Memorandum by the UK Offshore Operators'
The following points summarise UKOOAs submission
to the Energy Policy Review team of the PIU at the Cabinet Office:
Over the next 20-30 years, oil and
gas are likely to remain the most important fuels for the UK,
with gas having a particular role for 50 or more years.
Remaining, recoverable reserves of
oil and gas from the UK Continental Shelf (UKCS) are estimated
at between 28 and 36 billion barrels of oil equivalent (boe),
more than has been produced to date. Global reserves are sufficient
to meet demand beyond 2050.
Maximising recovery of UKCS reserves
and facilitating the entry of other supplies to the UK market
requires fiscal and regulatory stability, including effective
and timely arrangements for ensuring adequate investment in network
Diversity of supply, at competitive
prices, is fundamental to achieving security of supply. The role
of open markets is central to achieving this. There should be
no cause for concern among policy makers, provided markets are
open and any barriers to entry for new sources of supply and new
technologies are removed.
Natural gas has, more than anything
else, enabled the UK to achieve big improvements in its environmental
performance and put the country well on its way to meeting its
Kyoto commitments. Gas also provides the most efficient form of
Expenditure on UKCS activity supports
some 270,000 jobs in the UK (exports of oil and gas goods and
services add to these), mostly highly skilled, with much of the
work being at the leading edge of technology.
Oil and gas production benefits the
balance of payments considerably (£6 billion net in 2000)
and has generated exchequer revenue of some £166 billion
(2000 values) since the mid-60s.
Specific Questions posed by the Trade and Industry
1. Given the imminent dependence of the
UK on energy imports, how can the UK maintain a secure energy
supply? What mix of fuels would maximise security?
Please refer to bullet point 4 above. As we
stated in our submission to the PIU, in support of this:
"There are technological and other challenges
to be overcome and significant investment will be required to
meet the UK's future requirements for oil and gas. The industry
forecasts that at least $1 trillion of investment in new upstream
facilities will be required world-wide in the next decade alone
and that half of the oil and gas being produced at the end of
that period will come from sources not yet in production.
As well as the prime need to maximise recovery
from the UKCS, such a scale of international expenditure offers
large export opportunities for goods and services from the UK.
Both in terms of securing supplies and in opening export markets,
this is an important area in which the Government can continue
to make a difference by helping producer countries create the
right political economic, business and legal climate to encourage
long term investment in energy supplies, with financial and technical
expertise provided by business and industry.
Diversity of supply, at competitive prices,
is fundamental to achieving security of supply, as the UK has
experienced in the past 20 years. Open markets are central to
achieving this, because they increase diversity and minimise dependency
on any one source. Allied to this is the matter of free trade
which is itself a two-way process, both parties benefiting from
it. Many of the countries which supply oil and gas are significant
importers of goods and services. The essential point is that free
trade, as a result of open markets, binds countries together as
never before and, in turn, this can only serve to enhance security
In addition we stated that:
"Energy price stability, with its consequent
economic and social benefits, can best be ensured through competitive
UK and European energy markets on the one hand and the promotion
of international energy trade on the other hand.
Oil is freely traded on the international markets,
with supplies coming from all over the world. The IEA has estimated
that the share of world oil production dependent on export markets
will grow from some 40 per cent now to over 50 per cent by 2020
and the dependence of Middle East and North African producers
on export markets will remain at nearly 90 per cent. The UK remains
a large and attractive market for producers as, of course, does
the rest of the EU.
It is right that the Government should consider
the implications of the projected increase in imports of oil and
gas carefully, but we do not believe that the UK should be concerned
about this trend or need to take special measures, so long as
the right climate for international trade and investment has been
New infrastructure links are already enhancing
the range of supply options for gas and advances in technology
are creating new international trade in LNG, along the lines of
the oil market.
Since long-term UK gas supply needs to be seen
in the wider international context, current European initiatives
to improve network interoperability and interconnection, including
the proposed establishment of a European Gas Industry Standards
Board, are important. Policy makers and regulators should continue
to look at other stakeholder-based means of delivering effective
and pragmatic solutions to future requirements.
There should be no barriers created to the provision
of additional gas storage facilities and active consideration
should be given to whether measures, such as the easing of planning
procedures, can be taken to facilitate such projects. The UK has
a relatively small amount of gas storage compared with most other
EU countries and the development of more facilities could help
improve market flexibility of response and temper price volatility,
as the UK moves into a position of import dependence. However,
flexibility to manage short-term gas supply pressures can be provided
by other commercial and operational tools than the provision of
physical storage facilities. Open markets and consistency of approach
between the UK and European regimes will help ensure supply flexibility
for the future."
We enclose production charts (see separate attachment)
about the UKCS, as submitted to the PIU. This information is based
on data which are about 12 months old. We are currently gathering
new data, so as to update the charts. To continue to develop the
UKCS, it is anticipated that some £12 billion of capital
expenditure will be incurred over the four year period of 2001-04,
with between £3.5 and £4 billion being invested this
year, in order to sustain the production shown on the charts.
Another important factor is investment in the
gas network. As we stated to the PIU:
"The regulatory regime for gas transportation
should provide timely and efficient signals for new investment
in Transco's NTS. Regulation needs to work in the broad national
interest, which includes UKCS (and other) producers having reasonable
certainty about both the availability and price of transportation
capacity. The current regime is not working in this wider interest,
as it provides neither the signals to Transco, nor the certainty
for producers. It is important to note that the risks to the economy
of under-investment in the NTS far outweigh the risks of over-investment.
(UKOOA has been working with Ofgem and other participants on this
and has some new proposals for helping to resolve this matter,
too detailed for inclusion here.)"
2. Is there a conflict between achieving
security of supply and environmental policy? What is the role
for renewable and combined heat and power schemes?
There need be no conflict between security of
supply and environmental policy, as the progressive switch from
coal to gas over the past 30 years in the UK has demonstrated.
Indeed, gas can make further contributions to economic and environmental
objectives in future through, for example, the potential for more
CHP schemes of greater efficiency. The scope for reduced emissions
from domestic and commercial CHP schemes is substantial.
In order for such benefits to be realised fully,
however, it is important that the rules for embedded generation
are resolved as soon as possible. This will also enable other
forms of local power generation to be developed effectively.
3. What scope is there for further energy
The industry has progressively improved its
performance over the years, both in terms of its use of energy
and in reduction of emissions per unit of output. Modern oil and
gas production facilities are substantially more efficient than
earlier ones which will be the first to be decommissioned.
Downstream, in the commercial and domestic sectors,
there would appear to be ample scope for improvement, given the
relatively poor position from which the country starts. Moves
in this direction should also help reduce fuel poverty.
4. What impact would any changes have on
industrial competitiveness and on efforts to tackle fuel poverty?
We have argued above that open and competitive
international energy markets are the best guarantee of diversity
and security of energy supply. Such an international environment
is also the best means to ensure that UK industrial competitiveness
can be maintained. In addition, policies which encourage greater
energy efficiency will be able to enhance competitiveness and
reduce the incidence of fuel poverty.
5. Is any change of Government policy necessary?
How should/could Government influence commercial decisions to
achieve a secure and diverse supply of energy?
Please refer to our reply to the first question
above. As we stated in the Conclusion of our submission to the
PIU "We do not believe that policy makers should be concerned
about the existence of adequate supplies of oil and gas in the
foreseeable future, but we do believe that there is a significant
role for Government both in achieving the maximum recovery of
UKCS reserves and in ensuring reliable market access to longer-term,
international sources of supply".
Elsewhere in the submission, we stated ".
. . free market solutions are to be preferred and policy should
be aimed at removing any obstacles or barriers to ensure fair
access to markets for all sources."
Within the UKCS, we have seen the benefits of
parties working together, through the PILOT initiative, towards
a common goal, to maximise recovery of oil and gas reserves and
sustain the thousands of jobs dependent on the industry. It is
widely acknowledged that this initiative has been a substantial
success and we foresee the benefit of the partnership continuing.
Beyond these policy considerations and setting
the right framework, Government should be extremely careful. The
history of intervention and influence in commercial decisions
is fraught with difficulties and disappointments.
30 October 2001