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It is vitally important swiftly to decarbonise the UK economy if the country is to meet its obligations to tackle climate change, and clearly the use of fossil fuels must diminish. But within the timescale for these changes to take place, the UK will still need to use the oil and gas resources remaining in the UK continental shelf. With much of our current electricity generating capacity set to close over the next decade, the UK Government is right to focus on achieving affordable, secure and sustainable energy supplies as a key challenge. Within this, and especially during a period when international political or economic turbulence will continue to pose a genuine risk of disruption, the importance of domestic oil and gas production is obvious and the Government should do what it can to help ensure that the exploitation of these resources is as efficient as possible.
When determining policy on UK oil and gas the Government's priority should be security of supply, within the context of moving to a low carbon economy. However, proper account must also be taken of both the immense tax revenues paid by the industry and the 350,000 people whose employment rests upon it. Given that the sector predicts falling capital expenditure could destroy at least 14% of those jobs over the next two years, the Government must find a way to support UK oil and gas production in the current difficult economic climate.
While UK production peaked in 1999 and is now declining by around 5% annually, significant volumes are still being recovered and the UK remains an important player. Estimates for future levels of UK oil and gas production range however from 11 billion to 37 billion barrels of oil equivalent (boe), so while domestic reserves will almost certainly remain the single most significant contributor to this country's security of energy supply for at least another decade, the final quantities recovered will closely reflect how well or otherwise the Government formulates effective tax, regulation and licensing policy to govern the sector.
The oil and gas industry operating on the UK continental shelf currently faces a quadruple whammy of high costs, low prices, lack of affordable credit and a global recession. Unless the fiscal and regulatory regime is well designed and highly attractive then the likelihood is that the UK may not recover anything like as much of its reserve as would be desirable. So while we fully support the Government's objective of maximising the economic recovery of UK oil and gas resources, we also believe that within this framework Ministers need to articulate a strategy setting out how production levels are to be maintained.
The difficulties currently faced by oil and gas companies in accessing affordable lending and the bleak prospects this heralds for investment in the oil and gas industry pose an issue of grave concern. If the industry's worst case scenario is realised in 2010, then 50,000 jobs could disappear and production would fall significantly. The success of the steps announced in the recent budget will be judged by whether they help stop the downward slide in capital investment and any consequent contraction.
To address this problem DECC, through BERR and HM Treasury, must continue to engage with banks to ensure the UK continental shelf remains at the forefront of minds in the banking sector. Ministers must set out what steps they are taking specifically to help oil and gas companies access affordable credit and confirm that they are keeping the availability of such credit under close review.
We are not convinced that the field allowance and other measures announced in Budget 2009—albeit welcome—are sufficient either to create the competitive environment needed by the industry or to provide a strong enough incentive to exploit fully remaining UK gas and oil resources. With regards to the field allowance, we are particularly concerned that this measure may fail to stimulate the predicted extra 2 billion barrels of oil hoped for by the Chancellor. It fails to incentivise incremental investment in existing sites and does nothing specifically to encourage investment west of Shetland. Qualification criteria are too stringent and unless its scale can be extended, the allowance will provide no significant incentive for investment even in new fields. When reviewing the operation of this allowance the Government must reconsider the merits of more wide-ranging and generous reforms of the fiscal regime such as a capital uplift or a reduction in the supplementary charge, calculating and setting out the predicted effects on tax revenues and on investment in the industry.
With regard to the area west of Shetland, the UK must appreciate the importance of this resource. While we understand the Government's desire not to impose common carrier arrangements for a shared infrastructure to exploit those resources, Ministers must ensure the industry moves promptly to agree both a timescale for such infrastructure and arrangements to govern its use.
The Government should instigate and fund a comprehensive survey of the marine environment and its wildlife west of Shetland in order to evaluate the full potential effect of intensive oil and gas recovery activities in the area. Likewise, the Government must work with the oil and gas industry to facilitate a systematic and ongoing plan of marine wildlife surveys to fill gaps left by earlier surveys of the UK continental shelf.
We note that generally the industry has a good record of adhering to environmental regulations. However, concerns were raised with us about how far some companies promise to follow environmental best practice but then do not do so once licenses are issued. In the absence of specific evidence we cannot judge how widespread or sporadic this problem may be but we encourage those with concerns to raise them with DECC and expect such claims to be investigated fully.
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.
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