APPENDIX 28
Memorandum by Shell UK Ltd
SHELL IN
THE UK
This paragraph is to provide context for Shell's
submission to the inquiry into energy prices. Shell has been working
in the North Sea since 1964. Shell is responsible for producing
around a quarter of the UK's oil and gas. Shell also provides
around 15% of the UK's oil products. In the UK, Shell is engaged
in the business of Exploration and Production, Oil Products, Gas
and Power, Chemicals, Renewables and other activities. With centres
in the Northwest of England, Scotland and London, Shell provides
more than 9,000 direct jobs and 60-80,000 indirect jobs across
the United Kingdom.
1. WHOLESALE
GAS PRICES
1.1 In the UK natural gas is mainly used
for power generation and space and water heating. In power generation
gas is competing against coal and nuclear energy and against oil
and electricity for space and water heating. The exchangeability
of primary energies means that prolonged differences in price
would eventually trigger a switch from one form of energy to another.
This would have to take into account the cost of switching as
well as environmental and technical considerations.
1.2 A look at energy price indices shows
that gas prices follow a similar trend, with oil as the lead energy.
This is the case for systems that are indexed to oil, as well
as those that are not. There are regional variations triggered
by fluctuations in regional demand and supply, but in general
there is one price trend. This reflects both competition between
gas and oil and the fact that we operate in a world gas market,
which is part of the world energy market.
1.3 Market perception has some influence
on gas prices, but in principle the market is responding to the
demand and supply balance. Increasing interconnections among markets
results in a widening of the area we need to look at to understand
market effects. The demand-supply balance on the European continent
will affect the UK prices as will the competition between pipeline
gas and LNG, the latter also influenced by the competition for
LNG between Europe and America.
1.4 Reflection of market fundamentals in
the gas price is essential to give the right signals. Seasonal
price variations—low prices in summer and high prices in
winter—will trigger investment in transmission infrastructure
and storage.
1.5 Gas prices in the UK are amongst the
lowest in Europe, and are lower in real terms than a decade ago.
In recent years, the UK NBP (National Balancing Point) gas price
has largely moved in parallel with the gas price in other countries.
For example, the European gas and Henry Hub (US) prices have in
the large part moved in the same way as the UK price, which in
turn has reflected the wider price of energy. After having reached
record heights in September/early October, prices in the UK forward
gas market for winter 2004-05 have declined sharply over the last
couple of weeks.
1.6 Over the next two winters, the UK market
is anticipating a tighter balance between supply and demand. New
projects aimed at bringing additional supplies to the UK are currently
under way. For example, the Ormen Lange gas field and the Balgzand-Bacton
Line (BBL) will offer substantial new gas supplies to the UK,
from 2007 to beyond 2020.
2. GOVERNMENT
AND REGULATORY
PROCESS
2.1 Shell has been supportive of Ofgem's
work throughout its informal review of wholesale gas prices. We
have voluntarily supplied Ofgem with considerable quantities of
information and have spent time explaining our operations. Shell
will continue to assist regulators and government.
2.2 Shell follows normal commercial practices,
in compliance with competition law. We support Ofgem's conclusion
that whilst indigenous supplies of UK gas are declining, the market
remains robust and that security of supply has not been undermined.
2.3 Shell welcomes the findings of the Financial
Services Authority (October 2004) as reported by Ofgem, which
found no evidence of manipulation of the markets where wholesale
gas is traded.
2.4 Shell believes political and regulatory
frameworks need to support long-term investment in exploration,
production and infrastructure. Ofgem and the DTI have been at
the lead in introducing a liberalised gas market and should continue
to promote the benefits of this approach. We are increasingly
looking at long lead times for new projects, long payout periods
and long-term contracts to share the risks between investor and
shipper. The continuation of a stable and attractive investment
climate is therefore essential.
3. SHELL INVESTMENT
IN THE
UK
3.1 Since the 1960s, the Oil and Gas industry
in the United Kingdom Continental Shelf (UKCS) has contributed
17% of UK Capital investment, £200 billion in tax, hundreds
of thousands of jobs and 31 billion barrels of oil equivalent
to the UK economy. Shell's share is approximately a quarter of
this.
3.2 Over the last 10 years, Shell has invested
£8 billion in the UKCS. This has brought to fruition a number
of projects, which until recently were considered impossible to
realise. Examples include the Pierce field, where water injection
has increased its life by around 10 years, and Penguins, where
Shell technology continues to produce oil and gas once considered
uneconomic to recover. There are many others. We continue to invest
in pushing technological boundaries to accumulate new oil and
gas reserves from mature fields.
3.3 Shell remains committed to investing
in the UKCS to bring new energy supply and infrastructure projects
to the UK. These represent long-term investments in the security
of the UK's gas supply and address the future position of the
UK emerging as a net energy importer.
3.4 Shell is engaged in projects to attract
new gas supplies into our existing infrastructure. The UK-Norwegian
Framework Treaty (2003) will facilitate new supplies and make
a significant contribution to the UK's security of supply from
2007 onwards. This is a sustainable and effective way of prolonging
the life of North Sea production.
4. SECURING UK
ENERGY SUPPLIES
4.1 In line with trends forecast in the
Government's Energy White Paper (February 2003), Shell scenarios
indicate that gas could overtake oil as the main fuel of choice
around 2025-30.
4.2 Bringing gas to market is one of Shell's
strategic priorities. Implicit in this is diversity of supply,
which we see as key to security of supply.
4.3 Security of supply depends crucially
on all the providers having access to good infrastructure. Shell
continues to ensure that third parties can access its infrastructure.
4.4 Confidence in the UKCS is only just
beginning to return after the introduction of Supplementary Corporation
Tax (SCT) in April 2002. This is demonstrable by the recent offshore
revival, which has seen exploration and appraisal wells increase
from 40 to 60 a year. Further tax increases will put this revival
at risk.
4.5 We believe that a long-term sustainable
tax regime, together with the other advantages the UKCS enjoys
(political stability, open and competitive markets and access
to a skilled workforce), is essential to the long-term viability
of the North Sea.
4.6 As a major upstream gas supplier, Shell
sees its role as providing effective and efficient short-term
and long-term gas supply options for the UK market.
5. SHELL GAS
SUPPLY ACTIVITY:
The following are some examples of Shell's gas
activity in the European Economic Area. They build on the significant
infrastructure Shell already operates:
5.1 Goldeneye field in the UK came on stream
in October 2004 and is an example of where Shell is maximising
indigenous resources. This field will supply 3% of the UK's gas
demand.
5.2 Statfjord Late Life will bring in wet
gas to the north of the UK via St Fergus, ensuring that commercial
and domestic demand is met. The gas from this and Goldeneye will
secure 5,000 jobs along the supply chain, particularly in Scotland
and the North West of England.
5.3 Ormen Lange field in Norway, will come
on stream in late 2007. This is a giant gas field which has the
potential to supply 20% of UK gas needs for decades, through the
1,200 km pipeline to Easington. Progress was assisted by UK/Norwegian
Government action to reduce barriers across the North Sea.
5.4 Corrib is a large gas field off the
west cost of Ireland. First gas is scheduled for 2007.
5.5 Balzgand to Bacton (the BBL line) will
link East Anglia to the Netherlands to bring natural gas from
the continent to meet 10% of UK gas demand.
6 December 2004
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