it could if it wished undercut its commercial rivals in the downstream market and play havoc.

What I should like to know is what is BNOC's attitude towards refining. Are the Government using BNOC to influence the refining policies of the other companies? Are the Government trying to compel the other companies when they export their product to export it as a white product and not as crude? Are the Government in fact prepared to play ball (if I may put it that way) with the European Community in regard to refining policy generally?

The great difficulty that we are in about BNOC is that it is really neither fish, flesh nor fowl. It is a kind of hybrid, because, on the one hand, it is an attempt to enter the oil business commercially and, on the other hand, it is the chosen instrument of Government policy. It is really two things at once. One might even say that it is an attempt to mix oil and water. BNOC is rather like the question that was put by Fawcett to Cook on one occasion: How are you this morning? The reply was: Not at all myself". The answer to that was: Then I congratulate you, for whoever else you will be, you will be the gainer by the transaction".

4.28 p.m.

Lord HATCH of LUSBY

My Lords, may I ask the indulgence of your Lordships as traditionally given to one speaking for the first time in this House. However, I am not a complete stranger to your Lordships' House. I have spent many hours below the Bar here, as well as in a similar position in another place, associated with a variety of debates over many years. I should like to thank both present and past Members of this House, and of the other place, for the courtesy and helpfulness that they showed to me in that responsibility. I hope that that may add a little to my contribution to the work of your Lordships' House. If there is one thing that I discovered during my experience both in this place and in another place, it is that at least so long as this House exists as it is today, it is more appropriate and more possible to discuss wide and profound issues here than in the other place. The noble Earl who opened this debate will forgive me if I do not follow him by confining my contribution to this debate to the narrow issues of this Paper, but try to broaden them out to the wider issues which we have to have in mind in regard to our North Sea oil revenues and in regard to energy as a whole.

Oil has already played a crucial part in the character of our world society. I believe it will play an even greater part in the character of the society that our children and grandchildren will live in; and, in being accepted as a Member of this House, I regard my responsibility as being to the world that will be inhabited by my grandchildren. Oil is a part of man-controlled, man-directed energy, and that we may regard as the capital of mankind; whereas the income of mankind is comprised of the other forms of energy which are generated by the sun constantly. My Lords, I fear that since the end of the Second World War we have been using that capital in a wasteful, profligate manner. It has been estimated that our consumption of fuel reserves since the end of the war has risen at a rate of 1.9 per cent. per annum, which means that they are being consumed at double the rate every 37 years.

In support of this part of my argument, I should like to quote from a distinguished scientist, the Astronomer Royal, Professor Sir Martin Ryle, who wrote just last year: We have become accustomed to believing that our standard of living and full employment both depend on an ever-increasing consumption of energy—to heat our homes, to provide more transport and, especially, to provide increasing quantities of manufactured articles which consume both energy and other mineral resources, some of which have limited reserves. If we continue in this belief the energy shortage initiated by the exhaustion of the world's oil reserves will, by the end of the century, forcibly curtail the present trends in the worst crisis civilisation has yet experienced". I believe this wasteful use of our energy capital is closely associated with our obsession with consumption, which is another feature of this same period; and I believe that it may well be the task of this country and of other, similar minded countries to try to persuade people to limit consumption, in place of the common assumption made by all Parties that growth is the panacea for the future of Great Britain.

However, there is a wider, deeper and more crucial issue than arises from the use of energy in our century, and it comes from the fact that 80 per cent. of the energy now being used in the world is used by only 20 per cent. of the world's population; that the vast majority of mankind has to make do with one-fifth of our energy uses—and I am sure we have all seen the consequences of this imbalance. I have spent many years in the United States of America, and I am told by my American friends that more oil-produced fertiliser is used on their golf courses than is used throughout the whole sub-continent of India. We have seen these vast contrasts widening and deepening as more and more energy is used for useless or frivolous purposes. We have seen this wasteful use of energy at a time w hen but a little energy could save, not just the luxury life of mankind but life itself. Every minute that I am speaking here this afternoon, 30 people somewhere in the world are dying for lack of food. That, surely, is a sufficient challenge to our prospects as a nation to make us ask ourselves: How should our new resource be used if it is to contribute to the kind of world that we want to see our children and grandchildren living in?

My point to your Lordships this after-noon is that the possession of North Sea oil gives this country a brief opportunity to turn into new, constructive channels and to restructure the industry of this country, in association and cooperation with countries of the Third World, the untapped markets of the world, to provide them with what they need and to receive from them what they can produce—and obviously there will be opportunities for going more deeply into that issue. But, also associated with the refurbishing and restructuring of our industry, the redesigning of the direction of our industry, there should be our leadership, our persuasion, our education, to set up a new set of values among the people of this country. It is a very difficult task for politicians to call on their electorate to reduce consumption. I believe we have to do it; and for the past 18 months I have been a member of a committee of the Ministry of Overseas Development which has been looking at this very issue—the issue of how we inculcate into our educational system the basic needs to fit our children and our grandchildren to become citizens of the world.

I am glad to see that the Government have been spending an increasing amount of money on research into alternative sources of energy; and I am glad to see from this Paper that the Government believe that there must be a control over the depletion of our North Sea oil—a control and the direction of that depletion, just as, fortunately, the Norwegians have shown it can be done. But if we are to take on this new rôle, if we are to contribute to an international society where energy can be used equitably, then, with the help of our friends, we have both the responsibility and the opportunity, provided we are determined to use our new revenues for this purpose, to use the breathing space that we have been accorded, to control both the revenues and the extraction of the oil and to channel this new resource into the central purpose; that is, to create a world, which has be- come a village, the resources of which can be used for the benefit of all mankind.

4.41 p.m.

Lord CHALFONT

My Lords, it may surprise those of your Lordships who know me to find that I am attempting to contribute to a debate of this kind which is concerned with such abstruse, esoteric and technical matters but, like the noble Lord who has spoken before me, I should like to broaden the debate a little beyond the document which the noble Earl has mentioned in his opening speech and beyond the question of BNOC and its achievements and deficiencies. I should like to confine myself to two major points about the oil policy of Her Majesty's Government. They are points concerning military security and the impact of our national oil policy on our national security and our collective security. This, I hope, will be a speech which has no Party connotation of any kind. I believe and hope that it will raise points of national importance. The two issues that I want to raise are issues concerning the security of supplies of North Sea oil and the implications of North Sea oil for the military security of Western Europe.

Before doing this, it would clearly be not only discourteous but ridiculous of me not to refer to the distinguished maiden speech to which we have just listened. The speech of the noble Lord, Lord Hatch of Lusby, was modest; it was constructive, thoughtful, compassionate. It was, I believe, in the best tradition not only of maiden speeches in this House but of speeches in this House generally. He referred to Professor Martin Ryle's comments on the uses of energy generally. I believe that I am right in saying that the words he quoted are also quoted at the beginning of an extremely interesting pamphlet on the alternative uses of energy and the alternative sources of energy issued by an extremely interesting organisation in Wales which is devoted entirely to the investigation of alternative sources of energy. I believe that the noble Lord, in a maiden speech of remarkable impact, has opened for us a number of avenues of investigation and approach for the future. He is right in saying that our supplies of oil and reserves are not endless and that we must examine not only ways of finding alternative sources but other ways of using our energy. I, personally, am deeply grateful to the noble Lord for his contribution and like other Members of your Lordships' House I think that we shall look forward with lively interest to his future contributions to our debates.

As I say, I want to confine myself to two issues of security. The first is the issue of the security of our own North Sea oil. There are two possible threats against our supplies of North Sea oil. The first is posed by the alarming growth of international terrorism. I believe that no one who has followed international events over the last few months and years will deny that there is a widespread and growing network of international terrorism, that is highly organised, and is recruited in many nations of the world. It is trained in ruthless, destructive and lethal methods of terrorism. It is often trained—and there is reason to believe that the terrorists who attacked and murdered Aldo Moro in Italy recently had been trained—in East European and other Communist countries. The principal targets of these international terrorist groups are the countries of the Western democratic world. Just look at where all the recent attacks have taken place: in West Germany, in Italy, in France, in Holland and in Denmark. There have been even the earliest signs of terrorist activity in this country—so far, thank Heaven! comparatively mild if one relates them to the appalling things which have taken place in Italy, Holland and Germany.

It seems to me—and this is where I come to the specific subject of the debate—that these oil installations of ours, the platforms in the North Sea, the way in which that oil is brought ashore and the installations ashore that process it, are obvious targets for any international terrorist group, not from the point of view of taking hostages (although that may be the case) but specifically from the point of view of sabotage. Here is the one way in which an international terrorist group could strike at the very economic and political heart of this country. I believe that the Government, Her Majesty's Ministers, are already aware of this threat. One has seen reports in the Press of exercises that have taken place which are alleged to be exercises of a counterterrorist type. I say—at the moment without any sense of criticism—that my own information about these exercises is that they really do not inspire any confidence that they would be effective against the kind of ruthless and highly-organised international terrorist organisations which are abroad at the moment. I may be wrong.

I shall not ask Her Majesty's Government for any details of their defensive arrangements. That would be foolish and irresponsible. I ask only for assurance that Her Majesty's Government are satisfied that they have the resources to deal with possible terrorist attacks of this kind; that they have, or believe they have, the intelligence resources to warn them of possible attacks and that they have the resolution to defeat those attacks with a ruthlessness which is equal to that which I assure Her Majesty's Government will be applied by those who mount those attacks.

There is a second threat. It is the threat of the vulnerability of these installations in time of war or of confrontation. The interruption of oil supplies is an obvious strategy for any potential enemy. I have to be very careful nowadays about using the word, "enemy"; so I shall say, with great care, "potential enemy". I shall remind your Lordships' House, in the context of potential enemies, of the extraordinary growth of the Soviet Navy over recent years, especially in its capacity for submarine warfare. Again, I shall ask Her Majesty's Government for no details; for matters of defence are, quite rightly, matters that are secret in many cases and matters Her Majesty's Government have every right to keep in detail to themselves. I would only ask to be assured that this threat is recognised and that there are within the Western Alliance plans and resources to meet it.

I come now to the second of my points. It is the implications of North Sea oil for the general defence and security of Western Europe. Leaving aside the problem of whether or not we can secure our own supplies of oil, what is our policy about those supplies in the context of the defence of Western Europe and, by extension, the defence of this country against possible attack from outside? I am talking now of military security; I am not talking of the effect which oil embargoes and other outside action can have on the standard of living and the economic prosperity of Western Europe; I am talking specifically about our military security. The present positition is that Western Europe is to a very high degree dependent upon the primary fuels, especially upon oil. It is a generally known fact that, as a region, after the United States of America, Western Europe is the second largest oil consumer in the world. It has—and this is again a glimpse of the obvious—a very limited oil production of its own. So the first point that I should like to make in this argument is that over the next decade or so North Sea oil is likely to be a product of crucial significance to Western Europe.

We know that Western Europe has recognised the importance of oil, has recognised the unreliability of external sources of oil, and is planning to cut its energy requirements by something of the order of 10 per cent. Having considered its general energy requirements it is also planning to supply those reduced energy requirements from sources other than oil. One of those other sources—indeed, the principal one—is nuclear energy. We all know the profound and passionate arguments that are going on at the moment about the future of the peaceful uses of nuclear energy, arguments to do with the pollution of the environment, arguments of a real and serious kind about the implications of nuclear energy on the possible spread and proliferation of nuclear weapons. I am not proposing today to go into those arguments. I will only say that, whatever may be the outcome of those discussions, it seems to me—and this I believe is a generally held belief—that up to the end of this century Western Europe is likely to he still very, very heavily dependent upon the supplies of oil.

The supplies of oil from Arab countries are notoriously unreliable, so I just make this point as a step to my next argument that, although North Sea oil may be only a tiny proportion of the oil reserves of the whole world—some people estimate it at about 2 per cent.—it is still going to be of considerable importance to Western Europe. I mean importance not only to the economy of Western Europe, to the prosperity and to the quality of its life, but of vital importance in one respect which I think has been very largely ignored in the public debate, and that is our military security, the defence of Western Europe.

The major point that I want to make in this debate this afternoon is that the effective military defence of Western Europe, and therefore of this country by extension, depends to an almost total extent upon reliable supplies of oil. Without it, all our tanks, our guns, our vehicles, our aircraft and our ships will become, after quite a short period of time, useless hunks of metal. They will not be weapons of war any longer without reliable and continuing supplies of oil. In passing, let me note here that in the context of which I am speaking—which is the remote context, one which we must all think about and plan for—of a major war in which we are involved, we may be totally cut off from supplies of oil from the major supplying area of the world, the Middle East. Those people who are pretending or purporting at the moment to be complaisant about what is going on in Southern Africa, and what is going on in the Horn of Africa, had better well remember that if all that goes wrong, if the worst happens in the Continent of Africa, quite apart from what may happen to the people of Africa, we in Western Europe will be cut off from the vital supplies of oil upon which not only the economy but the defence of Western Europe will depend.

Furthermore, there is another point; it may be a technical point but it is a real one on which I think my friends on the Government Benches may care to ponder. The only weapons which are not made totally ineffective by deprivation of supplies of oil are nuclear weapons: the nuclear powered submarines and the nuclear missiles. So I elide a very complicated tactical argument here, but I ask you to believe it. If you do not believe it from me, I ask you to investigate it for yourselves. One of the effects of depriving Western Europe of its essential supplies of oil in time of war is to make the use of nuclear weapons more likely. That I believe is something which no one in your Lordships' House—and certainly no one sitting behind the Government Front Bench—would wish to contemplate.

I should like to ask the Government what their policy is regarding North Sea oil and Western Europe; I might remark in passing—although I do not wish to make a great point of this—that under the provisions of the Treaty of Rome we are supposed to have a common market in energy; but my argument goes deeper than that. I am asking Her Majesty's Government to give an assurance to your Lordships' House that, when we have our full supplies of North Sea oil, we shall not adopt the policy usually characterised by that well-known phrase: "I'm all right Jack". We are members now of a European Community. Europe needs a common energy policy. It needs many other things as well; it needs a common foreign policy and an economic and monetary union, but these are matters which are outside the context of this debate. I only recall for your Lordships as a lesson the disarray that disfigured the face of Europe at the time of the Arab oil embargo after the Yom Kippur war in 1973, when instead of facing this problem collectively and resolutely, all the countries of Europe rushed around like demented chickens in a thunderstorm, all pursuing what they perceived as their own national interests without any concern at all for what was the long-term interests of Western Europe.

Britain now has an opportunity to give a lead. With a co-operative and common energy policy in Europe not only shall we have negotiating strength in the future political and diplomatic crises that lie ahead, but we shall have—and this is the point of my remarks today—a more effective military security against external threat. The Common Market is the best market for any surplus products that are likely to be available from North Sea oil in the 1980s but only if there is a total energy policy and a common energy policy in Western Europe. I should like in passing to ask the Government to bear in mind something which has already been mentioned by one noble Lord. I think the noble Lord, Lord Orr-Ewing, in an intervention earlier mentioned the possibility of a dramatic fall in oil prices, and the impact that that would have on our policies.

I pass now to my conclusion, which is to ask Her Majesty's Government for a number of assurances. These, I believe, are constructive. They are not in any way abrasive or polemical, and I know that the noble Lord, Lord Strabolgi, who will answer the debate, is very much concerned with these matters. I should like to ask, first, whether we can be assured that there are resources and there are plans available to protect our North Sea oil against international terrorism and that Her Majesty's Government are satisfied with those resources and those plans. I would ask whether the Government are satisfied with the plans to defend the supplies of North Sea oil in times of crisis or of limited war, whoever may be the enemy.

I should like to ask whether Her Majesty's Government would agree that Western Europe and the Common Market will have priority of claim on any surplus of supplies that may arise from our North Sea oil operations. I should like to ask whether Her Majesty's Government, as a net exporter of oil in the 1980s, will take the lead—this may be a more difficult question—in helping to formulate an effective common energy policy for Western Europe. Finally, I should like to ask for an assurance to be given to your Lordships' House that Her Majesty's Government is giving due importance to the need for a common energy policy for Europe in the context of the military defence of Western Europe against a possible attack from outside. Perhaps I might end with a quotation from a monograph published by the Stockholm International Peace Research Institute—not a hawkish body by any means, but a body devoted to, and committed to, the principles of international co-operation and disarmament. The publication is called Oil and Security, and what it says is this: Oil is a commodity of basic stragegic importance. No modern defence system can be maintained and no war can be fought without a great supply of oil. A matter of vital importance for those responsible for planning national security, then, is the assurance that the country can count on sufficient supplies of oil to sustain its defence. What that says about a country can be said equally of Western Europe. This is a truth of vital importance to Western Europe and I am grateful for the opportunity to take advantage of this short debate, initiated by the noble Earl. Perhaps I might say in passing that I listened with great care to his speech and found it not only a literate, thoughtful and constructive speech but one that is refreshingly candid and frank about the plans of a possible Conservative Government for the future. I should like also to take advantage of this debate to ask Her Majesty's Government, when they consider all the long-term implications of their future policies and when they are thinking about the implications, political, economic and military, of their policies in respect of North Sea oil, to bear in mind the security of this country and the security of Western Europe.

5.4 p.m.

Lord COCKFIELD

My Lords, having myself so very recently faced the same ordeal as the noble Lord, Lord Hatch, may I join in congratulating him on a most interesting and informative contribution to the debate. It has sketched in the picture against which the problems set by the Consultative Document need to be considered. I must apologise to the House for the fact that I, too, may have to leave before the end of the debate owing to a long-standing engagement which was entered into before this debate was arranged.

May I be forgiven for starting with a personal reminiscence: my own involvement in the problems of the oil industry, primarily from the taxation point of view, first arose in the early 1950s when I was working for the noble Lord, Lord Butler of Saffron Walden, who at that time was Chancellor of the Exchequer. More recently, in the period of four and a half years between 1973 and 1977, I was very directly concerned with the prices and profits of the oil industry and of all the major oil companies operating in the United Kingdom. I mention this experience, extending, as it does, over a period of some 25 years, because it is directly relevant to what I shall be saying later. I mention it also because, looking back over this period, one sees the great improvements which have occurred in the quality and availability of information about oil companies and their operations; and one has also seen a great growth in expertise and knowledge within the Government and within the Government agencies.

There are two quite separate aspects of the problems of North Sea oil. There is, first of all, the question of winning the wealth; that is, obtaining the wealth from the North Sea. Secondly, there is the question of utilising wealth; that is, what we do with it once it has been obtained. The winning of the wealth is, of course, of crucial importance because until we win it we cannot spend it and until we win it we cannot achieve the strategic aims of the noble Lord, Lord Chalfont.

The Consultative Document deals with the question of winning the wealth, and what we have to ask ourselves is whether the proposals it contains represent the best and the most efficient way of winning the wealth. I suggest that they do not and I propose taking three specific provisions in the Consultative Document where the proposals do in fact differ from those in earlier rounds.

First, the terms proposed for BNOC's equity participation and for its carried interest are such that the bigger the share of the burden the licensee is prepared to carry and the smaller the proportion of the reward he is prepared to accept, the more likely he is to be granted the licence. In short, the licensee is being squeezed from both ends. This is highly ingenious. It may secure for BNOC the maximum share of what oil does happen to be discovered, but as a means of ensuring the maximum effort in exploration and discovery it is the exact reverse of what is required. It maximises the cost of failure to the licensee and minimises the reward of success. It is difficult to avoid the conclusion that these particular arrangements are designed primarily to promote the position of BNOC.

Secondly, for the first time, the licence to operate is to be separated from the licence to explore. The licence to operate will be granted only once a discovery has been made and the decision as to who is to be the operator will not be made until that time. It follows that the identity of the operator, which is a matter of considerable, if not crucial, importance, cannot be known when the original licence is applied for. This introduces a new and undesirable element of uncertainty into all the arrangements. The reasons given in the Consultative Document are not convincing. They would justify deferring the appointment of the operator where the applicant so wished, but not where the original licensee and the ultimate operator wished to he appointed together from the outset. Here, again, the suspicion must be that the arrangements are essentially a device to enable BNOC to extend its operations still further, if it is in a position to do so once a discovery is made.

Thirdly, for the first time, there are proposals to give BNOC the option to buy the licensee's share of the oil produced, and for BNOC—again, at its option—to sell its share of the oil to the licensee. Presumably, these arrangements are designed to ensure that BNOC becomes a major dealer in crude oil. But I think it is important that we should know whether they are also designed to enable BNOC to enter the downstream market. Are we to see BNOC refineries, despite the surplus capacity which exists at the moment? Are we to see BNOC garages selling BNOC petrol, despite the fact that there are already too many garages? I think that some enlightenment on these points really is required.

One would have thought that the national interest demanded, first, that the best qualified applicant should be selected; and, secondly, that the applicant, once selected, should be enabled to explore, to develop and to operate to the maximum advantage, both for himself and for the nation. The proposals in the Consultative Document are not designed to achieve these ends.

The inescapable conclusion is that their real objective is to build up the position of BNOC, as part of an active and aggressive policy of expanding the public sector at the expense of the private sector. I know it is argued that this is essential to enable the country to secure its fair share of the oil revenues, and it is claimed that without the entrenched position of BNOC as an operator, as a regulatory agency and now, as proposed, as a dealer in crude oil—

Lord STRABOLGI

My Lords, I am sorry to interrupt the noble Lord, but I said—and I emphasised it—that BNOC is not a regulatory agency.

Lord COCKFIELD

My Lords, I am most grateful to the noble Lord. But it carries out certain functions which are essentially functions of a regulatory agency. The noble Lord is entitled to apply whatever description he wishes. I am trying to ask: what is the reason for these proposals? The point that I really want to develop is that the argument is, I gather, that it would be impossible for the Government to ensure that they were receiving their due share of the revenues of the North Sea unless BNOC was put in the position into which it has been put —a position which it is proposed to extend under the terms of the Consultative Document.

I know that it is also argued—and I am familiar with this argument, because it is one with which I had to deal—that profits can be manipulated by the under-statement of revenue and the over-statement of costs, with the result that it would be impossible, it is claimed, for the country to secure its rightful share of the revenues through the mechanism of taxation. I simply do not accept these arguments. In the 1950s, and to a lesser degree in the 1960s, there was a tradition of secrecy in the industry and information was hard to come by. But this has long since ceased to be so. It proved perfectly possible, during the lifetime of the 1973 price control, to get all the information which was needed about costs and prices, as well as about profits. There was no insuperable problem in checking the broad accuracy of the information from independent sources, and we were able satisfactorily to monitor performance after the event.

I see no reason to suppose that a taxation solution to the problem cannot be made to work. The Inland Revenue have greatly increased powers to deal with transfer pricing. It is, of course, essential that all the information needed should be made available, but it is quite unnecessary to set up BNOC as a major dealer in crude oil, in order to obtain this information.

I would go further than that and say that the argument that the Government neither have the information and cannot get it, nor have the expertise and cannot get it, is quite inconsistent with the argument that sufficient information and expertise is available within the ambit of Government to enable BNOC to enter into the trade of crude oil dealing. The only reservation which I should like to make is that if BNOC, nevertheless, ends up by buying too dear and selling too cheap, the net result of its activities will be to add a loss of tax revenue to a loss of trading income. Therefore, as a route to solving this problem, I cannot see that it has any very great advantage.

I do not propose repeating the arguments put forward by my noble friend Lord Gowrie, all of which called into question the present rôle of BNOC. There must, I suggest, be a better way of managing our affairs than through the further extension of BNOC's powers, as envisaged in the Consultative Document. We need to find the best and most efficient way of winning the wealth. We need to find the most efficient way of securing for the nation its proper share of the wealth. But a massive extension of the public sector will not, in my view, achieve either of these ends.

Lord DAVIES of LEEK

My Lords, before the noble Lord leaves that interesting argument, may I, as one who is aware of his expertise in this direction, put this point to him? Before the Thistle field could go on with exploration, it had to borrow some £70 million-odd from the Government, and the only argument that I have to put forward is that most of this major exploration is due to the fact that Government loans have been willingly given for the expertise. Consequently, Government organisations and the public should have a return on those loans, but that point has been completely missed.

Lord COCKFIELD

My Lords, I do not follow the noble Lord in his suggestion that the point has been completely missed. I specifically stated that, in my view, the problem of the nation acquiring its proper share of the wealth was one which could be tackled through the mechanism of taxation, and that it did not need an extension of the field of activities of BNOC to achieve this end. But the noble Lord has also confirmed—and I find this most interesting—that the exploration is done by the private sector and not by BNOC.

5.19 p.m.

Lord KALDOR

My Lords, if I may borrow for a moment the jargon of the United States Senate, I consider myself to be the junior Member of this House from Hungary. The senior Member, the noble Lord, Lord Balogh, cannot, as the noble Earl, Lord Gowrie, explained earlier this afternoon, be present at this debate because he is abroad. I should not like to say that I deputise for him; it would be quite wrong of me to do so. Nevertheless, I hope that what I have to say will not contain anything with which he would strongly disagree. But I should like to say that I was very greatly pleased and gratified by the tributes that were paid to the noble Lord, Lord Balogh, from all sides of the House, for the important work which he has done in connection with the development of Government policies and with the successful exploitation of North Sea oil.

Before I begin my speech, I should like to associate myself with the complimentary remarks made by the noble Lord, Lord Cockfield, about the maiden speech of my noble friend Lord Hatch. The views and the sentiments which my noble friend expressed about the excessive exploitation by the world of its exhaustible resources and the very unequal incidence of that exploitation command, I believe, universal agreement. I hope that my noble friend will forgive me if I do not follow his general thoughts but, at a more mundane and controversial level, concentrate my remarks upon the points which have been raised by the Opposition. Although I shall not directly begin by taking up the arguments of the previous speaker, the noble Lord, Lord Cockfield, I think that he will find in my remarks that there will be both implicit and explicit references to what he said.

The history of the exploitation of North Sea gas and oil reflects the shifting emphasis given to the public interest and to the private interest of the oil companies as Governments of different colour have alternated in power. During the last Conservative Government, the interests of the oil companies were favoured in two major ways. In the first place, although an experiment was conducted in putting licences up to tender, which showed that the companies would have been ready to pay very large sums for them, the great majority of licences were allotted on a discretionary basis. In June 1971, tenders were put out for 15 out of the 436 blocks for which applications were invited.

According to the First Report of the Public Accounts Committee, the tenders received on the 15 blocks, to be awarded by auction, were surprisingly large. They totalled £135 million for the 15 blocks from 30 applicants, the sum of the highest premiums hid for each of the blocks totalling £37 million. This was very much greater than had been expected. As the Committee records: Ministers were immediately informed but the policy decision to allocate other territory on a discretionary basis was not reopened. Thus, after receiving £27 million on 15 blocks—far more than was anticipated— this experiment, which was intended to be only an initial step, was not followed up. Subsequently, the Government allotted 267 licences without any charge.

The second advantage enjoyed by the oil companies was that the only financial gain which accrued to the Government under the terms of these licences was a royalty payment of 12½ per cent. of the value of the oil brought ashore. This compared with the over 80 per cent. share which was secured at about the same time from private oil companies by the Norwegian Government on their part of the North Sea. It is true that the representatives of the Department of Trade and Industry maintained in their evidence to the Public Accounts Committee that the residual 87½ per cent. was subject to corporation tax at 50 per cent. so, taking the two together, 50 per cent. to 60 per cent. of the profit would accrue to the Government. But this claim was a hollow one.

As the subsequent testimony of a representative of the Inland Revenue before the Public Accounts Committee showed, under the then existing arrangements the oil companies could set off against their profits from the North Sea accumulated unabsorbed losses from their overseas operations to the tune of £1,500 million, a sum which was then increasing at the rate of about £500 million a year. That was on a pre-1973 basis, when the price of oil was only two dollars a barrel. At post-1973 prices, the rate of accumulation of losses to be set off against any possible tax liability of North Sea operators might have been very much greater. This meant that there was no chance that any benefit would accrue to the Exchequer other than the 12½ per cent. royalty payment. So far as the oil companies were concerned, whether or not this was fully known to the Government—and if I were to follow the argument of the noble Lord, Lord Cockfield, the Government must have fully known about it—the 50 per cent. corporation tax was a purely cosmetic tax.

Since then, the situation has been radically transformed. On the taxation side, as my noble friend Lord Strabolgi explained earlier this afternoon, the Government introduced a petroleum revenue tax of 45 per cent. which constitutes a first claim on the profits from North Sea oil. In addition, for the purposes of corporation tax, a ring fence was created around the North Sea which made it very difficult, if not quite impossible, to reduce corporation tax liabilities on the companies' North Sea operations on account of unabsorbed losses elsewhere. There were, however, very generous provisions for depreciation. Operating companies are entitled to write off 175 per cent. on all costs incurred on the exploration and development of any particular field before any tax is payable. I regret that the noble Earl, Lord Lauderdale, is not here, because this is the answer to his point that no interest is allowed against profits. The extra 75 per cent. was meant to represent, in a rough and ready but generous way, the interest accruing on amounts spent upon exploration and operations.

Further, to ensure that the taxation should not act as too much of a disincentive—we hear very much about the disincentive effects of taxation, and I was very surprised that the noble Lord, Lord Cockfield, who is such an expert on taxation, carefully avoided any reference to these effects when he said that all that we need to do is to tax profits sufficiently to prevent companies from obtaining an unreasonable return—and that companies did obtain a reasonable return on their investment, the first 1 million tons extracted per year from any one field was to be free of tax. If my memory serves me correctly, there is a further provision which ensures that a certain minimum rate of return on the capital invested is free of any tax, so as not to discourage companies, on account of taxation, from exploring and opening up less promising fields in the North Sea.

But no less important than these changes in tax provisions was the creation of the British National Oil Corporation, which was to be a partner, or at least a collaborator, of private companies in all North Sea operations. It is the existence and the activities of this Corporation which the large international oil companies regard as the main obstacle to the unhampered pursuit of their interests, and as we heard from several speeches this afternoon, these oil companies are not without their supporters.

In fact Britain treats the international oil companies—and this is something we have not heard mentioned today—more generously than most other countries where oil is produced: more generously than Norway, for example, and far more generously than the other main oil producing countries in the Middle East, in Africa or in Latin America, in all of which the oil industry has been completely nationalised. Even Canada has now set up a publicly-owned operating company. The only country where the oil industry is fully in private ownership and where the Government try to do everything through taxation and regulation, or through non-taxation and ineffective regulation, is the United States of America. It is certainly not an example for us to follow. Noble Lords opposite will not find there the harmonious relations between the oil companies and the Government which they apparently believe would exist here if the BNOC were abolished.

In this country the existence of BNOC is invaluable in helping to secure an overall policy which is in the best interests of the nation. There is first of all the fact that the Government through BNOC have potential control over the destination and use of at least 50 per cent. of the oil extracted from the North Sea, which may prove an invaluable safeguard in many of the situations which the noble Lord, Lord Chalfont, this afternoon envisaged as something which cannot be ruled out of court. Further, as an operating company, they acquire the know-how and the necessary experience without which civil servants would have to depend upon information supplied to them by private companies—a dependence which is dangerous since civil servants can scarcely spend their time eliciting information and giving advice to Ministers that is not in the interests of the supplier of that information. They can only pass on information which they receive.

It is the accumulating experience, both through its direct operational role in the Thistle field and through its representation on the committees of the operating companies, whether as an observer or as a participant, that permits BNOC to know not only what is happening but also what is not happening. In the absence of BNOC the only controls which the Government could exert, whether through taxation or through regulation, would be essentially of a negative character. They could discourage things or they could prevent them, but they could not ensure that oil from the North Sea was used to the best advantage both in the short run and in the long run.

It is the existence of BNOC, and that alone, which makes it possible for the Government to receive unbiased technical advice about the probable effects of any measure under consideration for example, a proposal to cut back production, or to leave particular fields as a reserve for future use, or to change methods of taxation, and so on. All this is the kind of technical knowledge and information which is very different from the kind of information that an accountant receives or the head of the Prices Commission receives in arriving at reasonable profit margins on costs or prices. It is therefore quite different from the sort of information which the noble Lord, Lord Cockfield, suggested that the Government possess already in ample measure.

At the same time it is not accurate to say, as was said by the noble Earl, Lord Gowrie, in a previous debate and implicitly at least repeated today, that BNOC operates as a regulatory body and therefore has a dual rôle; it acts both as a referee as well as being a participant in the game. What BNOC does is not to regulate but to acquire knowledge and thereby enable the Government to act upon advice that is both comprehensive and balanced. I regret to say that I detected almost a flavour of sour grapes in the opening speech made by the noble Earl, Lord Gowrie, this afternoon when he described, almost in tones of regret, what a dynamic institution BNOC has become; how much it achieved in the first two years of its operation, and how it secured one of our ablest business leaders for the head of its operations.

I also detected a note of regret that BNOC, being an operating company, fails to behave like a private operating company and fails to participate in that silent conspiracy of not telling the Government anything which it is not in the interests of this whole industry for the Government to know. I also detected a certain amount of regret or criticism in the remarks made by the noble Earl when he said that BNOC and the Government have tried to have the best of both worlds. They are trying to get all the knowledge, the expertise and the money of private industry and at the same time to secure the advantages of public enterprise and to safeguard the national interest in a way that only public enterprise can do.

The Earl of GOWRIE

My Lords, if the noble Lord will give way, as he was referring to me would he like to tell us this: since the formation of BNOC, since the fifth round licensing system, what single new or independent British company or single small company has been in any way encouraged to operate in the North Sea by the presence of BNOC?

Lord KALDOR

My Lords, I am afraid I am not able to give this information, but I should like to know whether, prior to the formation of BNOC, Governments have done anything to encourage the formulation of small new private companies? What have they done about it? All I wish to say is that in some ways the noble Earl is right; we are trying to have the best of both worlds. But since in this case "we" are the nation, what is wrong with trying to have the best of both worlds—what is against it? Of course, there are those who think—and the noble Earl, Lord Gowrie, as he made clear, is not among them—that there can be no conflict between private interests and public interests, the attitude which is epitomised by the well-known saying that "what is good for General Motors is good for the United States". Those who believe that will not, of course, perceive or acknowledge that there can be a problem here. If they believe that an invisible hand will compel the majority of the multinational oil companies to behave in the same way as if they were publicly owned, all I can say is that this is a very naive view which is not shared by those who are familiar with the oil industry either here or in other countries.

Much has been made of the fact or rather the allegation that the Consultative Document concerning the sixth round of allocations suggests additional criteria of preference in making awards that are far more onerous to the oil companies than the criteria of the previous round had been. All that the Consultative Document suggests by way of new criteria is, first, that in making awards preference should be given to applicants who are ready to offer training facilities for work on offshore installations. I cannot see that there is anything to be objected to in that; that is a most valuable suggestion which in no way can be regarded as unfair or onerous. Secondly, preference should be given to applicants who are prepared to be more flexible in accepting equity participation for BNOC or in meeting more than their share of exploration and appraisal costs. But we must not misunderstand the nature of the suggestions in the way the noble Earl, Loud Lauderdale, has done this afternoon—and I regret that he is no longer in his place to hear this. It is not true to say that BNOC will retain 51 per cent. equity interest and thus could receive 51 per cent, of the profits without contributing anything to the costs. What these propositions amount to is what is technically called "carried interest". BNOC has an option to acquire 51 per cent. of the equity, but if it exercises its option it must, of course, recompense the other operating companies in the consortium for its share of all the exploration, appraisal and development costs incurred. There is no question that it is going to try to get something for nothing. Carried interest means simply that if it has an option to acquire a participation, then, of course, if it does so, it must pay its due share of the costs. The third criterion is in granting options either to sell oil to BNOC in excess of BNOC's share or to buy oil in excess of the applicant's share, both at market prices.

The noble Lord, Lord Cockfield, characterised these proposals as grossly unfair, meaning as compelling the companies—I hope he will correct me if my memory is wrong—to minimise the rewards of success and to maximise the cost of failure. What he did not say, my Lords, is that no company needs to conform to any of these criteria if they do not want to. They are only suggestions; that is, that preference will he given to those companies who accept such criteria if they do. But if they do, it is either because they are not really regarded as so onerous as noble Lords opposite make out, or else they fear that their competitors will not regard them as so onerous. But, in either case, if they do in their application offer to give these preferences, this in itself is a sure indication that the terms offered are not terms with which companies would not willingly comply rather than lose the business. If, with all these conditions, they go on applying, it is because they expect that the net chance of profit is sufficient to undertake the venture. I should like to remind noble Lords that it is not our purpose, either on this side of the House or on the other side, to make profits as large as possible. Profit, as the great American economist, the late Henry Simons said, is a gift from the community given in order to operate the market mechanism in an efficient way. But the less profit you need to pay in order to obtain this service the better it is from the point of view of the community. It is, therefore, not a valid criticism, as the noble Lord, Lord Cock-field, says, that these provisions are bound to make the profits lower than they would have been if the provisions had not been made in the Consultative Document. Of course they do, but so what. We are speaking about the national interest and not the interest of shareholders, which is a very specific partial interest.

The major oil companies have been called the barons of the modern world. That may be an over-colourful expression. But certainly their power is such that a countervailing force is needed if the national interest is to be upheld. BNOC is such a force. Our main concern should be not to cut it down but to ensure that it is given sufficient resources and strength to do its job properly.

5.48 p.m.

The Earl of HALSBURY

My Lords, if my opening remarks appear to your Lordships not to be entirely to the point I hope that I may have your patience, because they will become more and more relevant as they proceed. I seek to persuade the noble Earl—for whose Motion we are all grateful since it gives us the opportunity to debate it this afternoon—equally with the noble Lord, Lord Strabolgi, who replies for the Government, not to peer down their microscopes at the contractual subsoil, but to stand up and turn their telescopes on to the horizon, where they will descry the monuments of past folly. I am sorry the noble Earl has just left the Chamber, but no doubt his noble friends will remind him of what I have said or he will read it tomorrow in Hansard. In particular, I want to draw your Lordships' attention to the possibility of using round six as a lever to renegotiate the disastrous terms on which we are being supplied with natural gas.

At this point your Lordships might well say, "This is a debate about oil. Why bring gas into it?" But, my Lords, you cannot discuss one without the other. An oil well is like a magnum of champagne, a bottle of Guinness or a syphon of soda water. It is under the pressure of the surrounding country rock. Release that pressure and it fizzes just like champagne, Guinness or soda water, and the fizz is the gas. You have a complete spectrum of wells, from wells with a very little gas to wells with a lot of gas, and wells which are almost entirely gas. Almost all natural gas wells will in fact produce a condensate if you reduce the pressure on them.

In our folly we have contracted to the supply of natural gas on terms which secure its wastage exactly on the lines described by the noble Lord, Lord Hatch of Lusby, in a remarkable maiden speech which was both knowledgeable and temperate—two qualities which always endear themselves to your Lordships' House.

Let me explain how the system malfunctions at present. The British Gas Corporation has contracted to take the output of natural gas from the North Sea. No matter how much gas is produced the British Gas Corporation is contracted to take it. Years ago, for ideological reasons, the production companies were screwed down on price. So if we put those two disastrous conditions together, how do they recover the interest on their investment? Simply by over-producing. What can the British Gas Corporation do except to sell that gas for purposes for which gas ought not be be sold.

I was horrified in the days when I was a member of the North Thames Gas Board—I was a member for 12 years—because towards the end of my term I found that we were almost under instructions from the Gas Council to supply interruptable gas to the Slough Trading Estate at very little more than a penny a therm in order to get rid of it—and, of course, the penny would have been marginal profits.

Gas is the ideal material for domestic use: in the kitchen, by the hearthside and even for central heating. It leaves no poisonous residues about and it produces nothing corrosive to pollute the atmosphere. The natural gas reserves in the North Sea are the heritage of our children and we ought not to be squandering them in industrial process heating which is a direct result of the terms of the contracts which have been entered into.

Something must be done and round six could easily be a lever—if people would wake up to the possibilities of this—to renegotiate those original contracts and limit the supplies of natural gas which must be taken up by the British Gas Corporation. There are two very differ-rent situations here. I recently went up to Sullom Voe because I like seeing things for myself. There they are building the world's biggest oil terminal in the Shetland Islands and I know roughly what will occur there, where the gas is a by-product.

The oil will be landed. The crude will be, as it is called, "topped"—that is, the gas and the volatiles will be taken out of it. They will be separated into their constituents. The liquefiable gases will be pressurised into containers and transshipped for sale, and the non-liquefiable gases will be burned in gas turbines to provide the power station requirements for the management of this big oil terminal. There may be some methane and ethane left over at the end. If there is sufficient, then it may pay to liquefy it and transport it to Canvey Island or it may not, in which case it may have to be flared or possibly become the basis of an indigenous gas supply for Lerwick and other places in the Shetland Islands. However, because the oil is the main product and the gas is the by-product there is no serious question of squandering resources of natural gas from that source.

But, in the southern North Sea where we are dealing primarily with gas fields we only have so much gas there and it ought not to be squandered by being burned in industrial process heat boilers. That squandering is the direct result of the foolish contractual terms that have been entered into. Therefore, I say again that we ought to use round six as a lever to renegotiate the terms on which we are buying natural gas from the Southern part of the North Sea.

5.54 p.m.

The Earl of LIMERICK

My Lords, I much enjoyed the speech of the noble Earl, Lord Halsbury. He will understand if I do not follow him in that way—indeed, there is no one, I think, who could follow him in that way. I propose to take a rather different line, but before doing so I should declare an interest in the debate as a director of two companies with small minority interests in North Sea blocks in both exploration and development stages.

I should like to apologise to my noble friend Lord Gowrie, on whose initiative we are debating this subject this afternoon, for the fact that owing to a prior engagement I missed the first few minutes of his speech.

I should also like to refer to the very notable maiden speech from the noble Lord, Lord Hatch of Lusby. He displayed a very thoughtful and sensitive approach to the subject and I should like to follow him in one of his thoughts. I agreed with him very strongly on the question of limitation of energy use. I share his concern about the rate of consumption of hydrocarbons and about the rate of economic growth of which this world is capable.

Our democratic systems are founded not so much upon economic growth as upon the expectation of economic growth. Even a small shortfall can spell discontent and finally may spell revolution. Therefore, it must be a matter of concern to us all to note the percentage of the growth of which the world is capable which is pre-empted by researching and producing new energy sources. We hope to hear the noble Lord again often.

Against the background of this debate and my own knowledge I am taking no doctrinaire line against a national oil company. I should contend that a national oil company is not necessary to secure a major British share in North Sea hydrocarbons—which were already vested in the Crown—and, of course, all oil companies operating in the North Sea, including BNOC, under the terms of their licences have only the right to produce the oil. Nevertheless, BNOC exists and it will not cease to exist.

Several speakers failed to acknowledge, or perhaps were unaware of, the inevitability of change in terms of the licensing rounds as the North Sea geology became better understood. I thought that the noble Lord, Lord Strabolgi, was perhaps a little guilty in that regard. The object of the fourth round—quite properly and desirably in the national interest at that time—was to encourage and accelerate what was high risk exploration in very largely unknown areas. Speed was then of the essence and speedy exploration was what was achieved. It was right then and it worked to our national benefit. To look back now with all the advantages of hindsight and to say that the fourth round was too generous is as futile as it is easy.

Of course, the fifth and now the sixth round can be negotiated in terms more favourable to the owner as against the concessionary, because on the basis of great and very rapid increases in geological knowledge, the odds of securing an acceptable return on investment are now quite different from what they were all those years ago. I make no complaint about the stiffening of terms in the fifth and sixth rounds. On the contrary, I should be complaining if they had not been stiffened. However, to complain retrospectively that the fourth round was too generous is, I think, claiming too much knowledge.

There was no shortage of applicants for the fifth round and on present evidence it seems unlikely that applicants will be lacking for the sixth round. Personally, I see nothing impossible about the terms proposed in the Consultative Document, provided—and this is the main point to which I shall return—there is confidence in the regulatory authority both in negotiation and in the procedure for licences granted under this round.

The question is: shall we get the best applications, and will the licences be awarded in response be on suitable terms so as to maximise our unrepeatable short-term national advantage represented by the hydrocarbons in the North Sea? The central point here is, I believe, the role of BNOC. The noble Lord, Lord Strabolgi, stressed that BNOC is not a regulatory body. In statutory terms, of course, he is absolutely correct. There can be no argument. A practical question, however, is to what extent, owing to its ambivalent relationship with the Secretary of State for Energy and his Department, it is able to influence or even indirectly, de facto, to exercise the role of such a regulatory body.

In another context recently Mr. Tom King commented: The basic structure in which oil companies do not know whether they are dealing with a competitor, a partner, or a boss, is at the root of this hostility to BNOC". How real is this hostility and how justified might it be? I should like to cite five cases of what I think could be described as reasonable doubt or concern about the manner in which BNOC is exercising its triple role as competitor, as partner and as adviser to the regulatory authority. All the North Sea licensees with interests in producing fields were invited to negotiate participation on a "voluntary" basis. I place the word "voluntary" in inverted commas. It was also made clear that the companies who did not volunteer to negotiate participation would not be considered in any further applications for exploration licences either in the fifth round or in any subsequent round. Negotiations for fifth round participation were conducted by joint teams made up of BNOC personnel and nominees from the Department of Energy. For all practical purposes, this was a situation where the Government were negotiating direct with the private sector and it could hardly properly be described as a purely commercial negotiation at arm's length. I have heard first-hand accounts of negotiations in which the attitude adopted was that the terms of participation were standard, and that the other party could take it or leave it; hence the widely reported frustration and delay.

Secondly, prior to starting on participation negotiations, the Government imposed an embargo on all farm-outs. This delayed a considerable amount of exploration activity in the North Sea, much of which depended on the ability to farm into a favourable exploration situation or alternatively to farm out prospects judged to be marginal or high risk. Farming out is such a fundamental activity that any embargo on it is bound to have a strongly inhibiting effect on exploration. I think it became apparent why the Government had done this when they started to tell companies that they would only agree farm-outs if the applicant company was prepared to state its willingness to negotiate participation on the Government's terms. I have heard of a case in which two oil companies had agreed with the Department of Energy to the issue of a joint licence, which, on a technicality, involved the part assignment of a licence by one of them. Although the whole thing had been agreed in principle, BNOC withheld consent to the farm-out and made it clear that signing a participation agreement in BNOC's favour would be a precondition of its consent to a farm-out. I can think of no clearer example of negotiation under duress.

Another problem arose over the principle of the Area of Mutual Interest. This is a fundamental concept of the industry. It recognises the fact that geological work, whether seismic or drilling, conducted within a block may yield information of great commercial value in respect to a contiguous block. When companies joint venture to explore contiguous blocks they therefore agree that the contiguous blocks fall within an AMI, and also agree that no member of the joint venture will apply for an open acreage in contiguous blocks except in conjunction with or by agreement with the other joint venturers. BNOC has refused to endorse this principle, which means that it can apply at any time for open acreage on a basis of geological information leading to the expenditure by other parties.

The normal arrangements for licence allocation in Britain have up to now been that companies may only apply for licence areas on invitation from the Minister. Where, as is usually the case, there are competing applicants, the Minister will use his discretion to decide which applicant has the greater merit. Quite often in the past the Minister has advised the applicants to reach a joint venture agreement among themselves and to apply jointly for the licence. We now have a situation where BNOC and, incidentally, the British Gas Corporation can apply for any open acreage on an uninvited application basis. This gives BNOC a major competitive advantage over the private sector, especially bearing in mind its refusal to endorse the AMI principle to which I have referred.

My last example of non-commercial discrimination is that BNOC has sought and in many cases obtained a pre-emptive right in respect of the sale of licence interest. Normally where acreage is the subject of the licence held jointly be several parties there is agreement between them to the effect that a party wishing to sell its interest will offer it to the other parties pro rata. BNOC is demanding that the party wishing to sell should offer the whole interest to BNOC before offering it to the other licensees.

As a footnote to those points I reflect that, up to and including the fourth round allocation, a high degree of trust existed between representatives of the industry and officials administering North Sea oil. The officials have been increasingly involved in one-sided take-it-or-leave-it type discussions passing for negotiations with industry. A number of them have found it distateful and the old bonds of trust and confidence have been eroded. I cannot believe that it is in the long-term interest of the country that a major industry and the sponsoring Department should regard each other as adversaries.

Like my noble friend Lord Lauderdale, I endorse the principle of smaller and more frequent rounds. I suggest that the way to maximise benefit is fully to harness the skills and risk-taking proclivities of smaller as well as larger oil companies. Prima facie, Clause 4 of the Consultative Document is favourable to the smaller companies. The designation as operators can be for the exploration phrase only, in contrast with the fifth round, in which it was only BP among the United Kingdom oil companies which was named as the operator of a block. But there is a sting in the tail. It comes in Clause 9, where there is proposed—on an optional basis, I concede at once—a Dutch auction-type procedure as to who is prepared to give BNOC a more than 51 per cent. interest and/or carry some or all of BNOC's exploration costs.

The Dutch in fact do it differently and, in my opinion, better. They have a regime under which the oil companies carry all the exploration costs—and I see nothing wrong with the principle that the exploration costs should be borne by the private sector, provided that the companies are clear as to the terms on which the Government interest is going to "back in", as it is called later on. In the case of the Dutch State oil company, when they back in on certifying that a hydrocarbon discovery is commercial for development, they refund retrospectively their 40 per cent. share of the exploration costs and pick up a full interest from that point. That seems a sensible way of going on.

Lord KALDOR

My Lords, I am sorry to interrupt the noble Earl. I understand that this is also the case in this country and that if subsequently BNOC wishes to acquire its option of an equity interest, it will refund the share retrospectively.

The Earl of LIMERICK

Yes, my Lords, but there are two differences. One is that to get to this position now the British company must go through the Dutch-auction procedure. It cannot be certain that a licence will be awarded to it, other things being equal and satisfactory, unless it offers more than 51 per cent., or offers a carried interest, which is not required of it in the basic conditions of the round. This is the point of difficulty. Also, in relation to the fifth round, there was no procedure for retrospective refunding of exploration costs. What companies have found, as they have required consents for alterations in the licences or whatever it may be, is that it is being insisted that they sign a consent to participation by BNOC in terms of which, under the fifth round, they cannot get any refund of the exploration costs. That is why I think the Dutch system is superior.

These are the matters—and I recite them without pleasure—which raise suspicions of unfairness in this competitive, as I have called it, Dutch-auction, except that it is not Dutch: "Will you carry Big Brother, or will you be willing to make him even bigger?" It appears at least possible that it is an aim of current Government policy—it is at least inherent in the policies currently being applied—that the smaller companies should be squeezed out of the North Sea exploration business. If this is so, there would be no sense in the policy, since the industry has always functioned effectively on the basis of large and small companies operating in competion.

There is no monopoly of originality in the larger companies. Much exploration which is successful can be attributed to ideas of small companies, which are willing to take proportionately large risks. To the extent that companies are squeezed out, the parties involved in the North Sea will increasingly be BNOC, on the one hand, and the international majors, on the other. I doubt whether any limitation of competition of this kind would be in the longer-term national interest.

Like my noble friend Lord Gowrie, I am very conscious of the value of building up Britain's offshore technology. But this technology and expertise does not reside in Whitehall, in Glasgow, in Aberdeen, or in Peterhead. It resides on the oil rigs, in the design offices and workshops of numerous companies, nearly all of which are private and many of which are small. The point of acquiring technology for a company with 20 years of life might be debated. I could see a lot of point in it if it were to open up substantial export opportunities. However, this, I think, must be in doubt, because as a national oil company by definition BNOC will actually be precluded from participating in offshore concessions in many parts of the world—a case in point being Venezuela. The small companies feel, rightly or wrongly—and some of the evidence suggests rightly—that they are being leant on unnecessarily, or even unfairly, by Big Brother, who is counsel, judge and jury.

I should like to end with a suggestion. I apologise to the noble Lord, Lord Strabolgi, that I did not have the opportunity of putting this to him before. If he is unable to respond to it this afternoon, I shall understand. I hope that it will be seriously considered. I attach the highest importance to getting a sense of confidence, partnership and participation back into the whole business of exploiting this tremendous national resource which we have. My suggestion is that part of the disaffection sterns from the fact that there is no court of appeal. There is a Consultative Document which is larded with phrases such as, "in the opinion of", "subject to the consent of", and "if appropriate". The person who is the arbiter in every case is the Secretary of State. What would do immeasurable good in restoring confidence would be the appointment of some independent Commission or Commissioner on the lines of the Ombudsman, to whom cases of alleged unfair influence could be referred. If the policy is as Her Majesty's Government have stated, they have nothing to fear from such a procedure. It would greatly restore the confidence of those dealing with BNOC.

6.16 p.m.

Lord WYNNE-JONES

My Lords, this debate has been fascinating. It has been made notable by the maiden speech of my noble friend Lord Hatch, who contributed a new point of view to our discussions, and one which is certainly of great importance to us. The noble Earl, Lord Halsbury, took up this point later in his speech, where he had a suggestion to make which I think is an interesting one. I agree with him that the wastage of natural gas is really a tragedy. That is true, of course, of all our fuels. That is really, I suppose, what this debate is about. We are concerned with the oil in the North Sea.

In this country we are in a better position today than probably any country in the world, not in the extent of our resources but in the fact that we are trying to do something in the way of planning the use of those resources. Taking up Lord Halsbury's point, it refers to coal and gas. It also refers to nuclear power. It refers very much to oil. If one compares what is done here with what is done in America, for example, one finds that the planning for oil there is absolutely hamstrung by the fact that they have not got the ability to enforce a national oil policy in America. Of course, they have fiscal methods of doing it; but that is all. They have no other way of doing it. In consequence they have failed to get any effective policy. This has spread over the whole of their energy field and has obviously been a great worry to President Carter.

We may not have a perfect or a complete energy policy, but we at least have the elements of an energy policy which is much more effective than elsewhere. One of those elements—and an important one—is precisely oil, the very element which the Opposition would strike away, and from which they would remove the effective control. Yes, they will put on a fiscal control. They have already said that. They have been saying that for years. But the noble Earl, Lord Limerick, who in a speech of considerable moderation discussed this subject, said that we should not go back with hindsight and decide what might have been done. I do not go back with hindsight. I go back to Hansard of 7th June 1972, when the noble Lord, Lord Balogh, and the noble Lord, Lord Tanlaw, and others, took part in a debate in this House and pointed out the disastrous policy then being followed. They pointed out how our resources were being thrown away and that the oil companies were being made a present of thousands of millions of pounds.

The noble Lord, Lord Orr-Ewing, shakes his head. But may I quote the figures? He would like the figures, no doubt. The figures are as follows. Mr. Wadhams, who had been with Shell, made the following statement about the financial consequences to the oil companies of the method of taxation. He said that on an annual production of 1 billion barrels of oil the Government would receive, under the scheme in operation then, £30 million in taxation, whereas, for exactly the same amount, under the same conditions, Libya received £850 million in taxation from the oil companies. When one country taxes the oil companies to the extent of 30 times more—not 30 per cent. more—and yet is able to get the oil produced, one has to admit that we were being rather ridiculous in throwing away all this, and making a present to the oil companies.

Lord ORR-EWING

My Lords, I do not think that the noble Lord is comparing like with like. In the case of Libya, they are on-shore wells which have been in production for many many years; one would not expect there to be very much risk now. However, in the North Sea one was pioneering deep exploration wells which were very expensive and not altogether successful in the early phases. Therefore, the two are not of like character at all.

Lord WYNNE-JONES

My Lords, I was hoping that the noble Lord would say that because that is precisely the point to which I was about to come. The point is that, at the time, in 1972, just before the debate took place here, in the North Sea—not in Libya—the Conoco Oil Company announced that it had sunk nine wells and that six of them were successful. At the same time it was being put round by the public relations officers of the oil companies that only one in 20 wells was successful. However, the figures that they were using were the figures that applied to the Gulf of Mexico and not the figures that applied here. It has turned out to be a fact that the success rate in the North Sea has been far higher than it has been anywhere else.

The Earl of GOWRIE

My Lords, I am most grateful to the noble Lord for giving way. He is being so controversial that it is impossible not to leap up and down at him, and I hope that he will forgive me for interrupting. The fact is that in 1972—before a 400 per cent. increase in the oil prices and with a resource that was not known or widely understood—the situation was almost entirely different. As I said in my opening remarks—and this is the only point I make on this—if we had pursued what the noble Lord, Lord Balogh, and others wished us to do in 1972, with a bit of luck we should still be sniffing round the perimeters of the Forties Field. The whole show would not have got on the road. The noble Lord, Lord Wynne-Jones, knows that very well.

Lord WYNNE-JONES

My Lords, the real difference was that in 1972 there was a Conservative Government; since then there has been a Labour Government, and it is the Labour Government that has made all the difference.

The Earl of GOWRIE

My Lords—

Lord WYNNE-JONES

My Lords, the noble Earl has already interrupted me several times. It is precisely the fact that the Labour Government took a positive oil policy; it is precisely the fact that they introduced the idea of BNOC; it is precisely the drive that they put in it; and, if I may say so in the absence of the one who was largely responsible, the noble Lord, Lord Balogh, probably played a more important part in all this than anyone else in this country and I believe that the country owes a great deal to him for what he did.

Lord KALDOR

My Lords, perhaps I could interrupt in reply to the comment made by the noble Earl, Lord Gowrie. He spoke of 1972. The events which I described in my speech took place in 1971, a year earlier, and showed that in the very few cases—and they were by way of an experiment—the Government were willing to put up licences to auction or to tender on a competitive basis; and the companies were willing to bid enormous sums in order to get those licences. That was in 1971. Nevertheless, the experiment was not followed up.

Lord WYNNE-JONES

My Lords, I agree with what my noble friend has just said. Perhaps I could refer once more to what the noble Lord, Lord Orr-Ewing, said. He referred to the great expenditure of the oil companies. In a decade the Shell Company spent £250 million on a certain development. The return that it received afterwards was between £80 million and £120 million per annum. That is not exactly penury for the company; it is not exactly a return which is so small that it does not encourage the company to continue. In fact, even today, when the taxation is a good deal higher, they still want to do on.

What did Mr. McAllister of the Occidental Oil Company say only the other day, for which he was sent away to Canada? He stated that the Government had been too slow in allowing them to go ahead and develop. In other words, he did not want to pull out; he wanted to go ahead faster. But this is exactly the point; it is exactly the reason why we need a national control. This is precisely where the advice of BNOC becomes so important. Who knows what is the right rate of development? It is estimated that in the 1980s there will be so much oil about that there will be a glut on the market. Does it make sense to go ahead now with rapid development in order to contribute to that glut? Or is it more reasonable to look at the matter properly from a national point of view?

If we produce the oil for the early 1980s, when there is almost certain to be a glut, either we shall have difficulty in getting rid of it and we shall have to store it, or we shall have to sell it at a cheaper price. On the other hand, if we hold back our rate of development, there will certainly be a shortage of oil in the 1990s. No one can be certain of the exact date at which any of these things will happen. In fact, a letter on this very matter by Professor Peter Odell is published in today's issue of The Times. In his letter Professor Odell says that from its own production and from participation BNOC has more than enough crude oil to meet all possible short or medium-term sales opportunities, but that BNOC believes that the oil will be scarce by the late 1980s. Odell himself states that he does not believe this. This is obviously a matter which has to be looked into.

But how can one look into this unless one has an operator like BNOC which can supply the information to the Government? The Government themselves cannot obtain this information; they are not explorers. So BNOC will play a vital part in determining Government policy. If the noble Earl, Lord Gowrie, following usual Conservative policy, says: "When we get back we shall wipe out everything that Labour has done"—

The Earl of GOWRIE

My Lords, the noble Lord must not make unjustified accusations. That is not what I said.

Lord WYNNE-JONES

My Lords, the noble Earl said quite definitely that they would remove the advisory power from BNOC. That is what I was talking about. If the noble Earl chooses to interrupt me, he might at least interrupt me on a point where I said what he thinks I said, but I did not. It is really quite essential that if we are to have a proper control of oil policy—and gas policy comes into this—there should be active Government participation. Without that we shall not get control; without that the country will suffer, I, personally, hope that BNOC will continue to thrive and do the excellent job that it has begun.

6.29 p.m.

Lord ORR-EWING

My Lords, I should like to start with an apology. I understood that this would be a short debate with short speeches. It has been a debate with very well-informed speeches, but not all noble Lords have set the fine example of the last speaker in being short. I hope that it is not too discourteous, but I have a commitment at 7.15 p.m. which means that I may have to leave if I am not to avoid losing my wife—not for the reasons that noble Lords may think, but I have a date to take her out!

I should like to add my congratulations to those already offered to the noble Lord, Lord Hatch. Everything that has been said about him has been said with justice, and we hope to hear him again. I should also like to add my congratulations to the noble Earl, Lord Gowrie. He has chosen a subject with good timing because it lines up not only with the Government's White Paper but also with the publication last Friday of this admirable document, the 1977 British National Oil Corporation's annual report. I commend it. There are plenty of copies in the Printed Paper Office. It has been difficult to get from the other place because I think the demand has been high.

I am sorry that the noble Lord, Lord Kearton, probably through business, has not been able to be with us. I realise that he would not be able to take part in the debate, but as there is no annual general meeting where he can be questioned, or could listen to what shareholders say, I hoped that he might be here in a listening capacity. We miss him just as much as we miss the noble Lord, Lord Balogh, on this occasion. Perhaps on a future occasion they will both be here.

I wanted to concentrate briefly on the expansion, plans of BNOC, which I think I would describe as a "sprint for growth": secondly, on the pressures that they are exercising on private sector companies—and my noble friend Lord Limerick's speech was so powerful, and the instances so applicable, that I shall not have to dot the i's and cross the t's in that area; thirdly, on the effect their plans have on capital expenditure and, above all, on their cash flow, neither of which are set out in any detail in their report.

There is evidence that BNOC is spending taxpayers' money at an enormous, and I believe unjustifiable, rate. There are strong signs that the Benn/Kearton axis is now aiming at a sprint for growth, and I cannot help wondering whether that is because a General Election might change their powers in the future. In this sprint BNOC leans over backwards to help the powerful multinationals, and God help any small British company which is trying to get licences and to make its presence felt. The multinationals are known, as so many noble Lords know, as the "Seven Sisters". By 1980, at the present rate, BNOC's ambition seems to be that it shall become the eighth. It could do it. BP, worldwide, produce 1½ million barrels of oil a day, and BNOC could, through its 51 per cent. participation agreements, market 1 million barrels a day by 1980. If it is allowed to carry on with its ambitious plans, I ask myself: how is it going to finance the operation?

My noble friends may have seen the article in the Sunday Times of yesterday where it showed the growth of expenditure in a useful graph, and showed aptly and clearly that BNOC itself would be producing from its own wells about 100,000 barrels a day, but showed an enormous expansion of the oil it would be purchasing. In a year or two it would be purchasing 600,000 barrels a day of crude; that is six times as much. This would be bought from other companies who are obliged to sell it. This surely is going to bring about a tremendous cash flow problem, and I wonder whether both Houses are going to be asked, as a Parliament, to grant further cash for this expansion.

In the fifth round BNOC got 40 blocks. The cost of drilling a well now is around £4 million, and on one site normally at least two wells are drilled. Half the cost on a site would be borne by BNOC. So if it has 40, it would necessarily have to spend another £160 million on all this other expenditure if it is going to make use of the oil on those 40 blocks.

On 5th April there was announced yet another allocation; this time a further nine blocks. I think that this one should be called the fifth and a half round, because there was the fifth round and we are coming to the sixth round. This was an interim round with extremely unusual conditions, because nine blocks were let to BNOC with no competitive tendering, with none of the qualifications that we were always assured were going to take place; a straight allocation. Many of these blocks were very promising. Therefore, from what my noble friend Lord Limerick has said, none of us can help wondering whether some of the information that it gained as an operator has come from private sector companies, and that it knew that these were promising wells and it went for them direct with none of the normal tendering procedures. A suspicion that it got some of this basic information from those private sector companies must exist. My noble friend Lord Limerick pointed out, chapter and verse, why those suspicions arise.

We now learn that in round six BNOC will get priority on six blocks. Why, again, overriding priority? When the other tenders are in, BNOC is going to be able to select its six blocks. This is not fair competition by any standards. These are the points that we made throughout the debate on the Pipelines Bill. We kept saying, "Right, we go along with the idea that there should be a public oil company; but how are you going to ensure that there is fair competition between the two sides in every respect?" The examples we have had this afternoon certainly suggest that this is not to he. They prove that BNOC has increasingly crept in as a regulatory body and, at the same time, as an operating competitor.

I think that the Tory policy, which is flexible and was well set out by my noble friend in his opening speech, is to appoint either a regulatory agency which is separate from the producing company or, alternatively, again to rebuild the energy department in the Ministry. It is perfectly capable of undertaking it, and we should like to see responsibility pinned on the Secretary of State so that we may question and examine him. I think that there is something in the suggestion at the end of my noble friend's speech, that perhaps there ought to be some arbitration body which is called upon when there is any doubt about fairness.

I believe that this sprint for growth shows itself in the tremendous growth in the staff. There have now been recruited 745 people. I believe that many of them have been recruited from competitor oil companies and, of course, they have been tempted away, or bribed away, with higher salaries. Certainly, if noble Lords will turn to page 41 of the BNOC report, they will find that a very large percentage of that small number of 745 is very highly paid indeed. There are 106 people listed there who are paid between £10,000 and £15,000 a year; there are 17 people who are paid between £15,000 and £25,000 a year. This is a fairly small company, of 750 people. Admittedly, the sums are big; but surely one wants real experts with a knowledge of the industry, and not large numbers of clerks trying to carry out this job.

I turn further to the cash flow. In the pipelines Act it says that £600 million would be made available to BNOC, and that on the Secretary of State's say so that limit could be raised to £900 million. But it also says that that was the limit of all borrowing. I have given the noble Lord notice of this point. The Bill does not say that this was the limit from the National Oil Fund. Is not getting a loan from a United States bank, Citibank, which heads up a consortium and borrows another 825 million dollars, a contrivance to get round the cash limits imposed by Parliament? If Parliament does not control through cash, it loses all control altogether.

I would ask the noble Lord, Lord Strabolgi, when he comes to reply, whether Parliamentary authority is going to be sought to expand BNOC borrowing powers. I imagine that this loan was taken partly to reduce the percentage rate it was paying on its borrowed money (and that was revealed in this report), but also to get round Parliamentary control. Noble Lords will know that the Comptroller and Auditor General has asked some very pertinent questions indeed about this device. It seems that Britoil is set up under some charity umbrella. This is a strange thing to learn of a nationalised oil company. It is a strange arrangement, and while I have had it reported on good authority, if I am wrong I am sure the noble Lord will put me right.

The annual report also takes credit for the fact that this huge loan was achieved without any Treasury guarantee. But that is a rather naive viewpoint. Would any Government—foreigners,who are providing much of the money, would know this—let a nationalised concern like BNOC go to the wall or go into liquidation? That could not possibly happen, so ipso facto there is an unwritten standby arrangement from the Government of the day.

Finally, I wish to touch on the pressures, either partially hidden or otherwise, which amount almost to blackmail. If an oil company criticises BNOC then, as we have heard so many times this afternoon, its president—in this case Bob McAllister—is sent to Canada or elsewhere on a smaller job.

Several noble Lords: Oh?

Lord ORR-EWING

Yes, indeed, my Lords, he was president of Inter-Continental for the United Kingdom and Western Europe, and it is fair to say that he has been sent to a smaller job in Canada. BNOC have let it be know n that Bob McAllister's sacking should be taken as a warning to other oil companies. It is difficult to get chapter and verse on this, but I have that on good authority.

Perhaps I may give one more example to add to those which my noble friend gave. BNOC must give to the North Sea oil companies authority for the expenditure of AFEs—authority for expenditure—and I believe that unless these orders are placed where they are politically advantageous, the North Sea oil companies do not get a chance on future licences, or delays are imposed in giving them approval so that they cannot develop their existing fields on time. This blackmail may not sound serious, but the power to throttle can greatly affect the cash flow of any of the big majors; and of course cash flow is of vital importance when developing a commodity like oil.

I have sought in a short speech—shorter than the average in this debate—to draw attention to the need to know a little more about the capital programme of BNOC, to know something about its cash flow and to expose once again the fact the pressures—undue, incorrect and unfair pressures—are being brought on the private sector. I hope that when the noble Lord, Lord Strabolgi, replies he will try to set our anxieties at rest, because we all want to see this great oil industry go forward in a spirit of amicable cooperation and not in a mood of grave suspicion.

Lord TANLAW

My Lords, I should be grateful if the noble Lord, Lord Orr-Ewing, would clarify two points. There has been criticism from other speakers on the Conservative Benches about BNOC going ahead too slowly, and Mr. McAllister has been mentioned in this respect; but Lord Orr-Ewing referred to a sprint for growth. Would he clarify what he meant by that?

Lord ORR-EWING

Certainly, my Lords; I meant a sprint for their own growth and a brake on anyone else's growth by arguing about the form and conditions of the agreement, a point that was made very purposefully by other speakers. That is the difference.

6.44 p.m.

Lord VAIZEY

My Lords, I wish at the outset to join other noble Lords in congratulating the noble Lord, Lord Hatch of Lusby, on his interesting and important maiden speech which touched on a central issue, an issue to which I am sure the House will return many times in the future, when we shall expect Lord Hatch to lead us. I also wish to thank the noble Earl, Lord Gowrie, for tabling a Motion on this vital question, and in the course of my, I hope, brief remarks I shall try to touch in a non-partisan way on the questions he raised for our consideration.

I also wish to join the noble Lord, Lord Kaldor, and others in saying how much I regret the absence of the noble Lord, Lord Balogh, this afternoon; I have learned a great deal from him and the nation stands very much in his debt for his con struction of an oil policy. When I was at Harvard, Professor Seymour Harris, used to claim that his adoption of Keynesian ideas had saved the United States Government so many billions of dollars that the rate of return on his salary ran into billions of per cent.: I am tempted at times to think that the interventions of Lord Balogh into oil controversies in this country have saved this country a not inconsiderable sum.

I begin by touching rather generally on a central question which the noble Earl, Lord Gowrie, raised—namely, the relative merits of public and private corporations. I thought I detected in some of his remarks a feeling that on the whole the public corporations were less efficient and less popular than the private corporations. The last time I addressed your Lordships' House—the subject was the problems of management—I suggested that the problems were rather more complicated; that the problems of running large organisations were common to both private and State corporations and that, broadly speaking, small businesses—small affairs and those engaged in mending things and so on—were best left to small firms. That is the area where the major criticism of the nationalised industries came in; criticism of the gas board, the electricity board, the public transport system and so on. I do not believe that the criticisms are broadly directed towards bodies like the Central Electricity Generating Board, the Atomic Energy Authority or, I suggest, a body which operates so major an enterprise as the British National Oil Corporation.

Noble Lords have given some examples of what they have in mind and perhaps I may illustrate what I have been saying by a very homely example. Perhaps unpatriotically, I drive a Renault car. That car is made by a State enterprise and it seems to be an extremely good car. I try to have it serviced at a Renault garage, which presumably is also nationalised, but it is just as hopeless as the gas board. I believe therefore that the broad categorisation of public as bad and private as good is something we should avoid. I appreciate that Lord Gowrie has an infinitely more sophisticated view of the economy than that, but as the election comes near we might be tempted into that kind of fruitless debate. I suggest that we should take a pragmatic view of the failures and successes of our economy.

There are special problems in the oil industry. The oil companies are enormously powerful. They have in the past controlled Governments. As Lord Kaldor —who I regret to see has left the Chamber —said, they are enormously powerful, especially in the United States, and it is difficult to see whether they control the Government or the Government control the oil companies in that great country. It is because of the enormous power of the oil companies that, as noble Lords have said, so many oil producers like ourselves have set up their own State oil corporations.

I listened with great care to the arguments of the noble Lord, Lord Cockfield, and I thought his conclusions were very powerful, but I begged to differ and I thought that much of what Lord Kaldor said answered some of the crucial points which Lord Cockfield raised. I think there is no question—and I was glad to hear Lord Cowrie make a quite positive statement in this respect—but that, if there were a change of Government, the BNOC should survive—

The Earl of GOWRIE

My Lords—

Lord VAIZEY

—and that assurance was an important one for him to give, because, if a Conservative Government were returned, they should surely try to retain what is good out of the achievements of the present Government and do away with only things with which they seriously disagree. We have before us the supreme example of the catestrophic abolition of the Prices and Incomes Board by the Heath Government in 1971, which was a major cause of the difficulties which led to the fall of that Government in 1974. Does the noble Earl, Lord Gowrie, wish to intervene?

The Earl of GOWRIE

My Lords, I am not taking up a debating point with the noble Lord, Lord Vaizey, but a point on which I think he misheard me. I said the British National Oil Corporation as presently constituted would, in my opinion, almost certainly not survive a change of Government.

Lord VAIZEY

I was coming to that—but I thought that the noble Earl had carefully moderated his statement to say that it would in fact survive, at least in embryonic or skeletal form. But if in fact he went rather further than that, I think it is a more serious question. I had taken it to be the crucial issue which the noble Earl was raising this afternoon, and I thought that some of his arguments were very persuasive; indeed, he persuaded me. So I hope that he has not gone too far overboard in disagreeing in advance with what I say.

The question is, if the British National Oil Corporation survives (as I think it should), how far should it continue to have the privileged position which has been given to it by the legislation under which it operates? I have gone as carefully as I can into this question, and I have consulted all kinds of people and have followed the debates with great interest and care.

First, I think it important that the Government should have access to the specialised geological marketing and other expertise which is available to the international oil companies, but which, by its very nature, could be available only at second hand to the Civil Service. Therefore, I think it very important that the existence of a State-owned British National Oil Corporation gives the Government information of a direct character about the business operations of this crucial sector of the economy which could not be available to a regulatory agency. So the fact that this corporation is directly responsible to the Secretary of State for Energy is enormously important for the Government's regulatory work. I think that the noble Lord, Lord Tanlaw, made that point, and I hope that in the end it is non-controversial, because I think it is the central argument.

Secondly, there is the question of whether the corporation should continue to have the privileged option to take up 51 per cent. in the oil fields newly developed by its competitors. Comparing the speeches of the noble Lords, Lord Cockfield and Lord Kaldor, on this particular point, I thought that the noble Lord, Lord Kaldor, had it. On the whole the arguments against taxation, and the arguments for participation, seem to me to be broadly very convincing. It is a much more straightforward way of getting the money into the Treasury. It is more likely to be based upon realistic assessment of what the operating conditions are, and what the marketing conditions are. It is more likely that the decisions will be taken in the interests of the nation and of the firms in which the State has a participating share, because they are working in cooperation and partnership, than if it is a straight tax deal. The interests of the State as a tax collector are, for obvious reasons to some extent allied to those of private firms for making profits: the higher the profits, the higher the tax. They are also equally obviously diametrically opposed, because the higher the tax, the lower the profits, and the less likely, therefore, the firm is to be successful in its operation. So I should have thought that on the whole the partnership, if it works, is probably a good idea, rather than a bad idea.

Here, we come to the crucial question which has been raised several times this afternoon. The noble Lord, Lord Strabolgi, on the Front Bench, has intervened several times to point out that the British National Oil Corporation is not a regulatory agency. Perhaps I may put it this way: should the BNOC take part in the regulatory process? I think that the noble Lord on the Front Bench would not disagree if I said that in some sense the information which the BNOC provides to the Secretary of State for Energy is a rather important part of the information which is available for him when he is undertaking his regulatory duties.

Here, I believe it is perfectly clear that there is some degree of conflict of interest, and one which begins to sound a certain number of alarm bells in my own mind about the whole possibility of a conflict of interests. Again, I can see that the argument would be rather conclusive on the side of the Government Front Bench if the information itself was so crucial to the decisions which were taken. Those decisions could not be taken without the close and constant co-operation with the BNOC which I understood from my reading of the consultations was the central part of the argument for the way in which the present system was set up.

Therefore, by and large, I do not quite share the noble Earl's fears and worries, which were expressed with extreme eloquence and force, about the role of the British National Oil Corporation. I would be somewhat sad if a Conservative Government were returned heavily committed to savaging this new beast, which in its turn ravages the North Sea. This might be a commitment which was unwise, and which in the long run the Conservative Government (if one came in) might greatly regret.

I very much took the point made by the noble Lord, Lord Tanlaw, on the Liberal Front Bench, to the effect that the slowness in allocating licences, indeed the slowness in exploration, may very well be no bad thing. One listened with care to what the noble Lord, Lord Hatch, said, and to what the noble Lord, Lord Wynne-Jones, said in what I thought was a very telling intervention. The whole question of the rate of depletion is absolutely crucial. I should have thought that the balance of the evidence so far was in favour of slow take-up, rather than fast take-up. There has been a consistent ambivalence throughout the debate in that speakers have argued (sometimes within the same speech) that we should have a slow rate of depreciation and that we have been unnecessarily slow in our discovery and development of these fields. I can see that these are not necessarily contradictory positions, but I think that when one listens to them they almost inevitably seem to some extent to be contradictory positions.

Up to the point at which I rose to my own feet this has been a fascinating and important debate; one in which your Lordships' House has been behaving—as, in my view, it should—as a forum for the discussion of long-term questions, and not for the making of immediate points of Party advantage. On the whole, the question of the future of Britain's oil reserves and of the future of this very important corporation deserves a lengthy period of consideration outside this House, in the public Press, and perhaps a period of abstention from over-strong criticism until we are absolutely sure which way it is going to develop.

6.57 p.m.

Lord GISBOROUGH

My Lords, I should like first to congratulate the noble Lord, Lord Hatch of Lusby, on what can only be described as a model maiden speech. I want to add a few words to those said already by the noble Lord, Lord Orr-Ewing, and the noble Earl, Lord Limerick, on the small independent companies. It appears that the awards of licences will largely depend on the size of contributions to BNOC, as well as other factors, such as trade union representation, snd so on, and on the proviso that applicants should indicate how much over the 51 per cent. they are prepared to offer BNOC and that they will carry BNOC's share of exploration and appraisal costs. That seems to me to have all the features of a Dutch auction. Not only has the huge and risky cost of wildcat wells to be carried for the BNOC by the oil companies, but it has to be carried to the stage when the actual development programme is approved by the Department of Energy. This proposal would mean that many small British companies would be spending more than twice as much as the cost proportionate to their interest for wildcat wells, through the unsuccessful wells that would be drilled, and throughout the development phases.

In a speech which I thought was jolly good Election knockabout, the noble Lord, Lord Strabolgi, mentioned the ring fence. As I understand it, the point is that the major oil companies have ring fence income already, and therefore will be effectively able to pass 52 per cent. of the cost of carrying the BNOC back to the Government; but independent companies, without this advantage of standing income, may be unable to compete with the major multinationals. The effect will be seriously to harm smaller British companies, particularly those coming into the field, whose potential contribution to the British economy far outweighs the interest of multinationals, whose profits do not remain in this country any more than they can help.

Another criterion for obtaining a licence is the option of the BNOC to have the right either to buy or to sell its share of the oil or gas, so as to protect the BNOC from unattractive market situations. This could be a tremendous burden on the independent companies, many of which have no capacity as refiners to take the oil or to sell it. Furthermore, the six months' notice which the BNOC is to give the companies of its intention to sell or buy, is far too short in view of the long-term contracts which oil companies are used to making. These conditions have been described as very objectionable. The price at which the oil is to be bought or sold is described as "market price". There is no particular denition of "market price", and if the fact is that the price is to be dictated by an expert, then the question is: Who is the expert, and how could that be necessarily acceptable?

In the proposals, BNOC are effectively to dominate all operating committees, but the minority interest holders must go along with exploration and appraisal programmes provided by the majority on these committees. This is the first time that any participant in a licence has been denied the opportunity to step out of work obligations after statutory obligations have been met. BNOC dominance in this situation could make the position of smaller companies once again impossible. Most of the smaller British independent companies have been built round the North Sea exploration and development. They need a strong, sound and good future, not only to survive but also to expand. It is a vast capital-intensive industry, and obviously requires enormous resources. Unlike the major international companies, most British independents have very little overseas interests and must rely on work in the North Sea. Thus, it is only a few, and the majors at that—Chevron, Occidental, Shell and BP (and heads have rolled for it already, as has been mentioned)—that have had the courage to protest at the rôle of BNOC and the domination of the Government in the North Sea exploration.

The domination is increasingly severe each round, but the independent companies cannot afford to commit commercial suicide by expressing their concern at the rôle of BNOC and at the increasing domination of the Secretary of State and certain of his civil servants. These civil servants are acting at their own discretion within the sweeping powers given to the Secretary of State, and are acting in a political rôle, needless to say. They are justifying their actions as being, according to their view, in the national interest. Surely there is too much ministerial discretion in the Department of Energy, and there should be more control by statutory enactment.

Up to now, Britain has encouraged investment in North Sea oil and a large number of companies have therefore got into the act. There has been a great number of ideas, and the success is evident by the amount of oil that is coming out. But it is a vast investment. I have figures which disagree with those already produced, and I do not know which are correct, but it is reported that Shell now have a total investment of £1,000 million in the area, and that they will not get a positive cash flow from that sum until 1980. The costs are huge and the risks are enormous, particularly for the independents, without the vast resources. But the British independent companies have a great rôle to play and need every encouragement, with the ever-increasing high costs, the potential loss of buoyancy of the oil market and the fact that, as more and more areas get known, the areas left are less likely to have oil and to have been, in the words of one of the oil magazines, "well kicked over". The general thrust of the proposed terms will squeeze the independents and put the future of the North Sea development increasingly in the hands of the multinationals. As the BNOC rides entirely on the backs of major companies and independents, it is surely vital that BNOC should ensure the success, the wealth and the increase in numbers of all the companies, large and small on which it relies to be carried. If ever a rider starves his horse, the horse will either disappear or no longer be able to carry the rider.

7.4 p.m.

Lord STRABOLGI

My Lords, I think we have had a most interesting debate, and I should like to join with other noble Lords in saying how indebted we are to the noble Earl, Lord Gowrie, for initiating it. Before replying in detail to points raised by noble Lords, I should like to join in the congratulations to my noble friend Lord Hatch for a most notable and thoughtful maiden speech, if I may say so. I hope it will not be long before my noble friend addresses your Lordships again. He stressed in his speech, by implication, the great importance of a proper depletion policy, and how we shall have an oil crisis one day through the wasteful use of this resource. I am also grateful to my noble friend Lord Kaldor, who played such a distinguished role in the question of North Sea oil for his support., I think we were all interested in his account of the early arrangements; and, of course, he also reminded us of the strong criticism contained in the 1974 White Paper about the loss to the Exchequer of taxation through the previous Government's policy. This was supported, too, by my noble friend Lord Wynne-Jones in a very vigorous and emphatic speech. I am grateful to the noble Lord, Lord Tanlaw, for his support of our policy. He asked me to whom BNOC is financially accountable. The answer is that the Corporation is accountable to the Secretary of State for Energy. The Secretary of State is of course accountable to Parliament.

The noble Earl, Lord Lauderdale, who apologised for not being able to stay, asked how the proposed arrangements for awarding exploration contracts first would help the small companies, as I alluded to that in my speech. It has previously been the practice when considering the technical competence of applicants to look to see whether the nominated operator is capable, not only of exploration but also of development; but the massive demands of the North Sea in terms of skills and manpower mean that only the largest companies have access to the resources to meet those demands. So our proposal that operators will initially be approved only for the exploration means that the applicants will have to satisfy a less rigorous standard of examination, and that must assist the smaller companies. But it is not true that the smaller companies have been unable to compete in the North Sea. Indeed, several were successful in the fifth round.

The noble Lord, Lord Cockfield, also asked whether an operator who had been successful in an exploration contract would be awarded the development contract. Licences are granted for exploration, and, if anything is discovered, for development and production of the resources in the discovery. Under the licence, the operator, who is usually a licensee and a partner in the consortium holding the licence—because most of this work is done by consortia, as the noble Lord, Lord Orr-Ewing, knows well —can function as such only with the approval of the Secretary of State. Under earlier licences, approval has been for the whole licence activity—exploration plus development if it occurred. The intention now is to introduce a natural break at the end of the exploration phase. The Secretary of State's approval will be given for the exploration phase only in the first instance. Resources generally for the development of the discovery are relatively scarce because they are on a much greater scale than those required for exploration. To regulate the pressure on those scarce resources, the prospective development operators, who are very probably also members of the licensee consortium—indeed it could be an exploration operator —will have to have their operatorship endorsed by the Secretary of State before functioning as such.

The noble Earl, Lord Lauderdale, also made a reference to the Eighth Report of the Public Accounts Committee. We do not consider it appropriate that orders should be made under Section 41 of the Petroleum and Submarine Pipelines Act 1975 in respect of any of the participation agreements we have so far signed. The Act confers power on the Secretary of State to make provision by order for the making of payments by BNOC to licensees who are parties to participation agreements. When the draft legislation was before Parliament, it was envisaged that participation in existing licences would occur through acquisition by BNOC of a 51 per cent. beneficial interest. Ministers made it clear that the licensees would be compensated in respect of that acquisition. In practice, none of the agreements so far concluded provides for State participation in this way. The noble Earl, Lord Limerick, made the suggestion that there should be a court of appeal for—I take it— the unsuccessful applicants. The law authorises the Secretary of State to exercise discretion in awarding licences. There is no evidence of disquiet about fairness of allocations. Indeed, there have been no complaints from any quarter; but I will inform my right honourable friend the Secretary of State about the noble Earl's suggestion.

The Earl of LIMERICK

My Lords, I am grateful to the noble Lord for giving way. I must have expressed myself badly. I was not referring to allocation of licences but to cases of negotiation in which it was felt by the party other than BNOC that they had been leaned on in a rather heavy manner along the lines of the examples that I cited. Those are the cases that I had in mind, where I thought there should be some reference to an Ombudsman —I used that parallel—in cases which may approach maladministration.

Lord STRABOLGI

My Lords, I take the point the noble Earl has made, but this is so always. If there is any complaint about this so-called "arm twisting" that the Opposition are always talking about, they can let my right honourable friend have the information. I should like now to deal with the carried interest which was also mentioned by the noble Earl, Lord Limerick, and the noble Lord, Lord Cockfield. The carried interest for BNOC is a reflection of our policy to obtain the fullest national benefit from our offshore oil resources. The Opposition claim that to carry BNOC would place a heavy burden on the companies.

Let me put the matter in perspective. The position is that it will be open to the applicants to offer to meet some or all of BNOC's share of exploration and appraisal costs. There is no compulsion on them to make such an offer or to pitch the offer at any particular level. Where such offers are made, the companies no doubt will have satisfied themselves that the offer makes commercial sense in their interests. I cannot predict what the cost of carrying BNOC would be as this will chiefly depend on the offers applicants choose to make. I should like to repeat what was said by my noble friend Lord Kaldor; that is, that BNOC will, as in fifth round licences, pay its share of development costs as these are incurred.

The noble Earls, Lord Gowrie, Lord Lauderdale and Lord Limerick and the noble Lord, Lord Gisborough, all spoke about the lack of opportunities for the smaller firms. The noble Earl, Lord Limerick, implied, I thought, that the Government had some prejudice against small companies. I should like to deny that. The Government have followed the line of their predecessors in having no special attitude towards any particular category of company. It has been the policy of all Administrations that there should be no discrimination between applicants on grounds of nationality. All applicants are considered against a common set of published criteria. It is by reference to how well a company meets these criteria and not whether it is large, small or independent, that discretion is exercised in the grant of licences. I am sure that that is the proper policy. Any other policy surely would be inconsistent with our international obligations. That said, small British companies have, as one would expect, continued to put up a good performance in the rounds of licensing. In the fifth round, several such companies were successful, despite very strong competition from the blocks. I understand that the Association of British Independent Exploration Companies were very pleased with their success, and so, of course, were the Government. Twenty-four British companies were successful in the fifth round of which 16 came within the category of "small". I can publish a list of these in the Official Report if required.

I should like also to say a word now about our licensing policy. It is useful, I think, to make a few comparisons between our policy and that of the previous Administration. As was said in this debate, in their four years in office, the Conservatives had one huge round of licensing in which they allocated nearly 300 blocks. That resulted in a serious overdemand which our offshore industry was unable to meet. This is the offshore industry which gives the back-up to the oil development and which I think has not been mentioned so far in this debate. The lesson that we learned from that was to introduce a more orderly approach to licensing, offering smaller amounts of the territory at more frequent intervals. I was glad to note that this had the approval of the noble Earl, Lord Lauderdale.

Despite the increasing evidence of oil potential in the North Sea, the previous Administration issued licences the terms or which showed little change from licences issued five years earlier. I was interested in what my noble friend Lord Kaldor, with his intimate knowledge, said about this. The licences made no provision for the nation to obtain royalty oil; they included inadequate controls over development and had no controls at all over the rate of depletion or the flaring of gas. This is something, I think, which the noble Earl, Lord Gowrie, with this enthusiasm for laissez-faire should study, if I may suggest it, because this question of gas flaring has not been mentioned today. They included no provision to require exploration after the initial years of the licence; nor were the controls over the transfer of licence interests adequate.

The Earl of GOWRIE

My Lords, I am grateful to the noble Lord for giving way. I was at pains to try to distinguish between Conservative intervention traditions and Liberal laissez-faire. I am one of the least laissez-faire Members of your Lordships' House.

Lord STRABOLGI

My Lords, I was really remembering the speech the noble Earl made on 8th February when he seemed to think that the best way of controlling the North Sea was through taxation. In fact, his honourable friend in another place, the official spokesman for Energy, giving his reaction to the Press about the Consultative Document, said—and I have the Press cuttings—that the best way to control the North Sea was through taxation.

The Earl of GOWRIE

My Lords, what has that to do with laissez-faire?

The Earl of HALSBURY

My Lords, if the noble Lord will allow me to interrupt, I appear to be unfortunate because the noble Earl left the Chamber when I started to speak and the noble Lord must have been asleep; because I made a speech about nothing but gas.

Lord STRABOLGI

My Lords, I do not think I have yet referred to what the noble Earl, Lord Halsbury, has said.

The Earl of HALSBURY

My Lords, the noble Lord said that nobody had made a speech about gas.

Lord STRABOLGI

My Lords. I am glad that the noble Earl, Lord Halsbury, has intervened. I was talking about gas flaring which, as the noble Earl with his great technical knowledge will know, is a subject on its own. I am going to come to the points that were made by the noble Earl, Lord Halsbury, about British Gas later on in my speech.

Several noble Lords spoke about and complained about the sole licences for BNOC. The Government's policy on the issue of sole licences to State corporations is not a new development. The intention that BNOC should be able to acquire its own licences has been made clear on a number of occasions. My noble friend Lord Balogh, whose absence oil duty abroad we all greatly regret, referred to the prospect when the Petroleum and Submarine Pipelines Act was before this House.

The Government first used the power when we had sole licences, when two blocks were awarded to British Gas in 1976, and we recently decided that the time was right for this policy to be developed. Doing so will extend the expertise and experience of BNOC and British Gas, as the corporations will themselves be block operators. Apart from this, sole licensing provides a flexible and therefore most valuable tool for depletion, because the corporations each in their way have a ready identity of view with the Government on what is appropriate solely in the national interest. Thus BNOC could sit on the discovery until such time as it was in the national interest to develop it, even though this might be for several years. This would not be suitable with a commercial operator.

The noble Earl, Lord Limerick, spoke about "farm-ins" and "farm-outs". The new policy, as noble Lords will know, is that when a licensee wishes to give up some of its licence interest, it will be expected first to provide the corporation and British Gas with an opportunity to negotiate to acquire that equity interest. Let me emphasise to the noble Earl that these agreements will be freely negotiated. If the corporation does not wish to acquire the interest, or if genuine attempts at negotiation are unsuccessful, then the licensee will be at liberty to assign his interest to a third party. Naturally, as in the past, the terms of any assignment will be subject to the approval of the Secretary of State. This policy was introduced because the Government consider that the present State corporation's holdings in earlier licensing rounds—which is only about 12 per cent—is inadequate. It is much too modest a share. Even with the new policy, the private sector will still hold the major part of equity interests in these licences.

Various points have been made and there were complaints that British Gas and BNOC have been treated preferentially. Those were well answered by my noble friend Lord Kaldor. The noble Lord, Lord Orr-Ewing, said that there had been some delay in the award of fifth round licences and that BNOC was responsible for this delay. The continuing repetition of these allegations shows, if I may say so, some prejudice. The Government recognise that settlement of the joint operating agreements takes time and indeed has taken more time than we earlier thought it might. But there has been no undue delay. These are very important matters and contracts to be decided and some of them may of course last for a period of nearly 40 years. I do not want to go into the question of Mr. MacAlister, except that I thought that the noble Lord, Lord Orr-Ewing, implied somehow that he had been dismissed and sent back to Canada by BNOC. But of course he was sent back by his chairman, Mr. Armand Hammer, who strongly disassociated himself from Mr. MacAlister's remarks. Indeed, I have a cutting from the Guardian which is headed "Public rap for MacAlister".

The noble Earl, Lord Gowrie, complained that, in allocating fifth round blocks, the Secretary of State was disregarding the claims of United Kingdom companies. That again is not true. There were 40 blocks awarded to the private sector and United Kingdom companies had an interest in no less than 27 of these. I should like to say a few brief words about BNOC. I do not want to say—for I think the third time this afternoon—that BNOC is not a regulatory agency. One of the reasons for establishing the corporation was that it could provide a source of informed comment on which Government policy could be formulated.

The noble Lord, Lord Orr-Ewing, also spoke about links. BNOC have acquired information from its involvement in licences and by normal commercial processes. It is quite wrong to suggest that it has acquired the information improperly. There have been a number of allegations that BNOC has indulged in arm twisting. Let me make the point that licensing is entirely a matter for the Secretary of State. Of course where BNOC is in commercial negotiations it will take a robust and vigorous approach with those with whom it has negotiations. That is entirely appropriate, both as a commercial approach which any company would employ, and in the national interest. The noble Lord, Lord Orr-Ewing, also mentioned the question of training. Of course we are now arranging that there will be training by the commercial companies so that BNOC can build up its expert staff. I am sorry that he complained about the salaries; I thought they were fully competitive—in fact rather less than those paid in the private sector.

I must now deal briefly with Britoil because this was raised by the noble Earl, Lord Gowrie, and the noble Lord, Lord Orr-Ewing. I was asked a number of questions. Last year, with the approval of the Government, BNOC raised some 825 million dollars on the United States market by means of a forward sale of oil. The financing was structured as a forward sale in order to secure the most advantageous terms in the American market. It was a notable achievement on the part of BNOC to raise money at very low rates of interest without mortgaging any of its assets and without a Treasury guarantee. The particular way that the deal was structured has meant money so raised does not count against the corporation's statutory £600 million borrowing limit, since the transaction is not in the legal sense a borrowing by BNOC. However, the deal was in no sense designed with this view. The proceeds of the forward sale were used to repay BNOC's NLF loans. The only borrowings that the corporation has at the present time, which are counted against the borrowing limits, are those to a maximum of £15 million under an overdraft facility. It will be appreciated that, even if the forward sale proceeds had counted against the borrowing limit, BNOC would still have been well within its £600 million ceiling.

The noble Lord, Lord Chalfont, who apologised that he has not been able to stay to listen to my speech, rather widened the terms of the debate by extending it into the field of defence. Of course he is an acknowledged defence expert. He raised the very important question of the defence of our oil wells against terrorist attack. He asked whether the Government were satisfied with the arrangements. This is a matter that comes within the province of the Secretary of State for Defence. I will certainly bring what the noble Lord has said to the notice of my right honourable friend. North Sea oil is controlled by ourselves and the Norwegians, and we are both members of NATO. In the event of war, special arrangements will be made. That is as far as the House would expect me to go on that matter. The noble Lord, Lord Chalfont, also asked whether we were going to take the lead on a common European energy policy. As my right honourable friend the Secretary of State has made clear on a number of occasions, a positive European energy policy should be based on a proper recognition of each individual State's needs.

Lastly, the noble Earl, Lord Halsbury, gave as always a most notable speech, and he made the suggestion that the sixth round should be used as a lever for enforcing renegotiation of the contracts between British Gas and the companies supplying gas from the Southern basin. The renegotiation of contracts freely entered into is not a matter for the sixth round of licensing, but the noble Earl has made a number of interesting points, of which we will certainly take note. I hope that has answered all the various points raised by noble Lords. I can assure your Lordships that everything which has been said in this debate today will be noted carefully by my right honourable friend the Secretary of State.

7.31 p.m.

The Earl of GOWRIE

My Lords, I am happy to say that our debate did from time to time get controversial—I do not think that we should be afraid of controversy in this House—and as controvery raged I thought of sending over a note to the noble Baroness the Chief Whip to demand equal time with the noble Lord, Lord Strabolgi. But I think I have certainly been given a good run. I am very pleased with the way the debate has gone; I think we have learnt a lot from it, and so I have resisted that particular temptation.

I would just like to say to the noble Earl, Lord Halsbury, that I am acutely conscious that I did leave during his speech, which was rather shorter than I expected. This raises a difficulty in which the Opposition sometimes finds itself, because Government Ministers are able to send their private secretaries to Hansard to read their speeches but we have to do it ourselves. At some point or another one has to go and do that.

I should like to add my thanks and gratitude to the noble Lord, Lord Hatch of Lusby, for very properly widening the debate in his maiden speech, and for bringing us back to the humane values involved in this subject. We have debated them before and I do not apologise for not bringing them in this time; but he was quite right, particularly in a maiden speech, to refer to them.

I would add only one short point of my own to close the debate. I do not think that anything which the noble Lord, Lord Strabolgi, with his courtesy and friendliness, has said has really allayed my suspicions about BNOC. Indeed, I rather fear they have been strengthened a little bit. I will take the advice of the noble Lord, Lord Vaizey, and look very carefully at what the noble Lord the Minister has said, to see whether we can find more and greater areas of agreement between us. I am a little sceptical that we shall, but I agree with all noble Lords that it is desirable that we should. With those sentiments, I beg leave to withdraw my Motion for Papers.

Motion for Papers, by leave, withdrawn.