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We cannot forget the courage of those who work in this very hostile environment. Indeed, some have tragically lost their lives in the pursuit of exploring for and
producing this vital national resource. The oil industry does not always receive the attention that it deserves. As we enter a new era of energy developments in the UK, in which the skills, enterprise and commitment of the oil and gas industry will surely find new application, we should be proud of it and take full note of what it has already achieved.
As the Select Committee recognises, even though indigenous production is declining, UK oil and gas remain the major constituent of the UK energy mix. They currently provide for about two thirds of the nation's primary energy needs. By 2020, it is likely that well over half our energy use will still be fuelled by oil and gas, half of which might be from UK production.
Supporting about 450,000 jobs-including those that rely on the industry-and with annual expenditure of about £10 billion, the UK oil and gas industry makes a massive contribution to our economy. Indeed, there is no doubt about the industry's world-class credentials. Its reputation for meeting the challenges from harsh operating conditions and coming up with workable solutions to continuing technological challenges sets it apart as one of the most dynamic and successful industries in the world.
The North sea still offers many very good investment opportunities and it is important to all of us that those are encouraged, not deterred. Looking at reserves, we have, as my hon. Friend the Member for Sherwood said, about 20 billion barrels of oil equivalent, or perhaps more, remaining to be produced. A key Government aim is to ensure that the UK realises the full value of its oil and gas resources.
We have a clear strategy to maximise the benefits to the UK of our hydrocarbon resources. Working closely with the industry, we are seeking more exploration and new developments; we are seeking to get the best value from existing acreage and existing developments; and we are keeping the fiscal regime under review to ensure that it provides the right incentives for continuing investment.
I want to say something about new exploration and development. We continue to hold regular offshore licensing rounds, with the aim of making as much acreage available as possible for new exploration. We have taken a number of steps in recent years to offer more flexibility in licensing to attract the widest possible range of players. For example, we introduced the promote licence, at one 10th of the cost of a traditional licence, to allow smaller investors to get involved. There is also the frontier licence-covering areas such as west of Shetland-which initially offers a larger amount of acreage and so gives licensees a better chance during the appraisal process to identify exploration potential in those areas, where the geology is less well known and not so clearly defined.
All those initiatives have led to significant renewed interest in the North sea in recent years. In fact, recent licensing rounds have been some of the most successful ever. In the 24th round, we awarded 150 licences to 104 companies. Our 25th round offered a record-breaking 2,297 blocks or part-blocks for exploration, and received a record number of applications. As a result, late last year we were able to offer for award the highest number of licences ever-171 new licences to 99 companies,
covering 257 blocks. I can confirm that work is being taken forward so that we should be in a position to announce a new, 26th round in January.
The industry has, of course, felt the effects of the financial crisis, and I will say something later about those effects and our response to them. In addition, the rollercoaster of rising and falling oil prices has impacted on some investment decisions and on the pace of development. However, the past few months have seen more financing activity, and a number of relatively big North sea projects are in prospect. That said, we are not taking anything for granted. We continue to monitor exploration levels. They fell in the first half of the year, but I am glad to say that there has been a significant recovery in the third quarter, when 27 new wells were started, compared with 29 in the first half.
Mr. Kidney: I shall have to come back to the hon. Gentleman in a moment with the figure, but I know the point that he is making: that exploration is key and numbers are down. I am prepared to accept that point, but on the figure, I hope that he will allow me to come back to him in a while. We intend to maintain momentum by launching, as I mentioned, a 26th offshore licensing round next January.
I want to deal directly with the issue of the area west of Shetland. We are working with the industry to bring forward development west of Shetland, where about 15 per cent. of remaining UK reserves are thought to lie. It is vital that we unlock the gas potential west of Shetland, and a timetable has been established. As my predecessor mentioned in evidence to the Select Committee, Total has commissioned basic engineering studies in respect of development of the Laggan and Tormore fields, with capacity for further fields in that area. The participants are moving towards a decision on development in 2010, which we expect will be followed by a development plan submitted to DECC.
The area west of Shetland has been extensively surveyed in one of the largest and most comprehensive marine surveys undertaken for the offshore oil and gas industry. That work has been updated and extended by subsequent work carried out for the Department within the strategic environmental assessment framework. Future work will seek to ensure that appropriate environmental data for that area are kept up to date.
Simon Hughes: I am not an expert on this issue; my hon. Friend the Member for Orkney and Shetland (Mr. Carmichael) is an expert on it, as is our friend Tavish Scott, our party leader in Scotland. However, I understand that one of the issues rightfully preoccupying people in Shetland in particular and Scotland in general is that some of the explorations or the potential supply might be just within or just outside our territorial waters. Will the Minister tell us whether any discussions are already taking place with the Faroese authorities, which are the other side of the line, so that there are efficiencies of scale and intelligent conversations about maximising the benefit to everyone of any exploration going on currently west of Shetland?
Mr. Kidney: There certainly is work to be done in the area that the hon. Gentleman mentions. On the specific point about discussions with other authorities, I need again to take advice and perhaps I shall be able to come back to him on that point in a moment. It is a good one and I certainly endorse what he says about the expert knowledge of the hon. Member for Orkney and Shetland (Mr. Carmichael).
Mr. Mike Weir (Angus) (SNP): Before the Minister moves on from discussing the area west of Shetland, I want to point out that one that the Select Committee came across was that many of the finds west of Shetland are much smaller than traditional North sea finds, and there is huge concern about the infrastructure needed for smaller companies to develop those. Will the Minister tell us whether there have been any discussions on that? He mentioned Total and the studies in that respect. Has there been any discussion with the smaller companies about how they might join in and how to ensure that they have the infrastructure to develop smaller fields?
Mr. Kidney: The hon. Gentleman raises two issues. One is the viability of constructing new infrastructure, based on projections of what returns might be had from the development. The other issue is the access of smaller players to that infrastructure if they are involved. If I may, I shall come later to what I can say on access to infrastructure. Clearly, the discussions that we have with the potential collaborators in the development include the first of those points-the viability of the scheme and what it will take for it to be viable. I am sure that the hon. Gentleman appreciates that we have such discussions with the proposed developers all the time.
I want to move on to the issue of making the most of existing licensed areas and developments. We continue our drive to identify and carefully scrutinise fallow acreage and discoveries. Where it is clear that no work plans exist, licensees are encouraged to relinquish the licence, so that such acreage can be made available again via our licensing rounds. That allows others the chance to bid for such acreage and exploit it.
We have also taken action with industry to improve oil and gas recovery from existing brown fields. We have a rolling programme and we meet all the North sea field operators regularly to consider fields' performance and to help to identify ways in which long-term production levels might be increased. Taking a regular look at older producing fields, a number of operators have successfully increased production levels through refreshed seismic and geological interpretation, additional drilling, further investment in platform facilities and the use of new technologies.
With production levels declining overall, it is important that the industry considers how enhanced oil recovery techniques might improve overall recovery from North sea fields. The potential exists to tap more than 1 billion extra barrels using enhanced oil recovery. The Energy Minister, Lord Hunt, chaired a session on the subject with a number of key operators in Aberdeen. It proved a very useful discussion, bringing a sharper focus to some of the key challenges and stimulating ideas for overcoming some of the obstacles.
For example, it was agreed that enhanced oil recovery can be more difficult for mature fields and that issues exist around project economics and the availability of injection fluid. It was also recognised that research is needed into ways to reduce the cost and weight of
facilities upgrades and to promote low-cost methods and collaborative pilots to share costs. My Department is now working closely with the industry to take forward the subjects that were discussed.
On access to existing infrastructure, we are promoting new action to facilitate fair and reasonable access. In particular, my officials have embarked on a series of one-to-one meetings with the directors of companies that own and operate North sea pipelines and infrastructure. The key aim is to ensure that smaller players with development options can get access to infrastructure within reasonable time scales and on fair terms. I recognise that that is a long-standing issue for the industry and that responsibility for a successful outcome lies largely on the industry's shoulders. Of course, an industry code of practice and guidance from the Secretary of State provide a framework for decision making, but we continue to make it clear that the Government would be prepared to intervene in a case if stalemate were reached between an infrastructure owner and the operator of a development that required access.
Sir Robert Smith: Although the long-stop exists for companies to challenge something through that formal process, that has never actually happened. An optimist might say that that is because everything is going so swimmingly that it is not necessary, but the feedback from those trying to get access is that people are reticent to go to a formal process. In January 2009, the Minister wrote to companies to engage on the issue, but is there any feedback on how that engagement is going?
Mr. Kidney: Obviously, I did not write that letter, because I was not a Minister in January-the hon. Gentleman will no doubt say that that is a shame. The one-to-one meetings are a result of the engagement that began with those letters and they are continuing. We are keen to ensure that the industry understands exactly how the Secretary of State would respond if asked to use his powers. The hon. Gentleman and my hon. Friend the Member for Sherwood are absolutely right that no one has yet asked him to exercise his powers, and we all understand the pressures that mean that people would not want to ask. Nevertheless, we have those powers.
The Secretary of State's previous guidance was quite helpful in terms of the charging activities of those who give access to infrastructure. If new obstacles are arising, we will be happy to look at ways of ensuring that people understand how the Secretary of State would approach the issue. At the moment, however, the meetings are going extremely well, and a further understanding between us and the industry may emerge as a result. I hope that that is helpful to the hon. Gentleman. We hope that, as a result of our frank discussions with infrastructure owners, the industry can use the code of practice principles to ensure that nobody needs to come to the Secretary of State, but we stand ready if somebody does.
For the common good of maximising all our reserves, it is vital that smaller developments within the economic reach of existing pipelines are not stranded because they cannot obtain access, and we will be keeping a close eye on progress to ensure that that does not happen.
I am not entirely clear about how we have moved on. In the evidence before us, the small operators and Oil and Gas UK acknowledge that the existing
system-discussion with each other, with the long-stop of approaching the Government, as the hon. Member for West Aberdeenshire and Kincardine said-is not working satisfactorily. What difference will the new system make? The independents suggest that we should go as far as legislation for common carriers. There seems to be a huge gap, and I am not entirely clear from what the Minister has said what progress has been made.
Mr. Kidney: Let me make it clear to the hon. Gentleman that we are not proposing further legislation at this point. The discussions that we are having on the basis of the code of practice and the Secretary of State's guidance-perhaps with an opportunity to update in 2010-will be sufficient. If somebody wants the clarification of a decision by the Secretary of State, we will very much welcome their asking for such a decision. No one has come forward yet, but if they do, we will welcome the opportunity to give a ruling, which would then set a precedent for the entire industry. Unfortunately, that has not happened so far. The discussions that I have described, and the potential for updating the Secretary of State's guidance, are where we are in the process.
I was asked a little while ago about taxation. My predecessor was quite robust with the Committee on this issue and was not going to talk about it when he came to give evidence. However, I have specifically cleared the text that I am about to deliver with the Treasury, so I will be speaking with one voice with my colleagues there. Of course, taxation policy is a matter for Treasury Ministers, but the Committee will be aware that the Chancellor this year introduced a new field allowance-the consultation document called it a value allowance, and some people still use that term, but it is the same thing-to encourage smaller or more technically challenging fields to be brought into production.
The Chancellor himself visited a North sea installation -Shearwater-earlier this month, so he is well aware that conditions in the North sea are constantly evolving and that we have to ask ourselves whether the tax regime is right. He thinks, and I think, that it is important that the Government and industry work together on these issues. Stakeholders discuss a number of specific issues arising from the Budget 2009 package with DECC and Treasury Ministers and officials. Those discussions are ongoing and help to inform Government thinking. I can assure hon. Members that the Government will keep the North sea fiscal regime under review and monitor the impact on activity in the North sea of the package of changes introduced at Budget 2009. If there is a case for further change to the regime to meet our objective of maximising economic production from the North sea, the Government will be prepared to act. I hope that that is a helpful response to the request from my hon. Friend the Member for Sherwood.
We continue to work with the industry through PILOT -the joint Government and industry oil and gas forum -to secure the long-term future of the UK continental shelf. At the next PILOT meeting, in November, we will challenge industry to take a long-term look at the province and to come forward with new ideas, which could add renewed emphasis to maintaining investment and ensuring that we exploit UK resources to the full.
Simon Hughes: This is just a reflection really. When, as a result of pressure, the Government varied the incentive for people to invest in the renewables industry, people were fairly sceptical about whether that would meet the concern that people were not investing. However, it produced quite a significant positive response, and I compliment the Government on that. I am sure that colleagues from Scotland will make this point more strongly than me, but let me say that it does not take much Government fiscal encouragement to produce the investment response that people are calling for. I hope that the Treasury understands that, that it is sympathetic to such calls and that it will respond to them in the months between now and the general election.
Mr. Kidney: The hon. Gentleman should spit it out: the Government's action was a success, and if we tell the Treasury, officials there might be all the more willing to talk positively in the way that he indicates. That is a good point for us all to make. I have just recalled that the answer to the question about the number of exploration wells in the third quarter of the year was seven, as against nine in the whole of the first half, which fits with the picture of things picking up.
I want to deal with the environment. A comprehensive framework of environmental protection measures has been developed to minimise the impact of oil and gas activities. That is embodied in bespoke oil and gas legislation, consistent with and in large part derived from the legislative framework of the European Community. All activities that could have an impact on the environment are subject to rigorous assessment, and significant activities are controlled through the issue of permits, consents or approvals. There is also an inspection and enforcement regime in place to confirm compliance with the conditions included in the environmental approvals. That robust regime is reflected by the industry's performance and the UK has a good environmental record. I noted, in reading the Committee's report, that although suggestions had been put to it about non-compliance with conditions on environmental matters, the Committee found the industry to have a good record. I am grateful that it came to that conclusion.
The Chairman also raised carbon capture and storage, which is something in which I, too, am interested. Looking further ahead, we believe that carbon capture and storage will be one of the key technologies that will help the UK to meet its carbon reduction targets. The North sea has the potential to store more than 100 years' worth of UK power station CO2 emissions. Many in the oil and gas industry will have the knowledge and expertise to help us to realise that potential. However, the industry is keen, among other things, to get a clear regulatory regime for CCS. Last month my Department issued a formal consultation on how we propose to license the storage of CO2. We are keen to have comments from industry and stakeholders by the end of the year, so that we can move forward with the formulation of the regulations.
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