Select Committee on Trade and Industry Minutes of Evidence

Memorandum by the UK Offshore Operators' Association (UKOOA)


  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 capacity.

    —  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 power generation.

    —  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 Committee

  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 of supply".

  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 established.

  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 conservation?

  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

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