Oil and Pipelines Bill

HL Deb 22 July 1985 vol 466 cc1046-63

7.12 p.m.

The Minister of State, Scottish Office (Lord Gray of Contin)

My Lords, I beg to move that this Bill be now read a second time.

The Bill proposes important changes to the structure and extent of public sector involvement in the oil industry. It may be helpful if I describe briefly what has happened over the past year. Last July, prices in the spot market fell sharply. This fall appeared to be based on speculative pressures. The British National Oil Corporation accordingly, and correctly, maintained its prices. If BNOC had reduced its prices at that time, the speculative pressures would have been confirmed and reinforced; that could have risked triggering off a competitive downward spiral of term prices.

In October last year BNOC did reduce its term prices. Downward pressures on spot prices continued, however, and BNOC found that it could not maintain sufficient customers on term contracts. So the corporation found itself caught in a trap. By holding its term prices it was forced to sell oil on the spot market and incur losses. If, on the other hand, it had reduced its prices, it risked enhancing the speculative downward pressures.

This then was the background to the Minister of State for Energy's announcement on 13th March. In the past BNOC had possessed a temporary ability to contribute to stability in the market through the timing and manner in which it proposed prices for the considerable volumes of United Kingdom continental shelf crude which it sold on term contracts. But it had now lost that ability because of the massive growth of spot and spot-related sales. Indeed, it could now change its prices only at the risk of destabilising the oil market by setting off a cycle of speculation and competitive price-cutting.

This Bill puts in place an appropriate structure for those parts of BNOC's activities which need to remain in the public sector. BNOC's principal activity was the trading of participation oil. Now that this activity is not going to be continued, it is appropriate that a much smaller body with more limited powers is established to carry out the residual functions. Some BNOC staff have already moved off to other jobs; more will do so during the next few months. The board of BNOC have provided a package of compensation in line with the benefits paid by oil companies when they have made staff redundant. The Government's decision to abolish the corporation should not be regarded in any sense as a reflection on the calibre of BNOC's staff.

When this Bill was considered in another place, a number of debates took place about how the national interest in securing our oil supplies at a time of shortage will be preserved. In a minor crisis our own stocks will be sufficient to cover any deficit until the participation agreements have been reactiviated, should that be necessary. In any event, since our consumers will need oil products rather than crude, the important defence will be the assurances which the Government have obtained from refining companies. In a major crisis, the IEA oil sharing arrangements and, if appropriate, our powers under the Energy Act 1976 would come into play. I am content that the abolition of BNOC will in no way diminish the country's security of supply.

The course of the oil market since the announcement of BNOC's abolition on 13th March has reinforced the correctness of our judgment that it was inadvisable and certainly unnecessary for a public sector body to trade very substantial volumes of United Kingdom continental shelf crude when world production capacity is well in excess of world demand.

The Government envisage that the new Oil and Pipelines Agency will have three principal functions. The first of these is the continuation of BNOC's role as managing agent of the Government's pipeline and storage system. Currently the system consists of over 1,000 miles of pipelines and a number of storage installations. Commercial use of the system has expanded steadily over recent years, and the system now has an important role for both civil and military purposes. The Government will be looking to the agency to explore how additional commercial revenues could be generated.

The agency's second function is to be responsible for the disposal of royalty in kind oil. At present some 260,000 barrels a day of royalty in kind oil is lifted. The agency's roles, both in managing the Government pipeline and storage system and in disposing of royalty oil, will be governed by contractual arrangements between it and the Secretary of State for Energy.

The agency's third activity will be to maintain in existence the rights and obligations under the participation agreements, so that it could lift petroleum under these agreements should that ever be necessary. Consent to exercise options will only be given by the Government if such an exercise was finally justified by an existing or imminent threat to the security of the nation's oil supplies.

The agency will have powers to trade in petroleum on its own account, subject to the consent of the Secretary of State. That consent will be given only as necessary to maximise the proceeds from the disposal of royalty in kind. The agency would also need to be able to trade effectively should the participation agreements ever be reactiviated. BNOC has already shed all its pure participation supplies in co-operation with the licensees, and also shed a good part of its supplies under third party contracts. BNOC is currently trading only one-tenth of the volumes which it was handling before the abolition of the corporation was announced. The agency will not continue BNOC's role in trading liquid petroleum gases. This LPG trading can now be handled perfectly adequately by the private sector.

My right honourable friend has announced that, subject to the passage of this Bill, he intends to appoint Mr. George Dunkerley as part-time chairman of the agency when it is established. Mr. Dunkerley will shortly be retiring from his present position as deputy senior partner of Peat, Marwick, Mitchell & Company in the United Kingdom. We intend to appoint Mr. Kenneth Vaughan as full-time Chief Executive of the agency. Mr. Vaughan joined BNOC in 1978 after working for British Petroleum and the Kuwait National Petroleum Company; recently he has been BNOC's general manager with responsibility for managing the Government pipeline and storage system and for LPG trading. We also intend to appoint as a part-time member Mr. Owen Heald, who has recently retired as a director of Shell UK Ltd. He has wide experience in trading and marketing of crude oil and in pipeline operations.

Finally, let me briefly describe the provisions which the Bill contains. Clause 1 and Schedule 1 establish the Oil and Pipelines Agency and provide for it to have between three and five members, to be appointed by the Secretary of State. Clause 2 sets out the continuing functions of the agency, which I have already described. Clause 3 and Schedule 2 provide for all BNOC's property rights and liabilities to be transferred to the agency on an appointed day, the transfer date. Clause 3 also contains powers for BNOC to be subsequently dissolved. Clause 4 places an obligation on the agency to dispose of, on the best terms reasonably obtainable, any property rights or liabilities which are transferred to it from BNOC but which are not required for its continuing functions. Clause 5 and Schedule 3 give the agency a duty to comply with any general or specific directions given by the Secretary of State, and also contain financial provisions which will govern the agency's activities.

The remaining clauses and schedules are supplemental.

By March of this year, BNOC's role in trading participation oil had gathered the potential for introducing instability into the oil market. BNOC, having to face the future without its traditional trading pattern of term contracts, had been forced to become a heavy seller on the spot market. The Government and many outside commentators recognised that it was not good enough to let things carry on as they had done, and that it was imperative in the national interest to tackle the problems created by the changing structure of the oil market, even though that involved some difficult decisions.

The Bill before us is the result. It removes what, if this had remained, would have proved to be unnecessary and undesirable state intervention in the oil market. My Lords, I warmly commend the Bill to the House.

Moved, That the Bill be now read a second time.—(Lord Gray of Contin.)

7.22 p.m.

Lord Stoddart of Swindon

My Lords, I should like to thank the noble Lord, Lord Gray of Contin, for explaining concisely and succinctly the Bill which is now before us. He did so very briefly indeed and I suppose that should commend itself to the House, bearing in mind that the Bill came before your Lordships at five minutes past seven rather than at three o'clock this afternoon. Quite clearly the House felt that a debate on the televising of the proceedings of the House was more important than a major Bill of this sort. That is something which I very much regret and I hope that the noble Lord, Lord Gray of Contin, will join me in that regret.

Lord Gray of Contin

The cameras have gone away.

Lord Stoddart of Swindon

That is right, my Lords, the cameras are away. We now know the degree of importance and the priorities which the television media give to the work of this House; but that perhaps is something for another day.

I am afraid I cannot be as brief as the noble Lord. I think I shall take rather longer than he did; but, of course, he has two bites of the cherry and I only have one. No doubt he will wish to reply to what I and other noble Lords have to say in the debate. I must say that when the announcement abolishing BNOC was made on 13th March, I said in your Lordships' House that I was profoundly shocked. That was not mere party-political rhetoric. I meant it very sincerely indeed. There had been no previous warning about any possibility that BNOC was to be wound up. True, there had been concern expressed about so-called losses—and I say that advisedly—made by BNOC as a result of their intervention at the Government's behest in the oil price markets, but nobody really believed that as a result of these losses BNOC would be wound up, and I very much regret that, under this Bill, it is to be wound up. Indeed, there was every expectation following the Minister of State's speech in the House of Commons on 18th December that BNOC was held in favourable regard by the Government, and that the Government's view was that it should continue its operations without radical alteration.

The noble Lord will remember the speech of his right honourable friend the Minister of State on the 18th December, which was reported in col. 230 of the Official Report of the House of Commons, when he said: Simply because we transparently have a surplus, we should not dismiss the argument about security of supply. We should also bear it in mind that security of supplying is of interest to other consuming countries". He also went on to say: We must ensure that the United Kingdom continental shelf and the price that Britain secures for oil in international markets is not entirely under the control of international integrated companies. We must also ensure that there are some arms length sales at transparent prices. That is an important function which BNOC performs in setting the reference price".—[Official Report, Commons, 18/12/84; col. 230.] So certainly on 18th December 1984 the Government saw a continuing and important role for BNOC in matters of security of supply and the reference price for taxation purposes.

What then are we to make of the Government's apparent change of heart in only three short months? We can only conclude that they were playing for time on 18th December and that they knew all along that their real intention was to abolish BNOC in their own good time. In my view the Government's intention right from the start was to dismantle BNOC in two stages. The first stage took place in 1982 through the Oil and Gas Enterprise Act when exploration and production was removed from BNOC and Britoil, a private organisation, was set up. We all know what a debacle that was, and still is indeed. Tory dogma took over from sound commonsense and good business acumen, and thereby destroyed a successful, efficient and profitable corporation managed by throughly competent staff who were dedicated not to private profit but to the interests of the British people.

BNOC was then respected throughout the oil industry and indeed acted as the Government's eyes and ears in the North Sea, thus enabling them to plan for the future and to ensure that the interests of the British nation were not set aside by the multinational oil companies and their desire to maximise profits which were to be repatriated to foreign lands.

In this Bill we have the second stage which winds up BNOC completely. Apart from its role in the security of supply and reference prices, BNOC played a significant role in offering a commercial service to small, independent oil companies which had small amounts of oil in the region of between 8,000 and 10,000 barrels a day. They trusted BNOC and expected a decent deal from them. My Lords, what is to become of them now? The noble Lord did not mention them during his speech. Are they to be left completely at the mercy of the big fish, and is a Conservative Government who are constantly prating on about their concern for the small man to give them no help at all? Is the noble Lord really satisfied that the major oil companies will treat the small boys with the same fairness and consideration as BNOC did? I am sure that in his heart of hearts he cannot be satisfied and I should like him to elaborate on this aspect when he replies.

I should also like to refer briefly to the oil reference price and the considerable help that BNOC has been to the Inland Revenue in ensuring that tax losses are not incurred. The Minister of State himself recognised that BNOC has been useful as a reference point in fixing prices, not in arm's length arrangements but in a situation where artificial pricing is designed not to benefit the Inland Revenue but the oil companies themselves. The fact that BNOC is trading on a massive scale is bound to be of considerable benefit to the oil taxation office and that benefit will be lost when BNOC is wound up. We are not here talking about small sums of money that might be lost to the Inland Revenue. We are talking about perhaps hundreds of millions of pounds. If the price of oil is reduced by 1 per cent, £150 million is lost to the Exchequer, and this is a serious matter. Perhaps we can be told what arrangements are to be made to safeguard the position of the Exchequer on the demise of BNOC.

I now want to return to the most important matter of security of supply. I would remind the House again that on 18th December last year (in col 230 of the Official Report, Commons) the Minister of State made the strongest case for retaining BNOC on the basis of its role in achieving secure supplies of oil. In my view what he said then is just as valid today. Because he is able to perform a volte face with complete indifference to his reputation, he should not expect others to follow suit.

I would remind the noble Lord, Lord Gray, that although the oil supply position at present is very easy, the position in the future could—indeed, is likely to—be transformed. In the short term prices may very well fall still further, but in the long run they are bound to rise significantly in real terms. Indeed, speaking after the International Energy Agency meeting in Paris, the Minister of State recognised that there would be an energy shortage in the 1990s. Mr. Buchanan-Smith said: I believe IEA warnings to be very timely: most projections of the world supply/demand picture indicate a tightening of the world energy market in the 1990s. We have a well developed flexible set of plans for dealing with energy supply disruption and are ready to join with other IEA countries in taking any necessary co-ordinated action". In his statement, he says that Britain has, "a well developed flexible set of plans for dealing with energy supply disruption", but we have not. Indeed, by this Bill we are ditching the best safeguard for security of supply in a shortage. All the Minister really has to offer is a set of vague assurances from the big oil companies, and I shall return to those so-called assurances shortly.

But of course as well as the long-term there are the short-term difficulties to be faced. To begin with the downward pressure on oil prices persists and an end of the Iraq-Iran war could herald a complete collapse in oil prices. What that would do for our economy and the Exchequer I shudder to think. The Government have certainly not prepared for such an eventuality. Indeed, they have dissipated tens of billions of pounds in oil revenues in paying unemployment money to 3¼ million people, and in the process have allowed our manufacturing industry to decline to a dangerously low level. Furthermore, from next year our exportable surplus will decline and in the 1990s, which the Minister predicts will be an era of energy shortage, oil production in the North Sea will be on a steep decline due to the Government's failure to adopt a depletion policy which would have extended the oil plateau over a very much longer period and to the benefit of this country.

No doubt the Minister will contend that BNOC can have no influence on world oil prices, but that was never its primary purpose. Indeed, on pricing, BNOC was acting under Government orders, and paper losses, if there were any losses at all, arose from decisions of Ministers and not of BNOC. But, as I have said, pricing is not the real concern. We are talking about security of supply and the undermining of that security through the ending of participation agreements. We shall lose around 600,000 barrels a day of participation oil by this Bill and thus lose a powerful weapon in any shortage. Furthermore, the state will lose trading expertise and will no longer serve, through BNOC, on the technical and operational committees in the North Sea.

At present, the state, through BNOC, is involved in the detailed decisions of lifting, transporting and the destination of oil. Henceforth we shall be at the mercy of the big oil companies whose prime interest is not the British state but the maximisation of profit. That is not to criticise the big oil companies. It is their role to maximise profits; that is what they are there for. But I criticise the Government for their neglect of the interests of the British people and the sacrifice of those interests on the altar of Tory Party doctrine.

The noble Lord opposite will no doubt protest that the participation agreements can be reactivated on the basis of six months' and twelve months' notice periods. A fat lot of good that will do! By their very nature crises erupt at a moment's notice and can subside just as quickly. While the Minister is fluttering his hands and reactivating his participation agreements, the crisis will have come and gone, probably leaving the British economy in ruins behind it. Nero, who fiddled while Rome burned, will look like a saint compared with the Minister of State scribbling reactivation agreements while the country's economy collapses around him.

But of course the Government's second line of defence is that they have assurances from the oil companies. What sort of assurances they are we do not know; the Government refuse to give Parliament any details. Are they assurances by way of formal agreement, are they letters of intent between the chairmen of oil companies and Ministers, or are the real assurances made through the old boy network in London clubs or on prestigious golf courses? We do not know because the Minister will not tell us. Parliament is to be kept in the dark about Britain's oil supplies in an emergency because Ministers are too coy to reveal the dubious nature of those assurances.

Some idea of the nature of those assurances was given by the Minister of State at Second Reading in another place. He said that they were informal—informal, mind you, when so much is at stake! What on earth are the Government thinking about to subject vital national interests to informal arrangements? They were elected to safeguard Britain's national interests and not to subordinate them to informal assurances which when the crunch comes will not be worth a light because they cannot be enforced. The Minister of State has still not told the country the nature or the extent of those informal arrangements. He was pressed at the Third Reading in another place following the article in last Monday's Financial Times which gave some insight into the nature of the oil companies' assurances. As the noble Lord will know, the Financial Times report referred to a letter from a Mr. David Simon, head of BP's refining and marketing division, to an under-secretary at the Department of Energy.

The letter does not even have the status of a communication between the chairman of the company and the Secretary of State. According to this letter, BP agrees in the event of an emergency to keep United Kingdom customers supplied in accordance with the relevant contracts and established business. But BP is prepared to make that affirmation only provided that there are no legal or governmental constraints on its ability to raise prices.

Frankly, those assurances are worth very little. We cannot know whether they would be adequate in times of crisis the nature of which we certainly have little idea of at the present time. They are certainly no substitute for the real and positive influence that BNOC would have in a crisis; and at what price are those so-called assurances? There shall be no constraint on prices. It is incredible that the Government can be satisfied with such assurances, which I can describe only as impertinent.

But I wish to be fair to the Government. As the noble Lord knows, I always try to be fair to the Government. This letter from BP to an undersecretary was dated November 1983, 21 months ago. I think that the Government can help us this evening by saying whether there have been further letters at a higher level and more significant for the protection of our oil supplies in an emergency. Has the Secretary of State rejected the dictatorial demand that he should not intervene on prices if he believes that it is in the national interest to do so?

I sincerely hope that the noble Lord will not shelter behind the ludicrous and undemocratic charade of commercial confidentiality as his right honourable friend the Minister of State did in another place on 15th July. That simply will not do. We are not talking here about simple commercial transactions; we are talking about the nation's lifeblood in time of emergency. It is an insult to Parliament and to the British people that a Minister should seek to deny them information to which they are entitled, on the basis of commercial confidentiality. I ask the noble Lord to come clean on this matter and to tell us tonight the nature of the oil companies' assurances, whether such assurances will be legally binding and whether the Government have told the oil companies in no uncertain terms that they are not prepared to accept the assurances on a conditional basis. If the noble Lord is not prepared to give this information to the House, I can conclude only that the Government are scared of revealing yet another scandal to add to the already big heap that has accumulated since they came to office.

The Bill before us is an extremely important one. The smallness of the numbers participating in the debate I believe arises from the complicated nature of the issue and the oil industry itself. There is much more that I could have said, much more detail that I could have explored tonight. However that would have been wearisome and I believe, at this stage of the Bill, unproductive.

However, before I sit down I wish to make it absolutely clear that the Labour Party believes that this is a bad Bill in that it loosens the Government's control of a vital part of our economy and in a most cavalier way throws away its vital weapon of securing Britain's oil supplies, particularly in emergencies. The fact is that BNOC has a vital role to play in securing our oil supplies, and the Government, in abandoning such an instrument, are, in the Labour Party's view, acting irresponsibly and without proper care for the vital interests of the people they were elected to serve.

It is inconceivable that a future Labour Government would leave the people of this country unprotected and continue to allow the fate of our oil supplies to rest entirely in the hands of foreign multinational companies. I feel sure that, after the next election and the formation of a Labour Government, we shall return to this matter.

7.42 p.m.

Lord Lloyd of Kilgerran

My Lords, I hope the noble Lord the Minister will not think it too amiss of me if at the outset of my remarks I comment that I was rather surprised at the complacency with which he introduced this important Bill. In his opening, he referred to the measures replacing BNOC as "appropriate". He used the word "appropriate" twice and he almost left his speech at that stage. I must say that it seemed to me that the speech of the noble Lord the Minister begged as many questions as it answered on these vital matters of security.

Perhaps I may remind the noble Lord, as I feel that I ought to from these Benches, and support to some extent what the noble Lord, Lord Stoddart of Swindon, has said, that this Bill is concerned with measures for securing the future supplies of forms of energy which are at the very heart of our national welfare, on which our standard of living depends, and on which our national defence, the performance of our industry, transport, water supply and so on are so heavily dependent.

The Minister's speech was in great contrast to the general view expressed at a meeting which was held a couple of weeks ago in your Lordships' House when the director-general of the International Energy Agency, Frau Delga Steeg, from Paris, who no doubt is well known to the Minister, spoke of the work of that agency to the Parliamentary Group for Energy Studies, of which I have the honour of being a founder member and still a deputy chairman.

Speaker after speaker at that meeting, especially those from industry, emphasised the vital importance of adequate procedures for securing supplies of energy at all times and deprecated that so many countries, including the United Kingdom and other EC countries, had not yet formulated a coherent energy policy to this end. Indeed, one industrialist rather dramatically said, as I recall, that had the countries been meeting at the present time to form the European Economic Community the basic question upon which they would have concentrated would have been a common energy policy rather than a common agricultural policy, a subject which is at present dominating EC discussions. Another even suggested, on this question of having an energy policy, that so vital were energy considerations that there should be set up in the defence field an energy North Atlantic Treaty Organisation to supplement the present NATO emphasis on arms control.

I agree that the subject with which we are dealing is of immense complexity and that forecast after forecast over the past few years by experts has been found to be wrong. The Minister, who has such a distinguished experience of energy matters in the other place as well as in your Lordships' House, was perhaps right to be brief and cautious and not to venture into details and forecasts. He may have adopted the same view as did Sir Frederick Tombs, the chairman of Rolls-Royce, when he addressed the Parliamentary Group for Energy Studies a few weeks ago. He said that his main qualification for addressing the group appeared to be that he was an experienced energy practitioner who, for many years, had made his share of wrong energy forecasts.

I do not propose to follow the noble Lord, Lord Stoddart of Swindon, in his interesting and cogent analysis of the situation leading up to the sudden abolition of the BNOC in its present form. I agree with much of what he said. I wish merely to raise a number of points relating to this Bill which I feel require further clarification and perhaps form the basis for amendments.

The main reason for this Bill is that the Government eventually formed the view that there have been important market changes which now prevent BNOC in its present form from making a substantial contribution to the stability of oil markets in the short term. That is their forecast. I agree of course that there have been major changes in the structure of the oil market away from term contracts and towards spot and similar short-term contracts. In these circumstances I think there was a prima facie view that little advantage remained in retaining a public sector body such as BNOC to operate on its present basis. So far as I am concerned this evening, the question arises as to the adequacy of the new arrangements in this Bill.

I should first like to ask the Minister whether he is able to give any indication of the scope of discussions that the Government have had or may have had with OPEC, with the OECD and perhaps with the EC before arriving at a decision to modify so drastically the constitution of the BNOC. I mentioned our recent meeting with the director-general of the International Energy Agency. She was very careful to say that it was not the place of the agency to dictate to governments what should be done in their crises. I am afraid I did my best to tempt her to make comments on the action of the Government, but she quite properly resisted my lures in that direction.

Of course that was understandable since the function of the International Energy Agency, so far as I understand its operation, is directed to dealing with dramatic changes, with shortfalls of the order of 7 per cent. At the meeting with Frau Steeg some doubt was expressed by industrialists as to whether the mechanism laid down by the agency could be rapidly triggered to deal with sudden shortfalls of this order. However, I understand that this Bill is concerned with times when less severe market disruption may occur.

The next point I wish to raise is: what is to be the position of the small oil companies as a result of the Bill? Hitherto, these small oil companies dealing usually with less than 15,000 barrels a day relied heavily upon the BNOC to dispose of this oil. Now it seems that such small businesses will be at the mercy of the large oil companies and will probably go to the wall. That a Government that have expressed publicly so much general support for small businesses should apparently sacrifice the small oil businesses in this way passes my comprehension.

The next matter to which I wish to draw attention relates to the adequacy of the safeguards that the Government propose to rely upon by retaining the custody of participation agreements. I appreciate the powers that the Government possess under the Energy Act 1976 in the case of declared national emergencies. It can also be said, I suppose, with a considerable amount of fairness, that substantial security of supply of oil in an international emergency will be achieved because pipelines from so many offshore installations and platforms come direct into the United Kingdom and do not go anywhere else.

The present arrangements relating to participation agreements with large oil companies, as the noble Lord, Lord Stoddart of Swindon, indicated, do not seem to me to have adequate legal force, if any legal force at all. Indeed, the BNOC, with its control of about 800,000 barrels of North Sea oil, represented prima facie one of the vital means of ensuring power supplies in times of shortage. This is being replaced by a series of supply assurances from the major oil companies particularly those with refining capacity in the United Kingdom. I would also like to have more details of the character of these assurances.

The noble Lord has spoken at length on this matter. The arrangements of these participation agreements were referred to in the other place as being informal. I do not know whether these assurances may not be described as gentlemen's agreements. As a lawyer, specialising in intellectual property and commercial matters, I have always had a horror of so-called gentlemen's agreements. They always lead to trouble when a dispute situation arises.

There are other matters that I may be developing at Committee stage, There is the scope, for instance, of Clause 2 which sets out the agency's general functions and objectives. Again, under Clause 3, can the Minister say—I do not expect him to answer tonight but at some other time we shall be discussing this again—whether the properties and liabilities to be transferred will include any form of intellectual property rights and contracts involving third parties in this country and abroad? That question could give rise to serious commerical matters.

There is also the question of why the Government do not propose to trade in liquid petroleum gas. This is, I understand, a profitable market. No doubt the answer will be, and will continue to be, the answer that the Minister gave today—that it is better to leave liquid petroleum gas to be operated by industry. I should like to ask what will be the effect on the arrangements in the Bill if the Government proceed with their plans to privatise the British Gas Corporation. This privatisation could expand vastly the demand for gas particularly in the United Kingdom and northern Europe and create conditions in which supply of, and demand for, energy could be in hopeless disequlibrium.

Some clarification also appears to be required relating to the problems faced by the staff of BNOC whose careers have been so abruptly disrupted by the Government's sudden decision to abolish the BNOC in its present form. I join the noble Lord, Lord Stoddart of Swindon, in taking this opportunity to praise the staff for their past work.

There is, again, the question of the power to dispose of royalty in kind. I could not understand what the noble Lord, the Minister, had to say about this question of the disposal of royality in kind. No doubt, we shall hear about this at a later stage. Other matters have been raised by the noble Lord, Lord Stoddart of Swindon, with which I agree and concerning which it is not now necessary for me to take up the time of your Lordships.

If I may say so, what we have heard so far from the noble Lord, the Minister, has been less than satisfactory. His assurances do not seem to me sufficiently specific and may not be adequate when a market crisis arises. It seems to me that much of the reorganisation contemplated by the Bill may be directed largely to producing revenue to sustain the Government's economic strategy. I should like to urge the Government to take this opportunity now to turn their attention to developing a comprehensive energy policy for the continued management of the country's energy resources so vital to national welfare.

7.55 p.m.

The Earl of Lauderdale

My Lords, as joint founder with the noble Lord, Lord Lloyd of Kilgerran, of the Parliamentary Group for Energy Studies, perhaps I may be permitted to comment on the meeting with Frau Steeg, director general of IEA, to which he referred. She pointed out quite clearly and publicly that no country was seeking, preparing to seek, or proposed to seek, intervention in the free oil market and no country thought that was worthwhile or profitable while prices were falling. When the noble Lord, Lord Lloyd of Kilgerran, with his great exposure to energy problems, talked in a rather glib, and I might even say liberal, way about EC energy policy, he has perhaps yet to realise that that is grounded on the wide opposition of interest between countries that produce energy and those that are principally consumers.

Listening to the noble Lord, Lord Stoddart, I could not help feeling, as he proceeded, that it was a pity that the cameras had gone. We have had a great performance, a great rhodomontade. We were told that Tory dogma had taken the place of British interests in the Government's consideration and that BNOC was widely respected by the oil industry. Well, I think that it was at one stage. But that wide respect has gradually diminished. We were told of the great dangers to the United Kingdom Exchequer of a fall in price. But any suggestion that BNOC could now affect the oil price has really been killed by events.

We were told by the noble Lord, Lord Stoddart, if I have got him right—he spoke rather quickly and my shorthand is rather rusty—that we were ditching our defences against an oil price collapse. Finally, he said that we were fiddling while Rome burns. I was only sorry that he did not repeat his great phrase on 13th March when the Statement was made in this House. The noble Lord said at the time that this was, another example of this Government's centralist, corporatist attitude. I thought that Stalin was dead, but he seems in tact to have been revived, resuscitated, and brought back to life by this Government."—[Official Report, 13/3/85; col. 188.] That is splendid stuff. It is a great pity that the cameras missed it.

The fact is that all this arises from a structural change in the world oil market partly influenced by OPEC's own internal difficulties and partly also by the OPEC countries' treatment of foreign oil companies. Arising from both, there has been a distintegration of the vertical supply system as the multinationals share of oil production has shrunk, believe it or not, from more than 70 per cent. to less than 20 per cent. of the world supply. As this has happened, spot transactions have come to account for nearly half of the some 45 million barrels a day of non-Communist oil trade as term and barter contract terms have shrunk altogether. Finally, a lively futures market as arisen as a result. That was the context in whch BNOC traded about 1.3 million barrels of oil a day, which amounted to about 5 per cent., of the total of spot transactions.

As emerged from the proceedings of the Select Committee in another place last December, such a small proportion might, as the Minister of State, Mr. Buchanan-Smith, said help to "smooth out" volatilities in the price pattern. However events have shown that it certainly could not stem a serious price fall even by operations on that scale at the margin. Of course, BNOC suffered one great disability in facing a falling market. It had no storage facilities and therefore could not buy and hold. The BNOC was indeed a shrewd trader while spot prices were rising due to OPEC, on the one hand, and the Gulf War, on the other hand. But, as I have said, in a falling market BNOC was compelled to trail behind, unsupported by storage facilities.

The effect of the slide in price is beginning to be felt everywhere and not so much in trading as in exploration. We are beginning to see the effects on the continental shelf. The drilling rate is pretty steady in the Norwegian, Dutch and German parts of the shelf and is even moving up in the Irish, Danish and French sections, and the number of rigs in the North Sea overall is still rising. But on the British side of the continental shelf—the British shelf—the overall number of spuds, that is, holes actually opened, was down 12 per cent. in the first six months of this year as against last year. There has been a slide this year up to June of some 20 per cent. in the number of exploration spuds and there has been nearly a 40 per cent.—in fact, it is 39 per cent. to be exact—fall in appraisal well spuds on the British side of the shelf. So the question which prompts itself is whether the Department of Energy and the Treasury are right in their approach to the exploration and development of the continental shelf, however right they may be—and I think that they have got it right—with regard to BNOC.

We saw a pretty equivocal series of answers given to the Select Committee in another place last December and it is worth quoting just one passage from the report in this context. We were told that the Committee: considers that Government denials that it has tried to exercise any influence in establishing North Sea oil prices are at best unhelpful and at worst misleading". Those are harsh words. Although I believe that the Government are right in the steps which they are taking now because we cannot influence the oil price today, the question to be asked is whether the department in general has the right approach to the oil industry with regard to the shelf.

The department is sometimes suspected of trying to compete with the Treasury in exercising the maximum squeeze on the oil companies in regard to their drilling programmes and so on. We are beginning perhaps —who knows?—to see a decline in drilling. Therefore, the real question now is not whether or not we should proceed with this Bill, although in my view I think that we should do so. The operations which we saw in a period of rising price have turned into something quite silly with a falling price and there are all kinds of reasons to suppose that the price may well continue to fall.

It is not usually realised that taking the world motorcar industry as a whole, over the last 10 years or so the average number of miles per gallon driven by a car has now been increased by five. It is not usually realised that fuel per tonne-mile of air freight has dropped nearly 40 per cent. (39 per cent., to be exact) since 1973. It is not usually realised that oil used per unit of consumption in the OECD countries came down some 34 per cent. between 1973 and 1985. Those are all factors making for a slide in oil prices to say nothing of other factors which are now current daily news.

Mexico is dipping below the OPEC level; Venezuela is very likely to follow suit; a new Iraqi pipeline across Saudi Arabia is likely to open in September carrying half a million barrels of crude oil a day; and Iran is certainly tiring of the Gulf war so that peace may come about. Those are all factors which point to a continued slide—let us hope a gentle slide—in the world market for crude oil which no single country, so far as I am aware, can arrest. OPEC combined cannot arrest it. Certainly BNOC trading with a maximum of 1.3 million barrels a day cannot arrest it. Therefore, this legislation is necessary.

We want to make sure that the agency which takes over the residual activities is effective and that the department is adequately staffed for that purpose so that when the time comes in, let us hope, five, six, seven or 10 years time when the market begins to rise again, the facilities are there for dealing with that situation.

8.8 p.m.

Lord Gray of Contin

My Lords, we have had a short if very informed debate. I am most appreciative of those of your Lordships' House who have seen fit to wait after the cameras have switched off to get down to the really important business of the House. Like my noble friend Lord Lauderdale, I feel rather sorry that the cameras did not have the benefit of the contribution of the noble Lord, Lord Stoddart of Swindon. Those of your Lordships who have been with the noble Lord in another place are not unused to his contributions, although latterly in another place he had certain restraints of the Whip's Office although of course they were not quite so severe as they are for those in Government. However, we are glad that he can contribute to the full in this place. I shall try to deal with some of the points which the noble Lord raised, but I am sure that he would not expect me to deal in detail with all of the many rather involved points which he raised. We shall have an opportunity of going into them at a later date.

I am also very grateful to the noble Lord, Lord Lloyd of Kilgerran, who, with his distinguished legal background, has been able to bring a new dimension to our energy debate. We look forward to the Committee stage to hear what he has to say on some of the specific points which he mentioned. I am also most grateful of course to my noble friend Lord Lauderdale for his support and indeed for the very interesting résumé which he gave us of the present situation within the oil industry. In view of his knowledge and experience, he has a great deal to contribute in this sphere.

The noble Lords, Lord Stoddart and Lord Lloyd, both raised with me the question of security of supply. The noble Lord, Lord Stoddart, tended to belittle the role of company assurances in the security of supply and magnified the role of the British National Oil Corporation. United Kingdom consumers cannot use crude oil, however much oil BNOC could bring back to the United Kingdom. In view of its long-term contracts it could not bring back all that much anyway, certainly not quickly. It would be useless unless we had the assurance of our refiners that it would be refined to maintain product supplies to the United Kingdom market. If we have assurances that our market will be covered, then we have no need of BNOC's crude oil supplies. It is as simple as that.

However, I am not going to leave it there. It is not appropriate to discuss the particular circumstances of individual private companies. What is relevant is that each of the United Kingdom refineries has recognised its responsibility to its British consumers, and will do what it can, within the law, to keep United Kingdom consumers supplied unless any shortfall reaches such a level as to invoke our international obligations.

Given the circumstances of today's oil market there is fortunately little chance that there will be any shortfall of supplies in the forseeable future. It is therefore perhaps instructive—indeed I think it is important—for us to look at how the last Labour Government sought to safeguard supplies in the mid to late 1970s when there was a very real prospect of supply difficulties.

For a start, the Labour Government failed to secure a single assurance from a United Kingdom refiner. Instead their policy relied on the operation of the participation agreements and on BNOC. When the crisis came in 1978–79 this policy demonstrably failed because BNOC had committed large volumes of its crude oil availabilities to overseas purchasers on long-term contracts.

It is also interesting to note the Labour Government's policy on oil pricing in a crisis. Those were the days of statutory price controls. So when the companies' supply costs went up they has no assurance that they would be able to recover the increase in prices promptly. That did not promote eagerness to keep the United Kingdom market supplied. Nor did it, nor could it, have isolated the United Kindom market from the international increase in crude oil costs. So up prices went in due course in line with the market, but only after a delay which threatened supplies.

I make these points because they are important and relevant in view of what the noble Lord, Lord Stoddart, said. I noticed that he chose his words carefully, and he did not say that a future Labour Government would allow the history of Clause 4 to overcome and blind the initiative in the future, but he hinted that there would be the creation again of something not dissimilar to that which we have abolished. I do not think that that is the sort of policy which is likely to encourage oil companies to explore in the North Sea.

As my noble friend Lord Lauderdale pointed out, there is just the slight hint of a falling off, although I must remind my noble friend that last year was a record year in the North Sea, when more wells were drilled than have ever been drilled since the discovery of North Sea oil. However, I have little doubt that the sort of threat which the noble Lord, Lord Stoddart, gave tonight would do little to encourage the oil companies to increase their exploration should there ever be another Labour Government elected, which of course is very questionable.

The noble Lord also raised the question of tax reference. The value of the BNOC price as an indicator of market value had already disappeared with its contract sales at that price. Given the considerable growth in arm's length spot sales, the Oil Taxation Office is confident that it will have sufficient evidence of the market to make price assessments in the changed circumstances. Obviously this is a complicated area, and the Oil Taxation Office is consulting the oil companies about how the revised arrangements will best work. It has not suggested that any role for the agency would be appropriate or desirable.

The noble Lord, Lord Stoddart, also raised the point, as did the noble Lord, Lord Lloyd, of small companies. There is no intention of overriding BNOC's contractual commitments under oil purchase agreements. These will be inherited by the agency, but small companies are aware of Government hopes that it will be the agency's duty to discharge the rights and liabilities it inherits from BNOC.

There are other options available to such small companies if they do not wish to establish their own marketing functions. Several large producers with integrated and non-integrated companies have offered to handle their oil. They are also free to set up cooperative arrangements if they so desire. The fact so far that it appears that insufficient volumes have been committed to any co-operative scheme is itself witness to availability of attractive alternatives.

After all, over the years small companies have gone alongside their big brothers in order to gain experience when exploration and when licensing takes place. It is not new for the small companies to be faced with this sort of situation. Indeed, even the biggest of our oil companies started off as small companies.

The noble Lord, Lord Lloyd of Kilgerran, was largely correct to say that the IEA arrangements are concerned with major crises. This Bill of course is concerned with the agency's role in a minor shortage. I can remember in debates in another place many years ago there always being great arguments as to what constituted a minor shortage, but I suppose that if we take the 7 per cent. figure which triggers off the IEA commitment and we take something less than that, broadly speaking we are dealing with minor shortages.

However, the IEA has developed, and is developing, arrangements to meet the threat to world oil prices from a lesser shortfall. It is only by international cooperation, to which BNOC is not really relevant, that we can contain such economic threats to the world's well-being so far as oil is concerned.

The noble Lord, Lord Lloyd, also raised the question of royalty in kind. He rightly said that that is an involved subject. I shall not deal with it in detail tonight. What I would say is that the Government's powers to take royalty in kind are incorporated in licence model clauses and are not altered in any way by this Bill. The policy as announced by the previous Secretary of State on 30th June 1982 of taking royalty oil in kind from most offshore oil fields continues in force. BNOC's losses have arisen largely through not being able to sell oil at as high a price as they paid for it. Royalty oil is sold on behalf of the Government. BNOC makes no payment for it, and remits the proceeds to the Government. Variations in the proceeds have not affected BNOC's financial position. The agency will be in an identical position so far as that is concerned.

The noble Lord, Lord Stoddart, raised a number of other issues but I think he will understand if I do not deal with them in detail tonight because we shall have further opportunities to do so. In some quarters the Government have been accused of acting like a member of OPEC by trying to prop up the price of oil. That charge is unfounded. We have no view about the most desirable absolute level for the price of oil. As the country is responsible for only about 5 per cent. of the world oil production, we should not be able to influence this even if we wished to.

What the Government have recognised is that sharp movements in oil prices are in nobody's interests. A sharp fall adds to the risks of the world banking system, threatens important debtor countries and reduces the incentive of energy conservation and substitution away from oil. That could mean that in a few years' time OPEC's powers might become restored and we should face another sharp rise in oil prices and the inevitable damage which that would have on the world economy.

This Bill gives the Government powers to dissolve the British National Oil Corporation, whose principal function in recent years has been to trade in participation oil. These powers are needed because with the changes in the structure of the oil market and the current surplus of oil supplies—this was well illustrated by my noble friend Lord Lauderdale in his speech—there is no advantage in trading participation oil and there would be a number of disadvantages in continuing to do so. If participation trading continued, BNOC would need to continue offering a price to its suppliers. The events of the last year have demonstrated that this need to set a price is undesirable because it is apt to destabilise the market. Perhaps a comparison here is relevant: our need, for example, for bread at a time of war does not require us to trade bread through a public sector trading organisation during peacetime. Oil is hardly any more important to our economy than food.

I shall be happy to deal in more detail with the particular points which concern Members during the Committee stage, but in the meantime I commend this Bill to your Lordships' House.

On Question, Bill read a second time, and committed to a Committee of the Whole House.