UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 341-iiHouse of COMMONSMINUTES OF EVIDENCETAKEN BEFOREENERGY AND CLIMATE CHANGE COMMITTEE
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Transcribed by the Official Shorthand Writers to the Houses of Parliament: W B Gurney & Sons LLP, Hope House, Telephone Number: 020 7233 1935
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Oral Evidence
Taken before the Energy and Climate Change Committee
on
Members present
Mr Elliot Morley, in the Chair
Mr David Anderson
Judy Mallaber
Sir Robert Smith
Mr Mike Weir
________________
Memorandum submitted by Professor Kemp
Examination of Witness
Witness: Professor Alex Kemp, Schlumberger
Professor of Petroleum Economics,
Q97 Chairman:
Good
morning, Professor Kemp. It is very good
to see you. Thank you very much for
coming along to our session this morning.
You will be aware of the Committee's remit and what we are looking at in
relation to the production of oil and gas in the North Sea and associated issues
around the industry, the fiscal regime, environmental controls, skills, all of
those kinds of issues. Can I start by
saying, Professor Kemp, oil and gas has been a very important contributor to
the
Professor Kemp: The range of figures you have mentioned is consistent with the published figures from the Department of Energy and Climate Change. Their central estimate is about 20-21 billion barrels of oil equivalent. For what we call the sanctioned fields we are reasonably confident what could be producible for the probable and possible. The certainty increases with age but there are discoveries although there are doubts whether they will all be economically recoverable. For the yet-to-find, which is a big element in the optimistic total of over 30, 35, there are clearly a lot of differences of opinion on what might be discovered and that has always been the case. We do a lot of economic modelling. We have our own independent views on what could be producible using our economic modelling, which is different from what reserves are actually there but could be extremely remote or high cost. All being well, that is with a higher price than we have at the moment and a receptive regulatory and fiscal regime, we think that we could certainly recover over 20 billion barrels of oil equivalent. Our independent modelling shows that, and it could be 23 or 24 in the long period up to 2040.
Q98 Chairman: Some of these fields are deepwater and there are the west of Shetland fields. You mentioned the fiscal regimes as well as the price of oil, which are clearly drivers in terms of whether or not these reserves are exploited. Does the industry actually have the equipment and expertise to develop these fields? Is it just a question of the regulatory and fiscal regimes?
Professor Kemp: Broadly speaking, the technologies have evolved extremely well since the late 1960s, so by and large the technologies are available or could be adapted to deal with even the very difficult situations, say, in the Atlantic Ocean. I am a petroleum economist and we tend to see the difficulties from the economic side as well. It is worth emphasising that of the remaining potential of 20-25 billion barrels of oil equivalent, the average size at the moment is about 20 million barrels of oil equivalent with the most likely being less than that because, to use a little technical language, the distribution of fields left by mother nature is lognormal so there will be a lot of small ones below 20, 15 or ten. In the 1970s the average size of a field was over 500, so this is what makes the eventual recovery from an economist's point of view a little difficult and why we have a big range. We have got a lot of very, very small fields, some moderately sized ones and the occasional big one and that makes the economics difficult even with technologies that could physically do the job.
Q99 Sir Robert Smith: One of the things you mentioned there was that the size of the new fields is much smaller, so in terms of the economics of production is it quite important to understand that they do not get produced by putting a big platform on a little tiny field, they require the existing processing and infrastructure to be available? How do you assess the quality of the regime for new entrants finding small fields actually being able to access that infrastructure?
Professor Kemp: First of all, to develop a lot of small fields you would hope that it is not far from existing infrastructure. If it is not far from existing infrastructure then typically the most economical way to develop the field would be by a sub-sea system which would be tied back to an existing big platform. One of the difficulties is not all fields are in that happy position, some are what we call stranded, a long, long way away from any infrastructure. Examples would be some of the gas discoveries in the west of Shetland region. Access to infrastructure is clearly important and the majority of new developments now does use existing infrastructure. One of the issues to expedite the speedy progress in developing new fields is to ensure that access to infrastructure, which involves negotiation between the user field and the asset owner, takes place in an expeditious manner because delays are the worst thing. In our modelling of the future of the North Sea we see the need to get a large number of fields coming on every year, up to 20 fields per year is just possible all being well. If that slips because of delays, for whatever reason, then the production profile goes down more sharply.
Q100 Sir Robert Smith: The independents who were giving evidence to us last week were highlighting that there may still be concerns amongst some of the new entrants and smaller players that the terms of that negotiation are actually quite difficult. Do you detect whether the Government should be doing any more to make it easier for those negotiations to come to a speedy conclusion?
Professor Kemp: There was a major review of this a few years ago and, if my memory is right, in 2004 a new Code of Practice was brought in which was designed to speed up the negotiation process and to give guidance on what might be achievable. In terms of the economics, a key element in that substantial document was to say the two parties shall negotiate in good faith for six months and if they cannot agree after that and if one of the parties wants to get the government to intervene then the government would intervene and could set a tariff and other conditions taking into account the risks and costs of the infrastructure, and after having taken that into account would set the tariff which could prevail in a competitive market. That is the present arrangement. I do not think there has been any formal intervention to date. Whether that means it is all going very well I am not quite so sure, but clearly it is an issue that deserves to be made efficient because it can hold up new developments quite a lot.
Q101 Mr
Weir: Just to follow that up. One of the things the independents were
suggesting is there should be a common carrier system and they suggested the
one in the
Professor Kemp: The history in the
Q102 Mr
Anderson: Professor Kemp, my understanding is that
originally there were six or seven companies operating in the
Professor Kemp: The number of companies certainly has grown and I think there are a lot more than that altogether if you include the small licensees and the Promote licences. The advantage of large numbers is that you do have diversity because not everybody sees prospects in the same way and there are different ideas. We do have trading of assets because companies have different ideas of what to do with an existing asset or a block that has not been properly explored. My view is that larger numbers are fine because there will be more players, large ones, medium-sized ones and small ones. At the moment with a lot of small fields the very large players may not find some of them very attractive because the materiality of the expected return in relation to their size would not be very interesting, whereas for a small company it could be perfectly interesting. I think the large number of companies and diversity is good because it is one factor that can help to maximise the economic recovery. It does, of course, mean that the Department of Energy and Climate Change has more work to do in their talking, watching and regulating all of these companies, but that would seem to me to be very much worthwhile doing.
Chairman: Thank you. If we can just look at the current market conditions next. Professor, it is not easy for anyone at the moment with the global credit crunch, downturn, a fall in oil prices, so there are clearly implications for the industry there and, Judy, I know you wanted to come in on this.
Q103 Judy Mallaber: Yes, if we could explore that in some more detail. In some of your very early comments you mentioned about the price of oil. Is the low price of oil the single most important factor in the current market conditions facing UKCS companies? Is that the critical factor?
Professor Kemp: The present position is a very difficult one in the UK Continental Shelf. The price of oil, as you will know, collapsed from $140-odd to just over $40. What was not so well discussed was that the gas price at the wholesale level has also come right down as well. The wholesale price was just over 30 pence per therm this morning. That accounts for 45% of total production. That is a big concern as well. Over the last four or five years the costs have pretty well doubled, or maybe more, so the cost per barrel is now very, very high and there is a kind of pincer movement between the price coming down and the cost per barrel going up. On top of that we have the financial sector problems which make it very difficult for the small and medium-sized companies to get external finance, whether debt or equity. This has come very, very quickly but, of course, the companies have done their budgets - they do them late in the year - so $40 for oil is not a good outlook looking ahead and into next year because it does not look to me as if the price is going to come up much in the next couple of years.
Q104 Judy Mallaber: I think when you were talking earlier you indicated that there would be a relationship between the price of oil and the amount that would be taken out. Does your research confirm that lower oil prices will lead to lower rates of oil production from the Continental Shelf? I understand you are saying that there is a link between the rising costs of development and the price, but what prospects are there for the long-term price of oil and how significant will it be for the industry and how much exploitation will we get?
Professor Kemp: On the first point, the
amount of investment will certainly be linked to the price, so if a relatively
low price continues we will certainly get a significant reduction in investment
and that in turn would mean that the economic recovery would be put in jeopardy
because some of the infrastructure that we have already mentioned might not
become sufficiently used and might have to be decommissioned. Our modelling shows with $80 and more then in
the long-term we could recover over 22 or 23 billion barrels, but if it stays
at $60 then a fair bit less and at $40 certainly much less. There is a link with long-term price
sensitivity. My own view on the oil
price is that I fear it may stay relatively low for a while because the world
recession and reduction in world demand has been the driver in bringing the
price down and that could easily remain the case for the next couple of
years. Although eventually it will come
up, I fear it may be sometime in the future and that is what has led me to say
in my memorandum that for maximising economic recovery from the
Q105 Judy Mallaber: What is the timeframe between investment decisions and prices? How sensitive are investment decisions, how long does it take for there to be a change in production either up or down depending on the prices?
Professor Kemp: Broadly speaking, oil companies are quite cautious in the prices they use for screening investments. I am quite sure that none of them would have used $100 or $140 to screen a long-term investment because we are talking about an investment which would last, depending on how big the field is, 20 or 25 years if it is a reasonably sized field and ten years if it is a very small one. That is why a cautious view is taken given the history of big fluctuations. The time between the investment decision and getting production if it is a very small field could be quite quick, it could be one or two years if it is a very small one, but if it is a big one you and you have to have a big platform constructed then we are talking about several years.
Q106 Judy Mallaber: You mentioned the problem about getting finance for companies in the current credit crunch. Is there a real distinction between the impact on large and small companies? You also indicated you thought that the Government needed to assist. What kind of assistance would you look for? Is that to all types of companies? What responsibility do you think there is on the Government to give assistance to get extra finance in for investment and exploration?
Professor Kemp: Oil companies are affected by
the knock-on effects of the financial squeeze because that has helped to bring
the oil price down so, therefore, all companies' cash flows have come right
down. The major oil companies, despite
the fall in their cash flows, will still have funds available and could get
external funds more readily than small ones but, nevertheless, as we say, they
will be rationing their capital as well.
The problem with the
Q107 Judy Mallaber: So should the Government be helping smaller companies or larger companies?
Professor Kemp: In my memorandum I said there
was a very strong case. The Treasury put
out a consultation document at the time of the Pre-Budget Report and it raised
a particular incentive for new developers called the value allowance that would
be an allowance for the supplementary charge.
For new field developments we have the corporation tax, which is 30 per
cent, and then the supplementary charge on top of that of 20 per cent, so the
total for a new development is 50 per cent.
They said value allowance is on the table and my thinking is it is very
important that a reasonably sized value allowance should be implemented in the
Budget this April. If it is of a
reasonable size it could make a material difference to investment. I do not think it would stop investment
falling a bit over the next two years, but it could certainly mitigate that and
incentivise and bring forward some projects which would be of great help not
only to the oil companies themselves but to the supply chain which is now
beginning to suffer from lack of orders and unemployment. You mentioned exploration. Exploration will actually fall this year
because a lot of that does come out of the cash flows, nearly all of it
actually, and they are right down because of the low prices. The explorers in the UKCS who have been most
active in the last few years have been the medium and smaller players and they
are quite hard-hit. In my memorandum I
said that for those explorers who are not yet in a tax paying position there
are advantages in giving them the same sort of reliefs as would be available to
a company that was in a tax paying position.
A few years ago
Q108 Judy Mallaber: I think we are going to come on to the tax regime in a bit more detail. On that last point, is that why the Bank of Scotland invested in the Norwegian Shelf recently when companies are telling us they are getting problems in getting them to invest in companies here, or was there another reason why they went for the Norwegian investment?
Professor Kemp: It certainly is the case that when the Norwegians a few years ago introduced their incentive for new players to come to the Norwegian Continental Shelf there were small companies based here who went to Norway and they could never have done it without that relief.
Q109 Mr Weir: Just to pick up one point about the value allowance. You mentioned it for new fields but it has been suggested to me that something similar is required to help with the older fields that are coming towards the end of their lives to make them economic to ensure the last drop of oil, so to speak, is taken out of these fields. Is that something you feel the Government should look at?
Professor Kemp: Yes. We did a study two or three months ago on the mature fields that are still subject to petroleum revenue tax. That means incremental investments in these fields are faced with a tax take of 75 per cent and now that the oil price has come right down that is very high, but it is also discriminatory. It is also clear from our studies that looking ahead the economic recovery that we could get from the remaining reserves to a large extent is from existing sanctioned fields as well as from new ones. All the excitement is on the new ones, but to increase the recovery rate from the old ones, from 45 to 50 or 50 to 55 per cent, something like that, is a lot although it does not get the main attention in the media because that is not as glamorous as developing new fields. We said in our paper that there was a case, and we modelled the potential incremental projects, for removing the PRT altogether from these. There is a scheme in existence where under rather special conditions the PRT could be removed from such projects, but only where the incremental project is clearly separated from the main field, like a satellite, for example, of a main field. We think economically that does not make too much sense based on the physical separation and there is a case for applying it to all incremental investments.
Q110 Sir Robert Smith: That goes back to the earlier point about the future in the North Sea being small fields requiring the existing infrastructure to stay there, so is there not quite a strong incentive and a national interest for the Government to see ways of making those older fields more exciting to continue in production? Surely some kind of incentive is a bit easier than just stepping out into a new well and being able to build incrementally on that platform? Would that kind of tax incentive not be a double-win because it would not only encourage extra production on the platform but would keep the platform there as a hub?
Professor Kemp: Yes. The importance of the infrastructure of
pipelines, big processing platforms and terminals for maximising recovery at
lower cost is very clearly a major point.
The infrastructure is getting old in a lot of cases and it has to be
maintained and fit for purpose over the longer term and, therefore, will
require very considerable investment.
The best way to incentivise that is to get as much ongoing business as possible
for these pipelines, and incremental projects would play a major role
here. We did a study on that a year or
two ago which showed initially it would be the big processing platforms that
would be coming up to the end of their lives and, of course, the host field
would be near the end of its life. If
you have got a lot of small incremental projects all tied in, satellites tied
in, you could extend the life of that platform and also it would enable
investment in the pipeline to be enhanced as well. That was a point I mentioned earlier on,
namely the way to maximise economic recovery from the
Q111 Sir Robert Smith: We should not be complacent either because of past lessons. In the past when the price dropped there was still the attractiveness of reasonable finds to keep that infrastructure in place, but this time around, unless we get an incentive in there, we will not be around when the recovery comes.
Professor Kemp: The need for incentive is obviously stronger when the remaining fields and projects are all relatively small. In my memorandum I did show a lot of new fields could be brought on-stream with the value allowance even.
Q112 Sir Robert Smith: What sort of figure do you think the value allowance should be pitched at that achieves the double-win of maximising investment and minimising, I suppose, the Treasury's risk-taking?
Professor Kemp: That is a difficult one and I was a little coy coming up with one figure. What we did was to test a range of value allowances ranging from a small one of 12.5 million per field value allowance all the way up to 100 and for some difficult situations, like west of Shetland, to 250 million. We found as the size of the allowance went up then you did get more fields brought on-stream. Those fields I termed were contributing to economic production because they were still paying corporation tax at 30 per cent, they were not being subsidised or getting it tax-free. We found the numbers of fields incentivised went all the way up and we stopped at 250. It is a difficult judgment because clearly the Treasury has to look at what happens to its tax revenues. On the tax revenues we found that the evidence was a bit mixed, that sometimes the Treasury would be better off, that it gained more than it lost, although sometimes it was the other way around.
Q113 Sir
Robert Smith: Just one final thing I would like to look at
is how the
Professor Kemp: Around the world we are not
the toughest because the toughest ones tend to be in countries with gigantic
fields. I think the way to look at is to
relate the tax regime we have to the reserves and prospectivity and cost per
barrel. We must remember that we now are
a relatively mature province with the average size of field of 20 million
barrels of oil equivalent.
Chairman: Thank you very much. Linking with the issues of investment and financial regime is this issue of how you develop new fields and a lot of the industry and, indeed, the Government are looking to the west of Shetland. There is a wide range of issues there, not least some environmental sensitivities and, Dave, you want to come in on this one.
Q114 Mr Anderson: Thank you, Chairman. Professor, what exactly have we got out at the west of Shetland? What reserves are there?
Professor Kemp: What we have at the moment is in production we have got three substantial fields, Foinaven, Schiehallion and Clair. We have got some others that look promising. There have been some worthwhile discoveries on the gas side. We have two or three significant gas discoveries, quite large ones, and then a whole lot of small ones, over 20 altogether. The problem is to make these gas fields commercially viable has been very, very difficult because of the very high costs. The development costs per barrel of oil equivalent could be 20 or way up there. There is the problem of the infrastructure. If we want to get all these gas fields developed we do need another substantial pipeline and that is very expensive as well. In terms of the economics, that has been a big problem that has been studied for quite some time. In terms of reserves to make a scheme viable, things are looking a bit more promising there but the gas price, the oil price, has come right down. It is a very difficult environment. That was why we thought there was a case for giving a bigger value allowance for projects west of Shetland because all the modelling we have done over the last few years indicates it is extremely difficult with present costs and prices, and even higher prices, and the present tax regime to get a viable cluster development, which is ideally what we would like.
Q115 Mr Anderson: What is the volume of the reserves out there? Is it possible to estimate that?
Professor Kemp: Within a very big range. The Department of Energy and Climate Change has some big numbers but they are yet-to-find and quite speculative. I do not have them in my head but they are quite big. It is acknowledged that they are yet-to-find.
Q116 Mr
Anderson: If the development costs are $20 a barrel,
what does that equate to what you pay in the
Professor Kemp: Again, there is a range
depending on where you are based in the central
Q117 Mr Anderson: At the moment I understand the oil that is being pumped out of the three fields is going into tankers. Why could that not be continued if you had the field further out rather than putting the pipeline in?
Professor Kemp: For the gas you do need a new big pipeline, that is the problem, and tht is very expensive.
Q118 Mr Anderson: What sort of pipeline length?
Professor Kemp: Eventually the gas will have to come to market. The kinds of schemes that are being looked at would initially take the gas to Sullom Voe where it would be treated, the liquid separated and then you could have a dry gas pipeline coming down to St Fergus. That is one of the schemes that is being looked at but, as you can imagine, that is very expensive.
Q119 Mr Anderson: In terms of supporting the Government, do you think that the Treasury's proposed value allowance would help with this?
Professor Kemp: If we consider that what is on the table at the moment is this value allowance for the supplementary charge then if it was quite a big one for west of Shetland, given the special difficulties and very high costs there, it certainly could make a difference, yes. It is a little complicated because one of the big factors which differentiate the west of Shetland is the need for a very big joint pipeline and the value allowance is not directly geared to that, it is geared to the fields.
Q120 Sir Robert Smith: Just two quick questions on west of Shetland. One is what sort of contribution would it be making to our security of supply, getting more gas from our fields rather than having to import from abroad?
Professor Kemp: Do you mind if I look at my research paper on that? We produced a paper on the contributions of the different regions a little while ago. Take the case where in our modelling we recovered by two or three fields 20 billion barrels of oil equivalent, so on west of Shetland in our modelling 3.4 out of 20 from now to 2035.
Q121 Sir Robert Smith: So quite a substantial bonus for the country.
Professor Kemp: Yes. That gives you a feel for what the potential would be. That is taking a high price case. On the low price case a lot of these west of Shetland contributions are not viable. That was at an $80 price case, 3.4 out of 20 billion.
Q122 Sir Robert Smith: It is meant to be a hard-nosed financial business making judgments, but confidence and psychology seem to play a part in the instincts of the industry. How much would unlocking the west of Shetland be a boost to the morale of the province of the UKCS in terms of the supply chain, the critical mass, the idea that there is still something bigger to play for?
Professor Kemp: The way I put it is this: if we did a significant development going on the gas side with a reasonably big pipeline, that would be a great stimulus to all the small fields round about and even exploration round about because the knowledge that there was a joint pipeline there would make a very big psychological difference to how people would view acreage, prospects and everything. It would have a very strong knock-on effect. That is certainly a reason why from the national interest point of view some special consideration might be given to west of Shetland. On my 3.4 out of 20 to 2035, I would just like to add one point. That is on the assumption of past trends in exploration success. If the Department of Energy is right in that there could be a lot more, it is just that we have not been looking in the right places, then that 3.4 could become much bigger.
Q123 Mr Weir: You have talked about the cluster development and this common pipeline, but, going back to our earlier discussion about common carriers and access to infrastructure, what needs to be done to develop that common pipeline and to ensure that everyone developing or looking west of Shetland can get access to that should they be successful?
Professor Kemp: A common carrier could be
done by investors themselves acting on their own and over-sizing it from the
first fields if they were reasonably confident that later on more gas was going
to be coming in from new ones. They are
very cautious about that and that is quite risky and involves a lot of upfront
money. In the past we had lots of
discussion about common carrier gas pipelines in the
Q124 Mr Weir: Given we are hopefully opening up large new fields west of Shetland but we do not know yet how much oil and gas is in there, as I understand it, it is mostly the big companies that are currently looking there. Independents told us few of them were involved west of Shetland at the moment. If we are talking about a hub and common structure, surely it is essential that it is made at a size that will allow for future development otherwise you are going to get a situation where you are doubling your infrastructure causing extra costs in the long run. I appreciate what you are saying, but is there anything the Government can do other than giving them the money, which they are not likely to do, that would allow this to go ahead as a common resource, if you like, for developing the fields in the future?
Professor Kemp: There are things that the Government could do. For example, if you want to be radical, they could guarantee bank loans relating to the construction of a pipeline, but that would involve a lot of heart searching and there would be questions of State Aid under the EU rules and these kinds of things to be clarified.
Q125 Mr Weir: One final point on west of Shetland. We had the RSPB give us evidence raising environmental concerns about some of the activities west of Shetland and also calling for areas to be closed to exploration that are important for marine life. What is the industry's view on this point?
Professor Kemp: I think the next witnesses will tell you that. My view is that when it comes to licensing the environmental obligations for licensees are really quite strong. Studies have to be done before a licence is given out by DECC under the EU Habitats Directive and when a company makes its proposal it has to have environmental statements on how its activities would interact with marine life, porpoises, whales and all that kind of thing, and how the problems that might arise would be dealt with. My view is that we have quite strong legislation in place to deal with that as things stand and it has actually been strengthened over the last few years.
Chairman: Thank you very much, Professor, that is very helpful and interesting. We very much appreciate you taking the time to come here and for the very thorough and detailed replies to our questions. Thank you very much.
Memorandum submitted by Oil & Gas
Examination of Witnesses
Witnesses: Mr Malcolm Webb, Chief Executive Officer, and Mr Paul Dymond, Operations Director, Oil & Gas UK, gave evidence.
Q126 Chairman: Good morning, gentlemen, it is very good to see you. You will be aware of the terms of reference of the Committee and the work that we are doing. It might be useful for the record if you say a little word of introduction, who you are and who you represent. If we start with you, Mr Webb, please.
Mr Webb: I am Malcolm Webb. I am the Chief Executive of Oil & Gas
Mr Dymond: I am Paul Dymond. I am the Operations and Supply Chain Director
at Oil & Gas
Q127 Chairman:
Thank
you very much, gentlemen. As you know,
the Committee is looking at the potential future reserves of the North Sea and
the wider areas in relation to the Continental Shelf and factors which relate
to the industry, including fiscal regimes, training and what the industry needs
in relation to encouraging future development and exploration as well as our
potential reserves in relation to the Continental Shelf. I was very interested to see there are
estimates from Oil & Gas UK that you could provide 65 per cent of the
Mr Webb: It depends upon the business climate in which we work.
Q128 Chairman: I thought you might say that.
Mr Webb: Given the right political and business climate, of course, we can achieve that. That is not a blue-sky number. That is not something we picked out of the sky but is actually a number that comes from sustained investment of the sorts of levels that we have been seeing over the last few years. It is not an overly ambitious target in that sense. It does, however, depend upon the right business and economic climate and, as you know, at the moment this industry, like all other parts of British industry, is facing some particular challenges. We have the double-whammy of the global recession and the banking crisis and that is causing some problems at the moment. As you heard from Professor Alex Kemp just a moment ago, it is important that some steps are taken rather urgently now to maintain the pace at a reasonable level over the next few years otherwise those targets could become unachievable and that would be disastrous for the country.
Chairman: We will be coming on to the current market conditions in a moment and exploring what your views are on that.
Q129 Mr Weir: You heard the discussion we had with Professor Kemp regarding the question of the shared infrastructure and Oil & Gas Independents fold us they felt they faced problems accessing infrastructure controlled by the larger companies and the voluntary Code was not working particularly well. Do you have any comments on that? Do you think the voluntary Code is working well? How would you feel about greater government involvement than the common carrier principle?
Mr Webb: Shall we deal with that in two parts and look at the Code of Practice first. I am lucky to have to my left here one of the authors of that Code of Practice and someone who is very engaged in its development at the moment. If I may, I will hand over on the Code of Practice to Paul who can tell you something of the history and what we are doing at the moment to try and make sure that it does work in a better fashion than it has done in the past.
Mr Dymond: The Code of Practice was an attempt in 2004 to get the various parties together who recognised that the future of the UKCS very much depends on those smaller fields coming in and making use of the existing infrastructure and all parties are in agreement with that. The Code of Practice has worked well in a number of its parts that we put together, in particular in terms of providing technical information and, indeed, providing commercial information from deals that have already taken place so that people have a benchmark by which to assess what they might get if they should knock on the door. The one piece of the Code that has not been working particularly well, and we all recognise that, is we had put in all access to infrastructure is negotiated access between the parties and we put in place a mechanism to give a backstop to that negotiation in the event that it did not come to a conclusion of its own. The backstop was effectively for the party wanting access to make use of the existing legislation and ask the Department for a determination from the Secretary of State. It is that piece that is not working particularly well. I think the key issue there was if you were going to ask for that you needed to have confidence that you were going to get an answer that was both workable in the longer term and available to you within a useful timescale and it was comprehensive enough that you could make use of it. There have been question marks over all of those things, which we have been working on. I have to say we were actively looking at this over the course of the back end of last year and still are looking at how we can move this forward. It is very much a work in progress. There is a broad spectrum of companies involved, members of Oil & Gas UK but also OGIA and obviously the Department, looking at how we can make use of the legislation and have a backstop to the negotiation that people can have confidence in. That is not just about how does the process work, although it is very much about that, but it is whether we think the legislation is effective and may or may not need amendment. As you are aware, the Energy Act made some amendments to the legislation and tightened up some of the holes that were in there, but whether it needs further amendment, that may come out of the discussions.
Q130 Mr Weir: Have there been any negotiations that have stalled and are unable to get to a conclusion?
Mr Dymond: Yes, there are a number. There are a number that have gone forward, deals are being done, but at this current stage in a mature province there are both complex technical issues associated with some access requirements and commercial issues. If there is very little value in the field and you have to provide a service then there is maybe not very much money in terms of whether that is sufficient to make that work well and incentivise people and keep the infrastructure going for the period. There is a commercial issue in terms of where the boundary is in terms of sharing the rent of a new field coming in, but there are also technical issues that have to be addressed as well. It is a very complicated area, which is why it depends on where that negotiation stalled as to how you view it.
Q131 Mr Weir: Is that not likely to become an increasing problem as the smaller fields that are being developed are trying to use the existing infrastructure? Is that problem not going to increase unless it is sorted out fairly quickly?
Mr Dymond: Yes, but how do you sort that out. If you look to the Secretary of State to do the determination then you need to be assured that process can happen and will come out with a fair answer at the end of the day for all concerned. As I say, the small independents have been part of the conversation and everybody is in agreement that if somebody is providing a service then there needs to be remuneration for that and coverage of the incremental costs. It is a matter of that balance. In some instances there is no deal to be had and in some instances there is but it is very difficult to get to a conclusion. That is what the Code is meant to do. Another piece that has been working in the Code, and we are working very hard within Oil & Gas UK, is about behaviours, responding when people ask, being responsive in terms of progress. The Code very much talks about behaviours. We created guidance notes on how all the parties can make the Code work best for them and we are running a series of training courses to allow negotiators to get a better feel for that. All of that is making a difference. It certainly made a difference very quickly in 2004 and there are indications that it is making a difference with the extra focus that we have put on it over the last six to nine months.
Mr Webb: I think it is fair to say that everybody is determined this Code should work and work better than it has done. There is no denying it has not worked as well as we hoped it would when we put it in place in 2004. In part that is because of the sort of regulatory back-up and lack of conviction within the industry, frankly, that that would ever be operated. I think these new amendments we are putting through will be to the good and that is the right way forward. You mentioned the common carrier system and retrofitting common carrier arrangements onto these existing pipelines is going to be hugely complicated, hugely expensive and I cannot believe is the right way forward. The best thing to do is for the industry and the Government, and the Government is working determinedly on this too, to work together to make this existing system work better. I think we can do it.
Q132 Mr Weir: How about the new fields west of Shetland? Has thought been given to the hub system that Professor Kemp mentioned and the common pipeline to allow development of those new fields?
Mr Webb: Again, it is a complex issue. There are some developments that could go forward there. Do you saddle those developments with the incremental cost of a common carrier pipeline that could sink the economics of those developments? I think the answer to that is no. There is a gap there that needs to be filled if you want to do the common carrier and who is going to pay for that? I do not think the Government is going to pay for it in the short-term. The best answer for the west of Shetland is to go back to look at some of the fiscal incentives that we can put in place to make sure we get as much as we possibly can on the back of the existing development, which means improving the economics of the development.
Q133 Chairman: You emphasised the cost of a potential common carrier development west of Shetland, but is there not an advantage if you had some kind of hub system where you may share some of the services those could be shared amongst different companies and the costs could be shared, and also other companies could possibly go into the hub and the costs would fall on them but bring down the overall cost of exploration? Is it all one way? Are there not cost benefits from this?
Mr Webb: In the long-term you can see the advantages of scale that would come from that, it is a question of how you get there and who is going to finance that capital until those other fields come in because, as Professor Kemp said, there is an awful lot of exploration activity that needs to go on in the west of Shetlands yet, it is still in the frontier areas, so who is going to bridge that gap. If you put the cost of that down on to the first developers past the post they are likely to sink and then we will not get those either. It is a question of who finances that.
Chairman: Can we look at some of the issues of the current market conditions and explore those for a moment.
Q134 Judy Mallaber: If we can look in broad terms at market conditions before we then move on and look at the fiscal regime. In broad terms is the price of oil in your view the single most important factor in the current market conditions faced by your companies?
Mr Webb: I do think it is a very
important issue, but it is not the only one.
As I said before, right now the industry as we speak is beset by a
double-whammy of the recession which is feeding through into this lower oil
price and also the banking crisis which is causing problems of finance
throughout the industry at all levels.
By the way, there is another thing I would like to say in parenthesis,
and I hope we get round to it eventually: this industry is not just about
producing oil and gas, it also is about a fantastic engineering success story
that is based here in the north-east of England that is doing six billion a
year in export business across the globe and has got fantastic potential for
growth. That is the other side of this
industry that we can sometimes forget about and we really must not forget about
it. To come back to your question, the
price of oil is definitely a very important factor at the moment but so is the
seizing up of the banking system and the fact that small companies, for
example, find the equity markets closed to them. It is not all about debt, it is about equity
as well and they are finding the equity markets closed to them. They are also finding the debt markets closed
to them for their development work. That
is feeding through into very conservative attitudes necessarily by some of the
medium-sized players as well. In
previous recessions when there has been a problem on the price you may have
been able to look at the banking system as a sort of back-up and support but,
unfortunately, it just is not there at the moment it seems and, therefore,
people are adopting very conservative attitudes towards their capital
investment programmes in that knowledge.
If you like, they have to live off their kill, they have to live off
their cash flow and have to take a conservative attitude towards that cash
flow. The banking crisis is causing this
problem and then you have this low oil price which is depressing the cash flows
and all of that is repercussive, it interacts with one another, and therefore we
have quite a serious situation facing us at the moment on which the Government
really needs to act. The final part of
the equation is costs. As you heard from Alex Kemp earlier on, over the last
four years we have seen an explosion in the costs in our industry and that is a
global phenomenon, not something that is just in the
Q135 Judy Mallaber: Can we unpick a few of those issues before we move on to what the Government might do? What you are saying reflects very much what the Oil & Gas Independents' Association told us about the problems smaller companies are having in getting access to finance. You also mentioned medium-sized companies. What kind of difference is there in the factors that are affecting larger companies from the smaller and medium-sized companies? Is there a difference again in relation to those companies you are talking about in relation to exports and the supply chain? Are they affected differently or are the factors very similar in relation to access to finance?
Mr Webb: They are affected
differently. In terms of oil companies,
and I do not wish to be over-simplistic, we should divide them into three
groupings. The first is the super-majors
and, frankly, right now I do not see too many of the super-majors that have got
a problem on cash flow; they are relatively well financed. At the other end of the scale, however, you
have got the small companies that the Government's policies over the last ten
years have very laudably brought into this basin and we certainly need
them. One little factoid: last year 80
per cent of the exploration expenditure in the
Q136 Judy Mallaber: No, that is very helpful. Some of the problems you have described there very graphically, which I understand, are very similar to those that, as you have said, are common to small and medium-sized companies in my constituency, at least one of which is in your own supply chain as it happens. Is there any reason why your industry should be given special treatment as compared to other sectors I have where the equivalent to the fall in the price of oil, which is your additional problem, for them might be a fall in general trade? Overall, is there any reason why your companies should be treated any differently or more favourably than, say, companies in any other sector?
Mr Webb: I think this sector has got
some particular issues around it that do deserve and warrant special attention,
yes. Again, it goes back to what you
heard from Alex Kemp in his evidence today.
Frankly, we are on something of a treadmill in the
Q137 Judy Mallaber: We are going to come on to that. The money that the Bank of Scotland was prepared to put into the development of the Norwegian bank, was that just to do with their financial regime or were there other factors as well? Why were they prepared to put money in there when, as I understand it, some of your companies are finding it extremely difficult to get any money?
Mr Webb: I could not comment on the
individual business decisions of the Bank of Scotland but I think you make a
very good point here. The issue is
international competitiveness. The
Q138 Sir
Robert Smith: I should declare my financial interest in the
Register of Members' Interests that I am a shareholder in Shell and also as
Vice-Chair of the All-Party Oil and Gas Group we visited ONS in
Mr Webb: Absolutely. I do believe that the industry and Government
has got a common cause here, we both want the same end, which is the maximum
ultimate recovery of reserves for the nation from the
Q139 Sir Robert Smith: You represent the supply chain as well as the actual investors. Are those of your members who are still in a reasonable situation with their cash treating their supply chain in any way to keep them going through the crisis by paying quickly or anything like that?
Mr Webb: Yes. I am aware of individual cases but I could not go into those now. There is a responsible attitude there. As a trade association we are taking steps to make sure that we do approach this in a responsible way. For example, one way we can make the credit crunch worse is to lengthen credit periods within our industry. We have adopted a Code of Practice for all invoices to be paid within 30 days. It is absolutely vital that people stick to that at the moment. Shortly we will be launching a new helpline to reinforce that point and make sure the industry does stay there. There are a number of self-help measures that we are taking within the industry at the moment to make sure we do not make matters worse, which I am afraid is happening in other parts of the industry.
Q140 Mr Weir: One other point we have not covered in this is as well as the problem with credit there is the rising cost to the industry. You say that last year the cost of developing and producing a barrel of oil or gas rose by 12 per cent compared with 2007. Why have costs risen so dramatically over the last few years and do you expect them to start falling?
Mr Webb: With regard to the second point, yes, I do expect them to start falling and there are signs that they will fall. We need to be careful about not believing that is going to happen overnight, it will be a slowish process and that is what history tells us, that when we have been through these periods of recession before it will take some time for the costs to come down, and we are working on that. The whole of the industry is taking a responsible attitude towards that. Why did they go up? They went up because there was a global pressure on the system to find and bring more oil on to production. Furthermore, you will recall a few years ago particularly for the offshore oil and gas industry we had some particular events in the Gulf of Mexico with hurricanes taking out an awful lot of capacity there as well. It was a mixture of global pressures and a need to go and find oil and gas combined with some physical problems that happened that took out an awful lot of capacity. Those two things combined gave rise to inflationary pressures on the industry and that was where we saw a great increase in the costs, particularly in the costs of mobile drilling vessels, for example, supply boats and support vessels which were in short supply.
Q141 Mr
Weir: That takes us on to future investment
particularly in the
Mr Webb: That is a very good question
and it maybe goes to the heart of our discussion today. In some ways this is quite a simple
business. The success of the
Q142 Mr Weir: Is the pressure on the oil companies to reduce cost feeding down to the supply chain and what effect is it having? The SCDI and Scottish Enterprise produced a report a few weeks ago saying the supply chain was £14 billion but that was only up to the end of 2007, if memory serves me correctly. I just wonder what impact the decisions taken by your members in exploration and development are going to have on that supply chain within the next couple of years given the current economic situation.
Mr Webb: There are two issues there. Is the supply chain reacting to cost? Yes, I think it is as best it reasonably can. Remember, a number of these rates are locked in and it would be a noble thing for some people to give up contractual entitlements on rates, so it will take some time for some of these rates to come down. I am seeing a lot of responsible actions within the supply chain on that. You are right, there is also pressure from the employing companies on costs and everybody is doing what they can to get that message across within the industry, that we need to get to a different place on cost, but it will take us time to get there. On the worst case, if we saw capital investment fall by two and a half billion over the next two years we are going to see 50,000 people lose their jobs, that is one of the impacts on the supply chain that will happen and that will be very, very serious.
Q143 Mr Weir: I was going to ask you what the Government could be doing to facilitate investment but I think you told us that pretty comprehensively earlier on when you talked about the tax regime.
Mr Webb: Yes. It needs to do three things and they are all
sort of interlinked in some way. It
needs to help these small companies by releasing these exploration pools that
are accruing at six per cent cost to the Government, so that should not be too
much of a problem for them I hope. The
second thing it needs to do is really take supplementary corporation tax off
new developments. As you heard from Alex
Kemp, we need some very clear messages on that.
It is quite clear that Government recognises the problem here. This value allowance is not the industry's
suggestion, it is the Government's suggestion, that was where it came
from. It came out of discussions we had
at the beginning of this year when the oil price was in a completely different
place, so if it was valid at that oil price it is doubly valid now and needs to
be much more potent now than it was then to help with these short-term
problems. The third issue is there is a
problem around decommissioning costs and the securitisation of the
decommissioning costs. Because of the
way that it has set up the tax regime, the Government is effectively requiring
companies of all sizes, small, medium and large, to make security provision for
100 per cent of the eventual decommissioning costs of these fields. That is an unrealistic number because that is
a tax deductible expenditure, therefore why are companies being asked to make
security for 100 per cent of the cost when actually at least 50, if not 75 per
cent of the cost is going to be a tax deductible event. That is putting strain upon the
industry. By the way, it is also putting
strain upon the banking system right now.
As a little aside on that, we have got, and our Association has been at
the forefront of developing this with then BERR, now DECC, decommissioning
arrangements or agreements and those set out how we can cope with all of these
problems and they rate the securities that can be provided. Bankers' letters of credit seem to be the
instrument of choice of the Government and also of parts of the industry as
well. Unfortunately, the number of banks
that now pass the credit rating for those bankers' letters of credit has
fallen, including the market leaders in that area, and people are seeing the
credit rating of the Royal Bank of
Chairman: This is clearly all part of the fiscal and regulatory approach.
Q144 Sir Robert Smith: You have made a strong case that with extra incentives there is a rosier future, more jobs sustained, more energy supply and more long-term tax revenues. Have you thought about what level that value allowance should be pitched at to make a meaningful difference to future investment?
Mr Webb: High, as high as possible. I think it should be set at such a level that it takes supplementary corporation tax off. There is a problem here as well. You may have heard some very big numbers being floated around and you need to be careful about that. You need to set the value allowance so high to produce an after-tax effect that is quite restrictive really. I would not want anyone to think that when Professor Kemp was talking about 100 million or whatever that means there is 100 million of value allowance going to be paid to oil companies, it does not work that way. I think 100 million produces an after-tax effect of about ten million. That is another issue. We did say to the Government that the value allowance is not our preferred way of dealing with this because we think it adds further complexity to the taxation system, but they have persuaded us that is the only game in town and that is why we continue to talk to them on that and we want to be as constructive about it as we can, but it should be big.
Q145 Sir Robert Smith: You are engaged in negotiations on bringing forward the exploration relief to try and get the cash flow to smaller companies sorted.
Mr Webb: We certainly are, yes.
Q146 Sir Robert Smith: On the narrow question of whether there should also be incentives for incremental developments on existing hub platforms, a lot of this tax consultation discussion started in a different climate where there was a recognition by Government and industry that there were smaller fields, cost challenges and so on, but the snowball increased in size as the credit crunch hit and now we are seeing things that were being discussed in a calmer environment being needed as tools to rescue things in a really quite serious situation. Do you think there needs to be that extra incentive to get those hubs protected by encouraging incremental investment on them?
Mr Webb: Yes, I think there is a case
for saying all new projects is what we should be stimulating now. If we go back to that point, we need to be
sending a very clear signal that this mature
Q147 Sir Robert Smith: We are a new Committee because there is a new Deprtment and all sides have welcomed the fact we now have a Secretary of State who is a champion for energy and climate change and that is bringing together two departments that should be together.
Mr Webb: We lobbied for it. I cannot say that we affected the result of it!
Q148 Sir Robert Smith: You have expressed concern about it being under-resourced and you think the 60 million from the licence fees should be doing more to give resources to the Department. What are the problems you are experiencing because of what you see as under-resourcing?
Mr Webb: I have to be careful here. We deal with a lot of very dedicated, hardworking civil servants and I would say we see them working too hard these days really. The system feels like it is under strain and under stretch. There are a few people we deal with and we see them having to deal with everything more or less and I do think there is a problem. I cannot quote you figures, but I think there are unfilled vacancies within the oil team and I have concerns as to the resources that are available to that team. I also have another concern that with the splitting out of this new Deprtment we are now going to have another departmental bureaucracy put on top of that Department and I hope they are not playing the zero sum game and we find more resource is taken away from the front facing people within the Deprtment and goes back into the bureaucracy. You mentioned the 60 million number and I do not know if you saw it but last year The Guardian produced an excellent chart showing what total Government expenditure was on a departmental basis, a total of 586 billion for the year 2007, and when you looked at BERR, the Department for Business, Enterprise and Regulatory Reform, which was where energy was before, the total spend was 8.3 billion but 7.3 billion of that was going to nuclear decommissioning. When you looked further down you saw that energy supply and clean energy was a total of 0.068 billion, which is 68 million, which did not seem to me to be an awful lot. That is why we are interested in that 60 million number. It looked like the licence fees being paid for the North Sea were financing the whole of the energy section of BERR and I do wonder what is happening within DECC. We support DECC, but DECC has got to be able to deliver and has got to have the right resources to do that.
Q149 Sir Robert Smith: One other thing on the new Department and its role. One of the jewels in the crown of the North Sea has been the huge expertise built up there that has now earned a worldwide reputation and a big export market, so there are the jobs that have come on the back of the North Sea, we get the security of supply and the tax revenues and the jobs, but do you have any concern that when energy was in BERR it was in a department that was also thinking of economic development and jobs? Do you still feel that there is a champion within Government for that export, skills and jobs side of the industry and the benefit that brings to the economy?
Mr Webb: That is a very good point and I am not sure that we have linked up correctly with that yet. I think it is in BERR, but we have not found it yet and we should find it. You are right, there could be a diffusion of attention there as well. I was surprised to see the other day that there is an energy section still within BERR, I am not quite sure what it is doing but maybe that is the section we go through and look for some help on that.
Q150 Chairman: Can I press you on one point in your submission about the EU ETS? You expressed concern that the next phase could reduce production, presumably because of the auctioning?
Mr Webb: Yes.
Q151 Chairman: First of all, do you not think auctioning is the fairest way? Secondly, do you not see that there are potential benefits from a rise in carbon prices, particularly in terms of driving a number of changes in production methods and also the potential for CCS storage in the future?
Mr Webb: Yes, yes, yes, and yes. I agree with everything you have said. ETS is a good mechanism for dealing with this
sizeable problem we have and we need a fair price on carbon. If you do not get a fair price on carbon then
you can forget the CCS because it is only a fair price on carbon that is going
to drive the CCS. We have no problem
with that and as an industry we have never had any problem with ETS. Gas flaring, for example, is within the ETS
system and we have no problem with that either.
We are not anti-ETS. This is a
slightly more difficult industry-specific issue. There is no alternative but to generate our
electricity offshore in these platforms and using the resources that are at
hand, which is the gas and the production on the platform. It is impossible to think of retrofitting new
equipment on to these old platforms. If
the offshore industry is required to buy all its allowances for that
electricity generation then on our estimation operating costs are going to
increase by between 20 and 40 per cent on platforms offshore and that will give
rise to the premature decommissioning of some of those platforms. When those old hub platforms go then that
will take out satellite production from around them, so we believe up to a
billion barrels of oil and gas are threatened by this. However, there is some good news. As you may know, the EU has a trade intensity
test linked to the carbon leakage and it is very clear, and we have agreement
with DECC on this, that these offshore installations of the offshore oil and
gas industry qualify for that. That
resolves some but not the entire problem.
It resolves half of the problem because the emissions relate in part to
electricity generation but also to other direct power uses offshore, so we are
still left with half of the problem and we believe we need to find a solution
to that other half too. To use that
carbon leakage term, this is pure carbon leakage. If we do not produce this oil and gas from
areas around our shores we will have to import it from elsewhere and assuming
we achieve all of the Government's renewables targets, which we hope we do, we
know, for example, we will still be reliant on oil and gas for 70 per cent of
our primary energy supply in 2020. The
Q152 Chairman: It certainly is.
Mr Webb: That is the issue there. We have no problem with ETS, no problem with a sensible cost of carbon, that is going to be vital to drive some of the environmental investment that needs to happen, and no problem with CCS, CCS is an area of opportunity for our industry, particularly the supply chain, but there is a specific problem around ETS Phase III which the Government is fully aware of.
Chairman: Can I just touch upon the issue of environmental impact. The industry is well established and, generally speaking, its record has been pretty good on environmental management but, of course, as you push out into the undeveloped areas, particularly into the west of Shetland, deepwater, extreme weather, there are concerns about the potential environmental impact and also in relation to sensitive areas. David wanted to ask a question on that.
Q153 Mr Anderson: The various environmental bodies have told us that regulation control is generally good but sometimes compliance is not, do you accept that?
Mr Webb: I would have said that levels of compliance within our industry on environmental issues are pretty sparklingly good, frankly.
Q154 Mr Anderson: What procedures have you got in place to make sure that they work?
Mr Webb: Do you mean self-policing it from an industry viewpoint?
Q155 Mr Anderson: Yes.
Mr Webb: We do not double up on the work of the regulators, we help the regulators who are doing that, but we do keep an open dialogue with regulators right across the piece and try and make sure that we are as constructive as we possibly can be in these areas.
Q156 Mr
Anderson: Is complying with regulations a burden on the
industry? Is it driving people away from
investing in the
Mr Webb: Is it a burden? Of course it is a cost, but I do not think
there is anything we would point to where we would say because we have got
these environmental regulations people are not coming to invest in the
Q157 Mr Anderson: In terms of the decommissioning process, what challenges do you face there?
Mr Webb: The challenge is to try and postpone it for as long as we possibly can actually and keep this infrastructure in place so that we can get the 25 billion barrels recovered. That is the first and foremost challenge. As to the other challenges, I think we are well up to them. We have got a magnificent supply chain here and we have the confidence and capability to do it. Some of this decommissioning is already going on, by the way, we are not complete novices on this and I have every confidence that we can deal with the issue. The problem around decommissioning is the way that - I do not want to sound like I am kicking the Government all the time on these tax ---
Q158 Mr Anderson: We are used to it!
Mr Webb: --- the decommissioning regime is based upon some false premises. It is relying upon two things. It is relying upon corporate governance and bankers' letters of credits. If the banking crisis teaches us anything it is that is not where we should be and we need a new system whereby we can have properly established retirement funds for these assets financed on a post-tax basis.
Q159 Mr Anderson: The RSPB have told us that they would like a better survey of seabirds and wildlife, particularly west of Shetland. Is that something the industry would support and, if it supported it, would it help to fund it?
Mr Webb: The industry has had a good track record of working with the RSPB upon surveys in the past. We have got a lot of data and we would be very happy to share it with them and talk to them about that issue. You did say support it and not fund it.
Q160 Mr Anderson: I said support it and fund it.
Mr Webb: We are not the only users of the offshore and I think that is probably the sort of thing we should talk to all offshore users about.
Chairman: Can we just turn to west of Shetland and the potential that there is there?
Q161 Mr Weir: What is the potential to exploit reserves west of Shetland and what are the main barriers to exploiting these reserves?
Mr Webb: I am not sure they are
barriers, they are challenges. This is
in deeper water, more hostile territory.
It is exploration territory as well.
As Alex Kemp said, we are not too sure what is out there. We carry a number that is remarkably similar
to his. We think there is potential for
about four billion barrels out there, which is a substantial prize. There have been some developments out there
and there have also been setbacks. After
the initial discoveries I think people thought we were going to be into the new
Q162 Mr Weir: Given the volatility of the price of oil at the moment and its level at $40 a barrel, does that make development west of Shetland currently economic?
Mr Webb: As Alex Kemp said, this industry has to take a medium-term view upon oil price. I can assure you nobody did their economics at $140 and people do not necessarily always do their economics at $40. $40 can have an impact upon cash flows, it can have that sort of immediate impact and, therefore, knock through on capital that is available for development. You can take your view upon the oil price, and I would love to give you my prediction for it but it is very personal.
Q163 Sir Robert Smith: It is also the gas price.
Mr Webb: You are quite right. As Alex said, please look at the gas price, 30 pence a therm, and the forward price is not much better either. Those sorts of levels would not be good but I personally do not think that is the long-term view and that is also why it is hugely important that this country does unlock those reserves. Frankly, I think the oil price will rise. I do not think the world is replete with immediately available sources of oil, therefore I think the price will rise and people will be planning accordingly.
Q164 Mr
Weir: When we heard from the environmentalists they
were suggesting that there should be certain excluded areas, for example around
St Kilda and the
Mr Webb: We would have to look at every case on its merits, but hopefully what we can come down to is there is a question of balance here. We are looking for a sustainable future for our economy and that involves issues that are economic, social and environmental, so it is a question of looking at particular cases and drawing the right balanced judgment.
Q165 Sir Robert Smith: Do you share Professor Kemp's view that if you could unlock the west of Shetland the psychological boost is quite an important added bonus for the whole province?
Mr Webb: Yes, I do. The industry is looking for a signal from the Government at the moment. Both west of Shetland and generally they need to pass a clear signal that it does value this industry, that it sees the need for it and it will do the things that are needed to make this basin competitive.
Q166 Sir
Robert Smith: I suppose one other thing is there is a
certain economic value out there in the
Mr Webb: Yes. Also, I think that we as a society have to understand that getting those extra barrels is going to be a more difficult and costly event generally in the economics of the basin too and, therefore, I do not think we should have overblown aspirations as to how much practically we can get out. I think that is part of the problem. I fear we are in a regime at the moment that is looking to maximise short-term fiscal revenues and may be overlooking the potential for long-term economic benefit. The economic benefit here is very substantial. We say there are 25 billion barrels of oil and gas yet to be won. Plans that we can see in place at the moment have got around ten billion of that within their view, but there is another 15 billion beyond that. If you valued that at, let us say, $100 a barrel, which in the future may not be such a silly thing, that is $1.5 trillion of economic benefit to this country.
Chairman: I would like to conclude on
the issue that you raised on the skills and the exports, £6 million of exports,
the skills centres that we have in
Judy Mallaber: I am slightly curious. Your written evidence refers to skills
shortages in the industry but now we are told it is turning into a skills
surplus. A few years back I recall after
9/11 when Rolls-Royce in
Q167 Mr Anderson: Is there any potential for expanding the skills, coming back to decommissioning, that you could build up a skills base for people solely employed in decommissioning the infrastructure rather than using the workers who do it now?
Mr Webb: I think on that point it is difficult for me to think that we should construct a separate industry called the oil and gas decommissioning industry. That is a question for the supply chain. I think the supply chain has got the ability to expand into that and deal with that. My view on that would be it is a question of building on the expertise that is already there and going back to address this market.
Mr Dymond: There are also a lot more jobs involved in maintaining and operating than there are in decommissioning. Decommissioning is very much a non-productive spend, whereas if you were taking that same money and putting it into new investment then you would be developing new reserves, more jobs and more tax revenues.
Q168 Mr Anderson: It has got to be done eventually, has it not?
Mr Webb: Yes.
Q169 Mr Anderson: In a sense it will be probably a relatively less skilled job.
Mr Dymond: Not necessarily. The technical challenge for decommissioning is actually to do what we need to do cheaper because it is a non-productive spend. That is where the challenge is and that is what we are looking for the supply chain to develop, the capabilities to be able to reduce the cost of doing what we need to do. That is the challenge there.
Q170 Chairman: And the skills situation?
Mr Webb: Somebody said the other day, and I think we have to bear this in mind, that tomorrow has not been cancelled, and this industry has got a huge tomorrow ahead of it. We must keep up our effort on skills and training. We must continue to bring new people into this industry. I think it is almost inevitable we are going to see some job losses over the next year or two, that is almost bound to happen, but I do not think that should be an excuse for us to say, "Well, hold on, we are now going to stop training people, we are going to stop investing in skills and bringing new talent into this industry as well". I know that is a difficult equation at times but we must keep it up. I think if there was a lesson that we learned from the last time we went through something similar to this, although it was not the same because we did not have the banking crisis, it was that some of the skills loss that we suffered as a result of that took us several years to overcome afterwards, so I think there is a new resolve in the industry for that not to happen. That is why we do take this very seriously and why we did back OPITO and are financing OPITO and it is why we run one of the most impressive modern apprenticeship schemes with hugely successful retention and employment rates and with very well paid people coming out of that too, by the way. That is the other point about this industry. The average salary in our industry is £50,000 a year paying £20,000 NI and tax as well. The people who come out of our modern apprenticeship scheme aged 22, highly qualified technicians, are earning £46,000 a year as their starting salary. These are high-tech jobs, this is a high-tech industry and we must keep on investing in the skills, it is absolutely imperative that we do. I can assure you that OPITO will be doing all that it can to make sure that happens. I do not think there will be a slacking off from the industry in that regard but, as I said, it is almost inevitable we are going to see some job losses.
Chairman: Thank you very much, Mr Webb and Mr Dymond. Thank you for your submissions, which will be very helpful to us, there is an awful lot for us to consider. Thank you.