Energy Review 2006 – “Our Energy Challenge” Submission by UK Offshore Operators Association

Summary

The importance of UK’s oil and gas

The UK will become more dependent on oil and gas over the next 15-20 years and government should create an environment which helps maximise domestic production.

• Oil and gas will remain essential to the UK, its people and economy, for the foreseeable future.  They currently provide about three quarters of primary energy supplies.  This proportion is forecast by government to increase to 80% or more by 2020.  It was noteworthy that, after the G8’s energy ministers had met on 15th and 16th March 2006 in Moscow, in point 3 of an 11 point communiqué, it was stated that “Despite the increased presence of alternative sources in the energy mix, fossil fuels will remain the basis of the world energy industry for at least the first half of the 21st century.”  UKOOA agrees.
• The UK remains a very significant oil and gas producer, with substantial reserves remaining (16-27 billion barrels of oil equivalent “Barrel of oil equivalent” (boe) equates gas volumes with oil, so that a single measure can be made of the two in combination.), which will continue to bring major benefits to the nation in terms of security of supply, economic contribution and achievement of environmental objectives for many years to come. In 2005, the industry provided:

1. the overwhelming majority of UK’s oil and gas needs
2. some £30 bn of economic output
3. £5 bn of investment, the largest of any industrial sector
4. another £5 bn of operating expenditure
5. £10 bn in taxes paid
6. 270,000 mainly high value adding jobs
7. the single largest contribution to lowering atmospheric emissions.

• Given the inevitable increase in our medium term dependency on oil and gas, that which we do not produce ourselves will have to be imported at significant extra cost to the economy.
• Therefore, it is of the utmost importance that the UK maximises the economic production of its own oil and gas. However, there is a real danger that current energy policy will not achieve this end and that a significant portion of the country’s reserves will remain undeveloped, or even unexplored.

So, UKOOA calls for a new approach to energy policy

The UK needs a Secretary of State for Energy so that energy policy can be properly developed and promoted.

• Energy policy needs to be better aligned and represented within government.  Currently, it is being determined by a number of separate teams, including DTI, Treasury, DEFRA, FCO and the Prime Minister’s office. UKOOA believes that this is not sustainable and that a more efficient and coherent approach is required, managed by a dedicated department and headed by a Secretary of State for Energy.
• With respect to the production of offshore oil and gas:
  
  • there are too many different and un-necessarily burdensome regulatory influences (UK and EU) which fail to recognise the objective of maximising economic recovery of our reserves;
  • the remit and activities of Ofgem should be re-examined in this light;
  • the unsatisfactory rules regarding decommissioning are an example of conflicting policy which hinder the trading of assets and may well result in the premature removal of infrastructure to the detriment of future production;
  • the current fiscal regime fails to provide long term stability for encouraging investment, where the UKCS has to compete internationally for funding; more specifically, it discourages the pursuit of high risk exploration and development opportunities and does not recognise that new fields are predominantly small, costly to develop and of marginal value after tax.
• In making this proposal, UKOOA does not expect the Treasury, DEFRA or other departments to abrogate their particular responsibilities to a new Secretary of State, but we do believe that leadership in energy policy needs dedicated resources and expertise concentrated in its own government department.

The importance of open markets for security of supply

Government should continue its active support for the EU in its drive to liberalise European energy markets.

• Open markets play a central role in achieving security of supply, by encouraging diversity of supply at affordable prices. The government’s support for the EU Commission’s efforts to liberalise European markets is welcome.
• The EU and Member States should use their collective influence to create the right political and economic conditions to encourage major new investment in energy supplies and associated transport systems, both within Member States and in supplying and transit countries.
• DTI’s recent consultation on gas quality did not consider properly the potential implications for security of supply of its proposal to remain with the current, comparatively narrow range for the UK’s gas specification. These could be very significant.  We call for this matter to be re-examined.

Offshore oil and gas and the environment

Aspirations for carbon capture and storage must not be allowed to hinder the maximum economic recovery of our oil and gas reserves.

• Natural gas has, more than anything else, enabled the UK to achieve major improvements in its environmental performance during the past 35-40 years and to meet its Kyoto commitments.
• Carbon capture and storage (CCS) is a potentially interesting environmental development for disposing of a waste product from energy consumption.  The regulatory and technical challenges are surmountable, but the economics remain uncertain.
• While the industry can assist other sectors with disposal of this waste, CCS should not become a burden on and hence detract from the exploitation of our offshore oil and gas reserves.  Companies wishing to undertake CCS projects should be given credits under the EU’s Emissions Trading Scheme.

The oil and gas supply chain, a significant success story

Energy policy needs to recognise the economic and technical contribution to the economy made by the oil and gas supply chain and to ensure that its growth is fostered.

• The supply chain supporting the UK oil and gas industry is a significant and growing success story, with substantial foreign earnings (estimated at £7-8 billion in 2004) based on leading edge technology and with the potential for continuing long after our own oil and gas resources are depleted.
• Energy policy should recognise and support this dynamic, engineering-driven success story, both in this country and, of increasing importance, in export markets.