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Offshore Fabrication Industry (Scotland)

Volume 124: debated on Monday 7 December 1987

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Motion made, and Question proposed, That this House do now adjourn.— [Mr. Neubert.]

12 midnight

I am pleased to have an opportunity to bring to the Floor of the House the important question of the crisis facing the North sea oil construction industry in Scotland.

It would be easy merely to criticise the Government's industrial record in Scotland, which is appalling and shows little sign of improving. It would also be easy in this type of debate to concentrate on the construction yard in my own constituency, RGC Offshore in Methil. But I should like to widen the debate and talk about the crisis facing the whole industry in Scotland. That embraces seven major construction yards, which are facing immense difficulties. They are Highlands Fabricators, Kestrel Marine, Lewis Offshore, McDermotts, RGC, Scott Lithgow and UIE Scotland.

It is often said that winning oil from the North sea is very difficult in such a hostile environment, but increasingly in Scotland winning work related to North sea activity is also becoming very difficult in the kind of hostile environment that the Government are creating. Before getting into the substance of the debate, I should like just for a moment, to take hon. Members about 400 miles from here to my constituency on the shores of the Firth of Forth, where, in Methil, we have a major construction yard.

Just to give hon. Members some indication of the type of project that we are talking about, let me give the dimensions of the order currently being constructed in that yard. It is a £52 million contract for the fabrication of a jacket for the Tern oilfield which has been placed by Shell and Esso. To illustrate the scale of such ventures, this jacket will weigh 21,500 tonnes, it will be 587 ft high, its base will measure 328 ft by 262 ft and at the top it will be 239 ft by 95 ft. I say that by way of introduction, because we are not talking about small-scale developments but about significant steel structures.

The context for what I will say next is that, at present, the structure dominates the skyline, and it is hoped that it will be floated out in April 1988. The problem is that in the run-up to Christmas people in this area of high unemployment look at the yard, see the structure and think that it may be the last fabrication order to be floated out, after a distinguished 10-year period.

That brings me to the crisis that grips the North sea offshore construction industry. The crisis is real and immediate and could lead next year to the collapse of one of the most efficient and productive areas of North sea-related activity. I will argue that the activities of the Department of Energy and of the Scottish Office have been characterised by neglect, complacency and a lack of interest, leading to the squandering of enormous potential for creating jobs and consolidating the long-term future of the offshore construction industry.

Let me start by revealing to the House that just two years ago, those seven construction yards employed nearly 12,000 people. We now find that after April 1988 when most of the current orders will be floated out, employment could be less than 1,000. By any standards, that is a dramatic reduction in manpower.

That is complemented, and, indeed, caused by a slump in investment. If we look at the investment in what we call top sides and jackets, we see that a total UK share of £1,077 million in 1984 slumpd to £480 million in 1986. Indeed, the UK Module Contractors Association Ltd. predicts that capacity utilisation for the industry could be less than 20 per cent. in 1988, with the prospect of those yards being unable to respond to the upturn in North sea activity that is expected in the early 1990s.

The overall picture is one of gloom and despondency, and great regret that such an industry, still in its infancy, has been ignored so much by the Government that we are talking about a terminal decline in construction capacity rather than looking forward to the next 20 or 30 years when billions of tonnes of oil will come out of the North sea.

More important, the impact will be devastating in three areas. The first is the jobs and skills of the men who produce such sophisticated structures. Secondly, local communities will be devastated. Those yards are mainly located in areas of high, significant and continuing unemployment. But probably more important for the future is the devastating impact on the strategic capacity of the offshore construction industry to deal with demand if an upturn in North sea activity is translated into orders.

If that is not bad enough, I am greatly concerned that the Government have been repeatedly warned about the impending crisis. The third report from the Select Committee on Energy, Session 1986–87, entitled, "The Effect of Oil and Gas Prices on Activity in the North Sea", was a major report which included representations from the United Kingdom Offshore Operators Association Ltd., the United Kingdom Module Contractors Association Ltd., major oil companies, such as British Petroleum and Shell, the Scottish Trades Union Congress, the Trades Union Congress and the Scottish Development Agency. They all had one compelling message, which was to highlight the development gap in the years 1986, 1987 and through to 1988. They also asked the Government to take action to avoid the crisis, which, sad to say, we are now experiencing.

The collapse in the oil price has merely worsened an already difficult situation. It would be both unreasonable and unfair for the Government to respond by saying that everything could be laid at the door of the market place and the resultant oil price collapse. Despite all that, the Government have been complacent and irresponsible in refusing to take any action that would stabilise the situation in the short term and help build medium and long-term prospects.

In blaming the Government, I should like to mention some factors. First, the Treasury has maximised royalties, petroleum revenue tax and corporation tax at the expense of any serious priority being given to long-term industrial development. Secondly, the Government have relied entirely on the price of oil to sustain development. When the oil price collapsed, the Government had nothing to fall back on. Thirdly, they have ignored advice on the strategic necessity of having an efficient construction industry with enough capacity to respond to changing demands.

Fourthly, the Government's obsession with free market economics has meant that we have no effective energy policy, unlike most of our competitors who see energy as an important resource to be used for long-term industrial development. We have used oil for short-term financial expediency. Few countries, developed or undeveloped, have such contempt for natural resources and the potential that they offer for jobs and investment.

Fifthly, the Government have argued in the past that overcapacity in the offshore industry was the problem. That problem could reasonably be dealt with. We are now, however, moving towards no capacity, with skills, commitment and knowledge all being lost. That is a tragedy for the communities that I have mentioned and for the nation.

Sixthly, the men working in the yards, from the north of Scotland to the central belt, are frustrated, angry, and bitter, and deeply resent the way in which their jobs, communities and futures are being destroyed by a Government who, by surrendering to market forces, have betrayed the national interest. Despite claims by Ministers over the past few months about the anticipated increase in North sea activity in the medium term, prospects for the next 12 months are frighteningly bad. With the exception of a number of major developments, the only one that will be translated into an order is likely to be the Kittiwake field, operated by Shell. The Government have approved a number of others, but the development gap problem will mean no significant orders. That will facilitate the gradual rundown of the industry in the early part of the next year.

When the Government have allowed this crisis to develop, we shall hear that nothing can be done. They will talk of the market—the same old excuse for inactivity. Is it not possible, even at this eleventh hour, to decide on a reasonable notion of where the industry should be going in the next two or three years and in the run up to the year 2000?

I want to suggest some positive actions that the Government should take. First, we need a package of industrial and financial assistance that will allow existing yards to restructure their operations, with a planned approach to rationalising their capacity. We accept the need to rationalise overcapacity. That does not mean that we should kill the industry, as will happen if the present neglect continues. We also need Government assistance to diversification. Ministers speak long and eloquently about the need for the fabrication yards to diversify. They want to, but they need assistance. It cannot be done overnight. The Government can help.

Secondly, the Government need to carry out a construction audit of orders that are likely to emerge from the North sea over the next five years, to ensure that everything possible is done by the Department of Energy to avoid delays and minimise technical problems. The annex B procedure that is required for approvals could be speeded up without affecting safety, and I commend that suggestion to the Government. Thirdly, as we decline from peak production, we must also form an energy policy that will result in the planned development of oil and gas fields, to ensure the maintenance of a suitable size of construction industry in which abandonment programmes and technological modification schemes provide the maximum possible amount of work.

Fourthly, we need Government support to help to maintain an agreed size of industry. When the Government talk about Shell and BP, saying that they cannot do anything about this or that, I must remind them that the people of the United Kingdom did not elect Shell or BP. They elected the Government to intervene on their behalf when they feel, as they seem to now, that their interests are being neglected.

Fifthly, we need radical change in Government fiscal policy to encourage investment in Government-sponsored research and development to stimulate new field development. Minuscule progress was made on that in the Budget of March 1987. Much more could be done, and I suggest the Government examine the submissions of the UK Offshore Operators Association Limited and the Select Committee on Energy, which made some excellent proposals about the way forward in fiscal policy.

Sixthly, we must try to ensure that our construction yards are not exposed to unfair competition from European and Scandinavian yards when we bid for foreign orders. There is evidence—it is difficult to quantify—that that is happening already. Why do we have the fifth most productive oil field in the world, lying two or three miles off the Scottish coast, yet seven major fabrication construction yards without work? The public perception is that it is inconceivable that that could be a reality. The basis of my submission to the Minister is that that is indeed the reality facing Scotland and the yards in the next two or three months.

Surely it is not beyond the wit of a Government, even one committed ideologically to a free market, to say that we have a unique one-off oil and gas resource that will not last forever. A balance must be struck between exploitation of these reserves for jobs and industry, community welfare and prosperity and, on the other hand, the massive Exchequer funds gained as a result of the efforts that people in Scotland are making in the industry.

I wish to highlight the need for change and to identify how the offshore construction industry has shown realism and an ability to change to survive. With Government encouragement and support it is willing further to adapt in the years ahead. Over the past few years it has responded to the more difficult commercial conditions that have applied. It has improved its efficiency and has met the "weather windows" for the installation of North sea products. Higher standards of quality control are being achieved, and market forces are ensuring that lower prices are offered while quality is maintained.

In a submission to the Select Committee on Energy the United Kingdom Module Contractors Association Ltd., among many others, highlighted the continuing problems. Those include a lack of work, poor overhead recovery due to intermittent and low-volume work, difficult commercial conditions, and higher standards required by oil companies leading to higher costs for the fabricator.

The offshore industry can survive and adapt only if the Government provide the stability and financial support to see the industry through an extraordinarily difficult period. Workers, managers and customers require the Government to change course and to provide them with the right industrial and commercial environment in which they can all benefit. I am not making a special plea on behalf of one yard. I am making a special plea on behalf of the offshore construction industry. It needs support: if it is to maintain a presence in the six to 12 months that lie ahead. More important, we must ensure that in the year 2000 we have the industrial capacity in this very sophisticated business not only to deal with the North sea but to work from there and to have the export potential for which the Government are always arguing.

12.17 am

I am glad of the opportunity afforded by the Adjournment debate of the hon. Member for Fife, Central (Mr. McLeish) for the House to consider the prospects of the North sea offshore fabrication industry in Scotland. It is, of course, impossible to do so without looking at the oil industry generally, since the yards depend on continuing activity in exploration, development and production of the North sea oil and gas potential.

We are all conscious of the important role that the oil and oil-related industries play in the Scottish economy. I am pleased to note that all the signs are that they will continue to be major employers in the Scottish economy for a number of years. It is estimated that in mid-1987 over 50,000 people were employed in companies in Scotland wholly related to North sea oil and gas. That figure does not include people working in firms partly involved in supplying the North sea market or those engaged in short-term projects. When these extra jobs are taken into account, along with the effects on consumption, the overall level of oil-related employment in Scotland in mid-1987 is estimated to have been approximately 78,000, which is around 4 per cent of total employment in Scotland.

The majority of oil-related jobs are in the Grampian region, but many other regions also benefit. Throughout Scotland high levels of employment in certain sectors result directly from offshore activity. In Fife, approximately 1,600 jobs in wholly oil-related firms and 350 jobs in partly oil-related firms have been identified. While a proportion of these jobs are at the RGC yard at Methil, there are some other oil-related firms in the region.

With the downturn in oil prices, no one can pretend that the last 18 months have been other than tough for the oil industry and, therefore, for the fabrication yards. This resulting falling off in activity was of course, not limited to Scotland or to the North sea. It has to be recognised that the oil price collapse was a worldwide phenomenon largely influenced by OPEC's attempt to recover its major share of world oil supplies. As we know, this action brought the oil price tumbling from about $34 a barrel to under $10 a barrel. Therefore, it was not a localised problem that could readily be solved by simply seeking a market elsewhere.

The North sea industry was less quickly affected, and this contributed to such problems as a surplus of rigs in United Kingdom continental shelf waters, because some had been moved there from areas which had felt the effects of the fall more rapidly. There was an understandable tendency during that period for operators to retrench and to look for methods of economising in their undertakings. While production was not greatly affected, it is clear that development and exploration have slowed and that orders for new rigs have dropped.

My ministerial colleagues and I readily appreciate that in a period of slim prospects it is understandable that there should be calls for the Government to step in and somehow create work for the yards, but this is simply impractical as a solution to the immediate problem. The nature of the industry is such that there is inevitably a fairly lengthy lead-in period in the consideration of development before fabrication orders can be placed, as the hon. Member for Fife, Central will appreciate. In normal circumstances the oil companies are able to pace development to ensure a reasonably consistent flow of work. The suddenness and the extent of the oil price fall created a hiatus which has to work through the system, and there is simply no practical way of short-circuiting this. Clearly, however, I would look to the oil companies to reduce this period in so far as they reasonably can.

I do not accept the argument that the current downturn in activity should materially alter the Government's general approach to North sea development. The Government's decision to leave the pace of development to the market has proved extremely beneficial to the Scottish economy and the offshore industry, and, in particular, to the fabrication yards. There were few complaints about the pace when development was at its peak and the demand for fabrication was high. While I understand the concern from which it stems, it is less than realistic to demand a new approach because we are now faced with a temporary lull in activity.

It is arguable that because until now we have experienced only the good times, the offshore industry did not anticipate, and has been so hard hit by, the present bad times. As I have said, for many in the North sea support industry this was the first experience of the cyclical nature of their undertaking. The tailing-off in demand came as a shock, and I would not attempt to minimise how traumatic this has been for those who have found themselves out of work as a result. Howard Doris at Loch Kishorn and Kestrel Marine at Dundee have gone into receivership, and I am well aware of the difficult situation in which a number of other yards find themselves at present.

Fortunately, most of the other yards have some work at present. For example, Hi-Fab has recently completed a rig conversion for Amerada Hess and is working on a jacket for Shell's Eider field. Lewis Offshore has also some Eider work, and McDermott's has an order for Shell's Tern field. In general, most yards have work of some description which will keep them employed until early or mid-1988. This is also the case with RGC at Methil, in which I appreciate the hon. Member for Fife, Central has a particular interest. As the hon Gentleman said, RGC has work on Shell's Tern platform and platform jacket. I can readily understand the concern of workers such as those at RGC who, although they have a yard which is equipped to handle a wide range of services for North sea clients, from jackets to modules and other offshore structures, have seen their work force gradually depleted from some 1,200 men to about half that number — with the prospect perhaps of even further cuts. It is a concern shared by some 4,000 workers in the fabrication sector of the industry.

Employment in the oil-related sector in Scotland was hardest hit during 1986. However, the underlying rate of decline in employment in wholly oil-related firms would appear to have slowed considerably this year. The 1·4 per cent. reduction in such employment in the six months to June 1987 was a considerable improvement on the 16·1 per cent. reduction over the previous six months. It would therefore seem likely that the worst effects of the oil price fall on employment have now been felt.

From my contacts with the oil industry I know that over the past few months there is increasing evidence of a pick-up in activity, with a general air of optimism that the greater stability in the oil price will continue. There are solid signs of this. Of course, of particular interest to the yards is the increased level of rig activity, which is now getting back to its pre-price drop level, and there is every sign of it continuing throughout next year.

After the depressing sight of rigs stacked in many of our firths it is encouraging to have 49 active rigs, against a low of 21 in February. This is all the more encouraging given that the going rate is some $17,000 a day compared with $14,000 in late 1986. Planned schedules indicate that drilling activity could be up soon by some 40 per cent., taking levels back to pre-1986, and there is every prospect of further rises over the next five years. Analysts forecast that by 1992 rates may have risen sufficiently to produce a demand for new rigs and the conversion of semi-submersibles into production vessels for some of the more marginal fields.

Despite the then depressed state of the market there was an encouraging response to the 10th round of offshore licensing, when 75 applications for 61 of the 127 blocks on offer led to 51 awards. I believe that my right hon. Friend the Secretary of State for Energy is currently considering the possibility of an 11th round, with awards in 1989, which would maintain the accustomed two-year licensing cycle. The Government have approved four major projects so far this year. In addition we have before us plans for the development of 11 offshore oil and gas projects, including six new oilfields, most of which should be approved within the next few weeks.

BP is pursuing the development of the Miller field, the largest and most significant North sea development for some years. This £900 million development, involving expected reserves of 300 million barrels of oil and 300 billion cu ft of gas, will create an estimated 6,000 offshore construction jobs prior to first production, which is estimated at the end of 1991. I need hardly say what this will mean to hungry yards, or point out that the competition for orders will be extremely fierce, but I would fully expect that those Scottish yards which gear themselves for survival during the lean early months of 1988, will show their capabilities to be leading contenders in this competition. The development plan for Miller is currently under consideration by the Department of Energy and I understand that signs are hopeful for a decision at the beginning of the year. There will, of course, be the added benefit of an estimated 400 jobs on a permanent basis when the field is in production.

Shell-Esso are also pressing on with their Kittiwake development, which gained approval in September. The construction of the Kittiwake platform and its equipment is estimated to provide a total of 2,500 jobs. The 7,000-tonne deck fabrication order is now out to tender. The order is expected to be placed early in 1988, with work starting in late summer. It will take two years to complete and employ up to 200 workers at its peak. The 6,000-tonne jacket order is due to be placed later in 1988, with work starting in 1989. This work should take about 15 months and at peak employ about 600.

There is also a range of proposals for gas-gathering in the central North sea, including possible further development at St. Fergus. I cannot anticipate what the outcome of these will be, and it is not certain that the successful transportation scheme itself will necessarily involve any major call for new structures. What is important, however, is that when in place it will make much more viable the development of these smaller fields for which a separate transportation system would have been uneconomical. The exploitation of these resources will clearly involve some structure fabrication, which will inevitably improve the longer-term prospects for the yards. All these should have spin-off implications for the offshore supply industry and the fabrication yards.

No, I would rather not. I am running rather short of time.

The hon. Gentleman will appreciate that I am not suggesting that these developments will mean a sudden return within the next few weeks to full employment at the fabrication yards. I wish only that they did. By the nature of the industry there will be an inevitable time lag before orders for new structures emerge. The market for such orders as do emerge will be highly competitive. The operators will of course be looking for the most cost-effective arrangements that they can get. This means that it is essential that if Scottish yards are to make the most of their opportunities they must be in a position to produce top quality work, based on the most modern techniques.

I recognise that some yards have invested heavily in preparing themselves for the new market conditions. Indeed, it is one of the long-term gains of this lean time that the industry has been obliged to react by seeking new cost-cutting technology and adopting new practices and innovative procedures. Many of these changes represent valuable assets which can be exploited in other aspects of industry both in the United Kingdom and elsewhere to the great benefit of the economy.

Good examples of such modernisation can be seen in yards such as McDermott's, where a three-year investment programme of some £22 million has provided a stockyard gantry crane for handling plate, an advanced plate-cutting facility, a pipe-mill and spool fabrication facility and a computer-controlled warehouse with automatic storage and retrieval facility.

I realise how difficult it is for some yards to gear themselves in this way when they are striving to stay in existence with a very uncertain order book beyond early 1988. The next few months will be critical for them. There are no immediate short-term solutions to this. The hard fact is, as I have said, that the Government cannot conjure up work for the fabrication yards. That must continue to lie with the operators.

What the Government can do, and have done, is to ensure that the right fiscal climate exists in which operators can continue to develop the North sea's resources. In autumn 1986 we took action on the early repayment of advance petroleum revenue tax, which was expected to inject more than £300 million into the oil economy. In the 1987 Budget my right hon. Friend the Chancellor of the Exchequer proposed two further concessions affecting the development of new fields and oil-related research, which were expected to benefit the industry by over £100 million a year. Much of this is aimed generally at encouraging companies to proceed with projects which would otherwise have been delayed, and this is clearly having the desired effect. In particular, it is encouraging that the industry is increasingly looking at how to extract oil and gas economically from what had previously been looked upon as marginal fields.

The Government will continue to play their role by ensuring that a propr fiscal climate is maintained, and we expect to see a gradual improvement in the fortunes of the fabrication yards as activity in North sea developments increases. I know that the oil companies appreciate that the continuing existence of a variety of modern highly competitive yards is not only important but vital to the cost-effective development of the industry's interests generally.

Question put and agreed to.

Adjourned accordingly at half-past Twelve o'clock.