Select Committee on Trade and Industry Appendices to the Minutes of Evidence


Memorandum by BP


  1.  While there is still considerable potential within the UK Continental Shelf (UKCS), the eventual ending of UK self-sufficiency in oil and gas should not be a matter for concern given the availability of international supplies.

  2.  In particular, security of supply anxieties are greatly exaggerated. They should be placed within an international context. For example global oil reserves are extensive—and both technology and political change are opening up new areas such as the waters off West Africa and the Caspian. Moreover, the USA and other European economies have not suffered from the requirement for imports; self-sufficiency is both an unnecessary and very costly objective.

  3.  UKCS gas production will also decline, though the speed of this will be mitigated by technology. Numerous, readily available sources of gas supply exist—including Norway, Algeria, Russia and potentially the Caspian. The UK's gas position should be seen as part of the overall European position, where further liberalisation and "connectivity" is required to ensure gas can flow freely.

  4.  Renewable and alternative energies—in addition to their environmental benefits—also have a longer term potential in adding to supply security. However, it is unrealistic to expect any such source to make a material contribution to UK energy supply over the next 15 years. Beyond that timeframe, their contribution depends on technical progress. Governments have an important role, however, in helping to stimulate market demand in this field.

  5.  BP recognises the challenge of ensuring that rising global energy demand is not the cause of environmental damage. Climate change science may still be unproven but the risks identified by the IPCC are too significant to ignore. Action by the UK alone will not be enough but both the UK—and UK based companies—have an important role to play through the application of technology and the development of trading mechanisms to ensure that reductions in emissions can be delivered at the lowest possible cost.

  6.  Therefore BP recommends the following as the UK's public policy priorities:

    —  Diversity of supplies are the best guarantee of supply security; this will be greatly assisted by;

    —  Securing a liberalised, well-integrated EU market in which gas can flow freely; and by;

    —  Encouraging the development of a domestic market for alternative energy supplies, such as solar, which will allow for economies of scale and cost reduction.

    —  Emissions Trading offers the best route for encouraging reductions in emissions.


  1.  There are parallel inquiries currently under way into the issue of Security of Supply. The Government's Energy Review has the issue as one of its central concerns, and BP has made a lengthy submission. Similarly, the House of Lords European Union Committee is also conducting an inquiry into Security of Energy Supplies in the European Union. In addition, there has been the European Green Paper ("Towards a European strategy for the security of energy supply").

  2.  The growing interest in the subject is understandable. But some of the fears are either exaggerated or misdirected. There is no inevitable world shortage of energy resources as such, and there is nothing intrinsically dangerous in a growing need for energy imports. But there are measures which can be taken to help ensure that supplies are diverse and affordable. International engagement (particularly in trading systems)—coupled with the application of technology—offer the surest way of ensuring that the UK, and indeed the countries of the European Union as a whole, have adequate supplies of energy in the future. It is natural that any UK Government should feel a special responsibility to the United Kingdom. But security of supply can only be assured within a European and global context.


  3.  Security of supply issues are often ill defined, and are prompted by various concerns such as geographic proximity; resource depletion, and supply disruption. But the most commonly cited threats relate to reserve depletion, and lack of infrastructure to link supplies with customers (ie "connectivity"). In BP's view, the latter merits more attention than the former. Central to both, however, is the extent to which oil and gas is, and can be, traded on world and regional markets.

  4.  Oil is a global commodity. Some 58 per cent of the world's total consumption of oil was last year traded internationally—this amounts to 42,666,000 barrels per day (bpd). It is possible to import from diverse sources—for example, the US met over 50 per cent of its oil and product needs in 2000 from imports from around 50 countries (Table 1—Annex 1). Gas historically has not been traded to anything like the same extent, but this is changing (Table 2—Annex 1). World trade in gas as a percentage of consumption was some 22 per cent last year (excluding intra-FSU trade)—an increase from 15 per cent in 1990. However, this masks large regional differences, especially as the international gas market is comprised of loosely connected regional markets rather than a single global market as is the case for oil. While the US imports just 16.5 per cent of its gas consumption (Table 3—Annex 1), Japan imports 95 per cent of its gas (Table 4—Annex 1). The 15 countries of the European Union lie between the two, and last year imported some 50 per cent of their total consumption (Table 5—Annex 1). This figure of 50 per cent gas dependency in Europe is set in its proper context when one remembers that the similar figure for oil and product imports is currently nearly 70 per cent (Table 6—Annex 1), and has been higher in the past.

  5.  Although the gas import dependency of the EU is expected to increase from around 50 per cent to 70 per cent by 2030, this need not be a matter for anxiety. The USA and other national European economies have not suffered over the last 30 years from the requirement for oil and gas imports, and self-sufficiency in this area is an unnecessary as well as a highly costly objective. Indeed, if the UK last year imported all its current oil and gas needs, the cost would have been just 1.9 per cent of GDP. This proportion is likely to fall in the future, given the decline in energy intensity and the fact that growth in energy demand is significantly lower than the growth in GDP.

  6.  In terms of the UK specifically, there is still potential in producing fields, undeveloped discoveries and from further exploration. In particular, BP believes that there is potential to improve field recovery factors. For example in the Forties field BP has seen recovery factors increase from an original 42 per cent to a forecast 62 per cent over the past two decades. We now have an aspiration to recover 70 per cent of the original oil in place from Forties. If average North Sea recovery factors in all oil fields could be increased by 5 per cent, an incremental 2 billion boe could be recovered. 4D seismic and through tubing drilling are examples of technologies which give confidence to these predictions. They are having an impact today on many of BP's own fields.

  7.  There is then the significance of undeveloped discoveries which contain an estimated 4-5 billion boe of reserves. Although most of these discoveries are now being worked, many of them still carry significant geological and development risks. We conservatively estimate that 50 per cent of these reserves will be produced.

  8.  Finally, there are the prospects offered by further exploration. BP supports the DTI's view that there is approximately some 13 billion boe of undiscovered hydrocarbons on the UKCS, albeit with a wide range of uncertainty. However we don't believe it is realistic to expect current levels of exploration activity to turn all of this potential into production. This is because many of the pool are too risky, too small or too remote from infrastructure to justify industry investment. In our most likely forecasts we estimate that 20-40 per cent (3-5 bn boe) will eventually be recovered. This view is consistent with other industry work.

  10.  In summary BP believes that the PILOT target of 3 mmboe/d in 2010 is achievable. Indeed it may be conservative. However, the challenges involved in delivering this production should not be under estimated—the UKCS is maturing rapidly, fields are becoming smaller and more complex and there is increasing competition for investment from overseas opportunities. That is why maintaining the competitiveness of the UKCS is crucial.

  11.  There is, however, a particular issue relating to gas. While UK Gas will continue to be a major contributor of indigenous fossil fuel production, this cannot continue indefinitely and production is likely to decline from 2004, unless significant volumes of gas are discovered in West of Shetland. This is considered unlikely. If this is linked to expected gas demand (which itself is very uncertain), shortfalls could become apparent within the next few years. By 2010 the UK's import requirement could range from 30 to 60 bcm/a. by 2020 up to 80-90 per cent of the UK's gas could be imported. This analysis ignores the declining production from high swing fields in the Southern North Sea. Imports have already occurred to meet peak demand and this is expected to increase over the next few years, even if indigenous supply exceeds demand on an annual basis.

  16.  This therefore underlines the importance for the UK and Europe in assured access to international gas supplies. It has frequently been said that `Europe is surrounded by a sea of gas'. This generalisation is true—especially when the increasingly globalised LNG market is considered. The European Union has a wide choice of readily available sources of gas supply, including Norway, Algeria, Russia and potentially the Caspian (Table 7—Annex 1). When the increasingly globalised LNG market is considered, the outlook is even more secure. Moreover, despite there being a concern that new supplies of EU gas may prove unreliable, there has been no evidence to date of this happening despite political disruptions in places like Russia and Algeria over the last fifteen years (see Table 5—Annex 1). Furthermore, it is very much in the interests of suppliers to meet the demands of European consumers. These supplies are in competition with each other, which provides individual EU gas purchasers and aggregators with the opportunity to diversify supplies and thus reduce risk.

  17.  Added to this is the increasing diversity of LNG sources: BP does not believe, in the medium term, that LNG has a significant role to play with regard to UK Supply Security. Nevertheless, Europe as a whole can expect to benefit from LNG sources which are now coming from Trinidad and Nigeria to complement North African supplies to Europe. In addition, new Atlantic basin projects in Egypt, Angola and Venezuela are also looking for a firm home in Europe; and more distant LNG exporters in the Middle East and Asia are also looking to Europe for both short-term and long-term contracts.


  18.  The preceding section demonstrates that there is no absolute or physical shortage of energy which threatens UK Security of Supply, despite the inevitable decline in production from the UKCS. Oil and increasingly gas are global commodities, which are traded internationally. The greatest threat to supply security, therefore, arises from artificial obstacles placed in the way of the proper functioning of markets; and failure to invest in adequate physical infrastructure to bring the product (particularly gas) to customers. In particular, a priority should be to ensure that regulatory frameworks evolve to provide the appropriate investment incentives to increase the number and capacity of intra-EU supply routes.

  19.  This is closely linked to the issue of whether or not the completion of a single European market for gas is progressed as a mater of priority. It is not enough for the physical supplies to be available; they must also be affordable. It is to be expected that EU linkage of gas to oil prices will diminish with increased liberalisation and the growth of gas-to-gas competition. The issue of prices is closely linked to that of Market Liberalisation. It is important that all Member States comply fully with the 2nd EU Gas Directive when it is adopted to ensure that downstream liberalisation elements are implemented effectively.

  20.  Another vital issue is the provision of improved physical and operational interconnectivity and integration of European gas grids. If stable deep, liquid and future markets are to be secured there is a requirement for pan-European integration of the gas infrastructure. This in turn requires integration both in a physical and operational sense. BP strongly supports the initiatives of the European Commission in promoting a European Gas Standards Industry Board (GSIB) along the lines of that in the US. The industry should be seeking sensible solutions to the inconsistencies between the national systems such as ordorisation, exchanges between low-cal and high-cal grids, and so on. Without better integration, markets will not deliver the options for stability, which are necessary. Depth is particularly important for the futures market and thriving markets are in everyone's interest.

  21.  Another important requirement is the effective and co-ordinated use of storage facilities throughout the EU, coupled with the trading and cross-border movement of gas. National territories which have a high degree of supply security ought to be in a position to support those who, for whatever reason, might be less well served.

  Storage is also an issue for oil, and product stock holdings need to reflect the fact that imports which are dependent on ships are more prone to interruption than pipelines.

  22.  It must be acknowledged that, whilst liberalisation of continental arrangements has commenced, such developments remain in their infancy. Long term security of UK supplies and pricing will be dependent on the successful development of continental gas-to-gas competition, which we believe will require a concentrated effort to progress liberalisation with an associated gas release programme.


  23.  In addition to the general issue of how the UK can best maintain a secure energy supply, the Committee raises some further related issues, namely:

    —  The link with environmental policy and renewables.

    —  The scope for further energy conservation.

    —  The implications for industrial competitiveness and fuel poverty.

  24.  BP sees no reason why there should be an inherent conflict between guaranteeing energy supplies on the one hand, and environmental policy on the other. Clearly, the greater contribution which renewables can make, the less reliance will be placed upon depleting fossil fuels. The issue is not of principle, but of timing.

  25.  It is the view of the Royal Commission on Environmental Pollution that the UK needs to make a 60 per cent reduction in its CO2 emissions by 2050. BP is not opposed to the concept of targets; indeed, BP has its own environmental targets for internal purposes. Currently, it is BP's determination to reduce its own Greenhouse Gas emissions by 10 per cent by the year 2010 from a 1990 baseline. We're not so well placed to judge the validity of the Royal Commission's target for the UK as a whole. But whether well founded or not, we are confident that no single measure or action will in itself be sufficient to achieve the objective. The development of new technologies, in particular, will transform the relative ease with which this environmental challenge is overcome. The essential requirement is to encourage the development of strong and healthy enterprises with the necessary financial and technical capability to develop solutions for the future. There is a whole range of options from which to choose. BP, for example, has to date placed the main emphasis upon Solar Power. However, while it is almost impossible to quantify in advance the relative contributions to be made from renewable sources, energy efficiency, or cleaner fossil fuels (not to mention nuclear if the problems associated with this fuel could be overcome), it is clear that any short term penalty or deterrent to energy use which eroded wealth or a company's commercial strength would be counter productive from an environmental perspective.

  26.  So far as Solar specifically is concerned, BP was a major contributor to the final report of the Photovoltaic/Government-Industry Group and which contains a large volume of data relevant to this Review. We would place particular emphasis on recommendation 8 ie `The most effective means of encouraging the deployment of PV in the UK would be a major Market Stimulation Programme featuring a 50 per cent capital grant for 70,000 domestic roofs, and a similar grant scheme for larger non-domestic buildings costing around £150 million over 10 years'. This recommendation is highlighted because it illustrates how, in some areas, the initiative lies with Government alone to act. The experience of other countries, which have introduced similar market stimulation programmes, has been encouraging. But this is not the sort of measure, which private companies can introduce unilaterally, since it would be construed as market distortion. The other important aspect of policy is grid connection, which once again is outside the capability of companies such as BP to resolve alone. Without action in these two areas, it is very difficult to see how rapid market development can occur. With them both in place, however, rapid market growth could be anticipated as was the case in Germany during last year (albeit with a more attractive premium price buyback market stimulation policy).

  27.  Nevertheless, one should not exaggerate the potential which renewables such as solar offer in the short-term. BP has already announced plans to increase its Solar business turnover to $1 billion by 2007, which represents significant growth. Over the next two years, we will double our solar business's capacity. But this cannot supplant the dominance of fossil fuels—anymore than nuclear could if it too were expanded—over the short to medium term. That is why improving the environmental consequences of fossil fuels should be the first priority. That is why gas remains an attractive fuel environmentally (as well as commercially) for the purposes of power generation. In addition, policy makers should be reminded of the importance of fiscal incentives to accelerate the transition from fossil to renewables—both in terms of encouraging renewable technology, and in encouraging consumers to shift their pattern of consumption.

  28.  Linked to the potential offered by renewables is the issue of Combined Heat and Power Schemes which the Committee also raises specifically. BP supports the Government's promotion of CHP and its desire to double UK use of high efficiency Combined Heat and Power by 2010. achieving the target will deliver over one-fifth of the UK target of a 20 per cent reduction in CO2 emissions. However, to deliver this goal CHP needs a comprehensive strategy that provides a co-ordinated framework for action. This strategy needs to have both immediate and longer-term objectives.

  29.  The immediate objectives are to bring coherence and consistency to the current wide array of factors affecting CHP. In the longer term, the strategy needs to be designed to ensure CHP plays its full role in the transition to a more sustainable energy system in the UK. In order to achieve the stated Government target of 10 GWe of CHP by 2010 it is essential that exiting CHPs can remain in profitable, commercial operation; and that the market provides the necessary incentives to encourage investment in new CHP capacity.

  30.  On the issue of energy conservation and fuel poverty, liberalisation and increased competition will drive prices lower for consumers and give more efficient market signals. However, once inefficiencies have been removed from the incumbent monopoly—and once competition has reduced suppliers' margins—end-users cannot expect to continue to achieve significant year on year reductions savings in the prices they pay for their commodity costs. Equally, while fuel poverty in the UK is undoubtedly a major and shameful problem, it is highly questionable whether it is best addressed though price and market distortion, rather than though direct assistance to those unable to afford the energy they require and deserve.

  31.  Other market mechanisms can help in the process. For example, customers' requirements to manage their total energy costs more closely (as well as to meet their environmental challenges) will force suppliers to develop products and services which meet these twin objectives. One way that industrial organisations are already seeking to achieve great energy efficiencies is through utilising energy management services. It is estimated that the take-up of energy management services will grow by more than a third in the next two years, reaching 28 per cent by the end of 2002. Moreover, the existing users will be spending on average 22 per cent more on energy management products (Datamonitor Report, 2001). Energy suppliers are likely to be encouraged to help their customers meet new environmental legislation and manage their own energy portfolios more effectively. Competitive advantage will be secured through the combination of energy management expertise, an innovative approach to energy efficiency, breadth of product and service and best in class customer service.


  32.  It is clear that the UK faces a changing pattern of energy supply in the years ahead as the major phase of development of North Sea Oil and Gas comes to an end. This change, however, need not be disruptive in economic terms given the availability of supplies on the international market and in the longer term due to the likelihood that technical progress will provide additional supplies from one or more alternative sources.

  33.  With this in mind, it is very important that consideration of UK Supply Security issues is placed within an international context. International engagement (particularly in trading systems)—and coupled with the application of technology—offers the best practical means for the UK to respond to the environmental risks posed by rising global energy demand. UK companies, including BP, are well placed to play a leading role in the process.

  34.  There are some important realities. UKCS oil production is very close to (if not past) plateau, but the lifetime of the province can still be extended by the application of technical advances backed by appropriate incentives in the fiscal regime. Global oil reserves are extensive—and both technology and political change are opening up new possibilities in areas such as the deep water off West Africa and in the Caspian. It is in the UK's interest to ensure a diversity of available supplies and this should be an objective of public policy.

  35.  As discussed above, UKCS gas production will also decline, though again the speed of that decline will be mitigated by technology. But there are numerous, readily available sources of gas supply—including Norway, Algeria, Russia and potentially the Caspian. In the gas market in particular the UK's position should be seen as part of the overall European position, which means that we have a direct interest in a liberalised and well-integrated market in which gas can flow freely. This too should be a primary objective of public policy.

  36.  Investment in the development of solar and other alternative energy supplies proceeds but it would be unrealistic to expect any of these sources to make a material contribution to energy supply in the UK, or any other major economy over the next fifteen years. The position beyond that timeframe depends on technical progress. In the meantime the priority for policy should be to encourage the development of the market for such supplies.

  37.  The UK will become a net importer of both oil and gas but this need not be a matter for concern. The USA and other European economies have not suffered over the last thirty years from the requirement for imports and self sufficiency in this area is an unnecessary as well s a highly costly objective.

  38.  BP recognises the challenge of ensuring that rising global energy demand is not the cause of environmental damage. The science of climate change may still be unproven but the risks identified by the IPCC and numerous other studies are too significant to ignore. It is clear that action by the UK alone will have a minimal impact on the problem but we believe that both UK—and UK based companies—have an important role to play in meeting the challenge through the application of technology and through the development of trading mechanisms to ensure that reductions in emissions can be delivered at the lowest possible cost.

Annex 1

CountryImports % of total net imports
Arab OPECAlgeria  225   2.76
Iraq  620   7.61
Kuwait  272   3.34
Qatar      9   0.11
S Arabia1,571 19.29
UAE13 0.16
Other OPECIndonesia 470.58
Nigeria896 11.00
Venezuela1,530 18.79
Non-OPECAngola301 3.70
Argentina80 0.98
Australia47 0.58
Bahamas-6 -0.07
Benelux33 0.41
Brazil24 0.29
Brunei21 0.26
Cameroon6 0.07
Canada1,697 20.84
China (PR)41 0.50
China (Taiwan)-9 -0.11
Columbia340 4.17
Congo (Brazzaville) 520.64
Congo (Kinshasa)8 0.10
Ecuador124 1.52
Egypt11 0.14
France26 0.32
Gabon143 1.76
Germany22 0.27
Greece0 0.00
Guatemala7 0.09
India4 0.05
Italy-3 -0.04
Jamaica-25 -0.31
Japan-75 -0.92
Korea31 0.38
Malaysia45 0.55
Mexico1,015 12.46
Netherlands-12 -0.15
Netherlands (Antilles) 750.92
Norway341 4.19
Oman2 0.02
Panama-16 -0.20
Peru7 0.09
Puerto Rico6 0.07
Romania-1 -0.01
Russia72 0.88
Syria2 0.02
Spain-15 -0.18
Sweden27 0.33
Thailand4 0.05
T&T85 1.04
Turkey-13 -0.16
UK356 4.37
Virgin Is (US)290 3.56
Yemen27 0.33
other39 0.48
Total8,144 100.00

Table 2

  Trade (ex FSU) Pipeline


Total Consumption
Trade as
per cent of
198314542.7 187.71,48912.6
1984155.449.6 2051,61312.7
1985164.851.6 216.41,65913.0
1986168.651.6 220.21,67213.2
1987189.954.8 244.71,75913.9
1988199.760.6 260.31,84814.1
1989221.864.5 286.31,93114.8
1990233.572.3 305.81,96915.5
1991241.177 318.12,00715.8
1992253.680.9 334.52,01016.6
199325483.3 337.32,05516.4
1994266.787.8 354.52,06417.2
1995295.992.5 388.42,12618.3
1996321.8102.4 424.22,22819.0
1997321.7111.3 4332,21419.6
1998333.1113 446.12,24019.9
1999360.51124.2 484.712,29521.1
2000389.31136.96 526.272,40521.9

  Source: 1989-99 BP Stats Review of World Energy, pre 1989 BP Stats Review of World Gas.

  Note: If you include intra-FSU trade for 2000:

Total trade = 645 bcm (27 per cent of total consumption)

Table 3


19851990 19952000
Total consumption499.4 540.3620.6654.4
Canada22.340.2 79.1101.66
LNG0.72.5 0.66.24
Other00 0.20.17
Total imports2342.7 79.9108.07
Imports as per cent of consumption4.6 7.912.916.5

  Source: BP Statistical Review.

Table 4


Source: BP Statistical Review
19851990 19952000
Total consumption39.9  
SE Asia33.339.3 41.746.75
Australia03.9 9.29.81
Middle East33.2 5.414.25
Other1.41.5 1.61.65
Total imports37.747.9 57.972.46
Imports as % of consumption94.5 93.694.695.1

Table 5


Source: BP Statistical Review
19851990 19952000
Total consumption219.3 248.8302.5377.2  
Russia36.660.9 6979.57
Norway25.725.8 27.647.48
Algeria19.427.6 33.956.03
Nigeria00 04.33
Other1.21.3 3.32.58
Total imports82.9115.6 133.8189.99
Imports as % of consumption37.8 46.544.250.4

Table 6


Source: BP Statistical Review
19851990 19952000
Consumption12,18013,258 13,98014,558
Middle East3,0204,001 3,5823,666
North Africa1,7252,051 2,0172,050
West Africa985854 850553
Russia1,2251,926 1,6272,511
Other1,410915 1,4911,286
Total imports8,3659,747 9,56710,066
Imports as % of consumption68.7 73.568.469.1

Table 7


Source: BP Statistical Review
tcmR/P ratio

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