When the Sea Gem rig struck gas off Durham in September 1965 and the North Sea’s potential role as an energy source impinged upon public consciousness, Harold Wilson was Prime Minister, America was digging deeper into the Vietnam War and the Beatles were at number one with Help!
Just before the general election that brought Labour to office, the Tory minister for power, Frederick Erroll, introduced the Continental Shelf Bill to the House of Commons and spoke about the “exciting possibility that oil and natural gas may be found under the North Sea”.
He said: “Not very long ago, such a development would have seemed most improbable. But the search for new sources of energy the world over is unremitting and in recent years it has brought about remarkable advances in oil technology, particularly in submarine areas. Today, more than 20 companies of international repute are concerned in surveys of the North Sea . . .”.
Much of that statement would be just as applicable today. The search for new sources of energy remains unremitting and advances in oil technology have never ceased to be anything less than remarkable.
As the current debate over onshore shale gas fracking reminds us, governments have always had to run hard in order to keep up and to balance the risks against the opportunities.
It is unlikely that any politician of the sixties era had much idea of the industry that would emerge over the decades which followed.
Looking back to the House of Commons Hansard for 965, there is far more evidence of concern about negative implications for the north-east fishing fleet than of expectations about oil & gas.
Hector Hughes, the veteran Aberdeen MP, asked Erroll’s successor, Fred Lee, if he was aware of “the need to protect the fishing shoals in the North Sea” and claimed that “some of them have already been driven south as a result of these operations”.
That debate was soon left behind as the pace of exploration quickened and Aberdeen took on the mantle of oil & gas capital of Europe.
The relationship between government and industry over the past half century can be divided into three broad areas. There is the role of the state itself as a player within the industry. Then there is the whole question of taxation and how to secure the optimum public benefit without frightening the horses. Thirdly, there is the role of government and its agencies as regulator of the regime within which the industry goes about its business.
Most countries that discover oil take an immediate decision to treat it as a public asset and establish national oil companies in order to represent that interest and to establish centres of expertise.
Usually, as both wealth and knowledge accumulate, they spread their wings and become participants in the global industry. Statoil, created by a unanimous vote of the Norwegian parliament in 1972, is a convenient example on our doorsteps.
To this day, Statoil controls and operates 60% of the Norwegian Continental Shelf as well as having a ubiquitous global presence.
It could be argued that all other debates about the historical development of the North Sea – Scotland v UK, oil fund or no oil fund, and so on – are secondary to the question of how different things would have been if the UK had persisted with a Statoil of its own.
The problem, of course, was that there could never be the political consensus or continuity which this approach would have required.
With the return of a Labour government in 1974, the energy secretary, Eric Varley, brought forward plans to create the British National Oil Corporation. Under Edward Heath, the Tories had not ruled out state participation in the industry but their tone hardened rapidly with Mrs Thatcher as leader.
In the second reading debate, her energy spokesman, Patrick Jenkin, denounced BNOC as “the ugly unacceptable face of Socialism”. Ideological lines were thus set which would, within a few years, ensure the destruction of the UK’s counterpart to Statoil.
BNOC was established with headquarters in Glasgow but as soon as the Tories came to power in 1979, they set about dismantling it as a flagship of the privatisation programme. In 1988, the little that remained was sold to BP.
In all respects, the 1979 general election was the most important in the political history of the North Sea. Not only did the victory of the Tories result in the elimination of a UK state oil company and the wholesale adoption of the American free enterprise model, it also meant that by far the most significant period of revenues from the North Sea would coincide with the Thatcher era of government.
It is difficult to overstate the significance of that outcome.
When Labour left office in 1979, oil & gas revenues were just beginning to feature as a significant element in Treasury incomes.
By 1984, they had multiplied 14-fold and represented almost 10% of the UK Treasury’s tax revenues.
It was this coincidence of North Sea earnings that funded the tax cuts and social upheaval which characterised the 1980s.
Whoever was in office, it would have been a period of intense industrial transition. For that reason alone, direct comparisons with Norway will always be misleading. Equally, if these changes had occurred in a less ideologically-driven environment, the vast bonus of North Sea revenues would surely have facilitated a much smoother passage of change. As it was, the North Sea revenues of the Thatcher years equated with uncanny precision to the additional costs of unemployment-driven welfare benefits.
As Denis Healey, chancellor of the Exchequer in the late 1970s, said in an interview last year: “We didn’t actually see the rewards from oil in my period of office because we were investing in the infrastructure rather than getting the returns and, really, Thatcher wouldn’t have been able to carry out any of her policies without that additional 5% on GDP from oil. Incredible good luck she had from that”.
In the same interview, Healey said that he had been moving towards the idea of an Oil Fund at the time Labour lost office.
However, the records show that previously he had been a strong defender of the Treasury line against an Oil Fund which brought him into conflict with other Cabinet figures like Tony Benn and Bruce Millan, the secretary of state for Scotland.
An Oil Fund would have been a far-sighted measure, given the fact that minimal revenues were at that time actually flowing. But it would, without doubt, have been undone as soon as Thatcher came to office.
Again, comparisons with Norway are misleading. It was not until 1996 that Norway started making payments into such a Fund. The earlier decision to persist with Statoil was actually much more fundamental to the wealth which has eventually accrued.
Having decided upon the exclusively private enterprise model for North Sea production, one might have expected the Thatcher government to incentivise participants with the promise of a stable fiscal environment. That did not prove to be the case.
Under that and subsequent administrations of all complexions, the approach to revenue-raising has been opportunistic and unpredictable, though not necessarily as rigorous as the industry has often protested.
As Alex Kemp wrote in his magisterial history of the North Sea industry: “The process has been personified by very frequent changes and the introduction of devices in response to short-term government budget problems rather than the incidence of economic rents from oil & gas production . . . (This approach was) a consequence of the design feature of PRT with one rate plus several allowances. This was an ad hoc mechanism to make the tax progressive in relation to price, cost and volume changes, but it proved inadequate to deal with the major variations in all three that have actually occurred.”
On the other hand, taxing the oil companies is a difficult thing for any government to get right. Perhaps more than any other industry, they are guaranteed to howl in protest no matter how modest the imposition or relatively favourable the fiscal regime in comparison to other comparable territories.
I well recall the sound and fury which emanated from the industry when, in 2002, the government in which I was an energy minister introduced a supplementary charge of 10% – a decision taken entirely in the Treasury.
That went up to 20% in 2006 and then, in 2012, Tory chancellor George Osborne put it up to 32%. Oil prices were high and the government needed money for a “fair fuel stabiliser”.
At the same time, Osborne announced that “if the oil price falls below a set trigger price on a sustained basis, the government will reduce the supplementary charge back to 20% while prices remain low”.
At that point, when this was being welcomed as significant concession, I couldn’t help recalling the furore that a 10% supplementary charge had given rise to a decade earlier!
The only consistent rule in the eyes of the oil companies is that, whatever level of tax they are asked to pay in any place and at any give time, it will always be too much.
Governments just have to live with that mindset and do their best to get it right. While there are legitimate complaints about the lack of stability in the North Sea tax regime over the years, it is much less obvious that the industry has at any stage been inhibited by excessive taxation.
In all the arguments about the politics of the North Sea and what to do with the money that flows from it, there has always been a risk of paying too little attention to the third great area of government responsibility – the way in which the industry is conducted.
That was certainly true in the gung-ho days of the 1980s when extraction which would yield taxation revenues was the over-riding interest, to the dangerous exclusion of all others.
In July 2008, Frank Doran, then Labour MP for Aberdeen North, led a House of Commons debate to mark the 20th anniversary of the Piper Alpha disaster. He described “the Klondike period” in the North Sea when government wanted revenues while companies wanted a return on their massive investments. Meanwhile, “safety was lax and there were many accidents”.
Doran continued: “The Department of Energy was the safety regulator in the North Sea. It was also the department responsible for producing the oil. There was a clear conflict of interest but no one minded so long as the oil was produced. As a young solicitor dealing with personal injury cases in the north-east of Scotland, I saw many cases in which safety came behind production.”
That Klondike period ended, he said, in 1985 when the oil price collapsed to $8 a barrel.
Doran: “All new investment stopped. Production continued while operators came to terms with the new situation. Most affected was the routine maintenance of platforms and facilities. More than 20,000 jobs were lost in the north-east of Scotland and 50,000 in the UK.”
The rest of what Doran described in that speech is now part of grim history.
A great deal changed in the North Sea as a result of Piper Alpha but the lessons need to be constantly re-learned, not least by government and politicians.
The 50-year history of the North Sea should not be written primarily in terms of political arguments, fiscal upheavals or even technological advances.
Above all, it has been about the human achievements, commitments and sacrifices that have made it all possible.
Whatever the political and economic mood music that may surround them, both the industry and the wealth that flows from it depend upon the people who make it all happen.
Government has no higher responsibility than to ensure that they do so in the safest possible conditions.
Amidst whatever celebrations of the North Sea’s 50-year history there may be, let it be quietly remembered that three months after the Sea Gem struck that first gas, the same BP rig collapsed off the coast of Lincolnshire with the loss of 13 lives.
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