Peter Hain - Former Minister for Energy and Competitiveness in Europe (Jan 2001 - Jun 2001)

Speech to PILOT - Awayday

PILOT is a unique initiative and to me it exemplifies the kind of relationship which Government should have with industry. One of joined up thinking, co-operation and focus on common causes. We have some good news with Bonga, Otter and Blyth, which I welcome. I am also grateful to the industry for all their work on ultra low sulphur petrol.

My first message is a frank and important one. I am rather disappointed by the level of exploration drilling on the UKCS last year. Although an improvement on 1999`s poor performance, it is still much lower than it needs to be to meet PILOT's target for production rates in 2010. It is also nowhere near what it needs to be to match rising profits. But a survey shows significantly increased intent to drill over the next three years, reflecting the greater confidence with which the industry views UK potential. These intentions must be turned into action.

The Government has worked hard to stimulate increased investment.

We have agreed a Royalty Remission arrangement with Talisman, without which I doubt the Beatrice redevelopment project would proceed.

We are open to further discussions on royalty relief with any operator who has a strong enough case.

There has been an encouraging response to the 19^th Round of offshore licensing, indicating that there is still plenty of potential for exploration and investment in the UK.

We are taking other steps to promote exploration. We showed our determination to see new work carried out on the UKCS when we held the 2000 Fallow Initiative - this process will be repeated every year from now on.

But I'm concerned at the progress that some operators have made in response to last year's Initiative. While there has been a good start towards reducing the number of fallow blocks, and I congratulate the companies responsible, much more progress must be made in the next three or four months if the industry is to deliver on its promises.

The combination of future licensing rounds, the impact of a rolling programme of fallow initiatives and these indications of increasing investment on the UKCS should lead to a significant upswing in exploration and development activity in the near future.

I say "should". This is because I fear that, despite this effort, the full potential may not be realised. The prime barriers I see are not technical, not economic, but behavioural.By "behavioural" I mean the way in which the players interact with one another, the effectiveness of the business culture at identifying opportunities for wealth creation, creating alignments and completing transactions.

These concerns are not new. CRINE sought to address them and the Taskforce itself took action - the work on removing pre-emption rights is a good example. But there is more to be done and I believe PILOT can and must play a major part in ensuring this happens. Anna and Simon have some thoughts on what more can be done.

We now need more developments to be brought forward on the UKCS, securing more jobs for the workforce of the UK.

I am disappointed by OPEC's decision at the weekend to reduce production by 1 million barrels a day. I recognise that some of you here today may not share my feelings on this, because of the impact on your bottom lines. But world oil stocks remain low and are in need of substantial replenishment. This will require supply to outstrip demand and also the right price signals. If stocks are rebuilt, the market should become less volatile. In addition, an unsustainably high crude price will reduce demand. For many developing countries, imports of oil are significant. They require affordable prices for their economic growth to be sustained. And the US and Japan - both key oil importing countries - are already showing signs of slower economic growth. I hope you will all work with me to make sure the international oil market is as open and transparent as possible.

Meanwhile, I am equally disturbed at the way wholesale gas prices have more than doubled since early 2000 undermining our wider policy for a competitive gas market. Speculation over gas price manipulation is rife.

One of the main causes of the price increase is the lack of open markets in Europe and arbitrage across the interconnector with oil related gas prices in Europe.

Public concern over gas price increases is building. Industry is hurting. Our inability to be completely clear on the causes of the increases is harmful both to the Government and the industry. It breeds suggestions about anti-competitive irregularities in the way the market is operating.

We have therefore devised a three-point strategy to address the problem:

Firstly, of crucial importance, we are working with the Commission to achieve European gas market liberalisation. We look to UK based companies, especially those with shareholdings in European companies, to help us achieve this. We will be talking to individual companies about this. I hope you will co-operate.

Secondly, ways to improve the functioning and design of all parts of the market. This involves increasing the amount of information available to the market. Again, I'm looking for your co-operation here. We hope to do all this voluntarily. But I don't rule out investigation and regulation if necessary.

I know that some of you have been speaking with my officials about ways to improve information flows in the gas market. Information is central to ensuring a transparent, competitive and efficient market, and to securing public confidence in that market. It is vital that information that will help achieve such a market is readily made available to all players. Although some information is commercially confidential, I ask you to give serious thought to how to open up information flows around the onshore-offshore interface and how to do this quickly.

Thirdly, we will take action against anti-competitive behaviour. The operation of the Interconnector has been giving cause for concern for some time. I am pleased that the Commission are now looking into this. It will be a swift but thorough investigation. This should put all companies on notice that the Government means business.

In another initiative to help pro-competitive markets, I issued last month a consultation document on the arrangements and provisions on access to oil & gas infrastructure. I hope you will let me have your views.

Together we must make sure that the events of last autumn are not repeated. In the future we must work together to deal with any emergencies whether they be up or downstream.

Fuel prices coupled with recent announcements of record operator profits continue to put a strain on the public image of the industry. The media and public do not differentiate between upstream and downstream. Motorists look at simultaneous high profits and high pump prices and ask whether they are being ripped off.

I recognise that downstream is a very competitive market but it is important that smaller market players are treated fairly. I look to all of you to work with us to ensure that there is a well functioning market so that public confidence is restored.

PILOT is at a crossroads and today we must decide which direction it will take. At the heart of PILOT's agenda are the vision targets, set jointly by Government and industry.

Firstly, despite being a long way off, I believe that the 2010 vision is achievable. But I hope our working groups will consider some intermediate targets in each area. Targets for which we can take personal responsibility.

Secondly, training, and research and development is vital in delivering PILOT's work. I would like you to consider PILOT targets on these subjects.

Thirdly, I look forward to hearing the outcome of your discussions on which industrial activities will be critical to your sector, and the UK economy, to drive forward output and exports.

The PILOT targets on exports and new business are very important to help to sustain employment levels as the UKCS matures.

I am delighted by the Prime Minister's announcement last week that Shell has awarded the Bonga topsides project to AMEC in Wallsend. This is great news for the UK oil & gas fabrication industry and will, I understand, secure some 4000 jobs. I hope that PILOT's Fabrication Support Group will explore how to stem job losses.

Today I am launching the DTI/PILOT reports on new business opportunities from diversification and the environmental sector. These reports represent an excellent first step towards encouraging and helping UK companies into new markets.

I would urge companies to look closely at the prospects for them in all the sectors highlighted, particularly renewable energy.

We are looking to really accelerate the development of renewables in the UK and in a wide range of technologies. Some of these have synergies with the skills that already exist in the oil and gas sector - offshore wind turbines and wave energy in particular come to mind. In solar PV, I am pleased that Shell and BP are very active here.

Finally, I should like to reiterate the importance of PILOT to the Government. It is vital to achieving a successful energy policy and a successful economy.

Other speeches by Peter Hain - Former Minister for Energy and Competitiveness in Europe (Jan 2001 - Jun 2001)

(the following are available from the archive)
• "The Government's Future Manifesto and How This will affect the Greening of the Energy Industry" (20/03/01)
• Associate Parliamentary Warm Homes Group Conference (14/03/01)
• Electricity Association Annual Dinner (07/03/01)
• Speech on Competitiveness in Europe (05/03/01)