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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