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

Memorandum submitted by BG Group plc

1. Operating safely is the top priority for BG Group, and we welcome the opportunity to respond to the Energy and Climate Change Select Committee's inquiry on deepwater drilling in the UK.

2. BG Group is one of the leading players in the North Sea, with an interest in 16 UK Continental Shelf (UKCS) producing fields, and is evaluating a number of discoveries with development potential. We are operator of the Armada, Maria, Seymour, Everest and Lomond fields in the Central North Sea, and of the Blake and Atlantic fields in the Outer Moray Firth. We also made the Jackdaw discovery in the Central North Sea, which, were development to take place, we would operate. In addition to these operated fields, BG Group has interests as non-operator in a large number of other fields.

3. BG Group aims to continue producing around 50 million barrels of oil equivalent per year from the UKCS until at least 2014. Our strategy revolves around actively pursuing opportunities around our infrastructure hubs by identifying nearby exploration prospectivity, infill opportunities and third-party business. We are a leading player in High Pressure and High Temperature fields (HPHT), with significant production and exploration and appraisal assets.

4. In 2009, BG Group accounted for 5.2% of total UK oil and gas production, and 7% of total gas production. Production by volume in 2009 was 53% oil and 47% gas. According to the consultancy Woodmac, in 2009 BG Group was the seventh largest oil and gas producer in the UK.

5. BG Group believes that there is significant remaining potential in the UK Continental Shelf. According to the Economic Report 2010 by Oil and Gas UK, between 15 and 24 billion barrels of oil equivalent (boe) remain to be recovered in the UKCS. Of these, current investment plans can deliver 5.25 billion boe from existing fields. It is in the UK's national interest that UKCS production is maximised, because the higher our domestic production, the greater the UK's energy security and tax revenues.

6. BG Group believes that gas will be vital to the UK, not only as a transition fuel to the low-carbon economy, but also as a part of the low carbon economy itself. A new generation of combined cycle gas turbines (CCGTs) over the next decade could guarantee adequate power generation in a period when a third of the UK's generation capacity, which currently includes carbon unabated coal-fired power stations and nuclear plants, is scheduled to close. Gas should be the UK's fuel of choice, given its abundance worldwide, its affordability, and its environmental acceptability.

7. BG Group does not have interests in any deepwater fields in the UK. However, we believe that the blowout in the Macondo well was not necessarily directly related to water depth. As mentioned, from the evidence available to date, it appears that the Macondo blowout was significantly attributable to a flawed well design and compromised procedures. BG Group believes that the establishment of a defined code of practice, as described below (item 8), together with the verification of implementation of the code by an independent third party, would together significantly reduce the likelihood of reoccurrence of a blowout.

What are the implications of the Gulf of Mexico oil spill for deepwater drilling in UK

8. The blowout of the Macondo well in the Gulf of Mexico has focused minds on the technical and environmental aspects of exploring for and producing oil and gas. BG Group believes that it is important to distinguish between well engineering, including well design, and the safety case system on rigs. There is a view in the industry that the Macondo blowout occurred mainly as a result of a flawed well design, and not because of the safety regime on the rig itself. We believe that the priority for action must be on applying minimum well design, engineering, and well construction standards across the industry. One way of achieving this could be to establish a pan-industry code of practice for well engineering, to be drawn up and overseen by an appropriate international body, for example the International Association of Oil and Gas Producers (OGP). On the environmental side, there are undoubtedly lessons to be learnt from the incident. An obvious step forward is to establish a team of experts under the aegis of one of the international industry bodies to take those lessons and reinforce the industry's response capabilities accordingly. BG Group therefore welcomes the recent creation by OGP of the Global Industry Response Group.

9. Although BG Group believes that risk of a reoccurrence of a Macondo type blowout would be further reduced by the establishment and implementation of a code of practice for well engineering, the blowout in the Gulf of Mexico also illustrated that the operator of the well needs to have the ability to rapidly control any spillage of oil at the wellhead. With this in mind, BG supports the idea of establishing an enhanced comprehensive oil spill response system, involving vessels capable of capping a blown-out well and siphoning off the leaking oil to a containment system on the surface. Rather than each company working independently, this system would be shared between operators and would be available for very rapid mobilisation to all operators in the region. Such a system is currently being developed in the Gulf of Mexico. In this context, BG Group welcomes the recent award of a design contract by the Offshore Spill Prevention and Response Advisory Group (OSPRAG) to Wood Group Kenny for an oil spill cap and containment system.

10. BG Group believes that the UK's strong safety record over the last 20 years demonstrates that offshore exploration and production regulation and procedures are robust. We do not agree with the European Commission that a drilling moratorium is warranted, nor that companies need to be able to demonstrate a high financial capability before drilling certain types of well. We believe that requiring a high financial capability would drive business from the North Sea, with serious implications for energy security, jobs, public revenues and competition. All offshore operators in the UK must belong to the Offshore Pollution Liability Association (OPOL) as a condition of their licence, which in itself is a demonstration of financial capability. BG Group supported the recommendation to increase the OPOL limit from $120 million to $250 million per occurrence, and $500 million in the annual aggregate.

11. One implication from the Macondo disaster is that other jurisdictions around the world may benefit from learning more about how the UK's offshore safety regime functions. It is important that the UK, both from DECC and the HSE, continue to share best regulatory practice with their counterparts in other oil and gas producing countries.

To what extent is the existing UK safety and environmental regulatory regime fit for purpose?

12. BG Group believes that the safety regime in the UK is one of the most robust in the world. The division of responsibility for licensing and safety is split between the Department of Energy and Climate Change (DECC) and the Health and Safety Executive (HSE), an arrangement that avoids the conflicts of interest that some policymakers in the US now suspect hampered the effective operation of the former Minerals Management Service (MMS).

13. In addition to this separation of responsibility, the UK regime is based on the "safety case" concept, which establishes a "duty of care" on operators to ensure safe procedures on rigs whilst providing a degree of flexibility as to how to achieve the safety case. Operators can select the procedures and equipment that they believe will most likely help to achieve the objectives of safe offshore activities. Unlike most other jurisdictions worldwide, the HSE requires all fixed and mobile offshore installations operating in UK waters to have a safety case. Safety case regulations are reinforced by a code of practice and other guidance documents. The safety case concept was established in response to the 1988 Piper Alpha disaster. Since then, according to Oil & Gas UK, there has not been a single blowout, with over 7,000 wells drilled.

14. BG Group welcomes the recent Government decision to double the number of offshore inspections by HSE of installations, and to increase the number of HSE inspectors dedicated for this purpose from six to nine.

15. This is in contrast to the regime in the Gulf of Mexico, which is prescriptive in setting detailed rules and guidance for operators to follow. In the "Increased Safety Measures for Energy Development on the Outer Continental Shelf" report, published on May 27 2010 by the US Department of the Interior, one of the recommendations is to "adopt safety case requirements for floating drilling Operations on the OCS (Outer Continental Shelf)."

16. A further element in the robust nature of the UK regulatory regime is the requirement on companies to have their well-designs verified by an independent third party. We understand that the UK is one of the only jurisdictions in the world where this requirement exists. This provides added assurance as to the integrity of well-designs in UK waters. BG Group believes that other jurisdictions in the world should consider making this a mandatory requirement. It is standard BG Group practice worldwide for all of our BG operated well designs to be examined by an independent third party, in our case a company called NRG Well Management Ltd.

What are the hazards and risks of deepwater drilling to the west of Shetland?

17. BG Group does not operate, nor have any plans to operate, west of Shetland.

Is deepwater oil and gas production necessary during the UK's transition to a low carbon economy?

18. BG Group strongly believes that indigenous production of oil and gas will be vital to the UK, both during the transition to a low carbon economy, and beyond. Gas is the cleanest of the fossil fuels, producing half as much CO2 as coal when burnt. It is abundant worldwide, with the recent Shale Gas revolution in the US responsible for additional global supply. Gas is also the most cost effective source of energy for consumers when compared to offshore wind, nuclear, and coal with CCS. It is vitally important that new exploration and production is pursued in the UK, including in technically challenging areas such as deepwater or HPHT fields.

To what extent would deepwater oil and gas resources contribute to the UK's security of supply?

19. It is hard to state with certainty the precise contribution of deepwater oil and gas resources to the UK's security of supply. This is because the UK has relatively little deepwater acreage, and that which there is tends to be West of Shetland. BG Group has a number of High Pressure/High Temperature fields in our portfolio and these are more technically challenging than conventional fields. The challenge for government is to continue to incentivise, through new fiscal incentives, the development of these fields, and also of incremental developments to existing fields, which because of their demanding technical nature are more difficult to produce.

20. It is fair to conclude that volumes of indigenous oil and gas reserves which are not exploited would need to be sourced as imports instead, with implications for security of supply.

21. The offshore oil and gas sector is the most highly taxed in the UK at rates of between 50-75%. An effective way for the Government to encourage continued development would be via the introduction of new tax incentives, a general reduction in the current high rates, or a combination of both.

October 2010

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