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Government response
The Government welcomes the Committee's first report,
which has very appropriately addressed a subject central to the
development of the UK's energy supplies, and of the economy as
a whole, over the crucial transition to the low-carbon energy
supplies of the future. We agree with the Committee's stress on
the continuing importance of domestic oil and gas production to
the UK, in particular to maintaining the security of energy supplies,
and the importance of ensuring that the remaining reserves of
the UK Continental Shelf (UKCS) are exploited to the greatest
benefit. The Government is seeking by all practicable means to
ensure that the geological inheritance of the UK is fully explored,
and that the maximum economic recovery of these reserves is secured
over time.
We welcome the Committee's recommendations, aimed
at ensuring that the resources remaining in the UKCS are efficiently
realised. The recommendations are set out below, with the Government's
responses.
1. The Government is right
to focus on security of energy supply as a key challenge for the
UK. Much of the UK's current electricity generating capacity is
set to close over the next decade, and there is a continuing risk
of disruption to energy supplies internationally as a result of
political and economic turbulence. In this context the importance
of domestically produced oil and gas is obvious and the case for
Government doing all it can to help maximise economic production
is compelling. (Paragraph 10)
2. The Government's priority when determining
policy on UK oil and gas should be security of supply, within
the context of moving towards a low-carbon economy. However, proper
account also needs to be taken of the immense tax revenues paid
by the industry and of the 350,000 people whose employment is
reliant upon it. We are concerned to note that the industry predicts
that falling capital expenditure could lead to the loss of 50,000
of those jobs over the next two years. This strengthens the case
for the Government to investigate further ways by which it can
support UK oil and gas production in the current difficult economic
climate. (Paragraph 14)
We confirm that security of supply is central to
the Government's policies throughout the energy field, including
oil and gas. Domestically produced energy has a key contribution
to make towards maintaining this security; and as oil and gas
continue to provide the majority of our energy supplies today,
getting the best value out of our endowment of North Sea oil and
gas is an essential support for the transition to the low-carbon
future. We also agree with the Committee's stress on the very
significant contributions of oil and gas to the economy at large,
to employment and to public revenues. For all these reasons, Government
continues to pursue its objective of securing maximum economic
recovery of these reserves over time, and the maximum benefit
to the economy and UK employment.
3. Estimates of future levels
of UK oil and gas production cover a wide range: from 11 billion
barrels of oil equivalent (boe) to 37 billion boe according to
DECC. The Government cannot influence the amount of oil and gas
remaining in the UK continental shelf. But the policies it pursues
in relation to tax, regulation and licensing all have an impact
on the attractiveness of producing oil and gas from the UKCS and
therefore on production levels. The Minister told us it would
be regrettable if oil and gas production was at the low end of
the estimates, with a consequential need to import more oil and
gas. We think this is an understatement, given the contribution
of the UK oil and gas industry to security of energy supply, tax
revenues and employment. We support the Government's objective
of maximising the economic recovery of UK oil and gas resources
but believe that it now needs to articulate a strategy setting
out how it intends to achieve that objective with realistic but
stretching targets for future production levels. (Paragraph 26)
As the Committee recognises, the scope of future
UKCS activity is bounded by the geological inheritance. Within
the scope defined by that potential, the key to securing full
economic recovery is the right level of investment, which in turn
is strongly determined by global oil prices. Government has no
scope to influence these key determinants of investment, but seeks
to keep the regulatory framework flexible and responsive so that
the geological potential is fully explored over time, investment
can be maintained at the highest level consistent with the actual
evolution of oil prices, and economic recovery consequently maximised.
Very stretching production targets were agreed by the then Oil
and Gas Task Force (now PILOT) for the UKCS nearly 10 years ago.
Whilst they proved a useful marker for progress during the intervening
period, the usefulness of such aspirational targets is ultimately
limited by the extent to which individuals or organisations can
reasonably be regarded as accountable for their delivery. For
this reason Government considers it timely to explore within PILOT
the options for a more effective performance framework which could
be used to measure progress against a longer term horizon, say
2015 or 2020 if possible, and which would focus on more accountable
measures, or a basket of measures.
4. We are very concerned
at the bleak prospects for investment in the oil and gas industry.
If the industry's worst case scenario is realised in 2010, 50,000
jobs could be lost and production could fall by millions of barrels.
The Government must do what it can to facilitate investment, and
the success of the steps announced in the recent budget must be
judged by whether they help stop the downward slide in capital
investment. (Paragraph 30)
Although there has been a marked fall in exploration
expenditures, appraisal and development expenditure has held up
quite well in the first half of 2009. The most recent survey of
companies' investment intentions however indicated that a substantial
fall, of perhaps 20%, was likely in 2010. That survey is now many
months out of date and a new survey is expected later this autumn.
While oil prices are, as noted above, the single most important
factor in determining levels of investment, the fiscal regime
is clearly also significant, and is discussed further below.
5. We welcome the Government's
recognition of the difficulties faced by oil and gas companies
in accessing affordable lending and the fact that DECC, through
BERR and HM Treasury, is engaging with banks to ensure that the
UK continental shelf "is at the forefront of the minds of
the banks". However, given the problems oil and gas companies
are having in achieving affordable borrowing, it does not seem
that such engagement is having any conspicuous success. DECC Ministers
should set out, with their Treasury and BERR counterparts, what
steps the Government is taking specifically to help oil and gas
companies access affordable credit from banks and keep under review
the availability of such credit. (Paragraph 36)
The Government has introduced a range of general
measures to support the financial sector and encourage lending
to businesses, including the recapitalisation of the banks and
the introduction of the Asset Protection Scheme. These measures
are supporting access to finance for all sectors of the economy,
including the oil and gas sector. To date, the difficulties reported
by oil and gas companies do not seem to differ significantly from
those encountered by other sectors, but the situation is kept
under review and the Government will consider the case for more
specific measures in the light of emerging information.
6. Smaller companies in
particular are having difficulties accessing the infrastructure
they require in order to produce oil and gas because in some cases
of unrealistic demands by the infrastructure's owners. The industry's
voluntary Code of Practice is not working well in this respect
and, while we are not yet convinced of the case for a comprehensive
statutory "common carrier" system of access, we do think
that Government has to take a more active part in ensuring the
successful outcome of negotiations about access arrangements.
DECC and the industry should make it a priority to strengthen
the voluntary arrangements so that they do not hamper the ability
of companies to operate. If a voluntary code cannot be made to
work more effectively serious consideration should be given to
introducing a common carrier system. (Paragraph 44)
Negotiations for third party access to upstream oil
and gas infrastructure are underpinned by legislation that enables
the prospective third party to request the Secretary of State
to require access to be provided, and to set terms and conditions
in the event that agreement cannot be reached with the infrastructure
owner. This legislation was first introduced in 1975 and has been
extended and enhanced since then, most recently in the Energy
Act 2008. Although the Department has assisted informally in resolving
a number of disputes over the years, no formal requests to the
Secretary of State to set terms and conditions have to date been
made. The voluntary Infrastructure Code of Practice, developed
jointly by the industry and DECC, seeks to provide a process by
which the parties to a negotiation can find a mutually beneficial
outcome without recourse to the legislation. However, it is known
that there are concerns about the operation of this voluntary
code, and there are suggestions that it does not always achieve
its objective of providing access on fair and reasonable terms
where risks taken are reflected by rewards.
Much work has been carried out by DECC and the industry
over the last two years, both to strengthen the voluntary arrangements
and to provide more clarity about the approach that DECC would
take, in the event that a request were made under the legislation
to set terms and conditions. This activity has included the development
of guidance to support the voluntary code, the holding of more
than a dozen seminars to raise awareness and encourage compliance
with the voluntary code amongst commercial negotiators, and the
holding of senior manager meetings to seek to unlock negotiations
that have stalled. DECC is also carrying out increased monitoring
of individual infrastructure access negotiations. The Energy Minister
wrote to all field operators and infrastructure owners in January
2009 with five challenges to seek improved commercial performance,
and DECC officials are currently following up on these challenges
with each company.
A number of infrastructure systems already have several
third party users and these systems normally have standard terms
and conditions that enable rapid negotiations to take place. However,
for infrastructure systems with few or no existing third parties,
it can take time for terms and conditions to be formulated for
a new user. This is exacerbated by uncertainties over ageing infrastructure
with increasing operational costs and declining production. As
the UKCS matures, some of the newer fields contain 'sour' or 'off-spec'
hydrocarbons that need additional services to be provided by infrastructure
owners, and this can introduce further complexity. The voluntary
code encourages infrastructure owners to be as ready as possible
for third party business, and recent surveys have indicated that
this preparedness is much improved across the industry.
In summary, the Department is working with the industry,
through improving guidance to provide clarity on DECC's approach
to setting terms and conditions if so requested, and through other
initiatives, to strengthen the voluntary arrangements and address
the concerns that have been raised.
7. The oil and gas industry
operating in the UKCS faces high costs, low prices, lack of affordable
credit and a global recession. The Government cannot unilaterally
solve these problems. But that makes it imperative that where
it can make a difference - in facilitating credit from banks for
example and, even more crucially, in establishing a fair and sustainable
fiscal regime - it does so. (Paragraph 50)
In the last few months, there has been an apparent
easing of the financing climate, with a number of project finance
deals and equity fundraising. Nevertheless, the Government agrees
that current market conditions are overall more difficult for
the industry, and more challenging for investment on the UKCS,
than have been experienced for many years. It is seeking to assist
or to mitigate the issues wherever it has practical leverage to
do so.
8. We welcome the introduction
of the field allowance in so far as it acknowledges that the tax
burden on companies operating in the UKCS needs to be altered
in order to stimulate vital investment. However, we are very concerned
that the allowance seems to be flawed in a number of fundamental
ways. The main problem is that it does not incentivise incremental
investment in existing sites. Furthermore, we are concerned that:
it is likely to be ineffective in encouraging investment west
of Shetland; the criteria for qualifying for the allowance are
so stringent (especially with regard to HPHT) that its effect
will be minimal; and its modest scale is such that it will not
provide a significant incentive for investment even in new fields.
We share the concerns of witnesses that the allowance will not
stimulate the production of the 2 billion extra barrels of oil
hoped for by the Chancellor. (Paragraph 71)
9. The Government should review the operation
of the allowance in its first year of operation and be prepared
to extend its scope and widen the qualifying criteria in light
of that review. In any event, we think there is a very strong
case for widening the allowance so as to provide a meaningful
incentive for investment west of Shetland and to encourage HPHT
opportunities. Furthermore, much of the UKCS remaining reserves
are in fields which are not new but which will not be further
exploited unless the fiscal regime makes incremental investments
more attractive. This is especially the case in PRT-paying fields
where the overall tax rate is 75%. (Paragraph 72)
The new field allowance introduced by Finance Act
2009 was the outcome of extensive consultation with a wide range
of stakeholders, including a large number of oil and gas companies.
The categories of field chosen for the allowance were those that
face the most significant challenges to their commerciality, such
that tax may prevent them being brought into production. The value
of and criteria for the allowance were based upon evidence submitted
by the companies, as well as analysis carried out by the Government
and by independent commentators.
In setting the values and criteria for the field
allowance, it was at all times necessary to balance the benefit
to the UK in terms of increased production of oil and gas with
the deadweight cost to the taxpayer of awarding the incentive
to fields that would have gone ahead without it. The Government
believes that the field allowance as currently formulated achieves
this balance, on the evidence presented thus far. A number of
independent commentators have agreed with this assessment, including
Charles Westwood, from industry consultants Hannon Westwood, who
said that "the Government has judged it quite correctly in
making an intelligent and measured response to issues raised by
the industry."
However, the Government will continue to review the
effectiveness of the field allowance, and will be willing to consider
further evidence that stakeholders are able to present that supports
different levels or different qualifying criteria for the allowance.
The field allowance is not designed to address situations
where the fiscal regime is impacting on incremental activity in
existing fields. There is, at present, no clear way of incentivising
incremental projects that would not otherwise go ahead without
also giving support to projects that would go ahead in the absence
of an incentive. Consequently, such an incentive would have a
high deadweight cost to the taxpayer. However, the Government
is willing to hear industry's case for an incentive for investment
in existing fields, and their views on how such an incentive might
be delivered.
10. We note the Government's
reasons for pressing ahead with a value or field allowance, rather
than options which appear to have the benefit of being less complex
and of incentivising a wider range of production, such as an across-the
board capital uplift or a reduction in (or the removal of) the
supplementary charge. We recommend that in reviewing the operation
of the field allowance and assessing its effectiveness in increasing
investment the Government be prepared to reconsider the merits
of these bolder moves. It should calculate and set out the predicted
effects on production and tax revenues of a capital uplift or
a reduction in supplementary charge alongside the effects on investment
in the industry. We recognise that the nation should receive a
return in the form of both economic production and tax revenues
from the UKCS. (Paragraph 73)
In preparing the measures announced at Budget 2009,
the Government considered a range of possible mechanisms for supporting
investment in the North Sea. The Government will continue to keep
these mechanisms under review.
However, the Government designed the field allowance
to be targeted on those fields that most need support, thus ensuring
the allowance provides value for money to the taxpayer. Across
the board mechanisms would carry a much greater cost to the taxpayer,
as they would also be available to those projects that would be
brought into production without an incentive. As the Committee
has recognised, the Government must always ensure that the taxpayer
is receiving a fair return from the UK's national oil and gas
resources.
As mentioned in the Committee's report, greater detail
on the Government's reasons for rejecting various alternative
mechanisms for providing an incentive can be found in the consultation
document "Supporting Investment", published alongside
PBR 2008. The document can be accessed online at:
http://www.hm-treasury.gov.uk/prebud_pbr08_northsea.htm. Among
other points, the document notes that, although it had initially
been suggested that the cost to the taxpayer of across-the-board
incentives might be offset by the resultant increase in production,
further analysis suggested that this would not be the case.
11. The Government was right
to listen to the concerns of the industry regarding specific issues
relating to the chargeable gains regime, the re-use of North Sea
infrastructure for non-ring-fenced purposes and the operation
of the Petroleum Revenue Tax. The changes announced in the Budget
regarding these areas are modest but welcome. (Paragraph 76)
The wider Budget 2009 package will serve to underpin
investment in the North Sea, by creating certainty and stability
for companies who are seeking to invest. The Government is willing
to have further discussions with industry on any remaining issues
arising from the changes in these areas, to ensure that, where
possible, barriers to investment are removed.
12. We note the case presented
to us by industry representatives for accelerating the payment
of accrued but unrelieved tax allowances to smaller companies
and their argument that the lack of equity and debt financing
makes this particularly desirable. We urge the Government to estimate
the costs and potential benefits of this proposal as a means of
tackling the impact of the credit crisis on investment in the
UKCS. (Paragraph 79)
As noted in the Committee's report, oil and gas producers
in the North Sea already have access to the "Ring Fence Expenditure
Supplement" (RFES). This facility allows companies with insufficient
income to cover their costs to uplift the value of their unrelieved
expenditure by 6 per cent a year for a maximum of 6 years. When
such a company comes into profit the expenditure can then be offset
against its profits. The RFES is designed to support new entrants
to the North Sea.
The Government recognises that access to finance
has been a problem for firms in all sectors of the economy in
recent months. In the run-up to Budget 2009, the Government received
representations in support of a scheme aimed specifically at the
oil and gas industry, of the type outlined by the Committee. However,
the Government has introduced a range of general measures to support
the financial sector and encourage lending to businesses, including
the recapitalisation of the banks and the introduction of the
Asset Protection Scheme. These measures are supporting access
to finance for all sectors of the economy, including for the oil
and gas sector.
13. We would be surprised
if industry representatives did not call for a more congenial
tax regime. However, it does seem to us that concern that the
Government's fiscal reforms do not go far enough are genuine and
legitimate. The quadruple whammy faced by the industry - of high
costs, low prices, lack of affordable credit and a global recession
- make this a difficult time. We are not convinced that the field
allowance and other measures announced in Budget 2009 - albeit
welcome - are sufficient to create the competitive environment
needed by the industry nor that they will provide a strong enough
incentive to exploit fully remaining resources. We note and welcome
the Government's commitment to further engagement and hope that,
should the measures so far announced prove to be inadequate, more
wide-ranging and generous reforms of the fiscal regime will be
forthcoming. A key part of the UK's energy security strategy and
the prospects of the 350,000 people who work in or with the UK
oil and gas industry depend on it. (Paragraph 82)
The Government fully recognises the importance of
the UK's oil and gas industry, both to ensuring that the UK has
a secure energy supply and in the wider context of the jobs and
investment that the industry contributes to the UK economy.
As with all taxes, the Government will keep the North
Sea fiscal regime under review, and will monitor the impact of
the package of changes introduced at Budget 2009 on activity in
the North Sea. There are also a number of specific issues arising
from the Budget 2009 package that stakeholders wish to discuss,
and these discussions will be taken forward over the coming months.
If there is a case for further change to the regime, in order
to meet the objective of maximising economic production from the
North Sea, then the Government will be prepared to act.
14. We understand the Government's
argument for not wanting to interfere in a heavyhanded way in
the establishment of a common carrier arrangement for oil and
gas west of Shetland. But two things are clear: west of Shetland
resources offer enormous potential - possibly a fifth of our remaining
oil and gas resources; and putting in place a shared infrastructure
to exploit those resources is expensive and complex. The Government
should continue its dialogue with industry and agree a timescale
for the establishment of such a shared infrastructure and the
arrangements governing its use. If progress does not meet that
timescale the Government should be prepared to take a more active
role, probably through regulation but not precluding assistance
with funding. The UK must appreciate the importance of the resources
west of Shetland. (Paragraph 91)
We agree with the Committee's stress on the importance
of the West of Shetland area for future UKCS activity and production.
Earlier discussions in a Government-industry task force led to
a an industry managed, open process conducted in the autumn of
2008 to establish the extent of third party interest in new gas
infrastructure. This showed a potential requirement for some 18
million cubic metres a day of capacity, (equivalent to some 5%
of UK annual average gas demand), involving ten licensees in three
licence groups.
The Laggan/Tormore partners, headed by Total, now
consider that there is a commercially viable development option
for the Laggan and Tormore gas fields and are taking forward engineering
studies for an onshore gathering hub at the Sullom Voe terminal,
with a new pipeline linking to the UK mainland at St Fergus through
the existing Frigg UK pipeline. Commercial discussions are now
taking place between all the parties potentially interested in
participating in the new pipeline. An investment decision by the
Laggan/Tormore partners is expected early next year. The Government
is keeping closely in touch with developments and remains ready
to take further steps to facilitate development if appropriate.
Exploration work continues in the West of Shetland
area, with a number of exploration and appraisal wells due to
spud over the next 12 months. A further significant discovery,
close to Laggan/Tormore, has recently been reported.
15. We support the call
by industry for all fields west of Shetland to be eligible for
the field allowance. This is appropriate given the difficulties
inherent in exploiting the resources there. In fact, we believe
it would be only of modest assistance and recommend that the Government
consult with the industry on further options for incentivising
production west of Shetland. (Paragraph 94)
It is first important to note that fields West of
Shetland will be eligible for the field allowance on the same
basis as fields elsewhere on the UKCS - if they qualify under
either the small field, ultra heavy oil or ultra HPHT criteria
then they will be eligible for the appropriate field allowance.
However, designing a field allowance targeted specifically
at the geographical area West of Shetland is challenging because
of the heterogeneity of the fields on that part of the UKCS. While
the Government recognises that some fields West of Shetland do
face significant challenges, others have successfully been brought
into production, and there is a continuing appetite for exploration
in the area. As mentioned in the Committee's report, the recent
joint industry-Government task force, which brought forward plans
for investment in infrastructure West of Shetland, may facilitate
the development of more fields in the province. Consequently,
any tax incentive applied across the entire West of Shetland would
have a significant deadweight cost to the taxpayer, as it could
be claimed by a number of fields that would be brought into production
even without a tax incentive.
For this reason the Government does not, at this
stage, see a case for a general incentive for all fields West
of Shetland. However, the Government remains willing to listen
to representations from industry on the tax treatment of the West
of Shetland area, and will review the position in the light of
any new evidence that emerges.
16. The oil and gas industry
is subject to an array of environmental regulations and its track
record of adhering to them is impressive. There are concerns,
however, about the potential effect of intensive activity west
of Shetland. The Government should instigate and fund a comprehensive
survey of the marine environment and its wildlife west of Shetland;
more generally it should work with the industry to facilitate
a systematic and ongoing plan of surveys of marine wildlife to
fill the gaps left by earlier surveys of the UKCS area. (Paragraph
104)
The area West of Shetland was extensively surveyed
by the Atlantic Frontier Environmental Network (AFEN) some years
ago. The AFEN network included operators, DTI, the Scottish Executive
and JNCC. In 1996, 20,000 square kilometres of seabed lying to
the West of the Shetland Isles was mapped and sampled. A further
survey was carried out in 1998, covering an additional 10,000
square kilometres of seabed. This was one of the largest and most
comprehensive marine survey programmes ever performed for the
offshore oil and gas industry. This work has been updated and
extended by subsequent work within the Strategic Environmental
Assessment (SEA) framework. DECC (then DTI) co-funded marine surveys
of areas such as the Hatton bank and Rockall, which are of particular
environmental interest. Between 1999 and 2009, the entire UKCS
has been subject to environmental assessment in accordance with
SEA requirements. Ongoing SEA work will seek to ensure that appropriate
environmental data for all areas around the UK is kept up to date.
In addition, work is ongoing to address gaps in relation to information
about marine wildlife identified by previous surveys. Full details
can be found on the SEA website (http://www.offshore-sea.org.uk/)
17. We note the concern
raised with us that some companies commit to adhere to environmental
best practice but then do not do so once licenses are issued.
In the absence of specific evidence that this has happened we
are not in a position to judge whether this is a widespread problem,
or even a sporadic one. We encourage those with concerns about
where this might have happened to raise them with DECC and we
would expect such claims to be investigated fully. (Paragraph
105)
As the Committee recognises, no evidence was put
forward to support the suggestion that the information provided
within the Environmental Statement is given solely for the purposes
of gaining consent and that it does not reflect the reality of
what will be implemented.
The necessity for change will occasionally arise
in relation to some projects, but where there are changes, the
Statutory Nature Conservation Bodies (SNCBs) are consulted and
have an opportunity to comment and changes cannot be made without
the approval of the regulator (DECC).
DECC have however written to the SNCBs about this
matter and should any examples be put forward, they will be fully
investigated.
18. We welcome the Government's
initiative in the area of carbon capture and storage, a technology
that may offer a major opportunity to use existing infrastructure
and skills in the North Sea with beneficial outcomes. We look
forward to the outcomes of the study into CCS commissioned jointly
with the Norwegian government. We are also pleased to note that
issues raised with us about the licensing regime for CCS are being
addressed and we recommend that DECC maintains close dialogue
with industry to ensure that the regime works and that the UK
can benefit from the potential offered by North Sea CCS. (Paragraph
113)
The Government is pressing forward with the necessary
measures to put in place the right legal and regulatory framework
to support CCS. The Energy Act 2008 provides one of the first
legal regimes anywhere in the world specifically designed to permit
the safe storage of carbon dioxide underground. Following informal
discussions with the Carbon Capture and Storage Association and
other stakeholders, a consultation has recently been launched
(25 September) on the detailed regulations necessary to license
such developments and to implement the EU Directive on geological
storage of carbon dioxide. And the Energy Technologies Institute,
which has support from Government and industry, has recently launched
a research project aiming to provide a comprehensive assessment
of national storage capacity.
19. We note the industry's
argument that the tax treatment of decommissioning securities
is problematic and hampering investment. We look forward to the
outcome of the consultation the Government is undertaking on this
matter and may return to it if it is not resolved satisfactorily.
(Paragraph 117)
The Government appreciates the importance of companies'
decommissioning obligations to their investment decisions in the
North Sea. The tax regime around decommissioning obviously forms
part of these decisions. It is for this reason that, at Budget
2009, the Government introduced reforms to the regime to ensure
companies can access decommissioning tax relief following "change
of use" projects, and PRT decommissioning relief where the
production licence for a field has expired.
However, the Government recognises that the industry
is keen to discuss further changes to the tax regime for decommissioning,
particularly in relation to decommissioning security agreements,
and these discussions are currently ongoing. The Government will
consider the points made by stakeholders, and will be prepared
to act if further changes are appropriate.
20. We would welcome the
Government's assessment of the export potential of the industry
that has developed to support the UKCS and an indication of how
it plans to build on this potential. (Paragraph 118)
Forty years of development in the challenging environment
of the North Sea has enabled the UK to build up strong capabilities
across the oil and gas sector. These strengths include project
management, major contracting, design engineering, asset and operational
management, design and manufacturing of advanced equipment, research
and development, training and education, and professional and
financial services.
Developing the export capacity of the UK oil and
gas supply industry has long been a policy objective for Government.
One of the original PILOT targets set in 2000 was to grow the
export value by 50% in the five years to 2005. This has in the
event been exceeded, with estimated revenue of around £3
billion in that year. Current estimates put oil and gas exports
at over £5 billion. With the UKCS recognised as one of the
most hostile development environments in the world, active innovation
has been required to develop and perfect technologies which are
now in demand in nearly every other hydrocarbon producing province
in the world.
Many UK companies, with encouragement from Government,
have grasped the opportunity of global growth and internationalised.
One of the best examples of this is the Wood Group, an Aberdeen
company. Some 40 years ago the Wood Group diversified its activities,
which were rooted in the fishing industry, into the then emerging
oil and gas sector and is now operating in 50 countries, generating
substantial job opportunities, income and wealth. While it is
still an important supplier of services to the UKCS, over 80%
of income and profit is now derived from international activity.
UK based companies have been highly successful in
the global oil and gas supply market and UKTI figures now put
the UK share at some 5-8%. UK companies are particularly prominent
in the subsea market, where their expertise is much sought after
and where opportunities are set to grow for the foreseeable future.
The global subsea market is expected to nearly double in the next
five years and UK-based companies are well placed to build on
their market share.
Recognising the potential of the subsea sector, DECC
prompted the establishment of Subsea UK - a trade association
wholly focused on the subsea sector. The Committee will have seen
in visiting Subsea UK that this organisation has been a real success
and in the space of only a few years has grown to have a membership
of over 200 companies. It is now wholly self funding and doing
an outstanding job of promoting its members on an international
platform.
The Government Department primarily responsible for
promoting UK companies in international markets is UK Trade and
Investment (UKTI) which is currently targeting areas of the world
with the highest growth and export potential - these include Brazil,
West Africa, Australia and the Middle East. With an in-house team
of experts in this field and a track record of delivery, UKTI
are held in high regard by industry.
UKTI's Energy Team significantly assisted 1200 companies
in global markets during 2008/09 and expect to maintain this level
of support into the future. The oil and gas supply chain will
be promoted extensively through the UK Energy Excellence Marketing
Strategy, which highlights leading-edge UK capacities across the
energy sector, including biomass, fuel cells, geothermal, nuclear,
hydroelectric, solar, tidal, wave and wind, as well as hydrocarbons.
The Strategy's aim is to provide a single compelling voice across
the world, positioning the UK as a destination of choice for energy
trade and investment.
There will inevitably be challenges as governments
in charge of oil and gas developments around the world seek high
levels of local industry content and are likely to offer incentives
for companies to locate in-country. However, UK companies can
offer a combination of competence, capability and capacity which
together will give them the competitive edge to remain a world
leader in the oil and gas sector. The frontier area for the UKCS
is West of Shetland - one of the most challenging operating environments
in the world. The opportunities which will arise from meeting
the challenges of development in these conditions, together with
new opportunities and technologies in such areas as wet renewables
and carbon storage, should enable UK companies to retain a leading
competitive position in a growing global market.
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