§ 4.8 p.m.
§ Lord Kings Norton rose to move, That this House takes note of the report of the European Communities Committee on Natural Gas (15th Report, 1981–82, H.L. 190).
§ The noble Lord said: My Lords, the report before the House stems from two communications received from the Commission. The earlier of these is a particularly useful document analysing the role of natural gas in the Community's energy supply. It points out the growing importance of imports of gas from outside the Community and discusses the difficulties which are consequently emerging. It particularly identifies the problem areas of security of supply and the prices paid to producers. This paper was considered by the Council of Energy Ministers in October 1981 and they asked the Commission to study the question further.
§ The first result of their further work is the second Commission document, in which possible ways of improving security of supply are discussed. They were, of course, studied in some detail in the inquiry conducted by Sub-Committee F of the Select Committee. The sub-committee includes a number of noble Lords with special knowledge of the problems of gas and oil production, and one of them, the noble Viscount, Lord Torrington, will be making his maiden speech this afternoon. Knowing as I do the contribution that he makes to the work of the sub-committee, I look forward with more than usual interest to what he has to say.
§ The inquiry was spread over six meetings in the first half of this year, during which written evidence was received from a number of organisations. Representatives of several of these, including the Department of Energy, British Gas, Shell, BP, Elf Aquitaine, and Phillips Petroleum, gave oral evidence. I believe that the resulting report is a straightforward document, and that in introducing it I need do little more than indicate its scope and conclusions.
§ About one quarter of the energy demands of the Community is supplied by natural gas. The Community is however very far from self-sufficient, and needs substantial imports. Two Community countries are at present more conveniently situated than the rest. One is the Netherlands, which can supply its own needs: the other is the United Kingdom. Of our energy demands, 22.8 per cent. is met by gas, and of this gas, 76½ per cent. is from indigenous production. The rest comes from the Norwegian share of the Frigg field.
§ In the United Kingdom, we have, in consequence, little need to worry about security of supply for some time to come. We have substantial reserves on the United Kingdom continental shelf, and the Norwegian reserves can reasonably be expected to remain a secure source. The problems lie in the longer term. What, for example, when natural gas reserves available to us begin to decline, is the right balance between pipeline imports, imports of liquefied natural gas, and the manufacture of substitute natural gas from oil or coal? And what should be our contribution to the security of supply to the Community as a whole? Those problems 243 are bound to come. The question that comprehends them all is, when? The answer to that is the size and accessibility of the reserves on the continental shelves of the United Kingdom and its firm friends.
§ The importance of accurate forecasting of reserves is therefore obvious. Most of the witnesses examined in our inquiry believed that the reserves lie in the range 40 to 60 trillion cubic feet, but the Phillips Petroleum witnesses gave a much higher estimate, in the region of 110 to 130 trillion cubic feet. The higher figures would, if correct, ensure United Kingdom gas supplies until about the year 2020. The lower figures, however, would mean that sufficient gas from our own sources and from Norwegian imports at about the present level would be unlikely to last us beyond the end of the century, which, from the viewpoint of making and implementing a secure policy, is not all that far away.
§ Considerations such as these, elaborated as they are in the report, lead to the first, and perhaps the most important, of the report's formal conclusions, which is that more precise knowledge about the extent of natural gas reserves is essential and can be obtained only by increased exploration drilling. Exploration drilling should, therefore, be encouraged.
§ The form that this encouragement might take is discussed in Part II of the report. The possibility of funding exploration drilling at national or Community level is canvassed. Another suggestion is that the United Kingdom Government might offer for licensing such new acreage as would assist in the evaluation of reserves. Another, summarised in our second conclusion, is that in awarding new licences the Government should give more weight to the contributions to improving knowledge of gas reserves made by drilling on existing licences. We conclude also that disincentives to "farm out" activity should be eliminated, and I hope that in his speech the noble Viscount, Lord Torrington, will discuss this somewhat technical point.
§ I mentioned a few minutes ago the possibility of the United Kingdom contributing to the European gas demand. This is discussed in Part III of the report, and while your Lordships' Committee counsels prudence, it believes that the United Kingdom Government should consider whether, and when, exports of natural gas to the Community would be justified. Obviously that conclusion, utterly dependent as it is on the forecasts of reserves and the progress of developments in substitute natural gas manufacture, introduces the notion of a cross-channel pipeline. Noble Lords will have gathered from the first paragraph of Part IV of the report that a mere cross-channel pipeline did not appear likely to attract finance from commercial, national, or Community funds, but from later paragraphs, that a more promising possibility is a Norway—United Kingdom cross-channel pipeline.
§ Here the basic idea is the connection of the large Norwegian gas fields via the United Kingdom and its fields to the continental gas grid. Certainly the Norwegian producers might prefer—they might prefer—to reach the continental grid by some other route, such as via Sweden, but the overland United Kingdom route is likely to be the cheapest. Your Lordships' Committee believes that it should be United Kingdom policy to encourage the construction 244 of such pipelines. It would be to the advantage of Norway commercially; it would be to the advantage of the United Kingdom in the long term when our own indigenous supplies are diminishing; it would be to the advantage of the Community, even when the present Soviet supplies are augmented by the Siberian pipeline, in that both available volume and security of supply would be increased. Indeed the encouragement of diversity of supply to the Community is one of the report's formal recommendations.
§ In Part V of the report the long term alternatives to United Kingdom indigenous natural gas supply are discussed. Witnesses generally agreed that pipeline imports should be the first option. An appropriate pipeline system could make available to us not only Norwegian gas, but supplies entering the continental grid from the USSR and Algeria. Beyond a critical distance, at present not accurately quantified, it is more economic to import liquefied natural gas in tankers than to pipe it. The other possibility, which I have already mentioned, is gas synthesised from oil or coal. At current prices this is certainly not economic but, with the vast coal reserves of the United Kingdom and West Germany, it is clearly a possibility always to be envisaged, and it is satisfactory to know that the European Commission supports research and development in SNG manufacture, and that the British Gas Corporation has a pilot SNG plant operating, financed partly by the EEC. With the long term future in mind, therefore, your Lordships' Committee recommends that both the Commission and Her Majesty's Government should regularly review the need for, and the timing of, LNG imports and SNG manufacture.
§ My Lords, I have nearly done. I have dealt briefly with all the conclusions of the report, except two. One of these is that the free play of market forces provides the best defence against unreasonable price demands. The other is concerned with gas storage. The Commission documents recommend the development of gas storage facilities as one insurance against interruption of supply. The British Gas Corporation already have storage for liquefied natural gas and salt cavity storage for natural gas. They are also developing the use of depleted gas reservoirs for storage. They view these arrangements, however, as an insurance against interruptions in supply, and as ways of meeting peak demand. They see no case for strategic storage. In this your Committee agree, and have reported accordingly.
§ My Lords, that is a brief review of the report on natural gas which is before the House. Your committee consider that it raises important issues of policy and principle, and we shall he interested to hear from the noble Lord, Lord Skelmersdale, the views of Her Majesty's Government. My Lords, I beg to move.
§ Lord Wynne-Jones
My Lords, before the noble Lord sits down, may I ask him whether the committee formed any opinion about converting natural gas into methanol in order to transport it, rather than to transport liquefied natural gas?
§ Lord Kings Norton
My Lords, I must confess to the noble Lord, Lord Wynne-Jones, that we did not consider that possibility, but it is one which, now he has mentioned it. I will bring before the committee.
Moved, That this House takes note of the report of 245 the European Communities Committee on Natural Gas (15th Report, 1981–82, H.L. 190).—(Lord Kings Norton.)
§ 4.22 p.m.
§ Lord Strabolgi
My Lords, we are grateful to the noble Lord, Lord Kings Norton, for initiating this debate, and I think it is appropriate, as I am sure the House will agree, that he should do so as the noble Lord is, as the House knows, the distinguished chairman of Sub-Committee F, which has produced this thorough and far-reaching report. I should like to congratulate him, if I may, on the clear and concise way in which he has introduced this complicated subject.
Of course, the subject is also an important one, as he has said, since, as the Commission's documents make clear, natural gas meets around a quarter of the Community's domestic, commercial and industrial market. The Commission recommends that in view of the rapid growth of imports from outside the Community, including imports from the USSR, future supplies should be secured, and indeed improved, by encouraging, in particular, more indigenous production in Community countries. The United Kingdom has, as we know, substantial reserves of natural gas on the United Kingdom continental shelf, and there are also substantial Netherlands and Norwegian reserves, as the noble Lord said.
As the report makes clear, the problem lies in the longer-term. When natural gas reserves begin to decline, there must be a balance struck between imports by pipeline, imports of liquefied natural gas and the development of substitute natural gas from coal and oil. One of the difficulties seems to be, as the report points out, that there is by no means full agreement on how long the United Kingdom's reserves are likely to last—and this was touched on by the noble Lord, Lord Kings Norton. The most pessimistic forecasts estimate until about the year 2000, while the more optimistic predict another 20 years on—until, say, 2020. The most optimistic prediction of all, from Phillips Petroleum, one of the leading oil companies, concludes that the United Kingdom's needs could be satisfied until the middle of the next century. The only way to prove which is right among these various "guesstimates" is surely to have more drillings of both exploration and appraisal wells. The report suggests various ways in which this can be done.
The committee has also proposed that more weight should be given in future, when awarding new licences, to the contribution made by drilling work on existing licences to any knowledge of the gas reserves in the area concerned. This, I think, is a very important point which I hope the noble Lord, Lord Skelmersdale, will be able to comment on when he comes to reply. I should like to ask the noble Lord also to tell the House when he replies how the Government propose to encourage more drilling, and whether they think that the recent legislation has had any effect, or whether the onerous tax regime is proving more of a disincentive. Can the noble Lord let the House have some idea of Government policy, if it exists, on long-term export commitments when knowledge of the extent of our reserves is so hazy and apparently dependent on a fog 246 of conjecture? Here, the committee comes down firmly on the side of prudence, against the advocates of free market forces. Will the Government tell the House where they stand?
The committee's report considers the possibility of a cross-channel pipeline to bring the gas from the large Norwegian reserves due to come on stream in the 1990s to the European continental grid via the United Kingdom. This, I think, is a very interesting point, which was also alluded to by the noble Lord, Lord Kings Norton. Some of this gas could be delivered en route to the United Kingdom's grid. It is thought that an overland United Kingdom route might be cheaper than the seabed alternative. The committee concludes that such a pipeline would be an advantage to this country and also to our Community partners, and that it would improve Europe's security of supply in general, as this surely can only be increased by such a diversification of sources. I hope the noble Lord, Lord Skelmersdale, will be able to tell the House what the Government think of this proposal.
Whatever the timespan for our reserves of natural gas, not even the wildest optimist would predict that these will last beyond the middle of the next century—a mere lifetime away for a 1980s child. Let us hope that one day substitute natural gas, SNG, which can be synthesised through coal and oil, will be available to meet some of our everyday energy needs. The European Commission support research and development in this field, and I believe the British Gas Corporation have a pilot plant in Scotland which is part of the EEC research programme. I should like to ask the noble Lord, Lord Skelmersdale, when the Government think that SNG will become commercially viable, and what are their long-term plans for large-scale production.
There are several other matters which I should have liked to allude to, but I think there is no time available. These would have been particularly liquefied natural gas, its import and storage; but I know that many other noble Lords have their names down to speak, and we are also looking forward to the maiden speech of the noble Viscount, Lord Torrington. In conclusion, therefore, may I say that we are grateful to the noble Lord for introducing this report, and I commend it to the House.
§ 4.29 p.m.
§ Lord Tanlaw
My Lords, I want to echo the remarks which have been made by the noble Lord, Lord Strabolgi, to the noble Lord, Lord Kings Norton. It has been a privilege to serve on his committee and to be part of this really excellent report. I think the staff who helped prepare it deserve considerable congratulation on the way it is presented and on the way it can be read. I think that the speeches will be extremely short, because virtually everything we should like to say has almost certainly been said rather better in the report which is before us. I should like also to say how much I am looking forward to the maiden speech of the noble Viscount, Lord Torrington, because he made some very high-quality contributions to the subcommittee, and I look forward particularly to hearing what he is going to say to us in this debate.
As the noble Lord, Lord Kings Norton, has said, the report raises a number of questions for which Her 247 Majesty's Government should have some answers, or at least they should be in a position to indicate, at the same time perhaps, the longer-term thinking of the Department of Energy and the right honourable Minister concerned. But, for me, there is one question which the evidence in the report answers, which is the so-called energy crisis of resources. So far as gas is concerned, for me it appears to be over.
We have much more time to work out our policy than was thought two or three years ago. I feel that it is very important that we use this time wisely to present policies, not only for this country but for the whole Community, in order that gas supplies remain stable as do their prices for the next 30 years. The sources of gas supply, whether they are to be found under the land or under the sea, whether they are liquefied natural gas or substitute natural gas, are there to a certain degree in abundance. The only question that remains is that of the price to the consumers. This, of course, in turn, must depend upon the cost of production and delivery. Therefore, if I may paraphrase, supply stability must equal price stability. That, to me, is what should be the objective not only of Her Majesty's Government but of the Governments of the EEC in their future thinking about gas and its position in the energy programmes.
The only problem with the EEC is that they have a different approach, in that they are mainly importers of natural gas, whereas we in this country are in the fortunate position of having our own reserves. Therefore, the EEC may approach the subject from a different angle: although, basically, I do not think so.
The problem of forecasting has been mentioned. If I may put it in gambling parlance, you either go for the low field or for the high field on the estimates that have so far been given. The only way that we can get nearer to the truth of the matter is by a rapidly increased programme of exploration—and the incentives put forward in the Oil and Gas Bill are perhaps a start. The question is whether they are going to activate further exploration at a level and a rate which can give us some of the answers upon which to formulate an energy policy for the future.
I should like to ask the noble Lord, Lord Skelmersdale, if he would ever consider incentives to smaller, independent owners of land actually to dig for gas—if that is the right expression—at a low level. This has proved a very successful policy in the United States; and it need not necessarily be very expensive for a riparian owner to conduct his own search for natural gas on his own property. This may be a wasteful and expensive matter for the individual concerned but I should like to ask whether Her Majesty's Government would consider at any time giving incentives for riparian owners to do their own research at their own cost.
To return to forecasting, if we reach the high-field option or if the indications show that the Phillips Petroleum estimates may be more correct and are deliverable, then I believe that there is a case for the United Kingdom to consider exports to the Community. If, on the other hand, the increased exploration indicates a low field, then perhaps we might have to reconsider the matter of exports. My own guess, for what it is worth, is that the figures 248 contained in the high-field estimate show that the high level table may prove more correct than the more cautious estimates. In that case, I think that a pipeline network in the United Kingdom, including a cross-Channel link to look after the transport of the gas from the large Norwegian fields, is something we on these Benches fully support.
There is one matter which has already been touched on briefly. It is the Siberian pipeline, which will prove to become the biggest single supplier in Europe apart from Norway. Again, if I may go hack to the paraphrase of supply stability equals price stability, the diversity and continuity of supply for the Community must be at the forefront of any energy policy for the Community itself. I think it has been embarrassing to those of us connected with the subject of energy to see the efforts the United States Government have made to dissuade manufacturers from taking any part in this programme, and its quite considerable efforts to block this project in the form of technology. It could also be a costly policy to the Community, if it was successful, in the sense that it would create unemployment and would also create difficulties for those American subsidiary companies operating in Europe.
I should like to ask the noble Lord, Lord Skelmersdale, if he can give reassurance on the Government's position here to those companies that have been involved with the supply of technical apparatus for this pipeline. I believe that there are legal problems connected with this, and I think that some clarification would be helpful—as much for the reassurance of employment in France and Scotland as for those companies which are directly connected with the supply of gas equipment. When all is said and done, gas is not a very complicated item to supply. This technology ban would only make it a more inefficient supply; it would not stop it. A number of Press reports have indicated that, if the Americans were to effect a proper embargo on this technology, then the Siberian gas pipeline deliveries would be unable to go ahead. I am informed that that is not so. They may not be able to produce gas as efficiently as they would with this special turbine equipment; but it would not stop it.
Again a matter of principle is involved here. I do not want to widen the question into foreign policy or to deal with Poland. It is a question of a fair price for gas for the future of all in Europe. I believe that the Siberian gas contribution (which will amount to 22 per cent. of the European uptake) will go a long way to stabilising gas prices for the citizens of the EEC. I do not think it is any business of the United States to interfere with this policy, for whatever reason they may give. I cannot see the logic of it either, in the sense that they appear quite happy to export grain, possibly to feed the workers who are actually building the Siberian pipeline itself.
I do not want to enter into the wider context of this, but it raises a matter of principle which I think that we in Europe could do without at the moment. We wish to maintain the friendly and harmonious relationship with the United States on which the whole security of the Western Alliance depends. I think that this has been a silly, misguided policy which is creating unnecessary misunderstanding and certainly a lot of doubt about the long term future of Scottish employment, as well as unnecessary frustration for those of us 249 who are trying to involve any government which is part of the Community in a sensible energy policy for Europe. I hope that the Government, without affecting in any way our friendly relationship with the United States, will make their position more firmly felt than they have done to date, in that perhaps this matter can be dropped and the Community can plan its gas supplies rather on the lines that have been suggested in this report, without any disturbance for political reasons from our allies.
§ 4.39 p.m.
§ Viscount Torrington
My Lords, I must thank the noble Lords, Lord Kings Norton and Lord Tanlaw, for their introductory remarks. I had thought to open by saving that natural gas seemed a very appropriate subject for a maiden speech; but I think that that perhaps would be to treat it with undue levity. The benefits of natural gas now reach into a vast number of homes and commercial enterprises throughout this country. If we are going to continue to enjoy those benefits beyond the year 2000, we must take a number of important decisions in the relatively near future. I must declare an interest in this subject in that, outside this House, I am a director of a small gas and exploration company.
As a number of speakers have already said, and I agree, the most interesting aspect of the report is the very wide diversity of views over the ultimately recoverable reserves of gas from the United Kingdom continental shell. As has been said, we will only ascertain the truth by drilling a very large number of exploration wells. In order that the industry can raise the capital to drill those wells two important aspects need to fall into place. The first is that the industry should he permitted to make the best possible use of the very small supply of prospective exploration acreage; and the second is that a market should exist so that when an explorer makes a discovery he knows that he may sell his gas.
The raw material of the exploration industry is of course the exploration acreage and I must welcome, obviously, the decision of the Government to award new licences in the southern gas basin in the forthcoming licensing round. But in many ways we must be more concerned as time goes on with what I call secondhand exploration acreage. A great deal of prospective exploration acreage is now held by companies who have fulfilled their initial drilling obligations and whose original geological concepts have been shot down. The companies at the end of a primary term of a licence have to give up half the area and they give up the least interesting area.
But, at the same time, they find it difficult to persuade their managements to make additional drilling expenditures. Waiting on the sidelines of course there are a number of companies with different geological concepts of a given piece of acreage and the funds to pursue their ideas. This is in effect the traditional basis for a farm out where he who has the acreage gets together with he who has the funds and the new idea and together they pool their interests and drill another well and possibly make another discovery.
However, it is my impression that the Department of Energy in the past has not welcomed farm out 250 arrangements, possibly because they have tended to put a value on acreage which was handed out by the Government originally effectively for free. At the same time, the Inland Revenue has in a number of cases endeavoured to recognise this value and seek to charge a capital gain on he who is farming out the acreage. I am not aware that they have successfully recouped any tax on this basis, but obviously it is a disincentive especially as in quite a large number of farm-outs no cash actually arises in anybody's hands with which to pay the tax.
Geologists are artists rather than scientists and the oil companies are their patrons. We must ensure that the very small supply of canvas is used to the maximum efficiency and that the bad pictures can be repainted. I certainly ask her Majesty's Government to consider easing and encouraging farm out activity.
The other important aspect that I mentioned was market, and a very prominent aspect of the market is price. I do not think that it is appropriate for me today to say very much about price except that the pricing policy of the British Gas Corporation during the latter half of the 70s resulted in virtually no exploration activity at all. I hope that we are now about to see a change in that situation.
As to the market itself, which is what will give the security to the explorer, the United Kingdom is a closed market. Gas may come into it but it may not get out. The domestic explorer is therefore faced with the situation that if he brings a discovery on stream he may be trying to sell gas into a saturated market, either saturated by other discoveries or saturated by an over-commitment to Norwegian or Algerian LNG imports. At the same time, the Norwegians have recently discovered a number of very large potential fields in the northern North Sea which will be slow and very expensive to develop. They have to take careful decisions. They appear to be faced by two markets: one, which is nearer, is the United Kingdom; but, as I said, it is a closed market and from the Norwegian point of view the problem is exactly the same as for a British producer.
The European market is probably insatiable, although rather further away. Unless we take certain steps to encourage the Norwegians, I think that the bulk of Norwegian gas will go to Europe; but this need not be so. As another noble Lord has already said, the United Kingdom is a logical route for a grand trunk gas line. If such a gas line existed with the cross channel link, the Norwegians would be able to sell into the United Kingdom without the fear that perhaps domestic preference for a major, indigenous discovery will squeeze them out. The United Kingdom producer will be able to develop his field, knowing that if the market is saturated he will merely displace Norwegian gas which will travel on to Europe or (dare I say it?) maybe his gas will be exported. What is perhaps most important of all is that the United Kingdom consumer will have the bulk of the supplies of gas available to Western Europe passing through his back yard. That must be a very valuable aspect.
This is not really a European Community matter; it is more a matter for Westen Europe and we might still be having this debate if the EEC did not exist. It must he to the benefit of the whole of Western Europe that Britain is encouraged to find and develop its gas reserves to the maximum—and this is so for 251 Norway—so that ultimately the large anticipated imports of gas from Eastern Europe remain merely a useful palliative and not an addictive drug to Western Europe. My Lords, I commend the report to you.
§ 4.47 p.m.
§ Lord Kearton
My Lords, it is my good fortune immediately to follow my noble friend Lord Torrington and to congratulate him on his superb maiden speech. He has demonstrated in this speech his very powerful analytical mind, his great knowledge of the industry and the extraordinarily constructive comments that he always has to make on very complex subjects. I was one of the many on Lord Kings Norton's Sub-Committee F who learned a great deal from my noble friend Lord Torrington. It is customary to say on these occasions that we all hope that the maiden speaker will speak much more frequently in future. This is certainly the case with my noble friend. In this House I have noticed, as a sometime attender, that either the very young or the very old speak best, and those of us in the middle do not speak too well. I think my noble friend Lord Torrington, although no longer in the very first flush of youth, is one of the younger speakers whom we would like to hear very much more.
It was a great privilege to sit on Sub-Committee F under the chairmanship of the noble Lord, Lord Kings Norton. It was an interesting investigation, we had excellent witnesses and the documentation of the report which, as has been said, was so well put together, will provide a source book for many years to come on natural gas matters.
It is said in the beginning of the report—this is in paragraph 7—that gas reserves hold the key to policy making. I think the range of gas reserves in the North Sea is perhaps even wider than has been already mentioned. The firm reserves, the reserves that people are absolutely sure about, are about 25 trillion cubic feet. In the upper range, the possibility, which was the one mentioned by Phillips Petroleum, is 130 tell So the ratio between what is certain and what might be is six to one and that is a very wide variability.
It was generally agreed by the oil companies and the Department of Energy that the probable and possible reserves will ultimately turn out to be from between 50 tcf and 60 tcf. But to determine this figure will require a great deal of additional drilling. I should like to put into perspective the figures of 25 tcf which are the firm, indigenous reserves on the United Kingdom part of the North Sea shelf. They are about 1½ per cent. of known world reserves. Similarly, if further drilling proves right at 50 tcf, it will still be about per cent. of the probable world reserves. So although natural gas is so important to us, it is really a very small fraction of world resources, and as a lot of the gas which exists is in countries which have no specific use for it, we obviously should consider importing some of our needs in future years.
Why do we not know what is in the North Sea? The obvious answer: not enough drilling. Why did we not have enough drilling? I think the basic reason is that the fields found early were very large indeed and the British Gas Corporation was able in the 1960s and early 1970s to enter into contracts which ensured its needs for some 15 years ahead.
252 British Gas concentrated on premium outlets and were able to develop those premium outlets because they were able to offer advantageous prices to the customer. British Gas did not want to establish great quantities of new reserves. They felt that if they did so the demand to use up those reserves by the producers who had spent their money on exploration would be to degrade the end use of natural gas. In other words, instead of being reserved for premium uses, the gas would start being burned under boilers. This is what happened with the Gruningen gas from Holland, and I frankly think that the policy of the British Gas Corporation turned out to be the correct one for the country.
British Gas was able to develop this market because of its extraordinarily good service, because its price was right and because it did a brilliant job all round. It did an excellent job on transforming all domestic appliances to use natural gas, and the way it put up the equipment to handle the gas coming ashore was very well done. The land distribution of the natural gas was a major enterprise, again extraordinarily well done, and I think that the whole way in which British Gas tackled this wonderful new benefit to the country is deserving of the highest praise and credit.
The low prices which British Gas offered, by which they were able to take the market from electricity and other energy forms even at lower purchase prices—and it must be remembered that some of them were very low—were freely entered into at the time by the producers, and this gave British Gas great cash resources. They used these progressively to write off all their obsolescent plant; they used it to pay off their debts and they invested heavily and wisely. As my noble friend Lord Torrington has said, British Gas perhaps got a little complacent about the strength of their position and in the mid-1970s were not very popular in the North Sea. At the time, if I might declare an interest, the British National Oil Corporation had a 50 per cent. share in the Viking Gasfield and I struggled very very hard indeed to get a rather better price from British Gas for the supply. I had to do it from BNOC because our partners, Conoco, were so intimidated by the British Gas Corporation that they did not like to do the arguing themselves.
The British Gas position, as sole monopoly buyer, was extremely strong. I might mention that the price British Gas were paying in 1975–76 was as low as 2p per therm, or even less. Since 1976–77 there have been progressive increases. British Gas has been more accommodating to adjusting southern North Sea prices. They have had to pay a higher price for Frigg gas and for gas from the Brent field; so we have seen this progressive increase in the last few years in the price paid by British Gas. In the last financial year it was up to 10.5p per therm, which is five times what they were paying a few years earlier—still very low, but more satisfactory.
All the indications now are that British Gas is having to adapt to a new position. It coped very well with very wide seasonal demands: the difference between peak demand and the low summer demand is a factor of about four. British Gas renegotiated many of its contracts for the southern North Sea to cope with this to ensure that there was no hitch in supplies. But by now their comfortable position is going. Those 253 original contracts are coming to an end, some of the southern gas fields are becoming exhausted and more than half the gas has already gone. It realises that it is going to need new gas, certainly in the second half of the 980s—some figures put it as near as 1985 and others in 1988. But in only a few years from now British Gas will want fresh gas and this has altered its outlook on the price it is prepared to offer.
As my noble friend Lord Torrington said, price is a very keen component in the whole exploration and development scene and the latest news is that for the associated gas from the North Alwyn field it is prepared to offer something like 22p per therm. The gas which British Gas was expecting from the North Sea spinal pipeline has not matured because the pipeline has not been proceeded with. Brent gas will be rather late and I think it has been rather below expectations in quantity. So we are going to have a change from the picture of a satisfied buyer with adequate gas and strong contracts into one of a buyer which needs extra gas; and all the indications are that the British Gas Corporation will be coming close to what is now the accepted price for new gas in Europe, whether it is from Algeria, Tunisia or Russia, of round about 25p per therm. So I think the anxieties of the producers and explorers, which were very real indeed for most of the 1970s, will now be a thing of the past.
It is essential that the Government take steps, as outlined in the report, to make sure that more exploration is done. If we are going to get the extra gas we need, not just for the 1990s but even for the second half of this decade, exploration must take place now and development must be put in hand very shortly. I think the idea that the new Oil and Gas (Enterprise) Act will greatly change the position of British Gas as a main buyer is not well founded. We did not find anyone in the witnesses from the oil companies who thought that being able to sell the gas directly to perhaps industrial consumers in this country would make any great difference. As my noble friend Lord Torrington said, selling into this closed market, the British Gas Corporation has an overwhelmingly dominant position. My own view is that with supplies of gas so uncertain this factor of six between what we know is there and what possibly might he there, and probably only a factor of two over what we know is there (and even that is dependent upon a great deal of exploration), does not really leave us with much room to export to the Continent, not if we are to safeguard our own position. If in fact some of the exploration produces major fields, then, as the report indicates, the Government could reconsider the position.
I have paid some compliments to British Gas, and I think rightly, because their contribution in making possible the development of the North Sea has been really quite amazing and they have finished up providing tremendous assets for the nation. At current prices, the British Gas balance sheet is about £10.5 billion. Their capital liabilities, which are normally regarded as equity capital, are under £400 million; and even offsetting the £400 million British Gas have £300 million on loan to the National Loan Fund. So to all intents and purposes this immense asset of £10.5 billion has been provided by British Gas by clever 254 commercial operations with no load on the taxpayer whatsoever. For the future I have fears that the Government will try to take too much out of the gas industry, as undoubtedly they are trying to take too much out of the oil industry at the present time. It seems reasonable, I suppose, when the Gas Corporation get into the position of lending the Government money that they should take the money from it directly: hence we have the gas levy, which was about £300 million last year and will probably be between £400 to £500 million in the current year.
However, when one looks at the figures of British Gas, one finds that their selling prices are now up to about 30p per therm, their buying price, plus the levy, is up to about 13p per therm and, if they have to pay—as they undoubtedly will have to pay—the going market European prices for the extra gas, which will be around 25p per therm, then the selling price for British gas, both to industry and to domestic consumers, will increase quite markedly over the next five or six years. It is most important that we do not get into a position where British industry is penalised by paying more for gas than its industrial competitors in Europe.
I think that the Government have fairly asked British Gas whether the operating costs, which in the last year's accounts are 16.5p per therm, can he reduced. But if they cannot he reduced, then any further loading of taxation or levy on the British Gas Corporation will make the position both of the domestic consumer and of the industrial consumer of this country very much worse. I think that we must do everything we can to encourage more gas production. Our taxation system is already too onerous on the producer, and we must not make the parallel mistake of making the taxation system too onerous on British Gas.
The report brings out that there is a great deal of natural gas in the world, and your Lordships will probably have gathered that I believe, as the report states, that British Gas should keep their options open when it comes to the importation of natural gas from other sources. It makes great sense to have this trunk pipeline from Norway, through the United Kingdom, across the Channel and into the Continent. We shall require a great deal of nursing to get this done. Our relationships with the Norwegians on previous negotiations have not been too happy. Maybe we were asking too much: maybe they got suspicious of us. But the fact remains that there are fences to mend there. Although there is a great deal of gas in Norwegian waters, it is not thought that it will be either very easy or cheap to extract and to get the full benefit of North Sea reserves in Norwegian waters passing through this country and on the Continent is going to take at least 10 years, as I think most experts would agree, and a great deal of money. Therefore, if we are to have our share in the 1990s we must get negotiations starting now.
With regard to substitute natural gas from coal, I think that this is for the very distant future. Even the evidence from the Coal Board put it in the decade 2000 to 2010, and even that is probably optimistic. When one thinks also that, to provide even half the present natural gas that we are using from the North Sea by substitute natural gas would take 40 million to 50 million tonnes of coal, it does not seem to be an 255 extremely sensible thing to base our future gas supplies on gasifying coal. It would be much better to scour the world to see what other supplies of natural gas we can import or, even more importantly, do everything possible, as outlined in the report, to get more exploration of the North Sea to make certain that our own reserves are established at a firm figure as soon as possible.
§ 5.3 p.m.
Lord Campbell of Croy
My Lords, I have had the privilege of being a member of the sub-committee which produced the draft of this report and I, too, should like to thank the noble Lord, Lord Kings Norton, for the admirable way in which he introduced it in this debate today. I declare an interest, as I have in the past, as having worked during the last seven years for an oil company which is the operator of one of the largest fields producing oil in the North Sea at present. I am very glad to be following the noble Lord, Lord Kearton, because I am well aware of the great achievements which he made as the first chairman of the BNOC, which was a partner in the consortium for the field which I have just described.
We have had the pleasure of listening to an outstanding maiden speech from my noble friend Lord Torrington and I congratulate him upon it. He can speak to us with great knowledge and experience from his position as a director of a company that is engaged in exploring for oil and gas. He said that geologists are artists, rather than scientists. He was certainly an artist today, with his brush painting the picture of farming out acreage in the North Sea. I know that we all look forward to hearing him many times in this House in the future.
Already speakers have pointed out that there is a very wide range in the estimates of the remaining gas in the United Kingdom's sector of the North Sea. If one takes the minimum figure which the Department of Energy puts forward, and compares that with the maximum which the Phillips Company puts forward, the difference is enormous. I think we all agree that we need more knowledge, not only in order to evolve a policy for natural gas for our country, and also for Europe, but because it is basic to an informed policy on energy as a whole for this country. The question is: What are the best methods of finding out more information about our reserves?
Hitherto, after the 1960s, there was little incentive for the companies to explore for gas; the gas had already been discovered in the basin off East Anglia. Companies were naturally attracted in the early 'seventies and onwards to finding oil further north, which led to the discovery and the development of the major oilfields east of Shetland. Those were, indeed, successful discoveries, because our self-sufficiency today depends to a great extent upon the oil flowing from those fields. But because the companies felt that it was not worth while or economic to find and produce more gas in those days, we have not gained as much knowledge, or as much gas, as we could have done.
Of course, associated gas has been produced with the oil in oilfields and that will, no doubt continue. The point about that is that, in most cases, the gas has to be produced at the same time as the oil, if one is to get the oil. It has been important to make sure that as 256 much gas as possible was saved, either by being used on the platforms for power, or by being pumped back into reserves in the sea, and not simply flared. Those operations will still be necessary, but new, deliberate searches for gas are now required. I believe that the Government are aiming to encourage this—certainly, their new legislation appears to have that as an objective—and, for various reasons, as the noble Lord, Lord Kearton, said, prices are likely in future more to reflect the costs of producing natural gas from the North Sea.
As regards the recommendations in the report, I should first like to turn to licensing. There are many factors to be considered when a Government are awarding licences to applicants. But I believe that the recommendation in the report should be taken very seriously; that is, examination of the extent to which companies have in the past gone out of their way to try to find gas. That mentions a past contribution, but I suggest that it should not be exclusive; after all, some companies have not had the opportunity to seek for gas in the past. So that recommendation should not be carried out in a kind of rough justice way. To some extent, it has been a matter of chance. So I should like to add a footnote to that recommendation, and say that Government should consider the general performance in the past of companies, and the likelihood in the future of their being able to add to knowledge, from the programmes which they are putting forward, of our reserves of natural gas. So it is also the contribution which can be made and is to be made by companies, as well as their past performance, which should be considered.
I now turn to taxation, which is mentioned in paragraph 10 of the report. As the noble Lord, Lord Kearton, indicated, the North Sea tax regime has become oppressive so far as oil is concerned and it is now. I believe, a deterrent to development plans. This is not the only factor which deters companies but it is one which the Government can control. Most of the other factors are not within their power.
Of course, it is not exploration that is as seriously affected by the tax régime as decisions on development. It can be pointed out that there are applicants who come forward, apparently eagerly, at succeeding rounds of licence awards, and that will no doubt continue. But it is the later development decisions which are very much more expensive and which indeed involve huge quantities of money. Exploration is expensive but it is small compared with the amounts of money involved when a field has been discovered and decisions have to be taken about development. The lead times for both oil and gas are very long. In order to ensure the supplies which the Government and the country will expect in the 1990s, decisions on the development of fields need to be taken in the near future and not delayed. The fields on which these decisions will be taken are, on average, going to be considerably smaller than the ones which have been found and developed in the past. Most of the large fields in the North Sea have been discovered.
Another point is that the supporting industries, especially the platform building companies, are finding themselves without work while development decisions are being delayed. They may dwindle, and later we might have to go to foreign suppliers because our own industries have declined.
257 As I have said, I do not expect the applications for exploration to be much affected by the oil tax régime. It is the very important development decisions concerning our future supplies to which I draw attention. I urge the Government to re-examine very seriously the effects of the North Sea tax régime with their eyes on the 1990s and the quantities of both gas and oil which we ought to be producing in those years. I am not suggesting that there should be massive expansion. I am simply considering self-sufficiency in those years. But decisions will need to be taken now in order to ensure supplies.
I come to the pipeline which has been suggested in the report: a pipeline for gas from the Norwegian sector to the United Kingdom and then another pipeline, which would be part of the scheme, from Britain to the Continent. It looks as though this scheme will be needed. It will provide flexibility of supplies and it will enable the price mechanism to operate. As other speakers have pointed out, this seemed to the Committee to be desirable and necessary in the future, but it will take some years to bring to fruition. It seems that recently gas pipelines have been bedevilled with difficulties. I refer to the gas gathering line which eventually did not come about and also to the Siberian pipeline. But in this case I suggest that the pipeline must be so clearly advantageous to all concerned that there should be no difficulty about the financing of it, whether from private sources or public, or a combination of both. Those decisions, however, must clearly be taken before the pipeline scheme is embarked upon. As regards this pipeline, I do not think there would he any difficulties about the strategic side.
With those comments, adding to the recommendations of the report which I fully support, again I should like to congratulate the noble Lord, Lord Kings Norton, on introducing this debate.
§ 5.14 p.m.
§ Lord Davies of Leek
My Lords, from this side of the House, I should like to join in congratulating the noble Viscount, Lord Torrington, upon his informed speech. I hope that we shall have many more opportunities of listening to him. I should also like to congratulate the noble Lord, Lord Kings Norton, and his expert team upon this splendid report which I have read, including that part where the noble Lord, Lord Kearton, expressed his doubts about the marginal development of gas from coal.
I shall not detain the House for very long, because there are speakers yet to be heard with much more expertise than I have. However, I have a number of points to make. What has to be remembered is that the onshore infrastructure for the supply of gas from our indigenous offshore supplies was completed—and suprised us all—in the mid 1970s. It was a massive job, and it has proved effective. It proved so reliable that the demand for gas from industry as well as from domestic users almost outstripped supply. This was because of the excellent pipeline communications. To meet this demand the industry planned to increase capital spending from £300 million per annum in the current year, to about £400 million in 1983. It would be absolutely foolish of the Government to cut down 258 on that capital development. I am not going to discuss whether private or public enterprise should be involved. However, if Britain is to be less moribund than it is at the moment, it is vitally important that our sources of energy should be co-ordinated.
This gas industry—it is God's gift to us, together with oil—is not being exploited and organised as it should be. Lack of capacity to meet today's demand for gas has placed a restraint on the industry's freedom to set prices. This is a political area. There must be a reasonable price, whether it be public or private enterprise. A private entrepreneur must get his price per therm for the gas which will allow for development. We want reasonable exploration and a reasonable rate of profit for those who are courageous enough to enter this difficult area. As I have already said, the demand for gas has placed a restraint upon the industry's freedom to set prices. The public do not seem to be aware, although I believe that it was the noble Lord, Lord Kearton, who mentioned it in his speech that the Gas Council did a magnificent job. They capitalised the expenditure programme with no recourse to national funds. This was an achievement in itself, proving that public enterprise has done a good job.
Let me turn to Cmnd. 1978/7049 and Cmnd. 1979/7439. Without boring the House with the details, what do we find? In 1978–79 there was a drop in the estimates of capital expenditure by 50, in the following year by 149, and in the next year by 188. Then it crept up a little to 100 in 1981–82, because there was supposed to he a re-phasing of major transmission projects. The steel industry is of paramount importance to the gas industry, because it will supply the pipelines. What is the good of discovering gas in Morecambe Bay and the Irish Sea unless one can guarantee that British Steel will provide the pipes? We should not forget that President Reagan threatened not to provide steel for the transmission of gas from Siberia. We do not want to be in the hands of a Reagan or anybody else.
We want our British steel industry to be kept alive, and if this Goverment had courage they would take the opportunity now of seeing that South Wales and other steel areas get cracking on producing. Once you lose good steel labour it is like losing miners, and the young ones will not come into it. Not any Tom, Dick or Harry can cut coal at the face; it is nothing like a factory. Once you lose these men and their strength (and, God forbid, they are good for Rugby only until they are 25, and then they are finished, with pneumoconiosis) it is very difficult to get the training undertaken for coal cutting. It is exactly the same in the steel industry. Although we are discussing gas, we are also discussing gas pipelines for communication, and the Government must be alerted to this point.
Domestic, industrial and commercial consumers need as much energy as we can get. This Government's job—because they now have the job of running the country and I do not want to make any party politics out of this—is to get down to co-ordinating energy supplies. Do not let us forget that ruthless competition could be a drag on the co-ordination of energy supplies; competition, yes—but do not let us get ruthless about it.
Finally I should like to ask what progress is being made with the Morecambe Bay sites in the Irish Sea.
259 We have heard very little about this although it is in the report. Will the Government act on the expertise which has been presented by the assiduous progress of the noble Lords who sat for weeks to produce this report? Something should be done with this report. One other point; it is important to develop new resources and technology. I remember that on a visit to China I learned that the Chinese were trying fluidised combustion, which they had just heard about, and the liquefaction of coal. I am not qualified enough to get an in-depth argument going on that point but, from my reading and discussions, a coal-based natural gas is now already beyond the experimental stage. I do not know whether the noble Lord, Lord Kearton, who is well informed, thinks that this is so far beyond the experimental stage that it is nevertheless worth dealing with that side of producing gas.
My final point—and it is not a crack at the noble Lord the chairman—is that I have here a little book of initials and what they mean. I paid a lot of money for it. It states:This is a guide to initials, acronyms and abbreviations designed to soothe the temper of everyone who suffers from the current worldwide initial mania".In the name of the Lord above, I was on a committee to which I suggested that on the first page of its report we put a list of the abbreviations so that when Lord Davies of Leek looked at SNG or ABC and has forgotten from three pages previous what those initials stood for, he could turn to the list and find the meaning. That is a bit of a jocular remark but to a student of these problems and to men who are busy, it would be time-saving and good for the English language.
§ 5.24 p.m.
§ The Earl of Lauderdale
My Lords, I wonder if I shall ever listen to a speech by the noble Lord, Lord Davies of Leek, when he does not refer to acronyms. Of course, one starts one's contribution to this debate by joining with other noble Lords in their accolades to the maiden speech of my noble friend Lord Torrington. It was a very well-informed speech: clear, precise, instructive. It so happens that we got him interested in the sub-committee as a result of my meeting with him at a dinner, when I asked him, "Why not come and test the temperature and see how you like it for one morning a week, with two or three hours' reading a week?" He came and we on Sub-Committee F were all enchanted and instructed by his contributions. He has now gone a stage further and taken the temperature of the House itself. This is clearly welcome to us all and there is no doubt of the sincerity of successive speakers' conventional assurances that they look forward to hearing him again.
I should disclose an interest in that I too am connected with a company that gave evidence to the committee. But nothing I have to say now has come out of my office nor from any kind of briefing they have given me. I always feel overwhelmed in these energy debates by the expertise of those who have gone before and those who threaten to come after. One is comforted by sitting for week after week under the distinguished and genial chairmanship of the noble Lord, Lord Kings Norton, and in company which is always stimulating.
260 Most of the things I wanted to say have been said already but, to abbreviate a little, the short point of our report is that both Britain and the EEC will need a lot more gas than they at present know where to find—and it will certainly he needed if the famous upturn in the economy ever comes about. In our consumption in this country of about 50 billion cubic metres per year, we have to import one-third from Norway. The EEC, consuming five or six times as much as Britain, will face a yearly shortfall greater by about half than our total annual consumption—and that even when they have supplies from the Soviet Union. As has already been said, the difficulty is that nobody really knows where further gas is to be found nor indeed whether the Phillips estimates make sense or not.
The first question that arises is, what about the gas in the Norwegian sector south of the 62nd parallel? There are not less than 500 billion cubic metres there and north of the 62nd parallel there may be anything up to 3,000 billion cubic metres, although the safe guess is about half that. It will he difficult to get—costly in deep water and stormy seas and, moreover, there is oil beneath the gas which the Norwegians will naturally want to take out first. There are two big Norwegian fields in production now, Frigg and Ekofisk, and shortly there will be gas from Statfjord and Sleipner for which it is worth bearing in mind that BGC are now in sharp competition with European consumers to obtain an adequate share. The bargaining is, of course, about price.
How does one discover more gas? The answer revolves around gas price on the one hand and fiscal disincentives on the other. We know that as a monopoly BGC did pretty good business for itself and paid chickenfeed for the gas supplies available from the British side of the continental shelf. Then they had to go to Norway and pay a great deal more, as the noble Lord, Lord Kearton, has reminded us. Until the Government agree in principle to the export of gas found on the British side of the shelf there will be no free market such as was adumbrated in the recent legislation. Until that happens the price of gas cannot rise to its natural level and therefore provide the price incentive for exploration and development that is needed.
Although the Government are now inviting applications for new exploration licences—and in the Southern gas basin in particular—this is no guarantee that gas will be found. Nor is it any guarantee that if gas is found, those who find it will feel it is worth while developing it. As the noble Lord, Lord Campbell of Croy, pointed out, there is a big difference between the cost of exploration with a wildcat well and the actual development of a field. One is going to cost up to £50 million or so, but a field may cost more than £1,000 million. No wonder companies are hesitant about going for the development of a field even when they know pretty well what is there.
The Government are busy putting out—I call it propaganda—information from the press department of the Department of Energy that things are going very well, that no fewer than three big field developments are under way now or in early prospect. Well, at least two of them—and I speak with knowledge of one—could have been under way 18 months ago but for the extraordinary and almighty confusion which 261 subsisted in the Department of Energy focussing on the gas gathering pipeline. If ever a department has missed the bus I am afraid that is true of the Department of Energy. It reminds me of Rossini's words:Look in my face. My name is 'might have been'; I am also called 'no more', 'too late', 'farewell'.Of course, but for the violent fiscal disincentives to which the Government continue to be deaf and blind (despite arguments for months all over the country from economists, from businessmen, from oilmen, from gasmen, from investors)—I say, but for those disincentives, to which the Government are blind and deaf, there are certainly smaller fields which could now be on the way to development.
We read in today's paper that the United Kingdom Offshore Operators' Association are still deadlocked in their talks with the Treasury: those talks have been going on half the year. One can imagine the sort of wisecracks that these weary people must toss at one another: if we are to continue advance PRT, "give me today and take tomorrow". One pictures the exhausted negotiating team emerging from their long talks with the Treasury and the Inland Revenue wringing their hands and saying, "no use planting boiled potatoes; no use pumping a dry well".
As to getting the gas ashore, the scheme for what has been called a gas land-bridge pipeline has already been well spoken of in this debate, and it is a particularly important recommendation in the Committee's report. But one or two points about it have not yet been made. Such a pipe ought to cheapen the transport of Norwegian gas from the northern areas of Norway down to continental Europe. Secondly, it ought to enable the British Gas Corporation, as a result, to offer a more competitive price to the Norwegians when the time comes. Finally, it should eventually facilitate the inward movement of Algerian gas from across the Continent.
But there has been no sign, overtly at any rate, that the Government are much interested in this idea—rather the contrary. The word that one gets in talking to people in Whitehall is that if this or that private enterprise company cared to launch the idea and put up the money, HMG would not stand in their way—not much at any rate—and might even allow a tax concession here and there to help it on. This was the trouble about the ill-fated gas-gathering pipeline scheme. Private enterprise was expected to fund this public utility, earning a return at public utility rates without a Government guarantee. Without a Government guarantee there never can be a public utility of this sort funded by private enterprise, so far as I can see. In all these matters I am reminded of a useful phrase which appeared in yesterday's London Times:In the administration of inertia, Britain has led the world".These energy debates always produce interesting questions, and I believe there would be more energy debates and certainly more energy questions at Question time if we had the good fortune to have the noble Lord who is going to reply as in fact a Minister of the department concerned. This is no criticism of him at all. We know him, we like him, he is assiduous in his studies, he never misses an opportunity of trying to learn more about energy, he has a bright and sharp 262 intellect and a ready wit as well. But he is not a Minister of the department, and because of that I am afraid we have to expect—I say it in the nicest possible way; I hope he will treat me as a friend afterwards—little more than a dose of passionate apathy. We could wish that the apathy, when it does come, would be a hit more authoritative.
There are more than 80 Ministers in the Government but not more than a dozen in this House. This is an opportunity to say, once again in the nicest possible way as I always do, that if the Prime Minister does not take the House of Lords more seriously and substantiate the familiar lipservice which is paid to a bicameral legislature, then the Government are likely to face more defeats in this House than they have had already. This is said in the most gentle and friendly way to my colleagues on the Front Bench, and I do not want to labour the point unduly and spoil the moderate temperature of this debate. But of course a dose of indignation does do one good.
§ 5.36 p.m.
§ Lord Hinton of Bankside
My Lords, I must immediately apologise for the fact that I was not able to be in the House when the debate was opened. I shall certainly read the speeches that were given then, and particularly I shall read with interest the maiden speech of the noble Viscount, Lord Torrington.
When I try to study the problems of supply and demand in the gas and oil energies I always feel like a rookie who, somehow or other, has managed to get himself into a poker school where all the other players are professionals. The energy correspondent of the Financial Times, when he was writing last August about the Siberian pipeline gas supply project, said:Bluff hard and play your cards close to your chest. These are the tactics currently being employed.It seems to me to be obvious—and the noble Lord, Lord Campbell of Croy as well as the noble Earl, Lord Lauderdale, have underlined the fact that it is obvious—that sooner or later western Europe will need to import gas. It seems to me that that is likely to be sooner rather than later.
But there seems to be a wide difference of opinion about when additional supplies from outside Western Europe are going to be needed. In July of this year The Times correspondent said that Europe badly needs the 40,000 million cubic metres of gas that the Soviet pipeline can supply, but only three months before that Peter Odell had said:I do not think 1982 will be out before Westen Europe as a whole does not need Russian gas".As World Gas pointed out, Peter Odell was "never one to avoid controversy", and in the past he has made forecasts which were so widely different from those made by other experts that they were thought of as being derisory. I was among those who did think of them in that way. But a few months ago I was examining some of my old files and I came across letters and papers which Professor Odell had written in 1967, and I found that time has shown that the forecasts which he made in those papers were nearer the mark than the forecasts that were fashionable at that time.
Professor Odell's present prediction is for the end of this year, and I very much doubt whether he intends it to be taken as a long term forecast. Even in the short 263 term he may be thinking only about supplies from Russia through the proposed new pipelines and not of the very considerable quantities of gas that reach Western Europe through existing pipelines. As the Committee's report points out, there is little unanimity even among the major oil companies about the size of the United Kingdom reserves of gas. Most of those companies gave figures of between 1.1 trillion and 1.7 trillion cubic metres, but the Phillips Petroleum Company, as the noble Lord, Lord Campbell, pointed out, gave a very much larger estimate of about 3.4 trillion cubic metres. Your Lordships' sub-committee was not able to obtain a logical explanation of this major difference and we were left having to accept it simply as a "gut reaction" to the evidence that was available.
An article which was published in the Westminster Bank quarterly review in August of this year gives the probable reserves in the Community of Ten as 4.2 trillion metre cubes, with a life of 25 years. Their figure of 4.2 trillion cubic metres compares with the Brussels figure of 3.2 trillion for the EEC. The consumption of gas is given by the EEC as 0.167 trillion cubic metres per year, but, of that, 25 per cent. is imported. Those imports are mainly of piped gas which came in from the USSR, the Middle East and North Africa—countries which between them contain some 70 per cent. of the world's natural gas reserves.
I think that those figures give a picture of the Community's present dependence on imported gas which is surprising to those of us who are not professionally engaged in the gas industry. When one realises that already a quarter of the gas that is used in the Community reaches us through pipelines which cross international frontiers, a man who is as politically naive as I am is inclined to wonder why the proposals for additional pipelines from Siberia which extend into France have caused as much friction as they have done.
The production of indigenous gas within the EEC is likely to rise only slightly, if at all, above its present level and increased demand can only be met by imports of gas or by gasification of coal. Gasification of coal is not at present attractive. It is expensive and I have been unable to find any process which claims an efficiency of more than 70 per cent. for the coal conversion processes. Moreover, indigenous reserves of coal are limited within the EEC and they are, in effect, restricted to Germany and Britain, where supplies may meet further restriction by labour and by environmental limitations.
It is likely that any coal for conversion would in the long run have to be imported into the Community, so that even when economical processes for the manufacture of SNG—perhaps I should say "substitute natural gas," in the light of what the noble Lord, Lord Davies of Leek, said—have been developed.
The raw materials of supply would have to cross frontiers, or more probably cross oceans, and they would not be immune from interruption. The alternative of importing natural gas by pipeline with cryogenic transport is difficult. Your Committee was told that this was cheaper than the conveyance by pipeline for distances of more than 3,000 to 4,000 miles, but it is quite certainly not proof against 264 interruption. Moreover, it may be difficult to find sites for terminal facilities. My own reluctance to live on the doorstep of a liquid methane terminal may arise from ignorance, just as the widespread reluctance to have nuclear power plants as neighbours arises from lack of familiarity with them, but in both cases the restrictions must be recognised.
It seems to me that for many years to come the Community must rely, as it does now but to a far increasing extent on imports by pipeline and that whatever its origin the gas or the raw materials from which it is made are hound to cross the frontiers of some countries with which our relationships are not always cordial. If I take a relaxed view about possible hazards arising from this it may be because, having been in the electricity supply industry. I know how often supplies of electricity have continued to flow between countries which, to say the least of it, have had no friendly relationships with one another.
It is true that gas pipelines may be more vulnerable than electricity supply lines, but if gas has to be imported into the Community by pipeline—and commercial considerations seem to demand that there should be such imports—I suggest that this is a reason why there should be many pipelines from many sources bringing gas in. As the article in the National Westminster Bank review points out, price as well as reliability of supply emphasise the dangers of overdependence on a limited number of sources of supply. As availability and demand for natural gas have grown, many countries have built and are extending distribution grids in which flow can be in either direction so as to give greater security of supply. Although these national gas grids have been built, little if any thought seems to have been given to the desirability of an international gas transmission grid.
Now that additional pipelines are being built across frontiers, one wonders if they could be routed so that they could ultimately form a real international gas network instead of following discrete paths. It would, for instance, be possible to bring one of the Siberian pipelines through Finland to a point in Sweden, perhaps south of Stockholm, where it could join up with pipelines from Norway and run from there to cross through Denmark to Germany, having linked up with a line from the west coast of Norway and our own North Sea continental shelf gas. That line might run southwards through Britain to cross the Channel into France, and the ring could be completed by a pipeline from the Gulf States which could pass through Turkey and link up with lines running southward from Siberia through the Moscow area; interlinking rings could pick up gas from the North African countries.
I obviously am not trying, nor if I tried should I be able, to design such a system; I am doing no more than to suggest it as a possibility. If that possibility has a basis of realism I am not so unrealistic as to imagine that the construction work on a complete system could be started now; I merely suggest that the skeleton of such a scheme could he prepared and that, as the need grew, each succeeding pipeline could be so designed and routed as to conform with the ultimate plan. This plan would obviously have to be prepared in collaboration between the countries concerned but, in so far as the Common Market countries are concerned, the responsibility might be placed with the EEC which 265 could organise collaboration across frontiers in a way that could hardly be arranged by any one of its individual members.
It can, of course, be argued that the fundamental weakness of the idea is that gas supplies might be exhausted before the network is complete. We do not know what reserves and resources of gas are available, but the USSR is at present negotiating its contracts to run for 25 years. If they do not have very large resources it is hard to understand why they are using gas to supply 40 per cent. of their boiler fuel (a most wasteful use of a premium fuel); why (according to the Financial Times) gas supplies 90 per cent. of the fuel that the Russians use in their iron and steel industry; and why 60 per cent. of the fuel used in their cement manufacture is gas. If they are wise in using gas in this way, it suggests that they must have immense reserves. In the longer term, we should remember that the gas network could be used for distributing gas brought in cryogenically from further afield and for distributing gas which is made from coal, as will ultimately be necessary. I suggest that at least the possibility of such a grid system is one that should not be discarded without thought.
§ 5.54 p.m.
§ The Duke of Portland
My Lords, I should like to congratulate the noble Viscount, Lord Torrington, on his admirable maiden speech to which I listened, I must admit, with a measure of envy remembering my own effort some 18 months ago. I can do little but echo all that my noble friend Lord Lauderdale has said with humorous emphasis and deep knowledge of the subject.
As is shown in the committee's report, exploration has been inhibited by the low prices offered by the British Gas Corporation for gas from the United Kingdom sector. Consequently, we do not really know what the resources of that sector may be. Competition from members of the European Economic Community has forced the British Gas Corporation to offer higher prices for Norwegian gas than they are prepared to offer for gas from the United Kingdom sector. Nevertheless, the British Gas Corporation have been recently outbid in their efforts to purchase gas from the Norwegian sector and most of this gas will now go to Emden.
As my noble friend Lord Lauderdale has said, negotiations are taking place for gas from the Norwegian Sleipner field, which contains, I understand, as much gas as the Frigg Field, perhaps more. It is well known that the British Gas Corporation are making a very determined effort to obtain this gas. If they fail, they are likely to be short of gas by the end of the present decade, or at any rate in the early 'nineties.
It is said that Her Majesty's Government are trying to remedy this situation in the eighth licensing round by licensing areas of the southern North Sea, but this would only succeed if the British Gas Corporation are prepared to offer good prices. The measures taken by Her Majesty's Government to permit direct sales of gas to United Kingdom companies are unlikely to have much effect and could well be frustrated by tariffs inposed by the British Gas Corporation for the transport of this gas. In those circumstances the most 266 effective step which can be taken is to allow sales of gas from the United Kingdom sector to be made freely throughout the European Economic Community. That would stimulate both exploration and development; it would not diminish Government revenues since tax is based on sales price, and overseas earnings would be increased. Moreover, it would help to dispel the illusion that we are not good Europeans. I am well aware that the United Kingdom reserves are limited—we do not know to what extent—and it could he argued that these should be preseved for United Kingdom use. But in the present circumstances and in our present plight, it is surely to the immediate benefit of industry in the United Kingdom that the gas deposits should be developed now rather than hoarded for the distant future.
§ 5.57 p.m.
The Earl of Bessborough
My Lords, I am delighted to follow my noble friend the Duke of Portland because he always gives us very briefly a very wise message. I am, of course, also delighted to support the noble Lord, Lord Kings Norton, in his Motion drawing attention to this report, and to have the opportunity of congratulating my noble friend Lord Torrington on his admirable maiden speech. It looks as though he has left the Chamber for the moment, but I must none the less pay my tribute to his work on Sub-Committee F. Why he has not taken part in our energy debates in this House previously, I fail to understand for he is perhaps as qualified as man), of us, if not more so, to speak on this subject. I hope that he will indeed address us again frequently, especially on energy questions.
We have indeed had some interesting meetings in Sub-Committee F, discussing this subject with the various witnesses listed in paragraph 4 of the report. I need hardly add that I warmly endorse the conclusions, markedly brief and to the point—exceptionally brief and to the point—that are given in paragraph 32. Most of the points that I should like to make have already been made, but I think that I should repeat as others have done that there should be increased exploration drilling, and certainly in my view the Government should give more weight to the contribution made by drilling on existing licences to improve our knowledge of gas reserves.
I agree, too, that the Government should consider whether and when exports of natural gas to continental member states of the Community would be justified. In that connection—and, incidentally, having visited that part of the Frigg Field which falls within the Norwegian sector—I think it most important that Her Majesty's Government in the United Kingdom should encourage construction of the so-called "gas land-bridge"; that is to say, the Norway-United Kingdom cross-channel pipeline.
In advocating this I would not consider this pipeline as taking the place of the proposed Soviet pipeline. There must, as the noble Lord, Lord Kings Norton, said, and as many other noble Lords have said—and I listened particularly carefully to what the noble Lord, Lord Hinton, has just said about a Eurogrid network—be a diversity of supply to the European Community. I feel certain that the Norway-United Kingdom cross-channel line would be of' great value, 267 especially to continental member states of the Community, and especially in the event of any interruption of supplies from Siberia.
I would like to add here (although it was not, I think, a matter specifically raised during the deliberations in Sub-Committee F) that I strongly support the Government's attitude, as I am sure do other noble Lords—and indeed the attitude of other member states in the Community—in authorising the export of turbines and other equipment needed by the Soviet Union to complete the Siberian pipeline as soon as possible. I feel sure that if we do not supply the turbines the USSR will be capable of manufacturing them themselves. Moreover, I completely fail to understand the United States' Government's attitude in this matter considering the quantity of grain that they are supplying to the USSR.
I trust that the hopeful signs which were mentioned by my right honourable friend the Foreign Secretary in another place yesterday, that agreement could he reached which may result in a lifting of the American pipeline sanctions, will be translated into fact, and that all members of your Lordships' House will urge the United States Government to reverse their policy in this respect. I wonder whether my noble friend Lord Skelmersdale may be able to add this evening to what my right honourable friend said yesterday on this matter.
On a semi-personal note (and I hope that late in the debate your Lordships will permit me this personal note) I well recall how my great-grandmother, a distinguished Welsh lady—her name was Lady Charlotte Guest of Guest Keen—when she was managing the ironworks at Dowlais, in the latter part of the 19th century, supplied all the rails for the construction of the Trans-Siberian railway. She negotiated personally with the Czar. There were some who criticised this because there were many who criticised some of the policies of the Czarist regime.
Nor do we now approve the present policies of the Soviet Union in their own country, Poland, or in their invasion or penetration of Afghanistan, Africa and, indeed, in other parts of the world. However, most sensible people in this country in the 19th century thoroughly approved of our helping to build the Trans-Siberian railway and considered it a great tribute to British industry, and especially to those working at Dowlais, which the noble Lord, Lord Davies, knows so well, who played such an important part in its building.
I think, too, now that we should take this opportunity of congratulating John Brown on having contracted—and I emphasise the word "contracted"—to supply turbines for the Siberian pipeline. I would indeed congratulate the other firms in France, Germany and Italy for being capable of making their own contribution to the laying of this pipeline. This is indeed a notable achievement in West European technological and industrial co-operation.
In respect of our other conclusions, I hope that noble Lords will read the report in its entirety and also glance through the transcripts of the evidence from our witnesses, and perhaps especially that given by Mr. Robert Belgrave, on pages 91 to 97. There are a great many points that I would like to underline in regard to the evidence given by our witnesses, but in this 268 relatively brief speech I would particularly draw attention to Mr. Belgrave's remarks regarding relations between the British Gas Corporation and the Norwegians. While supporting what the noble Lord, Lord Kearton, said of the British Gas Corporation's remarkable achievements, like him I regret that British-Norwegian relations have not been altogether happy and that Norwegians involved in the negotiations are said to have been distinctly cool towards our own gas corporation. It is in my view unfortunate that a senior executive of a Norwegian company could have been led to say that we, the British, missed a chance last year, but that there might be a second chance as a result of the new discovery. We must not miss that second chance, and it looks as though we shall not do so. I think that we were glad to learn from Mr. Belgrave that he did not think that there was any underlying hostility in Norway towards us, and I felt that he was right in saying that the Norwegians were merely fed up with our method of negotiation. I certainly hope that that will change.
I think that one of the conclusions of our committee is that the European Commission—and, as your Lordships know we are particularly concerned with their proposals—and our own Government will regularly review the need for and the timing of liquid natural gas imports and also synthetic natural gas manufacture, and that regular reviews on the subject will be published. Incidentally, I was very glad—as obviously my noble friend Lord Lauderdale must have been—to read over the weekend that Total and Elf Aquitaine, the French oil companies, have submitted development plans for the £12 million North Alwyn oil and gas field and that the Department of Energy hopes to give the go-ahead for these plans well before Christmas. Again, I hope that my noble friend Lord Skelmersdale will confirm that this is indeed the Government's intention. My Lords, I warmly endorse what the noble Lord, Lord Kings Norton, and other noble Lords have said, and also the conclusions of the report.
§ 6.8 p.m.
§ Lord Briginshaw
My Lords, I sincerely wish to associate myself with the congratulations extended to the noble Viscount, Lord Torrington, on his able maiden speech and, with so many other noble Lords, I look forward to hearing him address this House again. In my view, the report before us fully warrants the serious attention that previous speakers have given it. It justifies the time and expertise that the committee has given to it throughout and, together with the noble Earl, Lord Bessborough, I commend detailed attention to the whole of the report.
At this time, after a comprehensive discussion of the character that has taken place, I propose to rationalise my contribution. As I have indicated, I associate myself with the appreciations to the noble Lord, Lord Kings Norton, for initiating the discussion on the report before the House. I think he had the advantage of a concise presentation, which appeals to me in particular. He was not at any stage talking for the sake of talking. It was a presentation that was apposite to the report itself.
I would accept the general direction set out in the report on the export of gas resources, in particular by the submissions of the Department of Energy. I do not 269 accept that a flexible tax régime should not be equated with definite obligations. I appeal, and I think join others who in varying phraseology have appealed for flexibility. The obligation on the operators is the key question, and is one of control, and that clearly remains with the state, which in my view expresses the national interest at this time.
The obligations are set out and restated in paragraph 14 and in Parts II and III on gas exports, and I understand those finally to contest the Phillips contention, which has been mentioned in this discussion. I suggest that that is a proper contest because I do not see the basis for it, even with all the expertise that has been presented to us.
I see no advantage in weakening our security referred to in paragraph 16 in Part IV. Surely the alternatives set out in paragraphs 16 and 17 move in the right direction. Paragraphs 19, 20 and 21 of Part V are long-term alternatives which have been the centre of the last part of the discussion here on alternative supplies for the United Kingdom. These are set out in precise form in a few words, which again appeals to me. Paragraph 20 sums up much of our discussion and presentation.
Imports by pipeline would need least in the way of new facilities and would pose fewest environmental hazards. Witnesses generally—and this gives us a wide sweep when one studies the report—agreed that the pipeline import should be the first option.Norwegian gas is an obvious source. A cross-Channel link, if suitably designed, would permit access to supplies entering the European grid, including gas from the Soviet Union and Algeria".It says so much in such a little space, but it is consistent with the whole of the discussion.
In saying that at this time of the discussion, and with a thin House, I think it is sensible to rationalise the presentation, and I find the summing up in the report itself another shortened version of a logical and sensible presentation to the House at this time. May I, without wearying your Lordships, go through it, because I am sure that I should save so much time in rationalisation if I could take advantage of an easy presentation, which is yet so important. In (b), the report says:In the award of new licences the United Kingdom Government should give more weight to the contributions made by drilling on existing licences to improve knowledge of gas reserves".We have all been asking for more knowledge.Disincentives to 'farmouts' activity should be eliminated.The United Kingdom Government should consider whether and when exports of natural gas to the Community would be justified".I am sure that that is correct.The United Kingdom should encourage the construction of a Norway/UK cross-Channel pipeline.The European Commission and the United Kingdom Government should regularly review the need for and the timing of LNG imports and SNG manufacture and should publish the results of such reviews.Diversity of supply to the European Community should be encouraged.Market forces are the best defence against unreasonable price demands".Finally in their summing up, they say:No convincing economic case can be made for strategic storage of natural gas in the United Kingdom".I would disagree with that. Of the nine points in the summing up, I would give six, and in order to save the 270 time of your Lordships now I should like to leave it there and say that on the three I have not marked favourably I should be open to conviction by the many noble Lords who have the expertise. Thank you very much.
§ 6.16 p.m.
§ Lord Polwarth
My Lords, in the course of this debate, there has been a wide measure of agreement with the report of the committee, which is hardly surprising seeing that out of the 12 previous speakers no fewer than 10 were members of the committee. Perhaps that is my only possible excuse for detaining your Lordships at this time by coming in myself as an outsider, perhaps with the excuse and the interest, which I declare, of being involved in various activities such as pipe laying, platform building, and the supply of equipment and services to the oil and energy industries.
We are enormously grateful to the committee, first of all, for tackling this vitally important subject, for looking at it so thoroughly and so expertly, and for commending it to us for debate. They have done us a great service. They are a perfect example of what we in this House can do in a field where we can apply our specialised knowledge. What better example of that than the splendid maiden speech of the noble Viscount, Lord Torrington, with all his personal experience in the oil industry. I hope that he will come to us regularly. I know the difficulties. It underlines Lord Lauderdale's point, that when people like him and others who are very busy in such activities take the time and trouble to come down here and contribute to our deliberations, perhaps they are entitled to the occasional ministerial reply. Again, I emphasise that this is absolutely no reflection on the noble Lord who is to reply. I have the greatest sympathy with him and admiration for the way in which he handles a plethora of different subjects for us.
I am so glad that we are looking at the Community aspects of this subject, because in this whole energy field we have tended to be rather inward looking and chauvinistic in the light of our good fortune in having these resources. Why do we not know what are the reserves of gas in the North Sea? Many noble Lords have already made clear the reason; namely, that there has not been the inducement, the encouragement, to producers, in the form of a reasonable market, to make it worth their while to do the vital development drilling needed. I need not reiterate that or the reasons.
On the gas front, we had for a long time the British Gas Corporation monopoly, and a good job indeed they have done. As the noble Lord, Lord Kearton, said, they have created a great asset; but of course ultimately it was not they who created it. It was the consumers of the gas who created that asset, through the good offices of the Gas Corporation.
The other aspect that is perhaps not emphasised so much in the report is the tax régime as it applies both to oil and to gas. I found it intensely disappointing to read another article yesterday in the Financial Times indicating that the talks between the industry and the Government on the tax régime seem to be just as much at a stalemate as ever, the Government insisting they are not convinced that an easier tax regime is necessary to encourage further development. I can only assume that this is not through ignorance but 271 through stubbornness. The evidence is there; as we heard, it was only in the last few months that three new field developments have been announced, the first since 1980, and some of those after a good deal of arm-twisting.
Perhaps the prospect is a little better now. There is the prospect of some competition in the purchase of gas, but it will not be a really free market until, as other noble Lords have said, we are able to export. There can be much argument about how long we should hold on to those resources for our own use or how soon we should be prepared to export. I believe we should show a little more courage and faith in the undoubted reserves there are or must be. It is, after all, a little ironical, is it not, that the French, who played such a leading part in developing our gas resources (with a little help from my noble friend Lord Lauderdale) should be unable to enjoy directly the fruits of all that work in the North Sea?
There is the very exciting prospect raised by the committee of the eventual trunk gas line through Norway via this country to the Continent and, as we know, the Continent is already linked to the Continent of Africa. The security aspect has been emphasised. While I do not for one moment agree with the American view of the problem—indeed, I think it was misguided and improper of President Reagan to be trying to cause our companies to break contracts freely entered into; as the noble Earl, Lord Bessborough, said, one particular company, John Brown, were suffering considerable hurt, financially and otherwise, from the policy adopted towards them—nevertheless, it will be all to the good if the Continent of Europe can be less dependent on the existing supply.
That will not merely be us doing them a favour. One can envisage a scenario well ahead when North Sea reserves might begin to run down—and who knows by then what other discoveries may have been made in the African Continent?—and we might be very glad indeed to have pipeline to bring gas to us from south of the Mediterranean. I appreciate the problems of pipeline schemes. We saw them with the proposed gas gathering scheme, on which, incidentally, the Bank of Scotland, with which I am connected, did a great deal of work to produce a viable financial arrangement, but it foundered because there were factors of monopoly and a failure of the Government to be prepared to give it real backing.
I believe—this is the view of nearly every noble Lord who has spoken—we should give every possible encouragement to exploration for gas and oil because I cannot conceive that we shall not need all we can find. The market will dictate what should be done, if we allow it to, and we must always remember that there is a need not merely for fuel but for feedstock for our petrochemical industries which will continue to be important and grow in importance. I think it is never the right policy to leave one's talents in the ground. After all, we have the highest authority for that, and we know what happened to the one who did!
There is a further reason for encouraging development in gas and oil more than we are at present, and that is because of the substantial industry we have built up in support of oil and gas. It has been the deliberate policy of successive Governments, through the Offshore Supplies Office, to create a 272 British industry for supplying and contracting to oil and gas, and they have had great success in doing so. It has been a real success story. The proportion of components of British content in the industry is now. I believe, up to about 70 per cent., and this has created a great deal of employment. It would be the greatest shame if that were allowed to languish, and I can tell your Lordships at first hand that a number of companies in the construction industry on this front are in a very uneasy position at present through the lack of orders coming forward as a result of the lack of new development. There could well have been substantial lay-offs and there could well be considerable, more, most of them in areas where there is very little alternative employment. That is another good reason to back a highly successful British industry that is not only supplying in this country but for export as well.
At the end of the day, I fear that one of the main troubles has been the dominance of the Treasury over the Department of Energy. We had high hopes of the translation of the present Secretary of State from his previous Treasury post, and I believe we have seen some progress since that move. I hope we shall see more. We read yesterday of the translation of a senior official who played a great part in developing the oil and gas industries, being moved to another sphere outside, and rumours as to the succession to the senior post in that department, rumoured to be a Treasury man. One could take that in one of two ways. Will it bring Treasury views into the Department of Energy, or, more hopefully, will we have a gamekeeper turning poacher who will teach the Department of Energy how to tackle the Treasury on equal terms? Let us hope it will be the latter in the interests of the development of these very precious resources which we are lucky to have, not just for ourselves but for the benefit of the Community of which we are part.
§ 6.27 p.m.
§ Lord Skelmersdale
My Lords, I do not know whether my correct course of action is to blush or hide. Whichever it is I should be doing, before beginning my daunting task of replying on behalf of the Government to the debate, I must apologise for rising to my feet for the third time today. The noble Lord, Lord Davies of Leek—if I might have a quick aside to him before I start—made a comment which comes often from his lips on the subject of acronyms. When I was studying for my second Question, one of the prepared supplementaries I was given to read and consider was headed, "Non-First Use of Nuclear Force" with the acronym in brackets, "NOFUN". I am sure that is not in the little book.
The House should be grateful to the noble Lord, Lord Kings Norton, and his sub-committee for initiating today s debate, which I may perhaps summarise as covering the role which gas will play in the national, Community and international context. I was somewhat alarmed when I saw the list of speakers and related it to my experience of their erudition, but I need not have worried. It is a credit to the noble Lord to have collected such a list, not forgetting the expertise of my noble friend Lord Torrington, whose excellent maiden speech will repay much study. I hope your Lordships will have the opportunity to hear him again both soon and often.
273 The future of the natural gas industry is of great importance to both the United Kingdom and the European Community. It is important to us as a country, as we are both a major gas producer and consumer; and I agree with the noble Lord, Lord Davies of Leek, that we as a nation sometimes play down the immense success of the development of our reseves in the North Sea and onshore, and I was glad that the noble Lord, Lord Tanlaw, referred to that. His idea of incentives to smaller independent owners of land to dig for gas is a most sensitive area. Safety, environmental and planning considerations are of great importance, and it is of course essential that the best oil industry expertise is utilised in such drilling and production operations. The Government are confident that their current onshore licensing procedures are effective in ensuring that such expertise is appropriately employed. I would add that it is not as yet—although the situation could change, and I take the noble Lord's point—generally considered that onshore finds are likely to make a significant contribution to the totality of United Kingdom gas reserves compared with prospects for additional offshore gas discoveries.
We can, and should, be justly proud of our achievements over the past 20 years in this industry. The rapid discovery and development of the North Sea gas fields and the efforts of the British Gas Corporation in building with impressive speed the national gas transmissions system, have been major factors contributing to the situation where the gas share of domestic energy demand has doubled in the last 10 years, and where natural gas now accounts for about 56 per cent. of the total energy consumed in the United Kingdom domestic sector. My admiration of the British Gas Corporation's role in all this is obviously equalled by that of the noble Lord, Lord Kearton.
This subject is important to the Ten as natural gas consumption in the Community virtually trebled in the 1970s, triggered initially by the development of the huge Groningen gas field in the Netherlands and spurred on by the oil crises of 1973 and 1979. The Community understandably hoped that this growth in the use of natural gas would reduce Europe's dependence on the fickle and politically volatile international oil trade. However, it is now apparent that Europe has in part decreased its dependence on imported oil at the expense of increased dependence on imported gas supplies. Imports accounted for only 5 per cent. of Community gas supplies in 1975, grew to 27 per cent. in 1980—which is a fraction more than the figure quoted by the noble Lord, Lord Strabolgi, but I hope that we shall not argue on this comparatively small point—and are now projected to reach some 40 to 50 per cent. of Community gas demand in 1990. Although, to be fair, gas imports will represent less than 10 per cent. of total Community energy consumption in 1990, it is, even so, an issue of major importance.
It is therefore an appropriate time to review the role of gas in the European Community as a whole, and I should like to round off this debate by running through the main conclusions of the Select Committee's report, touching on some of the many important points that have been made this evening. The committee has highlighted that, in order to make the right policy 274 decisions, it is essential to find out more about the extent and nature of the United Kingdom's indigenous natural gas reserves. To that end it proposes three measures. The first is that the Government should encourage gas exploration drilling. On 24th September, the Government published the formal invitation to apply in the Eighth Round of offshore petroleum production licensing. The aim is to license up to 85 blocks in the round. Thirty-eight of the blocks on offer for licensing lie in the southern North Sea, where most of our existing gas reserves were discovered. We are confident that this licence round, together with the freeing of the gas supply market in the recent Oil and Gas (Enterprise) Act—I do not share the rather shallow doubts of my noble friend Lord Campbell of Croy on this—will stimulate renewed North Sea gas exploration efforts.
I shall return to this point later, but before I leave it I should like to tell my noble friend Lord Bessborough that press reports about North Alwyn are accurate, and I expect formal approval to be announced by my right honourable friend the Minister of State in the very near future—certainly well before Christmas.
Most noble Lords I think have mentioned the thorny subject of reserves. The Department of Energy estimates that the remaining gas reserves lie in the range of from 33 to 64 trillion standard cubic feet. That includes allowances for as yet undiscovered fields. My noble friend Lord Hinton of Bankside highlighted the problem of the difference between my department's estimates and those of, for example, Phillips, one of the oil companies. In an aside I should like to say how nice it is to see my noble friend with us again and to hear yet again his visionary ideas, which in the past have come to fruition in other fields with which he has been interested, and with any luck will do so again.
The Phillips Petroleum reserves estimate is about twice that of my department's upper figure for total United Kingdom remaining gas reserves. The official figures were supported by the other industry witnesses to the committee. The United Kingdom proven reserves are equivalent to 14 years of consumption at 1981 levels. Using the official estimates of total remaining reserves—that is to say proven, probable, and possible—increases the figure to between 20 and 40 years.
If I got his expressions right, the noble Lord, Lord Tanlaw, equated supply stability with production stability, and I must say that I completely agree with him. The noble Lord, Lord Kearton, said that British gas purchases must be at the right price to ensure supply stability. I agree with that analysis, too. I was less clear on the points made by my noble friend Lord Torrington on capital transfer tax in regard to farming out, and perhaps if he has any evidence on the point, he might write to me.
Secondly, the committee urges the Government in awarding licences to give more weight to the applicants' record in drilling and evaluating existing licences in the area in question. I should like to make it clear to your Lordships that the past drilling performance of each company is examined when applictions for new licences are considered. I am pleased to inform the House that the Government indeed intend to increase the weight given to the relevant past drilling record in the evaluation of 275 applications for the current Eighth Round of production licensing, though I am bound to say that I do not feel that the prospective records of the oil companies in this respect have very much hearing in our thoughts. The extent to which it is practicable to allow that factor to influence awards is however limited, since the composition of licence applicant groups changes from round to round and often varies from one area of the United Kingdom continental shelf to another.
However, in respect of the Eighth Round blocks on offer in the southern North Sea, where most existing gas fields were discovered, there is a likelihood that applicant group composition will in many cases be the same as the groups already holding licences in the area. There should therefore be more opportunities for making a direct link between the award of new licences and the past performance of the applicants.
Thirdly, the committee proposes that disincentives to the "farm-out" of licences should be eliminated. The Government believe that in practice our "farm-out" procedures are no disincentive to additional exploration and appraisal drilling. Admittedly, it is necessary to obtain Government approval for such transfer of licence rights and obligations, but we generally take a favourable view of "farm-in" proposals that contain plans for additional or earlier drilling in the relevant blocks—and that, I would submit, is what we are all seeking.
On exports of United Kingdom gas reserves, the Select Committee endorses the present Government caution, but suggests that the Government should consider whether, and when, exports of United Kingdom natural gas would be justified. The noble Lord, Lord Strabolgi, asked whether I would come down firmly on that point, and it seemed to me that my noble friend the Duke of Portland was asking for the same thing. The position of the Government on the point is well known. We have said that we will consider exports if substantial new gas reserves are found and the United Kingdom gas supply position is thereby consolidated. I would tell my noble friend that I disagree with him, at least where he seems to be advocating exports whatever happens to supply. I would not condone that.
As I said earlier, we are confident that North Sea gas exploration efforts will be pursued with renewed vigour, and will help to prove up new reserves. In fact, we have evidence that the encouragement which the Act is intended to give to the oil industry, together with the British Gas Corporation's expressed willingness to pay realistic prices for new United Kingdom sector gas supplies, is already beginning to work.
My evidence is that in the three years before 1981, when our proposals for legislation were announced, there was not a single exploration or appraisal well drilled in the southern North Sea. Last year two such wells were drilled. The tally this year is already 11, and indeed I must tell the House that a week ago, when I was first studying this speech, the figure was 10. So things are increasing quite fast, and I suggest that the figures speak for themselves.
The House has been obviously intensely interested in North Sea taxation, as evidenced by parts of the speeches of my noble friends Lord Campbell of Croy and Lord Lauderdale. The Government are of course 276 well aware of the continued oil industry representation that the present tax regime is too onerous. I think that my noble friends will not take it too hard if I say that we are not exactly minnows in this particular sea. We are constantly monitoring exploration and development activity and have seen a substantial rise in exploration drilling in the last two years, while indicators of development activity are also showing signs of some improvement. On gas developments, we are confident that more competitive prices will now be paid to North Sea producers as a result of the Act, and that there will be no shortage of projects coming forward.
The Government also made clear their position on the tax regime in the recent response of the Secretary of State to the report of the Select Committee for Energy on depletion policy; but we are not ignoring the industry's pleas, and will continue to keep the tax position under review. I thought that both my noble friend Lord Polwarth and, indeed, my noble friend Lord Campbell of Croy were more than a little unfair on the Government's record on tax, because it will not have escaped their notice that there were in fact considerable, very useful and, I believe, welcome tax changes in the recent Budget. A number of these important structural changes were introduced, as I said, in the 1982 Budget, and they have since been modified by the changes announced by the Chancellor on 9th June. All these changes move in a direction sought by critics of the tax regime, so it really is not fair to say that the Government are totally obdurate in this respect.
Lord Campbell of Croy
My Lords, I wonder whether my noble friend will allow me to interrupt him. I should just like to say that this is really not the moment to go into all the details of a very complicated tax régime, although in fact I was a Front Bench spokesman in April 1975, and about the only speaker besides the Minister, when the original tax regime for the North Sea was introduced. I acknowledge that there were changes in structure, which were the ones asked for by the industry and which the Chancellor himself had foreshadowed; that is, the disappearance of the temporary tax—the supplementary petroleum duty. But the main point is that the changes which have been made have very little effect in altering the deterrent to development—not exploration, but development.
§ Lord Skelmersdale
My Lords, I shall refer the words of my noble friend to my right honourable and learned friend the Chancellor, naturally. The Select Committee recommends that the Government should encourage the construction of a Norway-United Kingdom cross-Channel pipeline, and my noble friend Lord Bessborough and the noble Lord, Lord Briginshaw, among many others, drew attention to this. As the primary purpose of such a scheme would be transhipment of Norwegian gas to European markets, it is clear that Norwegian participation is essential before the idea can be pursued. On a number of recent occasions, we have indicated to the Norwegian Government that Her Majesty's Government would be willing to consider any specific proposals for such a pipeline. So far, it is true, no such proposals have come forward, but we shall he ready to examine them positively if and when they do.
277 The noble Lord, Lord Kings Norton, raised the spectre—if I may so call it—of paying for this pipeline, and I would agree with him that this is obviously an important point in the whole agrument. It is, however, much too early to speculate on this. If the need for a land-bridge were established to the satisfaction of the Norwegian Government, of the United Kingdom Government and of other Governments concerned, it would still be some time before details of the scheme could be worked out. Only then would it be possible to establish the parties with the main interest in the project, to mobilise the banks and other sources of finance, and give detailed consideration to the financing problems, so perhaps the noble Lord is being a little previous on this.
While talking about exports and imports, perhaps it would be as well to discuss the problem of the Siberian pipeline. It is, of course, for the individual Governments concerned to ensure that they have given adequate attention to the security of supply question. However, studies have also been made by the European Commission, which give confidence that these matters are being fully considered. We note, for example, that the West Germans plan to limit their dependence on gas imports from any one source to some 30 per cent. of their total gas supplies, or only some 5 per cent. of total primary energy demand. Meanwhile, the International Energy Agency is conducting an IEA-wide study of the gas supplies and requirements of its members, including arrangements to cope with emergencies.
Turning briefly to the United States embargo on exports to the Soviet Union of goods for the pipeline project manufactured by European licensees of American equipment, as your Lordships will be aware my noble friend the Secretary of State for Trade has directed six United Kingdom companies not to comply with these measures in order that these companies can fulfil their contractual obligations. My noble friend Lord Bessborough made reference to what my right honourable friend the Foreign Secretary said yesterday, and I am afraid I have nothing to add to what he said then.
The Committee also urges that the European Commission and the United Kingdom Government should regularly review the need for and the timing of liquefied natural gas imports and substitute natural gas manufacture. The Government are aware that work on this subject is continuing in the European Commission. Within the United Kingdom, the Government are confident that the gas supply industry is monitoring the development of the gas markets, and will initiate projects of this sort when they believe them to be necessary to meet projected demand. That answer may not please the noble Lord, Lord Strabolgi, but that is what I believe. It is, however, much too early to say when SNG will become a commercial proposition, and I hope the noble Lord will accept that.
I would draw attention to the British gas industry's international reputation for both its pioneering work in the liquefied natural gas trade in the 1960s and its current research and development programme on substitute natural gas manufacture. It is therefore well placed to introduce these technologies to the United Kingdom when there is a market for such supplies.
278 Finally, regarding the broader question of gas supplies to the European Community as a whole, the Select Committee responded to three specific recommendations made in the earlier studies by the European Commission which were the starting point for the committee's deliberations. First, the Commission recommended and the committee endorsed that the Community should aim to diversify its import sources of supply. The Government agree with this principle and know that those of our European partners who are increasingly reliant on gas imports are actively reviewing possible new gas supplies on a worldwide basis. The United Kingdom itself is fortunate in getting 75 per cent. of its gas, via a number of separate pipeline systems, from its own offshore gas fields. The other 25 per cent. is imported from Norway, which we clearly regard as a politically secure and reliable source of supply.
My Lords, with so many speeches I am sure that I shall not have answered many of the points that I should have answered. I shall read Hansard carefully tomorrow, and, if I may, I shall write to those noble Lords whose dose of passionate apathy has been a little too little. I should like to conclude by recording how valuable I feel this evening's debate has been in bringing the attention of your Lordships' House to this important subject. I think its usefulness is due in no small part to the excellent report of the Select Committee, which has been the focal point of these stimulating discussions. I believe I am doing no more than echoing the sentiments of your Lordships in congratulating the committee on its report and noble Lords on their speeches today. I would end by saying that I believe that this report and today's debate have put another dent in the by now increasingly battered image that we in the United Kingdom have as bad Europeans.
§ Lord Kings Norton
My Lords, the House has a lot of business still to do this evening, and I do not propose to delay it any longer except to thank the noble Lord, Lord Skelmersdale, for his comprehensive comments on the debate. I shall read Hansard tomorrow just as carefully as he to make quite sure that Her Majesty's Government are as enthusiastic as I hope about the conclusions of the report.
Secondly, I should like to take this opportunity to add my congratulations to those that the noble Viscount, Lord Torrington, has received on his extremely articulate, very expert and most interesting speech. It was all that I expected it to be. Finally, I should like to thank all those who have taken part in what I believe has been a most interesting and valuable debate.
§ On Question, Motion agreed to.