UK Deepwater Drilling - Implications of the Gulf of Mexico Oil Spill - Energy and Climate Change Contents

7  Impacts of a Moratorium

Impact of the US Moratorium

128. The US observed a moratorium on any deepwater drilling from the time of the Deepwater Horizon incident in April until 12 October 2010. There were 33 deepwater drilling platforms in the Gulf of Mexico on which work halted as result. As a consequence, on 8 July 2010, the Texas based deepwater drilling contractor Diamond Offshore announced that its Ocean Endeavour drilling platforms—capable of operating in over 2,400m of water—would be leaving the Gulf of Mexico and immediately moving to Egyptian waters. The Ocean Endeavour had been leased to Devon Energy Corporation, and had been drilling in the same region of the Gulf of Mexico as the Deepwater Horizon. On 11 July 2010 Diamond announced that it would be moving a second platform out of the Gulf of Mexico to waters off the Republic of Congo. Mr Cohagan of Chevron UK told us: "We have to pay for the drill ships whether they are working or not [...] If we can't drill here it will be necessary for us to find some place [else] in the world".[196]

129. Devon tried to cite the deepwater drilling ban to get out of its contracts to lease the Diamond platform, but Diamond still took $31 million in early termination fees. Murphy Oil Corp and Cobalt Energy Inc also sought to annul contracts with Diamond because of the moratorium, but Diamond rejected their force majeure claims. Force majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties occurs. Anadarko, which owned a 25% interest in the Macondo well, notified four out of its three drilling contractors in the Gulf of Mexico of its intent to use force majeure to break their contracts, although Noble (which owns one of the rigs) disputed that the moratorium constituted an event that would free both parties from their contract.

Evidence on a UK Moratorium

130. ClientEarth, Platform, Greenpeace, the Marine Conservation Society and Caroline Lucas MP gave evidence to us calling explicitly for a moratorium on new deepwater drilling in the UKCS.[197] ClientEarth argued that a moratorium was necessary until "a comprehensive new regulatory package [comes into force that] introduces new legislation to fill the dangerous voids in the current regime".[198] Transocean, Chevron, DECC, DONG and British Gas (BG Group) argued that a ban would be unwarranted. [199] Chevron UK told us that a "moratorium on deep water drilling would have unnecessary and lasting negative impact on the UK's ability to maximise the value of a vital national resource".[200] DONG Energy said that a moratorium on deepwater drilling would "prevent the discovery and extraction of new sources of gas supply [...] required to mitigate the decline in supply from other areas of the UK [Continental Shelf]".[201]

131. At a September 2010 meeting of the Oslo and Paris Conventions for the protection of the marine environment of the North-East Atlantic (OSPAR) in Norway, a proposal for a moratorium on deepwater drilling was withdrawn due to strong opposition during a meeting of ministers, including from the UK.[202] The EU Commission's calls for a moratorium on deepwater drilling were eventually voted down by the European Parliament.[203]

132. Production of oil and gas from the North Sea is in decline. The average size of discoveries on the UK Continental Shelf in the last 10 years is only around 20 million barrels of oil equivalent and many of them are gas discoveries. Despite this, the decline of UK gas production has been much quicker than that of oil production.[204] Dr Hayward believed that "there is no doubt that deepwater will provide an important part of [future oil and gas production]".[205]

133. At the London Oil & Money Conference on 12 October 2010, the executive director of the International Energy Agency (IEA), Nobuo Tanaka, said that half of the world's oil supplies could come from offshore production by 2015, up from approximately a third today.[206] A 2009 study from the Society of Petroleum Engineers quantified the deepwater oil and gas resources world wide as 11.9 billion tonnes of oil equivalent, or almost 88 billion barrels.[207] Of this deepwater resource 15% was in Europe, and of that 25% was located in the UK: 450 million toe (over 3.3 billion barrels), comprised of 237 million tonnes of oil (1.75 billion barrels), and 213 million tonnes of gas.[208]

134. Global production of oil in 2009 was 3.8 billion tonnes (28 billion barrels), while proven reserves stood at 181.7 billion tonnes (1.34 trillion barrels). UK consumption in 2009 was 74.4 million tonnes (almost 550 million barrels). In terms of global demand the UK deepwater resource is small, amounting to just over three years of domestic oil consumption. However, the Economics and Social Research Council point out that under IEA and EU rules, the UK is committed to sharing available oil with partners in the event of a major disruption, so West of Shetland (WoS) oil should be seen as a contribution to collective security as it cannot be reserved for the UK.208 DECC figures estimate that the 3-3.5 billion barrels of deepwater oil and gas resource (including both WoS and the less well explored West of Scotland) account for 15-17.5% of UK total resources. However, they note that this resource estimate includes 1 billion barrels of highly uncertain resource from the West of Scotland area. [209] Mr Cheshire of DONG Energy told us that a moratorium on new deepwater drilling in the UK would lead to, "a very significant delay on the ability to deliver projects".[210]

135. The main prospective oil and gas producing areas in deepwater within the UK Continental Shelf (UKCS) are considered to be in areas West of Shetland (WoS). The area West of Scotland (north of the Outer Hebrides) may also contain substantial oil and gas resources, but is yet to be fully explored. Mr Webb of Oil and Gas UK told us:

[...] industry is going to have to invest something like £60 billion over the next 10 years or so [...] if we want to keep rigs drilling here in the UKCS then what is needed most of all is the right investment climate for that to happen.[211]

136. The West of Shetland area is estimated to hold around 20% of the UK's remaining oil and gas reserves, 3.5-4.5 billion barrels of oil equivalent. This includes about 1 billion boe of gas, representing around 17% of the remaining UK gas reserves, the majority of which lies in deepwater. The remaining WoS oil potential, 3 billion barrels, is split approximately 50:50 between deep and shallow water.[212] Dr Wills told us that: "Jobs and contracts in the terminals are worth £50 million to £60 million a year to a local community of 22,000 people".[213]

137. Production from the three fields West of Shetland (BP's Foinhaven—400-600m, Schiehallion—350-450m and Clair—140m) represents about 9% of total oil production from the UKCS (114,000 barrels per day). Total's £2.5 billion investment to develop the Laggan-Tormore fields will result in the production of 30 billion cubic metres of gas—the largest gas field development in over ten years. The infrastructure put in place to develop Laggan-Tormore will secure the installation of the first major gas pipeline from the area to the British mainland, opening up the basin for further developments. Chevron is exploring the Rosebank-Lochnagar fields in 1,115m of water.[214]

138. We conclude that a moratorium on offshore drilling in the UK Continental Shelf would cause drilling rigs and expertise to migrate to other parts of the globe. A moratorium on deepwater drilling would decrease the UK's security of supply and increase the UK's reliance upon imports of oil and gas. A moratorium could also harm the economies of communities in Scotland who rely upon the UK offshore oil and gas industry as well as the wider British economy to which the industry makes a major contribution. There is insufficient evidence of danger to support such a moratorium. We conclude that there should not be a moratorium on deepwater drilling in the UK Continental Shelf.

196   Q 264 (Cohagan) Back

197   Ev 595, Ev 598, Ev 599, Ev 630, Ev 633 Back

198   Ev 595 Back

199   Ev 59, Ev 591, Ev 596, Ev 631, Ev 592 Back

200   Ev 591 Back

201   Ev 632 Back

202   "The deepwater moratorium issue", International Association of Oil and Gas Producers-Highlights, October 2010 Back

203   "The deepwater moratorium issue", International Association of Oil and Gas Producers-Highlights, October 2010 Back

204   Ev 77 Back

205   Q 176 Back

206   "Half the world's oil production could come from offshore production by 2015", Reuters, 12 October 2010  Back

207   Ev w6 Back

208   Ev w6 Back

209   Ev 596 Back

210   Q 264 (Cheshire) Back

211   Qq 15 and 81 Back

212   Ev 596 Back

213   Q 222 Back

214   Ev 63 Back

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Prepared 6 January 2011