House of Commons - Scottish Affairs

Select Committee on Scottish Affairs First Report

2 Background

3. Exploitation of the natural resources of the UK Continental Shelf (UKCS) is maturing;[2] oil and gas production peaked in 1999 and continues to decline steadily. By 2006 some 36 billion barrels of oil equivalent (boe) had been produced and the UKCS is estimated to have about 15 to 25 billion boe still to be recovered.[3] The UK is now a net importer of oil and gas, although our reserves will continue to play a vital role in our economy for many years to come.[4] Most of the remaining reserves are likely to be found in relatively small oil and gas fields, increasingly remote from existing infrastructure, such as pipelines,[5] and many of the remaining smaller accumulations are likely to be found in more technologically challenging areas.[6] Depending on the interplay between the international price of oil, the cost of exploitation and the on-costs of tax and other expenses, smaller fields may not attract the investment in infrastructure needed to make them viable.[7] Mr Blackwood, Director BP North Sea, said that the North Sea was now a difficult place to find significant quantities of oil and gas. He said it was "hardly an optimistic location for new discoveries".[8] Production has fallen despite continued investment and cost inflation is high because of global competition for supply chain resources.[9] The industry faces rising costs[10] and a declining rate of post tax return.[11]

The need for sustained investment

4. For exploitation of these resources to be maximised, sustained investment is crucial.[12] While the UKCS has some attractive features from an investment point of view,[13] the United Kingdom Offshore Oil and Gas Industry Association (UKOOA),[14] told us it was increasingly difficult to attract investment.[15] There are a number of initiatives aimed at increasing investment such as the PILOT programme, fallow processes, 'Promote' licences, initiatives on brown fields and the 100% first year capital allowance.[16] Witnesses from the industry told us that anything to support investment in marginal projects and small pools was welcome.[17] The PILOT initiative, which aims to maximise recovery from the UKCS, is regarded as a tremendous success.[18]