Select Committee on Trade and Industry Written Evidence


APPENDIX 26

Memorandum by ExxonMobil International Limited

THE IMPLICATIONS OF INCREASING DEPENDENCE ON GAS IMPORTS

  ExxonMobil[89] recognises the Government's strategic objective to meet the UK's need for secure long-term, competitively priced energy while minimising environmental impacts. We believe that an open, competitive market for energy, operating on a level playing field within a transparent and stable fiscal and regulatory framework, will best meet this challenge. In addition, open markets will attract and retain the necessary long-term capital investment required to meet future energy needs.

  Traditionally in the UK, natural gas was sold into domestic, commercial and certain industrial markets. However, liberalisation of the gas and electricity markets in the 1990s coupled with an abundance of indigenous gas reserves and new high efficiency combined cycle gas turbines substantially increased gas use in the power generation market. Until two years ago, the UK was energy self-sufficient; however, the ending of self-sufficiency need not mark the end of a competitive energy market in the UK. The vast majority of OECD countries are net importers of energy. The key challenge for any importing nation is to diversify its sources of energy, strengthen its relationships with exporting nations, and develop and use its resources more efficiently.

ADEQUATE GAS SUPPLIES AVAILABLE FOR THE UK

  Each year ExxonMobil undertakes a global energy outlook. Our latest outlook forecasts that, over the next two decades, natural gas will be the world's fastest growing major energy source, supplying close to one quarter of the world's energy needs by 2030. This growth is due largely to the increasing use of natural gas for generating electricity through more-efficient power generation technologies. Fortunately, gas reserves are abundant around the world as noted by the Oil & Gas Journal estimate that global gas reserves will last approximately 58 years.

  While global energy demand is expected to rise by close to 50% by 2030, our UK energy outlook (Figure 1) shows a modest increase of about 4% in total primary energy demand between 2005 and 2030. Similar to today, approximately 75% of the total demand in 2030 will be met by oil and gas. For the most part, oil demand is driven by transport fuels where there are limited competitive alternatives. In contrast, gas demand will be driven by heating and power generation uses. Despite significant increases in the production of wind power of approximately 15% annually on average to 2030, it is likely to supply less than 4% of the UK's total primary energy demand and only approximately 10% of power generation by 2030. Our outlook assumes nuclear power will retain a fairly stable share of approximately 8-9% of the UK's total energy mix through 2030, while we expect a significant decrease in the use of coal.


  Natural gas currently is approaching 40% of the UK's energy mix and is likely to maintain this level through 2030. Of the total demand for natural gas in 2030, more than 75% will come from imported supplies; however, 70% of proved global gas reserves lie within economically transportable distance of the UK. Geographical flexibility for importing nations like the UK will increase as discoveries in Norway, Qatar, Russia and offshore West Africa have widened the range of potential suppliers. Furthermore, the petroleum industry's investment in technology has reduced both the cost of moving gas by pipeline over long distances and the cost of converting gas to liquefied natural gas (LNG) and shipping it over long distances. These trends in transportation and liquefaction add to the flexibility and diversity of gas resources expected to be available to meet import requirements and ease security of supply concerns. Figure 2 below shows National Grid's most recent outlook for annual gas demand and supply. It shows the UK has many options available to it to meet demand. However, the UK will have to compete in a global market with other importer nations to secure future gas supplies.


  ExxonMobil believes diversity of supply, in terms of various fuels, delivery modes and geographies, is fundamental to security of supply. In the future, UK gas supplies will come from many different sources including the UK Continental Shelf (UKCS), the Netherlands, Norway, Algeria, Qatar, and West Africa. Ultimately, the best guarantee of supply security is establishing an effective market framework providing open competition, market pricing and adequate investment incentives for attracting diverse supplies. Essential to this market framework is a stable and predictable fiscal, regulatory and legal system. The large projects that are increasingly important to bring new gas supplies to the UK require long-term investment commitments that at minimum require certainty of access to the market for the duration of the project.

  The projects listed in Figure 3 alone, and there are more, demonstrate that the UK gas market is functioning and competitive. The massive investment currently underway in the form of LNG re-gasification terminals and international pipelines is evidence that the market framework in place is appropriate and working.

  One of these major projects is the South Hook LNG terminal in Milford Haven, Wales. The terminal is a significant part of a $13 billion venture between Qatar Petroleum and ExxonMobil that includes production assets, liquefaction facilities, ships, and a re-gasification terminal at Milford Haven. The terminal will have a capacity of 1 billion cubic feet per day beginning in winter 2007-08 with an additional one billion cubic feet per day available in winter 2008-09 representing approximately 20% of current gas demand in the UK. The project has become competitive through access to a large gas resource in Qatar, technological advances such as the world's largest liquefaction facilities, larger LNG vessels and access to a liberalised market in the UK.

  Another of the significant import projects that ExxonMobil is involved in is the Langeled pipeline linking Norwegian gas fields to the UK. Langeled is the world's longest subsea export pipeline stretching 1,200km from Nyhamna, Norway via the Sleipner gas field in the Norwegian North Sea to Easington in the UK. The pipeline is expected to come online before winter 2006 with a capacity of more than two billion cubic feet per day or the equivalent of approximately 20% of current gas demand in the UK. Overall, the attraction of the liberalised UK market has accelerated the commercial viability of major pipeline and LNG projects.



  At the same time that the UK will be competing in the global market for gas imports, the UKCS can continue to provide a substantial portion of domestic energy supplies. Estimates of the UK's remaining oil and gas reserve potential vary considerably depending on the view taken on yet to find reserves and the rate at which these are proved through exploration and appraisal drilling. Overall, remaining UKCS reserves are estimated by the DTI to be in the range of 20-28 billion barrels of oil equivalents. Maximum exploitation of these reserves will require not just innovative technical and commercial solutions but also a stable and supportive fiscal and regulatory regime. The three significant negative changes to the fiscal policy enacted by Treasury since 2002 are inconsistent with DTI's stated goal of maximizing production from the UKCS. The lifespan of oil and gas producing assets are typically measured in decades and it is important for investors in these industries that fiscal regimes remain stable over similar timeframes, not just for the life of a particular Parliament.

  The most recent increase in the Supplementary charge to Corporation Tax (SCT) comes at a time when crude prices are at high levels. At more historical price levels, this level of taxation is likely to render many resource development projects in the UK North Sea uneconomic, shorten the economic life of existing fields and reduce the prospects for optimising resource recovery. In addition, it has increased financial uncertainty for investors and will make future investment decisions in this already high production cost area more difficult. If the UKCS is to remain globally competitive, the fiscal regime must reflect the fact that the basin is a mature, high cost environment generating smaller discoveries than its closest competitors in Norway, the Netherlands and the Gulf of Mexico. Overall, through our experience in the North Sea and around the world, we have concluded that resource owners and resource developers both benefit when fiscal regimes are competitive, stable and long-term in focus.

ENVIRONMENTAL BENEFITS OF GAS

  A significant factor driving the rapid growth in gas demand is the increased environmental benefits of using gas in power generation. Compared with coal fired technology, gas offers higher energy conversion efficiency and lower carbon emissions. Furthermore, the complete life cycle of combined cycle gas turbine power plants from extraction of the gas through power generation emits approximately half of the greenhouse gases per kilowatt-hour than an equivalent coal fired power plant.

OPEN MARKET WILL YIELD COMPETITIVE ENERGY PRICES

  Open, competitive markets help attract global supplies and contribute to security of supply. Flexible and well-functioning markets provide security by enabling supply to meet demand more efficiently than a controlled system. Price movement provides the necessary signals for market participants to efficiently balance supply and demand through new investments that target increased supplies as well as energy-efficient technologies. Intervention and controls, however well meaning, can have significant unintended effects and distort short-term and long-term supply and demand signals. Open gas markets will result through time in globally competitive prices.

  Recent gas price volatility has created difficulties for consumers, particularly for energy intensive companies and domestic consumers, but the recent prices must be put in perspective. UK domestic gas prices are still cheaper in real terms than 15 years ago and still among the most competitive in Europe. For many years, commercial consumers also enjoyed very competitive prices compared to European competitors. However, in order to ensure the UK benefits fully in the future from the creation of an attractive market for gas imports, Government should continue to encourage the other European member states to fully implement the Gas Directives in order to increase liquidity in Continental markets to assist gas flow between the UK and the Continent and to ensure there is a level playing field in attracting LNG.

SUMMARY

  There are abundant gas reserves in the world to provide affordable, efficient and clean energy for the foreseeable future. Security of supply will be provided by attracting gas from various sources through multiple delivery modes. With the current framework in place, the UK is positioned well to compete in the global market for gas supplies. However, in order to remain globally competitive, Government should guard against any action based on short-term volatility that may undermine the investment climate. Even though the UK is becoming more reliant upon oil and gas imports, the UKCS still has considerable reserves remaining which can continue to play an important role in the future security of energy supplies. The UK Government should ensure the right fiscal and regulatory framework, which reflects the complex and high cost nature of the UKCS, is in place to maximise the recovery of these indigenous resources.






89   The term ExxonMobil is used in this submission for convenience and simplicity and as abbreviated reference to specific affiliates of Exxon Mobil Corporation. Back


 
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