British National Oil Corporation (Hansard, 13 March 1985)

§ The Parliamentary Under-Secretary of State, Department of the Environment (The Earl of Avon)
My Lords, with the leave of the House, I shall now repeat a Statement being made in the other place by my right honourable friend the Minister of State for Energy on the subject of the British National Oil Corporation. The Statement is as follows:
"With permission, Mr. Speaker, I wish to make a Statement about the British National Oil Corporation. I hope it is for the convenience of the House that I should make this Statement now in view of the debate arranged for tomorrow.
"In the summer of last year the Government reviewed the institutional arrangements and 187 operations of BNOC. They then concluded that the balance of advantage lay in retaining the corporation in its present form, given the contribution it was able to make to deriving full benefit from our oil resources.
"Since then the environment in which BNOC has to operate has undergone important changes. BNOC has traditionally operated by purchasing and selling oil under term contracts at prices fixed for a period of months ahead. Its purchases under participation contracts have been in this form which, as I explained to the Select Committee on Energy, has enabled BNOC to make a contribution to stability of markets in the short-term.
"There has however now been a major change in the structure of the oil market away from term contracts and towards spot and similar short-term transactions. This trend is unlikely to be reversed in the near future.
"In these circumstances BNOC could avoid the risk of losses only by linking its prices for participation oil closely and continuously to movements in the spot market. Such a system would mean that BNOC could no longer contribute to stability in the market. The Government have concluded that this shifts the balance of advantage decisively against the retention of BNOC in its present form. I see no advantage in retaining a public sector body to operate on that basis.
"The change in market structure I have described has led me to the conclusion that BNOC should no longer purchase oil by exercising its options under participation agreements. Dealing in participation oil has been the dominant part of BNOC's activities.
"The Government consider it essential to retain powers that would enhance security of supply if that proved to be necessary. We will therefore retain the participation agreements themselves so that we can activate them to have access to these oil supplies should the need arise.
"We will also retain the arrangements under which we have the power to receive oil from Continental Shelf licensees as royalty in kind. These two factors together mean that security of supply will continue to be safeguarded.
"I see a need in present circumstances to retain one other function of BNOC; namely, the management as agent for the Government of the Government oil pipeline system. This system is important for both defence and civil purposes.
"The retention of these three functions—custody of the participation agreements, disposal of oil received as royalty in kind and management of the Government pipeline system—requires the establishment of a small Government oil and pipelines agency as a successor body to BNOC. The abolition of BNOC and the establishment of the agency for the purposes I have described will require legislation and I intend to introduce this in the present Session of Parliament.
"Finally, I wish to express the Government's thanks for the valuable work carried out by the chairman, board and staff of BNOC."
My Lords, that concludes the Statement.

§ Lord Stoddart of Swindon
My Lords, I should like to thank the noble Earl for repeating the Statement made in another place. May I say to him that I, and indeed my colleagues, are profoundly shocked by this utterly disgraceful Statement? On 18th December the Minister spoke in the House of Commons on the important and vital role of BNOC in securing and controlling the nation's oil supplies, yet a few weeks later the same Minister comes forward in the House of Commons and announces the abolition of the BNOC which he praised so highly in December.
The notion that the Department of Energy, even through an agency, can exercise participation agreements and be involved in the complex problems of buying and selling oil, is incredible. In fact it is yet another example of this Government's centralist, corporatist attitude. I thought that Stalin was dead, but he seems in fact to have been revived, resuscitated, and brought back to life by this Government.
How many people of experience and professionalism in oil trading has the Department of Energy—that is, compared with Mr. Grossart and his expert BNOC team? I should like the Minister to tell me that. Would not the department in fact be better employed in properly and more efficiently discharging the existing duties rather than taking on even more?
The single, lame excuse for abolishing BNOC is that it could no longer contribute to the stability of oil prices. Does the noble Earl not understand that that was never the corporation's original purpose? It is only the deliberate intervention of Government in the last few months which has caused BNOC's problems, as in fact the Select Committee on Energy noted in its fifth report, published last Monday.
Did not the Minister of State himself recently review the role of BNOC and totally reaffirm the vital part it can play in the management of our oil affairs? Furthermore, has the noble Earl noted that the Select Committee on Energy in its fifth report did not even consider the abolition of BNOC as a possible option? Have not the Government, by this announcement, kicked the Select Committee firmly in the teeth and rendered the massive work it has done on this issue completely useless?
May I ask the noble Earl what arrangements will be made to ensure that Parliament and the public are kept informed of the Department of Energy's operations in the oil market, particularly in respect of relationships with OPEC and the cost to the taxpayer of market interventions? We have heard that the Prime Minister's Private Policy Unit has been further reviewing BNOC's role. Is it not now absolutely clear that on a major aspect of energy policy the Department of Energy is being taken over by the Prime Minister's policy unit? Given the very personal involvement of the Minister of State in supporting BNOC, will the noble Earl recommend that he should now resign?
This announcement is the final act of vandalism which began with the dismantling and breaking up of the successful and profitable British National Oil Corporation under the Oil and Gas (Enterprise) Act. The national corporation belonged to the nation. It was the only corporation which had 100 per cent. 189 loyalty to this nation. I assure the noble Earl that the Labour Party will oppose this legislation tooth and nail. We commit ourselves now to re-establishing a national oil corporation which will safeguard and develop our precious oil resources for the benefit of the nation and the British people.

§ Lord Taylor of Gryfe
My Lords, I understand the logic behind the Statement made by the Minister this afternoon. It is obvious that if you guarantee a certain uptake to the oil companies at a certain fixed price as part of the participation agreement and the market weakens against you the taxpayer is bound to incur substantial losses. Indeed, the Select Committee in the House of Commons reviewing this matter only last week reported that current losses for BNOC amounted to £61 million last year, and that a continued weekly deficit has continued to operate.
I have no doubt that the Minister will defend the Statement he has just made this afternoon on the grounds that covering the loss of £61 million plus current daily losses by buying oil at guaranteed prices and selling it on a very weak spot market incurs further liabilities to the taxpayer. But I wonder whether the Minister would tell the House what will be the net revenue losses to the taxpayer as a result of this exercise?
If Exxon or other of the oil companies sell at an appreciated price rather than the guaranteed price, they make a profit, but these profits are taxed to the extent of 80 per cent. and presumably the taxpayer gets back a substantial part of the profit that has been made. If you abolish the BNOC purchasing power then it means that the price of oil falls, the net revenue to the taxpayer arising from PRT is consequently depleted, and in fact the net advantage from this exercise is not as substantial as is claimed in the Select Committee report. Perhaps the Minister will enlighten us as to what is the net revenue impact of these changes.
Perhaps too he will answer the question put so forcefully from the Labour Benches as to why the Minister, only a few weeks ago, giving evidence to the Select Committee, defended the continued existence of BNOC, whereas today he announces that BNOC, under his auspices, is to be abolished. Perhaps he will also tell us a little about the consequences of this for the small companies operating in the North Sea. The large companies can offset the loss from a reduction in price against their downstream and refinery activities, but the small companies have no such activities and depend on the guaranteed offtake price, which BNOC presently guarantees. Under the circumstances, can the Minister make some estimate of what the consequences of this policy may be for the smaller operators—not the Exxons and the Texacos but the smaller operators, who are very lively and who have invested large sums in North Sea development?
As I say, I accept the logic of what the Minister is saying and I accept that the market is bound to be a soft market for the foreseeable future. We are moving into summer, the miners' strike has been settled, and presumably the consumption of oil in world markets will be reduced, and I can understand why he is taking these measures. But I hope that he will deal with these 190 consequences and say whether he anticipates that there will be any effect on future exploitation and exploration policy as a result of the removal of this guaranteed price for 51 per cent. of the output.
I accept the Minister's statement that the old argument about security of supplies no longer exists, and that that was the original justification for BNOC, because the pipeline has come ashore anyway, and I am delighted that, while he is not exercising the powers involved in the participation agreements, he is in fact retaining the power to exercise these if the market rises or if we are in any danger.
Perhaps I may join with the Minister in paying a compliment to Ian Grossart and the staff of BNOC, who have discharged this difficult responsibility well. Perhaps the great mistake was in splitting the marketing activities of the oil operation in Britain from its exploration and exploitation activities, which are now vested in Britoil. But that is past, and I am delighted that certain powers involved in this operation are going to be retained to be used when necessary.

§ The Earl of Avon
My Lords, I am grateful to the noble Lord, Lord Taylor, for his reception of this Statement. I am rather astonished by the reactions of the noble Lord, Lord Stoddart. I am particularly astonished that there should be any question of Stalin or anybody being chained up. I thought that what we were doing was easing the chains. I find it extraordinary that he should have such a reaction about something which saves the public an unnecessary expense, which is why we have moved swiftly to save them from a corporation which is no longer required.
The Government have been consistent in their policy of seeking to avoid action which could risk destabilising the oil market. They share this objective with their Western allies. They would gain no advantage from a violent fall in oil prices, which might be followed by an even greater surge in prices. Because of changes in the oil market structure, BNOC could no longer make a contribution to stability, but the terms under which it acquires participation oil developed a strong potential for destabilising the market. The policy is that prices should be determined by the balance of supply and demand and that Her Majesty's Government should seek to avoid actions which could risk destabilising the market. With a change in the structure of the oil market, the BNOC price had gained a potential for destabilising the market. The only way to achieve the Government's policy is abolition of that price and the supply arrangements which made it necessary.
The noble Lord, Lord Stoddart, mentioned the Select Committee's report on oil pricing. I am rather surprised that he used that in support of his arguments, because I should have thought that the result was about two-thirds of the way towards what the Government have done today. The noble Lord, Lord Taylor, asked particularly about tax revenue. Tax valuation will continue to be based on the market price, and this would not be affected by abolition of BNOC. I am also told that there would be no effect on small companies.

§ The Earl of Lauderdale
My Lords, is my noble friend aware that there is much sympathy for the Government in facing the dilemma that BNOC was set up at a time of rising prices and we are now in a period of falling prices? But in recognising that, is the Minister quite sure that he has read his brief correctly when he says that BNOC is no longer able to contribute to market stability? Surely the fact is that, trading about 1.3 million barrels of oil a day out of the total free world market of 45 million barrels a day, of which half is on the spot market, considerable influence at the margin is exerted by BNOC. So to withdraw the use of that instrument will surely be to encourage instability of prices rather than the opposite. Can the Minister say whether the Government have been able to discuss this problem with the industry, notably the United Kingdom Offshore Operators' Association? Is he not aware that some oil companies, notably BP, have been arguing that we should keep BNOC but that its trading and price fixing methods should be more flexible?

§ The Earl of Avon
My Lords, my understanding of my noble friend's question was to ask me why we were doing this, and the answer, I thought, is basically in the different operation of the market. There is now so much oil being dealt with at spot prices that the question no longer arises. Do I hear my noble friend say that that is not true?

§ The Earl of Lauderdale
My Lords, what I wanted to say is that it is the case that about half the 45 million barrels of oil traded in the free world each day is now traded on the spot market and not by long-term contract. While half of the free world's 45 million barrels a day is traded at contract prices, the half that is traded on the spot market is an area in which the 1.3 million barrels a day handled by BNOC can have an effect and has been having an effect.

§ The Earl of Avon
My Lords, I am grateful to my noble friend for his clarification. Concerning his question on consultation, no, we did not.

§ Lord Taylor of Gryfe
My Lords, I wonder whether I have misunderstood the Minister, and perhaps he could clarify this. I assume it is correct that tax revenues will not be affected, and that the overall rate of tax will not be affected, by these decisions. But if the off take price of oil is reduced by the major oil companies, thereby reducing their revenues, then presumably the taxation revenues will be consequently reduced. I am asking: what is the net effect of these measures on our total revenues? I presume we shall save £60 million on the abolition of BNOC—that is the figure for last year—but what will be the consequence of this on the taxation revenues which result from a reduction in the offtake price, which is inevitable? What is the net advantage to the nation?

§ The Earl of Avon
My Lords, I cannot honestly say that I have the answer to that question today. I hope that I can find it for the noble Lord and write to him. The one figure I do know is that we shall receive back three-quarters of the cost of BNOC as a result of tax.

§ The Earl of Lauderdale
My Lords, will my noble friend add just one piece of information? When the 192 legislation comes, is it not only to keep BNOC in being but to keep in reserve the same powers for the compulsory buying of oil to steady the price if we reach a period, which many oil companies think will be coming in four or five years, where we have rising prices again?

§ The Earl of Avon
Yes, my Lords. The original Statement says that we shall retain the participation agreements themselves so that we can activate them to have access to these oil supplies should the need arise.

§ Lord Cledwyn of Penrhos
My Lords, is the noble Earl aware that the case he has sought to make and the Statement itself give the House no confidence that the Government are doing a prudent thing in abolishing BNOC at this time? Is he further aware that the reaction to this in the markets will tend to destabilise rather than to stabilise the position? Can he say briefly what consultations the Government had before they came to this serious conclusion? In a whole catalogue of divisive legislation this has been the most divisive.
The Minister has the obligation to tell the House that in addition to interdepartmental discussions there were cogent and clear discussions with the other parties involved. Can he say what discussions have taken place with the oil companies in this country; will he say what discussions have taken place with the trade unions: and. finally, can he say whether there were discussions with the chairman and members of BNOC, who have rendered signal service to this country during the existence of BNOC? The Minister's duty at this moment is to explain to us what consultations took place.

§ The Earl of Avon
My Lords, I am astonished that the noble Lord should speak in these terms on a measure which I find to be totally explicable. No consultations have taken place because of the risk of speculation about the changes in the oil market. The chairman of BNOC was asked to come in this morning, and he was told of the decision.

§ Lord Cledwyn of Penrhos
My Lords, It is absolutely disgraceful that the distinguished chairman should be called in and presented with a fait accompli without being given the opportunity to state a case. Can the noble Earl tell the House now what were the reactions of the chairman when he was told in this fashion?

§ The Earl of Avon
My Lords, I am informed that his reactions were what any good civil servant's reactions would be.

§ Lord Diamond
My Lords, I am delighted that the noble Earl finds the situation "totally explicable". He will forgive me, however, for reminding him that one question has been asked twice and not answered. We are all very interested in it, and may I put it. therefore, a third time? Those of us who listen carefully to what the Government have to say recollect that three weeks ago the Government, through their official spokesman the Minister in question, said the very opposite to what is now being stated. It is a simple question. May we have the answer?

§ The Earl of Avon
My Lords, I did not get the noble Lord's supplementary question. Is the noble Lord asking why my right honourable friend changed his mind over the space of three weeks?

§ Lord Diamond
Yes, my Lords.

§ The Earl of Avon
My Lords, the answer is that the situation has changed in the oil market structure. BNOC can no longer make a contribution to stability; the terms under which it acquires participation oil have developed a strong potential for destabilising the market.

§ Lord Davies of Leek
My Lords, my question to the noble Earl the Minister, while thanking him for the Statement, was to ask whether he is not faced with a fait accompli like the rest of us. This matter is of such devastating importance to me that I think it is worthy of time being allowed for the House to debate it fully and to go into it in depth and with understanding. That is not casting any aspersions on the Minister. I thank him for the answers that he has given us.

§ The Earl of Avon
My Lords, I thank the noble Lord for his appreciation that I am doing my best. I will certainly go through the normal channels to see what can be done.

§ Lord Stoddart of Swindon
My Lords, in his reply to me the noble Earl suggested that the report of the Select Committee went two-thirds of the way towards supporting the abolition of BNOC. I really would ask him to reflect on that. Is it not a fact that the Select Committee did not consider abolition as an option? From paragraphs 27 and 28 of the report it is quite clear that the Select Committee had no idea that BNOC should be abolished. Indeed, the only criticism they make—and they make no criticism, as far as I can see, of BNOC—is criticism of the Government's interference with BNOC which has made it difficult for it to carry out its task. Would the Minister kindly comment on that?

§ The Earl of Avon
My Lords, as I understand it, the Select Committee considers that BNOC should move to setting term prices for shorter periods and in more direct relationship with market values, in preference to the alternative of strengthening BNOC's ability to stabilise the short-term market by allowing it to invest in storage and intervene more actively in the forward market. I hope that the noble Lord and I will be able to discuss this again at some later date.

§ Lord Shinwell
My Lords, while I do not complain about the Minister's clarity, for clarity is one of his attributes, I find it difficult to follow all this. For quite a long time we have been exercising our pride, if we have any pride left in matters of this sort, because we control oil, North Sea oil—and that is the language we use: "North Sea oil"—and the revenues from North Sea oil. Is the Minister going to derive any revenue from North Sea oil in the future? If so, could he exercise his mind on the issue? He spoke about something associated with new technique but there is no clear concept about whether the revenues would be continued. If they are to be continued, will they he used by the Government as before?

§ The Earl of Avon
My Lords, I would underline everything that the noble Lord, Lord Shinwell, has said. Indeed, we have got an enormous pride in what is going on in the North Sea and that pride will in no way be abashed by this particular measure. The noble Lord might like to know that the North Sea oil production which we are getting at the moment represents 5 per cent. of the oil production of the world. Therefore, on the taxation situation, as I mentioned to the noble Lord, Lord Taylor, we can have another look at this shortly.

Lord Morris
My Lords, may I ask my noble friend the Minister the nature of the change in circumstances to which he referred when answering an earlier supplementary?

§ The Earl of Avon
My Lords, without having a look at Hansard I am afraid, since I have been on my feet for such a long time, that I cannot remember.