Main Report Index

Next Section

UKCS 2004 Business Environment Working to Close the Gap The industry, together with the other stakeholders in the UKCS, has been extremely active in focussing on means to close the 0.5 million boepd gap to achieve the PILOT production vision. Recent work includes: The fallow blocks and discoveries initiative, which encourages their early relinquishment or disposal; The commercial code of practice for licensees sets a benchmark for commercial behaviours to encourage swift negotiations which benefit all parties involved. Similarly, the supply chain code of practice focuses on standardising commercial behaviours in the supply chain. Annual surveys are carried out in conjunction with the Department of Trade and Industry to monitor the effectiveness of these codes of practice; Improved access to exploration data, through the use of the DEAL data registry and the launch of the National Hydrocarbons Data Archive; The Master Deed to assist asset transfers; The technician training programme, designed to renew our skills base; The revised infrastructure code of practice, to ensure third party access to infrastructure is provided on fair and reasonable terms. Infrastructure Code of Practice Ready access to infrastructure will play a key part in unlocking future volumes in the UKCS. The industry, working with the Department of Trade and Industry, has fundamentally revised the Infrastructure Code of Practice to ensure even treatment for both infrastructure owners and users alike and provide fair and reasonable terms for third party access to existing infrastructure. It will ensure transparency of technical and commercial terms and conditions for all deals, which will be published by the parties involved. For the first time, automatic dispute resolution will be provided. This revised Code of Practice was published in draft form in May and is now undergoing a short period of industry and public consultation. It is intended that it will be adopted by all UKCS licensees by the third quarter of 2004. To ensure it delivers the required results, UKOOA will maintain and monitor the effectiveness of the Code of Practice on behalf of the industry. Gas Information Disclosure UKOOA members supply information to Transco and the Department of Trade and Industry (DTI) on gas supply to improve UK security of supply. Routine interruptions of gas supply to some customers with interruptible contracts in June 2003 and the electricity blackout in part of London at the end of August had led to DTI concern over the security of energy supplies. The DTI asked UKOOA members to increase the voluntary disclosure of information to Transco, believing that this would aid smoother operation of the National Transmission System (NTS). In November 2003, UK gas terminal operators agreed to standardise and enhance the information they provide to Transco regarding their maintenance programmes and planned and unplanned outages that can affect the supply of gas. In March 2004 UKOOA members, who represent over 95 per cent of total UK gas production, agreed to increase the flow of additional, longer-term information to Transco to help with its "Transporting Britain's Energy" (TBE) ten year planning process. The underlying detailed data - which contains market sensitive information - is protected by a confidentiality agreement with Transco. UKOOA members have also agreed to Transco providing aggregated information to the wider market, although the detail has yet to be finalised. Emissions' Trading Scheme In Europe, emissions' trading represents a response by industry and government to the challenge of global climate change and one of the many concrete actions necessary to ensure that the EU meets its Kyoto commitments. The advantage of emissions' trading is that it offers the potential to deliver the greatest reductions in emissions in the most economical fashion. The EU Emissions' Trading Scheme (ETS) will come into effect on 1st January 2005 for the 25 Member States and is mandatory for all installations with thermal input greater than 20 Mega Watts. The scheme is in two phases: 2005-7 for carbon dioxide (CO2) emissions only, and 2008-12, the Kyoto period, for all six greenhouse gases. The main sectors covered by the EU Directive, which was approved by the European Parliament in July 2003, are power generation, which is responsible for over 60% of UK emissions, oil and gas (up and down-stream), steel, chemicals and cement. It is estimated that some 1,500 UK installations (95 of them offshore on the UKCS) will be in the scheme and in excess of 20,000 across the EU. This will be the largest emissions' trading scheme in the world and will cover about 45% of all EU emissions of CO2. The upstream oil and gas industry emits approximately 25 million tonnes of CO2 per annum, although for the time being flaring will not be included. UKOOA's projections show that, in the short to medium term, offshore emissions will rise slightly, with more energy being consumed in recovering remaining reserves as fields mature, before commencing a sustained decline as installations are decommissioned. The EU ETS is what is known as a cap and trade system. Emissions allowances are awarded free to qualifying installations for each calendar year, based upon historic emissions. The awarded allowances will decline over time in line with national targets for reducing emissions. Installation owners face the choice of investment in abatement measures to reduce emissions, creating the option to sell excess allowances (if any) in the EU wide emissions market being established under the scheme, or to purchase additional allowances in the market to meet any shortfalls arising. Penalties for failure to comply are severe: €40/tonne in Phase I, rising to €100/tonne in Phase II. It is expected that the cost of buying allowances in the market will be significantly below these penalties, thus encouraging trading and the resultant sourcing of the most effective solutions for reducing emissions, wherever these may be. Each Member State is responsible for developing its own National Allocation Plan (NAP) which determines the allocation of allowances for qualifying installations and whole sectors. These national plans are subject to approval by the EU Commission to ensure both compatibility with other plans across the EU and consistency with Kyoto commitments, as well as to minimise distortions in the single market. In the UK, the Department for the Environment, Fisheries and Rural Affairs (DEFRA) is the lead government department, with support from DTI. UKOOA is working closely with these departments to ensure that the impact of the UK National Allocation Plan on the upstream industry is fair and reasonable. It is essential for the right balance to be struck between the obligation on the UK to meet its Kyoto commitments (the supply of natural gas from the UK continental shelf has done more than anything else to put the country on course to meet those commitments) and, at the same time, ensuring maximum recovery of the remaining reserves from the UKCS. The EU Constitutional Treaty - The Energy Chapter During the last two months of 2003, UKOOA and the Industry Leadership Team1(ILT) fought a concerted campaign aimed at achieving amendments to the Energy Chapter of the draft EU Constitutional Treaty. Attracting the interest of numerous institutions, including over a hundred members of parliament, Scottish and European politicians and the CBI, the campaign's objective was to achieve clarity in the drafting of this proposed new energy law such that it preserved the right of individual member states to exclusive policy competence over their respective indigenous energy resources. The campaign was successful. New and much clearer wording was agreed for the draft. This was achieved initially by the UK and Dutch Governments' acceptance of industry's concerns, and the subsequent agreement on the part of the two Governments to incorporate those concerns into intergovernmental negotiations. In the event, negotiations lasted until June 2004. While these included both revisions to, and even at one stage the complete deletion of the Energy Chapter, Article III - 157 (as the Energy Chapter is known) ultimately retains the amended wording. The industry believes this wording provides sufficient clarity to confirm that the specific policy competence for natural energy resources will remain exclusively at the level of the Member State. Subject to the EU-wide ratification process to come, clearly it will be important for industry to monitor developments as laws and proposals begin to come forward under the Energy Chapter. Footnotes 1 The Industry Leadership Team (ILT) comprises senior figures from across the industry, representing operators, contractors, the supply chain and the trade unions. Several of ILT's members also sit on PILOT, the joint government industry forum. 2003/4 Budgets In the Budget statement on 9th April 2003, the Chancellor announced that PRT would be abolished on tariff income arising under new tariff contracts entered into since Budget day, with effect from January 2004. This measure was consistent with a recommendation in the UK Norway Co-operation Agreement and had been proposed by the industry. Changes to the fiscal regime in April 2002 had left a legacy of infrastructure taxation which resulted in the marginal rate of taxation on tariff business varying from 40% to 70% dependent upon the age of the infrastructure. The fiscal distortion blunted competition between infrastructure systems competing for similar business, perpetuating higher tariffs and thereby discouraging new developments and exploration. At the same time the Chancellor announced a consultation into the lack of exploration activity which was concluded in September 2003. The consultation covered a range of fiscal and non-fiscal issues and resulted in the introduction of the Exploration Expenditure Supplement allowing new entrants to carry forward their losses with interest. The Exploration Expenditure Supplement was confirmed in the 2004 Budget.