6 The future for UK oil and gas
106. As we note above there is somewhere in the region
of another 20 billion barrels of oil equivalent to be produced
from the UKCS. It is important for the UK's energy security policy,
as well as its economy, that that resource be exploited. But although
there are still such reserves, it remains the case that the UKCS
is a mature region and that its resources are diminishing. In
that context, and recognising the need to move towards a low-carbon
economy, it is particularly important that effective alternative
uses for the skills and infrastructure developed for the oil and
gas industry are explored and that decommissioning is conducted
efficiently.
CARBON CAPTURE AND STORAGE
107. Work has already been undertaken to assess the
feasibility of carbon capture and storage (CCS) methods of storing
carbon in depleted oil and gas reservoirs and subsea aquifers.
Oil & Gas UK states that "CCS offers great potential
for significant reduction in CO2 emissions. The British Geological
Survey (BGS) estimates potential capacity under the North Sea
at around 20 billion tonnes of CO2 in oil and gas fields, with
an additional 20-70 billion tonnes in confined aquifers which
compares with the UK's current emissions of CO2 of some 580 million
tonnes per year."[136]
108. The Carbon Capture and Storage Association (CCSA)
told us that combining CCS with Enhanced Oil Recovery (EOR) techniques
provides the potential to "extend the longevity of oil and
gas operations and to mitigate the steady decline in indigenous
production, thereby minimising the rate at which Europe's import
dependency increases."[137]
CO?
Enhanced Oil Recovery (CO?-EOR)
is a method that increases the amount of oil that is recovered
from an underground oil reservoir. By pumping CO?
into an oil reservoir, previously unrecoverable oil is pushed
up to a point from which it can be recovered. The US Department
of Energy estimates that this can produce an additional 30 to
60 per cent of the original amount of recoverable oil.[138]
Once all of the recoverable oil has been reached, the depleted
reservoir can act as a storage site for the CO?.
109. The CCSA told us that the technology for CO?-EOR
has been technically (and commercially) proven in other parts
of the world but that economic conditions and a consequential
lack of infrastructure have prevented it being used in Europe.
However, they say that the technique offers a number of benefits:
Firstly… CO2 storage operations
may continue after EOR operations have ceased. Thus, investment
in EOR has the potential to make incremental storage capacity
available for later use that would likely otherwise not be developed.
In this way, EOR projects could quite feasibly bring CCS deployment
forward by many years.
Secondly, EOR can similarly contribute to the
investment in pipeline infrastructure helping to enable other
pure CCS storage operations. In this way we believe EOR has the
potential to make a contribution to the cost of early CCS demonstration
projects.
Thirdly, EOR can provide an effective route to
long-term, secure CO2 storage. Lifecycle CO2
emissions from EOR operations are usually limited since operators
have to pay for the CO2 they use and are therefore
naturally incentivised to recover and recycle any produced volumes.[139]
110. The Government supports further work being
undertaken on CCS and on 28 May 2009 commissioned jointly with
Norway a study of the role of the North Sea in providing storage
space under the sea-bed for carbon dioxide from European countries.
The study will look at "how quickly the base of the North
Sea could be needed for carbon dioxide storage and what the UK,
Norway and other countries have to do to get it ready in time."[140]
Also, DECC told us that one of the Budget's changes to the North
Sea fiscal regime would have the effect of removing "potential
barriers to projects that re-use North Sea infrastructure for
non-ring-fenced purposes including …carbon capture".[141]
111. Despite these welcome developments there appears
to be confusion amongst some in the industry about how they can
best exploit the potential offered by CCS within the existing
licensing arrangements. Alan Booth of the Oil and Gas Independents'
Association told us that his company had obtained a hydrocarbon
extraction licence for a field which subsequently proved to be
uneconomic for extraction but which might be suitable for CO2
storage. However, he said that (despite the assistance of DECC
officials) there was "no regime" which would allow him
to convert the licence into one for CO2 storage
and he therefore had to return the licence.[142]
112. We put these points to the Minister, who recognised
the importance of the issue:
We want to ensure that for carbon capture and
storage there is a clear licensing regime and that they are able
to get a licence to carry out carbon capture and storage. As we
develop our commercial capacity to do that that will need to happen.
As you know, at the moment we do not have a project here or indeed
anywhere in the world which is of a substantial commercial nature
involving carbon capture and storage. What we want to do is put
in place a regime which will enable carbon capture and storage
to take place, issue licences to enable it to take place, ensure
that it is properly inspected, that it is safe and that we have
a system which will encourage the development of an industry in
the future. I believe that in 20 years' time we will see
a worldwide industry involving carbon capture and storage….
[143]
Simon Toole, head of DECC's Licensing, Exploration
& Development Branch, told us that
There is a licensing regime coming into place
early next year, but the Crown Estate is already preparing and
will have the power from 6 April this year to start issuing leases
for the areas. If your concern is that people who want to get
hold of an area on which to do studies and work on carbon capture
and storage are being frustrated by the licensing regime, we have
been working very closely with the Crown Estate and very shortly
they will be able to get into a dialogue with the Crown Estate
to get hold of the territory that they might wish to use.[144]
113. 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.
DECOMMISSIONING
114. DECC's evidence highlights the scale of the
decommissioning operation to be undertaken in the UKCS:
The industry has begun to decommission the 500
installations and 35,000 kilometres of pipelines on the UKCS but
with UK oil and gas continuing to supply around 70% of our prime
energy demand, decommissioning work will be spread over the next
40 or more years. The cost of this work is currently estimated
at £23 billion with individual installations costing from
£5m to £300m.[145]
It notes that this work is undertaken in accordance
with OSPAR Decision 98/3 which bans the disposal of offshore installations
at sea other than in exceptional cases. All decommissioning projects
require an environmental impact assessment which must detail potential
emissions and consumption of natural resources and energy.[146]
115. However, Oil & Gas UK believe the decommissioning
regime is ineffective. It told us:
Decommissioning of offshore installations and
pipelines is regulated by the Petroleum Act 1998, with the
current owners being jointly and severally liable. Whilst companies
make full and proper provision for the costs in their accounts
… such provisions are not allowable against taxation, even
when put into a special trust fund, and the current regulatory
construct is fast becoming a barrier to investment.
Oil & Gas UK has been instrumental in setting
up the Decommissioning Security Agreement which identifies the
liabilities of parties concerned and how these should be secured
against default. However, the Government's position on the types
of security, whose use it has encouraged, is not satisfactory.
The Government has relied upon the corporate
covenants of investment grade companies and bankers' letters of
credit. The urgent need for a wider range of securities has been
particularly exposed by the current banking crisis, with reports
of banks disputing annual renewals of securities and limiting
the size of security they are willing to post, or even denying
it altogether.
The problem is compounded by the requirement
to post the letters of credit on a pre-tax basis. This means that
the companies have to provide securities up front for a sum which
includes the amount which the Government pledges it will ultimately
provide by way of tax relief. This in turn unnecessarily reduces
the funds a company has available to invest.[147]
In order to address this issue, Oil & Gas UK
has recommended that the Government allow companies the option
of:
"a) corporate covenants, for the larger
investment grade companies
b) letters of credit, on a post-tax basis
c) accepting that payments made into dedicated
trust funds to be used solely to meet the cost of decommissioning
are a valid and tax deductible business expense, which, regrettably
and unfairly, they currently are not. This is in marked contrast
to the new regime for future decommissioning liabilities in the
nuclear power industry".[148]
116. The trade organisation was disappointed that
the Government did not take such steps in the Budget, but noted
that the issue was still under consideration:
The government is yet to address our request
that they accept decommissioning security on a post tax basis
but has written offering to consult further on this, which we
welcome and will pursue.[149]
117. 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.
EXPORTS
118. Our report has concentrated on oil and gas production
in the UKCS. However, the supply chain which supports that domestic
production - estimated to include some 5 - 10,000 companies[150]
- is a major exporter of goods and services to the oil and gas
industry internationally. In 2008 it was estimated that the value
of such exports was £5 billion annually,[151]
equivalent to a quarter of total exports of goods and services
by the UK's energy sector.[152]
It is clear that the skills and expertise developed to support
production from the UKCS can continue to make a very significant
contribution to oil and gas production internationally and to
jobs and incomes within the UK. 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.
136 http://www.oilandgasuk.co.uk/issues/environment/emissions.cfm Back
137
Ev 60, para 2 Back
138
http://www.midwesterngovernors.org/Publications/CCS_EOR.pdf Back
139
Ev 60, para 3 Back
140
DECC press release, UK-Norway to study role of North Sea
in CO2 storage, 28 May 2009 Back
141
Ev 84, para 4 Back
142
QQ 16-18 Back
143
Q 220 Back
144
Q 221 Back
145
Ev 78, para 94 Back
146
Ibid, paras 96-97 Back
147
Ev 115, paras 3.10.1-4 Back
148
Ibid, para 3.10.5 Back
149
Ev 116, para 2.1.7 Back
150
Oil & Gas UK, 2008 Economic Report, p 13 Back
151
Ev 109, para 2.1.3 Back
152
Oil & Gas UK, 2008 Economic Report, p 13 Back
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