Examination of Witnesses (Question Numbers
171-179)
MR MIKE
O'BRIEN MP, MR
SIMON TOOLE
AND MR
JIM CAMPBELL
25 MARCH 2009
Q171 Chairman: Good morning, Minister,
and welcome to the committee, yourself and your team. It might
be useful for the record if you would like to introduce your officials.
Mr O'Brien: On my right I have
got Jim Campbell, who is the Director of Energy Development at
DECC (Department for Energy and Climate Change), and on my left,
Simon Toole, who is the Head of Oil and Gas; so both of them are
greater experts than I am in this field!
Q172 Chairman: Welcome. Perhaps we
could start off, Minister, by having a look at what DECC's views
are in relation to the current reduction levels on the UK Continental
Shelf. They have been falling. We were very interested to hear
from the industry, when we were in Aberdeen, that they thought
there was a potential on the UK's Continental Shelf to produce
65% of the UK's oil requirements up to 2020, which struck me as
quite a significant figure. Of course, that does suggest opening
new fields and exploiting new resources, but what is your own
analysis of the reserves and the potential?
Mr O'Brien: There is a sort of
common view in the media that we passed our peak on oil and gas
production on the UK Continental Shelf and that, therefore, it
is all downhill from here. We estimate that there is about 20
billion barrels of oil equivalent left, including very large reserves
of gas. In terms of countries in the world with gas reserves,
we are probably about the eighth and, therefore, we have a lot
of potential. We have used 39 billion barrels of oil, so we have
got about a third or so of what we could still exploit there.
I think you are right to say that it all depends on the amount
of investment. It does, and it depends on a number of issues around
accessibility, the science and the extent to which the new frontier
licences, particularly to the west of Shetland, will prove beneficial.
Quickly running through those, we may come on to it later, but
there has been a lot of argument about peak oil, and my view generally
on it is the key thing here is investment—how much money
is going in, what reserves there are and how accessible they are,
how large the reserves are, because we can have oil, but if it
is in small reserves that are too expensive, uneconomic to access,
then it is not going to do a lot of good. We also have quite large
reserves which have been depleted to some extent but which, with
new science, pumping in carbon or some changes in the way in which
production takes place, could be exploited further. There are
a number of factors there and one of the key things for us is
how can we identify new potential reserves and also exploit that,
and also do it, of course, in the face of the economic problems
that we currently have.
Q173 Chairman: It is really in our
interests nationally to develop those reserves, because it reduces
our dependence on fuel imports, and there is a very clear economic
issue of energy security. Does the Department have any kind of
strategic approach to this? For example, do you have any kind
of indicative targets about what you would like to see coming
from our own Continental Shelf?
Mr O'Brien: As far as energy security
is concerned, oil and gas is a key component and, as it depletes
over the coming two or three decades, probably beyond that, we
will still have oil and gas reserves. Energy security will become
an increasingly important factor, we will have to increase our
imports of gas and, indeed, oil and we will have to make sure
we have more gas storage. The way in which we manage our energy
security will change substantially, but we have a number of decades
to do that—two, three, possibly more—and we need to
make sure that we exploit, to the reasonable extent that we can,
the reserves and the ability to get at the oil and gas on the
UK Continental Shelf. We set some targets back in 1999 for going
up to 2010, and those targets were indicative. We were not going
to force anyone to do it, but they gave some view to the oil and
gas companies as to what we would like to achieve. We have been
talking to some of them about whether we ought to go back to that
and have further indicative targets. It is fair to say, as with
oil and gas companies, each of them have different views, and
I think there is an argument for having a target as to what we
would like to achieve, but it needs to be clear that in the end
there are a number of variables on this, including the ones I
have already described around investment and accessibility of
reserves, science and the frontier licences. Whether we are going
to be able to hit any target, a lot of this is down to investment
and the decisions that people are going to take, but the Government
does have a view that we want to create the conditions in which
we continue to encourage investment in North Sea oil and gas.
It is a matter of energy security; it is important to us that
we get the maximum benefit as a nation, as a United Kingdom, out
of this.
Q174 Paddy Tipping: You have just
told us that there are 20 billion barrels in reserve there. Your
evidence suggests there are 11 to 37, which is a big range. Why
have you put the pitch at 20 today?
Mr O'Brien: Because I am going
for the middle measurement. There is a maximum and a minimum,
and that is where you have got the diversity. All these things
are, in a sense, estimates as to the amount we think is likely
to be there. If you talk to someone in the oil and gas industry,
they will say 25 billion barrels. We say round about 20 billion,
but it is between about 11 and 37, and until, in a sense, we have
exploited it, we are not going to definitely know because you
may, as I said earlier, have reserves there but if they are not
commercially accessible, then they are not going to do a lot of
good. Probably 11 is round about what is the pessimistic view
as to what is likely to be commercially accessible. The 37 is
the maximum view as to what (a) we could potentially find and
(b) potentially exploit, if we were very lucky, in terms of being
able to access those reserves.
Q175 Paddy Tipping: Forgetting the
top end there at the moment and just supposing we are pessimists—I
think it was 11 billion—what then are the implications for
security of supply? Does the talk of two decades to make adjustment
come in closer?
Mr O'Brien: I think it would probably
still be two decades. If it were the more pessimistic position,
then we would have to import more, so we would be much more dependent
on the world market for oil and gas. We have good import facilities,
so that in a sense is not going to cause a massive problem. It
would be regrettable, because we want to see if we can maximise
the extent to which the UK can benefit from its Continental Shelf,
but we have created gas and oil import facilities. We have just
expanded, for example, at South Hook in South Wales, Pembrokeshire,
where we had a ship come in only last week from Qatar. As the
Qatari Minister duly told me when I was over in Vienna at the
OPEC Conference: "We have got a ship and it has come in now!"
So it was quite a significant event. We would be able to cope
with the lower end of the spectrum we have discussed, and it would
not massively damage us, but it would be regrettable because we
want to see the UK Continental Shelf be of benefit to the UK and
if we can maximise that benefit, all the better.
Q176 Paddy Tipping: I wonder if you
would tell us a bit more about the indicative targets up to 2010.
Are they being met? I think there is a case for indicative targets
into the future. How would you go about future indicative targets?
Mr O'Brien: What we would do,
what we did last time and what we did this time, and we have not
been too far off it, is talk to PILOT. The oil and gas industry
is very well served by a national organisation called PILOT, which
ministers are members of. We meet with them regularly, it has
functioned extremely well now for quite a few years and, when
I was Energy Minister last time, I remember attending a number
of PILOT meetings. The last one was in February. It is attended
by the chief executives and chairmen of the main companies. What
we do is basically agree the way in which we will ensure that
that level of benefit to the UK comes from the oil and gas industry.
So, in terms of determining targets, what we would do is talk
to PILOT about what those targets ought to be, what is realistic.
I always think it is best to have realistic targets. Aspirational
targets are all well and good and have their place, but we need
to be reasonably realistic about what we can get. We would then
have to agree with them whether that was the best way of going
about things—I will come back to what some of the problems
are in a minute—and also what those targets should be, and
we would probably work through that process in terms of talking
to the industry. Some of the issues that we face that we did not
quite face in the same way in the past: we have got a lot more
smaller companies involved, particularly in exploration of some
of the new areas, than we had in the past, some of the small American,
Canadian and other companies that have come in, and they are less
tuned in, perhaps, to our domestic PILOT mechanisms and the engagement
with the Government than was the case five or ten years ago, certainly
when we were dealing with larger, often UK-based or international
companies that were used to dealing with us. So we have got a
lot of smaller companies in. The engagement is actually very good,
but reaching agreement is not always quite as easy as perhaps
it was in the past.
Q177 Paddy Tipping: The point about
the 2010 targets. Were they realistic? Are they being met or are
they aspirational?
Mr Toole: There was a series of
targets, some on exports, which have been met and exceeded. The
one on production, which was three million barrels a day in 2010,
looks unlikely to be met. One of the features of targets is that
it is very important to make sure that people are responsible
for them, and one of the difficulties with overarching targets,
such as the three million barrels a day by 2010, is who is actually
responsible for that. In fact, the Minister has recently written
to the industry on behavioural targets of getting things done
within a certain period of time, of doing procedures properly,
and those can actually be pinned on managing directors or other
people and they are then responsible to do them, and many of the
things we need to do in the North Sea are about behaviours rather
than about geology. So there is space for those big aspirational
targets, but it is difficult to say who is responsible for them,
and we are trying to make sure we have at a lower level targets
that people can actually be held to account for.
Mr O'Brien: That is, again, particularly
difficult given the make-up of the industry as it now is compared
to what it was.
Q178 Chairman: I think the committee
would find it of interest, Minister, if we could have a note from
the department about the target for 2010 and how things are worked
out basically. That would be quite interesting.
Mr O'Brien: We can do that.
Chairman: Thank you.
Q179 John Robertson: The way various
things have been done is to cut back now to save for later. We
have got this crisis coming in the 2015 area of where we are going
to be importing all this gas. Should we not be cutting back on
our production today for tomorrow so that we are not as dependent
on gas imports round about 2015, when we are talking about 70%
of our gas needs might come from imports from other places? I
would like to know what you think about that. It is like the fish
stocks, really. We do not keep fishing, otherwise the fish will
disappear; we try to keep it going. In the case of fishing, obviously,
they procreate and there is more of them, but in the case of oil
we cannot do that, so we have one shot at this.
Mr O'Brien: I think, John, you
are right about the fact that we basically have one real shot
at making sure that we get the maximum benefit from UKCS. Exploiting
gas, in particular, in the North Sea is not like switching taps
on and off, it is making sure you have got the rigs and the equipment
in place, and they are enormously expensive. In order to have
them there and exploiting the benefits of UKCS, the gas in particular,
we need to ensure that they are paying for themselves. They do
not get put in there over night, and so the idea of leaving the
gas in the ground and then suddenly being able, if you had a problem,
to restart it very quickly is, as you know, not really something
that we can do. We are dependent on making sure that commercially
it is going to be worth the while of companies to put those expensive
pieces of kit out in the ocean to do the drilling, to do the accessing.
What we do know, and we would have to look at the extent to which
this was feasible, but there is a lot of talk about it, is that
some of the large gas reserves which have been depleted, there
is still a lot of gas in them, they have just been depleted to
the level at which it is commercially feasible to do so. Could
we, by pumping carbon into them, get more out? Would that science
become much more deliverable in the longer term? Would we, therefore,
be able to get much greater exploitation of UKCS in five, ten
years, 20 years than we have now? That is in a sense an open question
for (a) the science and (b) the commerciality of that sort of
proposition. We do face an increase in imports. A lot of people
talk about an energy gap. Actually, there will not be an energy
gap in 2015. There would be if we did not do something about it,
but we are doing something about it. What we need to do is make
sure we have sufficient capacity in 2015 and beyond in order to
deliver energy, and we are in the process of doing that, but over
the next 20 years we will see a depletion of gas on the UKCS,
we will need to import more, that is why we are putting in place
the Isle of Grain, and Milford Haven is key, LNG imports. When
I was last the Energy Minister I signed the treaty to bring the
Langeled Pipeline into the UK from Norway, which brings in about
19% of the gas that we need at the moment. We have also got connections
to Europe which we use. What we need to do is make sure that we
have a variety of gas sources so that we do not become overly
dependent. Thankfully, in terms of the crisis that occurred in
February, we only get about 2% of our gas from Russia, so we certainly
do not want to become dependent on that source given the difficulties
that arose in the dispute with the Ukraine. In terms of energy
security, we are watching that with a great deal of care. I certainly
do not deny it is an issue, and I am certainly not complacent
about it. I think there is a lot of hard work for government and,
indeed, for the industry to do to make sure that we have sufficient
gas capacity and gas storage. We have about 20% of gas storage
now for the level of imports that we have; about the same as Germany,
except Germany imports an awful lot more than we do. We have got
about 20% storage capacity compared to the amount of imports they
have. We need to ensure that we substantially increase our amount
of gas storage so that, if there are problems that arise, as arose
in February, and they cause shortages in Europe, we have actually
got sufficient storage capacity to be able to at least cushion
ourselves in dealing with that.
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