4 West of Shetland
83. The most significant remaining areas of prospectivity
in the UKCS are in the area to the west of Shetland and the Hebrides,
which is estimated to hold potentially 3 - 4 billion barrels of
oil equivalent (around 17% of the UK's oil reserves) and 10% to
15% of the remaining UK gas reserves.[106]
We were told that 3.4 billion boe might be recovered from west
of Shetland in the period up to 2035, assuming a barrel price
of $80. However, weather conditions are difficult, the area is
around 400 km from the nearest gas terminal, existing gas pipelines
are not sufficient to support significant development in the near
future and the gas discoveries made to date are not of a scale
to justify the necessary infrastructure on their own.
84. The Government has recognised the difficulties
faced in exploiting resources west of Shetland and established
a joint Taskforce with industry in 2006 to facilitate exploration
and development in the area. The industry representatives are
those with gas projects with prospects of starting in the next
5 years:
Total - operator of the Laggan and
Tormore fields
Chevron - operator of Rosebank and
Lochnagar
BP - operator of the Clair field
ExxonMobil - operator of Tobermory
DONG Energy - participant in Laggan, Rosebank
and Tobermory.[107]
85. The Taskforce has examined options for a multi-field
development with the capacity for gas export to mainland Scotland.
It considered, but rejected on cost grounds, alternative means
of utilising the resources, such as power generation and the production
of Liquified or Compressed Natural Gas near the source of production.
However, the Taskforce found four technically viable options for
gas gathering hubs, three located offshore and connected by direct
pipeline to St Fergus, and one onshore at the Sullom Voe terminal
in the Shetland Islands. DECC's evidence describes progress:
In September 2007 a well was drilled by Total
into the Tormore prospect close to the Laggan field which identified
additional gas. At the same time Chevron commenced an extended
appraisal programme of their Rosebank/Lochnagar discovery in the
growing confidence that they had a viable development further
to the west. These developments offered better prospects for development,
and the Laggan/Tormore and Rosebank/Lochnagar partners co-sponsored
an independently managed process in the autumn of 2008 to test
the appetite for third party investment in a basic engineering
study and ultimately, in the collective project. This revealed
a potential requirement for about 18 million cu. m/year of gas
transportation capacity (equivalent to about 5% of UK annual demand),
involving 10 licensees in 3 separate licence groups.
Total have now commissioned the basic engineering
study for Laggan/Tormore and the work is proceeding primarily
on the basis of an onshore gas gathering hub located at the existing
Sullom Voe Terminal in the Shetland Islands.
For the gas export pipeline, there are two options…A
direct pipeline from Sullom Voe to St Fergus on the Scottish mainland,
or an indirect route using a new shorter pipeline to connect Sullom
Voe to the existing, 100% Total-owned Frigg UK gas pipeline and
then via Frigg to St Fergus. In either case, the pipeline is
expected to have capacity for the 18 million cm/d of gas identified
in the third party investment process. We understand that the
partners consider that there is a commercially viable development
option for Laggan/Tormore, with development sanction in September
2009 and first production in late 2013. The parties interested
in developments west of Shetland are now moving towards a decision
on development later this year which will be followed by a submission
of a development plan to the Department for consideration. The
Department considers that this collaborative process has a real
prospect of providing infrastructure to deliver gas to the market
in 2013/14. It will be a collective solution that reflects the
requirements of players in the west of Shetland area prepared
to commit to development.[108]
The map on the following page shows potential gas
pipeline routes for west of Shetland developments:
Source: DECC (Ev 82)
86. Industry representatives told us about the potential
for production west of Shetland, but struck a cautious note about
its viability. Oil & Gas UK told us that the area could "potentially
yield up to a fifth of the country's remaining oil and gas reserves"
but that despite many years' exploration and promising discoveries
"development has been restrained by the deep, hostile marine
environment, extreme weather and the shortage of infrastructure
to transport oil and gas to market. This makes projects in the
region high risk, technically challenging and therefore extremely
costly."[109]
They also note that the recent falls in oil and gas prices has
made the area less attractive to invest in. In order to improve
the attractiveness of investments they have called for "fiscal
measures such as a reduction or the abolition of the supplementary
corporation tax rate or tax incentives for exploration".[110]
87. One of the main barriers to production west of
Shetland is the high cost of production and specifically the construction
of a pipeline to connect to the mainland, which would almost certainly
need to be used jointly by different companies given the relatively
small scale of the individual fields. This would involve a 'cluster'
development of different operators using the same infrastructure.
The financing of such a joint initiative is problematic, as Professor
Kemp told us:
A common carrier could be done by investors themselves
acting on their own and over-sizing it from the first fields if
they were reasonably confident that later on more gas was going
to be coming in from new ones. They are very cautious about that
and that is quite risky and involves a lot of upfront money. In
the past we had lots of discussion about common carrier gas pipelines
in the North Sea that were studied at enormous length and eventually
did not go ahead. The one in the North Sea did not go ahead because
the banks would not finance a pipeline unless there was pretty
well guaranteed large throughput from a very big field and that
was not going to be the case, so the second North Sea gas pipeline
did not emerge under private sector arrangements. If you want
to think more radically then there could be something like a government
guarantee to enable the banks to take a very generous view of
things. That kind of thing is possible but brings in the question
of State Aid and all of that and that would be quite complex.[111]
88. We raised the issue of a west of Shetland "common
carrier" with Oil & Gas UK. While Malcolm Webb, the Chief
Executive, could see advantages of scale in sharing costs in the
longer term, he noted that there were difficulties in getting
such a scheme off the ground and financing it until a range of
fields became operational. He warned against placing the financial
onus on the first companies to be active in the area, as this
could make costs prohibitive and drive them away. He posed the
rhetorical question:
Do you saddle those developments with the incremental
cost of a common carrier pipeline that could sink the economics
of those developments? I think the answer to that is no. There
is a gap there that needs to be filled if you want to do the common
carrier. Who is going to pay for that? I do not think the Government
is going to pay for it in the short-term. The best answer for
the west of Shetland is to go back to look at some of the fiscal
incentives that we can put in place to make sure we get as much
as we possibly can on the back of the existing development, which
means improving the economics of the development.[112]
89. Clearly, getting the necessary shared infrastructure
in place to be able to exploit resources west of Shetland is a
complex but key issue. Inevitably, Government will have a role
to play. Broadly, there are three positions which might be adopted
by the Government: as a funder or co-funder of a common carrier
infrastructure, with charges or taxes then being imposed on the
users; as a regulator of the shared arrangements; or as a facilitator,
working with the companies trying to get voluntary arrangements
which are viable and durable. The Energy Minister made it clear
that he did not favour the first option:
if the state were to intervene and fund such
a common carrier, it is difficult. Although we would get taxation
from it, we think that this is the sort of thing that the private
sector really ought to do. The infrastructure system has worked
reasonably well…in the North Sea. Moving into west of Shetland,
obviously we have an area which is going to be difficult to exploit…but
the state intervening to tell the companies how we are going to
lay the infrastructure out, making decisions for them about it
and then, presumably, charging them substantial amounts for access
to it, seems to me to be not the way to go. I would suspect it
will mean that many of the companies who would otherwise be looking
there will say, "Look, if we could go there and decide how
we want to do it, we would go, but if you are going to decide,
Government, how to do it, we are not going to go."
90. The Minister was also not keen on regulating
access to shared infrastructure west of Shetland:
At the moment, west of Shetland we have got a
number of companies interested, Total, Chevron, BP. They are all
looking at various permutations of putting in infrastructure if
they decide to carry out their exploitation there, and there are
issues about whether there should be connections from Sullom Voe,
whether it would then go down to St Fergus or whether it would
go across to the Total pipeline at Frigg. These are all issues
which I think, in the end, are commercial ones more than ones
that you want to determine by regulation. As far as access to
infrastructure is concerned, we have got the guidelines. Those
guidelines have worked reasonably well since 2001… Do we
now want to go into a situation where we put in place regulations
which oblige larger companies (and it will be by and large them)
to put in infrastructure and then oblige them to put particular
links in for the smaller companies by law? In which case, they
will simply say, "All right, if you want us to do that, we
are going to charge for that and those charges will have to go
somewhere or we will decide not to carry out that job because
it will not be economic any more." I think you are intruding
into areas where I do not think the Government necessarily needs
to go at the moment.[113]
Having eschewed the option of funding or regulating
a common carrier arrangement, the Minister described the Government's
preferred approach as "more of a dialogue rather than a diktat"
and said "that is probably the better way of engaging, unless
we have to do it some other way".[114]
91. We understand the Government's argument for
not wanting to interfere in a heavy-handed 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.
92. The other mechanism by which Government might
have been expected to support development west of Shetland is
through the fiscal regime. As we noted above, Oil & Gas UK
have requested "fiscal measures such as a reduction or the
abolition of the supplementary corporation tax rate or tax incentives
for exploration".[115]
BP told us that it "operates the first,
and currently only, fields in production [west of Shetland]….Many
of the other discoveries which have been made west of Shetland
are marginal and BP believes that a reduction in the fiscal burden
is required if more of the potential west of Shetland is to be
unlocked both from new discoveries, existing undeveloped discoveries
and fields in production. The Government's proposed Value Allowance
mechanism only partially addresses the basin challenges as its
scope is limited exclusively to certain narrowly defined categories
of new fields. It is important that investment incentives are
also made available to encourage investment in existing fields
and should be applied as widely as possible, including west of
Shetland".[116]
93. As we have seen, no specific support was provided
for west of Shetland in Budget 2009. BP, which had called for
all new fields west of Shetland to be eligible for the value/field
allowance, was disappointed:
In particular, the absence of any fiscal assistance
for fields currently in production - and for the area west of
Shetland - deprives both BP and, we believe, the industry as a
whole of the fiscal incentive which might mark a significant improvement
in today's difficult conditions.[117]
Also responding to the new field allowance, Oil &
Gas UK told us:
Its impact on exploration activity will be negligible
and it will not boost west of Shetland or tight gas development.[118]
The Independents' Association also said that all
west of Shetland fields should qualify for the field allowance:
Having created the Field Allowance we would encourage
Government to look at additional qualifying targeted areas. The
two areas that we would focus on would be assets west of Shetland
and Non Conventional Gas.
Assets in the area west of Shetland face considerable
challenges with respect to weather and infrastructure - additional
fiscal assistance is required to accelerate activity.[119]
94. 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.
95. Concerns were raised with us about the potential
adverse effects on the environment and biodiversity of oil and
gas production in the area west of Shetland and, to a more limited
extent, in the UKCS generally. We turn to these next.
106 Ev 69,para 25 Back
107
Ev 69-70, para 26 Back
108
Ev 70, paras 27-31. Back
109
Ev 113, para 3.6.1-3 Back
110
Ibid, para 3.6.5 Back
111
Q 123 Back
112
Q 132 Back
113
Q 187-188 Back
114
Q 190 Back
115
Ev 113, para 3.6.5 Back
116
Ev 55, paras 9-10 Back
117
Ev 57, para 6 Back
118
Ev 116, para 2.1.6 Back
119
Ev 107 Back
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