Select Committee on Trade and Industry Written Evidence


Memorandum by Shell UK


  In the UK, Shell is engaged in the business of Exploration and Production, Oil Products, Chemicals, Gas and Power, Renewables and other activities. With centres in the Northwest of England, Scotland, and London, Shell provides more than 8,000 direct jobs and 80,000 indirect jobs across the United Kingdom.

  The following summarises Shell in the UK:

    —  has equity in around 12% of the UK's oil and gas production, having operated in the North Sea since the 1960s;

    —  provides 15% of the UK's oil products;

    —  operates approximately 1,000 petrol stations, nation wide;

    —  aiming to develop, with partners, two large scale offshore wind farms; one of which would be among the world's largest;

    —  paid $1,209 million in UK taxes in 2005; and

    —  Shell's international businesses spent approximately $4.5 billion with UK suppliers in 2005.


  Shell recognises the energy challenge to ensure sufficient, clean, affordable and secure energy nationally and internationally, in the short-term and into the long-term future. Meeting this energy challenge requires organisation, skills, technology, finance, and the ability to manage risk, benefiting from the wisdom of markets, long term resilience and aligned effort on a global scale.

  Shell will be responding fully to the Government's consultation as part of its Energy Review as well as responding to the European Union's own Green Paper on energy, "A European Strategy for Sustainable, Competitive and Secure Energy". Our response is in development and we are participating in discussions through the DTI's seminars as well as a range of other stakeholder events. Our full response to the Energy Review will be copied to the Committee in April.

  Below are set out Shell's views on the key areas upon which the Committee seeks views as well as further comments on how Shell can contribute to meeting the energy challenge.


  Shell recognises that concerns have been expressed as the UK moves from being self-sufficient in gas to becoming a significant importer. However, Shell considers that gas should continue to play a key role in affordably delivering security of energy supply to the UK.

  The UK will need to replace some of its ageing electricity generation stations over the next 20 years and it is likely that some of the new stations will be gas fired. However, it is important to recognise that gas is used not only for electricity generation but for heating our homes and offices and for industrial purposes, meeting about 40% of the UK's primary energy needs.

  The UK has been in the fortunate position over recent years that this gas has come from indigenous sources. This distinguishes it from a number of other major economies such as Germany, France and Japan that have had to import substantial quantities of gas for decades. But while gas production in the UK sector of the North Sea has probably now peaked and the UK is becoming a net importer of gas, Shell believes that gas will continue to play a key role in affordably delivering security of energy supply to the UK.

  While gas supplies have been tight over the last winter and may also be tight in the coming winter, 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 the opportunity for substantial new gas supplies to the UK, from 2007 to beyond 2020.

  Gas needs to play a major role in the long-term energy mix. Gas is clean, with the lowest carbon footprint of the fossil fuels. In addition, it is difficult to see what other source of primary energy could replace gas as a substantial proportion of the overall mix. Self-sufficiency in energy is not a realistic option for the UK. Therefore policy frameworks need to be actively designed to ensure efficient markets, a sufficiency of supply, diversification and the use of the tools available for effective mitigation of risks. While oil markets have been international markets for a long time, gas markets are only recently become international. With an increasing number of LNG projects and a rapidly growing number of LNG ships around the world, the LNG market is becoming increasingly international. In addition, pipelines are bringing gas to regional markets. This process is likely to continue, particularly as European gas markets are deregulated and made more international.

  Against the above background the Energy Review needs to confirm gas as a major component of the long-term energy mix. The following themes need to be present in the Energy Review to ensure that the advantages of gas are realised in full and the associated risks are effectively mitigated.

  Maximising indigenous production: the UK sector of the North Sea has been in production for 30-40 years. It is now in "vigorous middle age". Future reserves could be substantial but are going to be more difficult to find and produce. It is vital that the incentives are maximised for oil and gas production in the UK sector of the North Sea. Human and engineering resources are in tight supply worldwide. Once resources leave the North Sea it is difficult to get them back. Therefore, consistent and competitive incentives for licensing and fiscal charges are crucial for the North Sea. The recent tax rise that reduced North Sea cash flows by 17% was retrograde to this need.

  Diversifying sources of supply: gas can be supplied from domestic sources, by pipeline from Norway, by pipeline from continental Europe and by LNG from several sources around the world. This provides a well diversified set of supply sources. What are needed in addition are the commercial frameworks, the incentives and the relationships to ensure supply.

  Providing a stable and predictable framework: it is of utmost importance to create and maintain regulatory stability. Without such stability the investment climate will suffer and consequently security of supply will be put at risk. It is also important to realise what role long-term contracts play: While we acknowledge that there is a role for short-term business in the gas market, we also see that the gas business in Europe is fundamentally long-term orientated. The role of long-term contracts is also reflected in the gas Directive and the Security of Gas Supply Directive.

  The European high level Green Paper on energy is welcome. The EU has an important role to play in securing European energy supply and the efficiency of European markets, by supporting enterprise initiatives and ensuring coordination across national governments, especially towards non-EU partners and other stakeholders. Shell recognises the need for co-operation at the EU level as markets become more integrated and welcomes proposals to improve external relations with major energy-producing and consuming countries based on reciprocity.

  Support the market structures that provide seasonal balancing: Until recently, the UK has depended on swing gas fields in the Southern North Sea to respond to peak gas demand as is normally experienced in winter. Many European countries have not had access to swing gas fields and instead have invested in long-range gas storage. As the structure of the UK gas supply is set to change, it is important that seasonal flexibility is provided; this could include investment in new storage facilities.

  Planning consents for new infrastructure: planning consents are likely to be needed for regassification terminals, for storage and for pipeline landfalls. It is crucial that streamlined processes are put in place for planning consents. This needs to be supported by very open public debate about energy needs and the pros and cons of different energy supply options.

  Promoting partnerships and relationships with major gas suppliers around the world: a number of countries are major suppliers to international gas markets. On the basis that the UK needs to be a participant in these markets the importance of good relationships and mutual understandings is high. Effort needs to be put into this at governmental and institutional levels, in conjunction with the EU. In addition partnerships among energy companies in these "resource holding" countries and the UK's major energy companies should be promoted as supporting common goals of secure markets in exchange for secure supplies.


  Shell is not involved in the nuclear power business. We consider its role in the UK electricity mix is rightly a matter for the Government and public debate. It is for the utility and electricity generation companies to decide whether they wish to make investment in new nuclear stations. However, a decision to build new nuclear power stations is likely to require special incentive arrangements. These arrangements may include changes to the regulatory environment or financial incentives to be developed should not preclude other forms of low carbon energy being developed. For example, as discussed above, the Review should consider changes to the planning regime to allow timely investment to provide for energy security of supply. This will apply to plans to develop nuclear power stations but also for other energy infrastructure projects, such as wind farms and storage sites.

  Shell is encouraging an approach by Government that does not "pick winners" but instead focuses on the outputs to be achieved, whether these are carbon reduction targets or security of supply. We advocate an approach that provides a level playing field between competing fuels and approaches to carbon management. The Review should focus on market incentives to deliver its carbon management objectives. Using an approach that involves market mechanisms should minimise the burden on the Treasury and on energy consumers.


  While gas will continue to play an important role in meeting the UK's energy needs, Shell is also working on responding to the energy challenge through: cleaner utilisation of hydrocarbons (eg carbon capture and storage) and commercialisation of renewable energy technologies (eg wind, hydrogen, and wind). We have now invested over US $1billion in alternative energies, making it one of the world's leading companies in the sector.

  Shell believes that wind energy has real potential for the UK as it has the best wind resource in Europe, as stated by the Oxford University's Environmental Change Institute study for the DTI published in November 2005. We believe that offshore wind is vitally important to delivering the UK's renewables target and this in turn is a key component for delivery of the CO2 target. We are focusing on the development and operation of two offshore wind farms in the UK. Offshore wind needs to be encouraged as it has the economies of scales required to make a significant contribution to low carbon energy. Our two projects are:

    —  London Array, in the outer Thames Estuary, is the flagship project of the UK offshore wind industry and if it proceeds it will be the world's first gigawatt (1,000 MW) scale offshore wind farm. It will contribute nearly 10% of the UK's 2010 renewable energy target and offset the emission of 1.9 million tonnes of CO2 each year.

    —  Shell is one of three companies that have been granted an option to lease an area of the Irish Sea from the Crown Estate to develop an offshore wind farm near Blackpool. Development is dependent on the results of a full economic feasibility study and environmental impact assessment.

  Together these two projects would meet the electricity needs of over 850,000 homes.

  Shell has an established position as the world's largest marketer of bio fuels, as well as a leading developer of advanced bio fuels technologies. Shell is actively participating in the implementation of the Renewable Transport Fuel Obligation (RTFO) for 2010.

  Shell has also recently announced a carbon capture and storage project with Statoil in Norway to use carbon dioxide to enhance oil recovery. If this project is successful, it could be used elsewhere in the world to address the CO2 challenge.

  In addition, clean coal energy could make an important contribution to meeting the goals on energy supply diversification. Coal gasification is a leading technology that it especially applicable for carbon capture and storage. We believe that hydrogen will become important in the future energy mix in the coming years and we will responsibly champion this development.

  Shell also responds to the energy challenge by promoting and participating in informed debate through our work on scenarios. We would draw to the Committee's attention to the World Business Council for Sustainable Development's "Pathways to 2050" document.

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