UK Energy Supply: Security or Independence? - Energy and Climate Change Contents

4  Primary energy supply resilience

31. Primary energy is energy that has been supplied without being subject to any transformation or conversion process, such as crude oil, natural gas, and coal. Indigenous production meets around two thirds of UK primary energy demand.[39] As coal accounted for less than 4% of final energy consumption by fuel in 2010,[40] we have focused on the production of oil and gas from the UK Continental Shelf, and the risks the UK may be exposed to as this resource declines. We also considered the conversion of crude oil into petrol and other fuels at refineries in the UK, and the risks to energy security as the number of these facilities decreased. We also looked at the fuel protests of 2000. Finally, we explored the nature and extent of the UK's energy dependence on Russia.

UK Continental Shelf

32. Virtually all UK oil and gas production occurs under the seas surrounding the UK, from the seabed known as the UK Continental Shelf (UKCS). Production of oil peaked in 1999, and production of gas in 2000.[41] As a result, the UK is moving from a position of self-sufficiency to increasing dependence on imported oil and gas. In 2009, imported gas accounted for approximately 32% of the total gas used.[42] Of these gas imports, about 58% came from Norway, 25% were liquefied natural gas (LNG) from various different countries, 16% came from the Netherlands, and 2% came via the Belgian interconnector pipeline.[43] The majority of the UK's crude oil imports (almost 70%) are from Norway.[44]

33. Greater reliance on imported oil and gas leaves the UK more open to supply risks associated with global supply constraints and price volatility.[45] The Government aims to reduce the need for oil and gas imports—and hence exposure to these energy security risks—by maximising production from the UKCS and through promotion of low-carbon alternatives such as electric vehicles, biofuels and fuel efficiency.[46]

34. The Minister told us that it was in the UK's "national interest" that domestic production of oil and gas were maximised.[47] In 2010, production from the UKCS still accounted for more than 90% of oil and 60% of the UK's gas demand by volume.[48] Oil & Gas UK believed that with the right investment climate the UKCS could still be producing and contributing to security of supply into the 2040s.[49] Shell believed that continued investment in new and incremental fields in the UKCS could "halve the [overall] decline rate" from 6.5% per year (observed over the last decade) to around 3%.[50]

35. Future resources will inevitably be more difficult to recover as the more easily recovered resources have already been exploited—which in turn will make it difficult to estimate future investment requirements.[51] Mark Hanafin of Centrica told us that if infrastructure ceased to be profitable it would likely be abandoned, and it was unlikely that production would be restarted.[52]

36. Oil and Gas UK believed energy security was not necessarily at risk because the UK domestic resources were in decline—it was more an issue of the "economic losses" to the country.[53] Nick Wye—for the Gas Forum—explained that as the UKCS had declined, UK industry had responded by building the necessary import infrastructure.[54] About £5 billion had been spent on gas infrastructure in the last five years, which allowed the UK to import a maximum of 140 bcm a year (compared to annual demand of between 90-100 bcm). [55] Oil and Gas UK believed that this import capacity meant the UK had the most diversified gas supply in Western Europe.[56]


37. Many witnesses saw the main threats to the UK as internal. For example, domestic fuel blockades in 2000 or the mining strikes of the 1970s.[57] According to former Home Secretary Jack Straw, during the 2000 fuel blockades the Government, " worked round the clock to get the tankers moving [...] with no contingency plans of any kind for handling a fuel crisis, and not even a readily accessible map of where the refineries were".[58] Later in 2000, a Memorandum of Understanding was agreed between the UK government, the Trades Union Congress, the police, and fuel companies to "continue to be committed to the normal supply of oil fuels as a national priority and economic imperative".[59] The main elements of the planning, information and management system set up under the MOU include controlling the delivery of oil fuels in the event of disruption to supplies.59

38. We welcome the Government's aim to move away from dependence on fossil fuels in the long-term. In the meantime, we recommend that the Government continue to monitor the diversity of sources and suppliers of oil and gas to the UK in order to avoid becoming overly dependent on a single source. This will become more important as dependence on imports grows. Government should also consider how vulnerable imports to the UK are to disruption and what sources would be available to replace imports in the event of disruption. The decline in UKCS oil and gas production could have economic impacts such as decreasing tax revenue and jobs, and a negative impact on our balance of payments. However, we conclude that the UK's energy security is not threatened significantly by a decline in UK Continental Shelf production.


39. On 23 March 2011, in his Budget speech the Chancellor of the Exchequer announced an increase in the supplementary charge on UK oil and gas production from 20% to 32%. It was intended that this would raise £2 billion in additional revenue to pay for a 1p per litre reduction in fuel duty. It appears that the Treasury did not consult the industry about the impact of this increase before it was announced.[60] Furthermore, it is not clear when the Treasury informed DECC about its intention to make this change.[61]

40. The oil and gas industry reacted furiously to the surprise announcement of a third tax increase in ten years and predicted that the lack of fiscal stability would lead to developments in the North Sea, particularly in the marginal and mature fields, being jeopardised with the risk that investment and production would move overseas. [62] There was particular objection to what was seen as a disproportionate impact of the tax on gas production where development costs were comparable with oil, but prices were much lower per barrel of oil equivalent.[63]

41. There was a fierce debate between the Government and industry witnesses over the impact of the previous increase in 2006 of the supplementary charge on production in the North Sea, with industry arguing that the long term impact showed a decrease in investments between 2006 and 2009.[64] Oil and Gas UK claimed that the UK was now regarded as one of the "most unstable oil and gas provinces in the world by many investors".[65] However, the Government's position remains that whilst the increase might, "affect the commercial viability of a handful of marginal investments [...] the Government does not expect a significant impact on investment or production in the forecast period as a consequence of this measure".[66]

42. If the Government is serious about maximising production from the UK Continental Shelf, it needs to consider the long-term impact of changes to the tax regime on investment. The evidence on the impact of 2006 increase in the supplementary tax charge on oil and gas production in the North Sea is inconclusive, but there is a clear need to sustain investor confidence by avoiding surprises, such as the further increase announced in the 2011 Budget. It is not sensible to make opportunistic raids on UKCS producers. The Government must build a more constructive relationship if it is to restore industry confidence and maximise the benefits gained from the UKCS.

Refined Products

43. Crude oil must be refined into petroleum products before it can be used. Although the UK is a net exporter of petroleum products, there is still a need for imports.[67] This is because there is a mismatch between the types of petroleum products used in the UK and the types that UK refinery technology can produce. The UK Petroleum Industry Association's (UKPIA) Director General, Chris Hunt, told us that the UK's refineries met the domestic demand in terms of capacity, but not in the "exact product mix" required.[68] In common with Europe as a whole, the UK produces too much petrol and too little aviation fuel and diesel.[69] This imbalance is expected to increase over the next 10 to 15 years.

44. UK refining capacity has declined from 18 refineries in the late 1970s to eight major refineries today. Of these, four have been put up for sale. UKPIA noted that market conditions (weak demand, low return on investment), along with competition from new "export orientated" refineries in Asia, could result in further closures of UK refineries.[70]

45. DECC recently commissioned a report from Deloitte to examine whether the Government should be concerned about the UK becoming more dependent on imported refined oil products as domestic refineries closed.[71] The report concluded that an increased dependence on imports would not necessarily threaten energy security because international trade in oil products has grown and new refining capacity was being brought online in other countries which would target export markets. However, Deloitte also noted that a higher proportion of future refined product imports may come from a small number of countries or regions, in particular from India and Middle Eastern countries such as Saudi Arabia and Kuwait. This may leave the UK more exposed to a disruption from a single source than is currently the case.[72] Most of the growth in global refining capacity by 2014 is expected to take place in China, the Middle East and India. Refineries in the Middle East and India are typically export-focussed and designed to meet Western quality specifications.[73]

46. Chris Hunt stated that the Government needed to have a policy framework for refineries.[74] He explained that exploration and production—the "upstream" side of the industry—was "far sexier" than the "downstream" side that dealt with refining and which tended to be left out of future energy scenarios.[75] The Deloitte report recommended that the Government should consider what, if any, is the minimum level of refining capacity that should be maintained as insurance against market breakdown or supply disruption. This might include an estimate of the baseline level of refining capacity required for the UK to be broadly self-reliant in an emergency.

47. We recommend that the Government publish its assessment of the minimum level of refining capacity by product that should be maintained in the UK as insurance against market breakdown. Based on this, the Department of Energy and Climate Change should develop a strategy for how it will ensure the minimum level is met.

Russian gas supplies

48. In 2010 Russian gas accounted for less than 2% of the UK's supply,[76] and Russian crude oil made up less than 10% of our imports.[77] For comparison, almost 37% of the UK's imported coal came from Russia in 2010.[78] Several witnesses agreed that Russia's dependence on Europe for its gas market is greater than Europe's dependence on Russia for its gas supply.[79]

49. Professor Stern, of the Oxford Institute of Energy Studies (OIES), added that "the Russians have proved generally to be highly reliable suppliers".[80] It was likely that the UK would experience indirectly any disruption in Russian gas supplies, as happened during the 2009 Russia-Ukraine crisis. [81] That incident led to an increase in gas prices on the continent, which incentivised companies holding gas in the UK to sell into that market.[82]

50. Despite the general belief that disruption of gas supplied from Russia was unlikely to impact adversely on the UK, DECC and others thought that the UK could benefit from increased integration with European gas markets and infrastructure, as it would allow the impact of any supply disruption to be diffused among EU Member States.[83] A European Regulation to safeguard security of gas supply was developed in response to the Russian-Ukrainian crisis of January 2009, which entered into force in December 2010.[84] The EU regulation required Member States to ensure that—by December 2014—exceptionally high gas demand (occurring once in 20 years) could be met in the event that supplies from the single largest part of their gas infrastructure (for example, domestic production, import pipelines, storage deliverability) or LNG capacity were disrupted.[85] However, Katinka Barysch, of the Center for European Reform, noted that the European Commission's efforts to encourage Member States to enhance their gas security had been met with a "slow and piecemeal" response that was likely to be insufficient to enhance the energy security of central and eastern European countries in particular.[86]

51. Many of Russia's existing gas fields are past their peak production.[87] The Government's recent Strategic Defence and Security Review stated that the UK faces a range of risks to its energy security, including "insufficient investment" in states that supply its energy. In terms of Russia, this would apply to Gazprom's own investments in its oil and gas fields.[88] Making that same point, the Minister and Chris Barton, DECC's Head of International Energy Security, told us that, even though Russia provided a small proportion of the UK's gas supply, active diplomacy was still important in terms of energy security to ensure that more gas entered the global market as demand increased.[89] Chris Barton added, "it is very much in our interests" that Russia developed its own gas and oil fields to meet global demand.[90]

52. Whilst any future disruptions of Russian supplies to the EU could have some impact on UK gas prices, the more immediate domestic challenges are more directly within the Government's control. for example, energy infrastructure resilience and exploitation of the UK's domestic resources.

International gas pipelines


53. Russia's northern gas pipeline through the Baltic Sea—Nord Stream—began final preparations for operating in September 2011.[91] The Minister told us that the pipeline would be "part of the solution" to the kind of interruptions seen during the 2009 Russia-Ukraine incident.[92] The project comprises twin pipelines built by Gazprom and its German, Dutch and French partners, to bring gas directly from Russia to northern Germany, by-passing Ukraine and Belarus.[93] The pipeline is designed to lessen the potential political problems surrounding the pipelines that pass through the Ukraine corridor.[94]

54. The combined capacity of the pipelines (55 bcm per year) is about equal to two-thirds of Germany's annual consumption of gas. Oil and Gas UK argued that Nord Stream would "considerably improve the security of Russian gas supplies to NW Europe"[95] and Gazprom added that it would mean the UK would be able to "able to access a potential greater pool of supply".[96]

55. The Russia Foundation believed that Gazprom's Nord Stream pipeline was designed to segment the European market into East and West (and avoid a single energy market) and marginalise existing transit countries in Eastern Europe (to increase Russia's influence on them).[97] Anne-Sophie Corbeau, a Senior Gas Analyst with the International Energy Agency (IEA), told us that there was a "question mark" over whether Nord Stream would provide any additional gas to Europe, implying that the pipeline would merely re-route gas that would otherwise have transited Ukraine.[98]

56. While the Nord Stream pipeline will mitigate the risk that transit countries could disrupt gas supplies between Russia and Europe, we conclude that the pipeline will not increase European gas security significantly as it is likely to re-route gas around Ukraine rather than add any new volume.


57. Only three countries supply the vast majority of EU gas imports—Russia (40%), Algeria (30%) and Norway (25%).[99] The development of a European "Southern Gas Corridor" through Turkey or the Black Sea was meant to address this over-reliance by providing a new pipeline route for Azeri gas from the Caspian region. There are a number of different southern gas corridor pipeline projects in various stages of development: "Nabucco", "South Stream", "ITGI", and "TAP".


58. The Nabucco Pipeline Company is made up of a consortium of Bulgarian, Turkish, Hungarian, Austrian, German, and Romanian companies, and is a multilateral approach to increasing Europe's energy security.[100] The European Azerbaijan Society (TEAS) described the Nabucco pipeline as the EU's "preferred project" to bring Azeri gas to Europe.99 In June 2011 the Nabucco consortium signed agreements with transit countries through which the proposed pipeline would run, which came just a few weeks after a two-year delay in the project's target date for completion was announced.[101] During the signing ceremony, Gunther Oettinger—EU Energy Commissioner—said that "Nabucco has made the final step from a project to reality".101

59. The TEAS described the project as having been "hampered by disjointed European policy and lingering questions over supply", but added that it believed much of the latter was "scaremongering" on the part of Russia who has its own pipeline plan for the Southern Corridor (known as South Stream, discussed below).[102] Katinka Barysch, of the Centre for European Reform, argued that the Nabucco pipeline would reduce the ability of Russia to blackmail countries in eastern Europe that are currently dependent on it for gas imports,[103] and that, unlike the Nord Stream pipeline, the main benefit of Nabucco was the access it would provide to a "completely new source of gas" from the Caspian region.[104]

60. There is a case for European Governments to make themselves less dependent on Russian gas through subsidy of the Nabucco pipeline.[105] Professor Stevens of Chatham House believed that if "left to the private sector, it will not happen".[106] Katinka Barysch saw Nabucco as a "public good" because it would diversify European gas supplies away from Russia.[107]

61. Others argued that the potential security benefits of Nabucco were not so large as to justify putting between €12 and 20 billion into building it.[108] To those concerned about overdependence on Russian gas, LNG could be a much more "immediate" and "commercially viable" solution.[109] Some saw gas pipeline projects such as Nabucco and South Stream (discussed below) as too large and no longer relevant in the era of increased LNG capacity and "unconventional gas."[110] (Unconventional gas is "natural gas" held in an "unconventional" geological formation, such as shale rock—this was the subject of our fifth report of the 2010-12 parliamentary session.[111]) Peter Kaznacheev, of Khaznah Strategies, claimed that these projects only continued to enjoy support for "purely political reasons"—the EU support Nabucco while Russia champions South Stream—and neither of them appeared to be commercially viable.[112]

62. The Minister told us that while the Government was supportive of Nabucco—and the development of the southern gas corridor more generally—they believed it should be "market driven" without large amounts of European funding.[113]


63. Gazprom plans to build its own pipeline through the southern corridor, called South Stream. The project will be developed by Gazprom and the transit countries through which the proposed pipeline could cross.[114] At a promotional event on 25 May, the Russian Energy Minister and Gazprom's top hierarchy advertised the South Stream project to politicians and investors in Brussels.[115] Commissioner Oettinger stated that "South Stream so far seemed more of a concept than a concrete proposal", based on Gazprom's insistence that Russia has "all the [gas] resources it needs" for the project while not identifying specific sources.115 Alexei Miller, Gazprom Chairman, countered that South Stream "is more than a concept […] it is an incipient construction".115

64. Some commentators believe that the South Stream proposals are aimed more at delivering strategic political goals rather than genuinely delivering a new pipeline route. Peter Kaznacheev, of Khaznah Strategies, told us that "Russia is trying to see whether the EU […] would call [the Nabucco project] off and, if it does, then Russia can, with dignity, do the same because [building South Stream] is not in Russia's interests".[116] Professor Alan Riley agreed, and described Russia's current gas pipeline strategy as a "major difficulty for the Russian government and Gazprom", because development of both the Nord Stream and South Stream pipelines will increase significantly the cost of gas delivery for Russia. [117]


65. The International Energy Agency's Anne-Sophie Corbeau offered a further perspective on Nabucco when she compared it to smaller pipeline projects in the Southern Corridor, including the Trans-Adriatic Pipeline (TAP) and the Interconnector Turkey-Greece-Italy (ITGI)[118] Along with Nabucco, both of these pipelines are expected to be supplied by Azeri gas; however, it has been estimated that there is insufficient gas to meet the large planned capacity of the Nabucco pipeline.118

66. Any development of the proposed Nabucco gas pipeline should be determined and driven by the market. Debate over the merits of the different gas pipeline proposals fails to acknowledge the broader energy landscape, with increasing liquefied natural gas (LNG) availability, smaller pipelines planned in south-eastern Europe, and increasing unconventional gas production having the potential to make such very large pipelines uneconomic and redundant.

39   Ev 112 Back

40   DECC, Digest of UK Energy Statistics 2011, Chart 1.4 p 15 Back

41   Ev 198 Back

42   DECC, Digest of UK Energy Statistics 2010,Chapter 4 p 95 Back

43   DECC, Digest of UK Energy Statistics 2010,Chapter 4 p100 Back

44   DECC, Digest of UK Energy Statistics 2010,Chapter 3 p 68 Back

45   Ev 112 Back

46   Ev 112 Back

47   Q 481 Back

48   Ev 198 Back

49   Ev 198 Back

50   Ev 211 Back

51   Q 275 Back

52   Q 103 (Hanafin) Back

53   Q 274 (Odling) Back

54   Q 274 (Wye) Back

55   Q 274 (Wye) Back

56   Q 274 (Odling) Back

57   Ev w79, Q 280, Ev w79 Back

58 Back

59   DECC, Memorandum of Understanding, 29 September 2000 Back

60   Energy and Climate Change Committee, Implications for the North Sea Oil and Gas industry of the Budget 2011, HC 1081-i, Oral evidence, Q 79 Back

61   Energy and Climate Change Committee, Implications for the North Sea Oil and Gas industry of the Budget 2011, HC 1081-i, Oral evidence, Qq 13-17, 84 Back

62   Ev w143, Ev 204, Ev 198 Back

63   Energy and Climate Change Committee, Implications for the North Sea Oil and Gas industry of the Budget 2011, HC 1081, written evidence from Oil and Gas UK, NSOG 04 Back

64   Energy and Climate Change Committee, Implications for the North Sea Oil and Gas industry of the Budget 2011, HC 1081, written evidence from Oil and Gas UK, NSOG 04a Back

65   Energy and Climate Change Committee, Implications for the North Sea Oil and Gas industry of the Budget 2011, HC 1081, written evidence from Oil and Gas UK, NSOG 04 Back

66   Energy and Climate Change Committee, Implications for the North Sea Oil and Gas industry of the Budget 2011, HC 1081, written evidence from Oil and Gas UK, NSOG 08 Back

67   DECC, Digest of UK Energy Statistics 2011, Chapter 1 p 12 Back

68   Q 264 Back

69   Q 265 Back

70   Ev 164 Back

71   Deloitte, Downstream oil- short term resilience and longer term security of supply, Final Report for DECC, 1 April 2010 Back

72   Deloitte, Downstream oil- short term resilience and longer term security of supply, Final Report for DECC, 1 April 2010, p 8 Back

73   Deloitte, Downstream oil- short term resilience and longer term security of supply, Final Report for DECC, 1 April 2010 Back

74   Q 268 Back

75   Q 268 Back

76   HM Government, Securing Britain in an Age of Uncertainty: The Strategic Defence and Security Review, Cm 7948, October 2010, p50 Back

77   DECC, Digest of UK Energy Statistics 2011, Chart 3.2 p 68 Back

78   DECC, Digest of UK Energy Statistics 2011, Table 2B p 44 Back

79   Ev 229, Q 51 (Mitchell) Back

80   Q 51 (Stern) Back

81   Ev 226 Back

82   Q 405 (Corbeau) Back

83   Ev 112 Back

84   Regulation (EU) No. 994/2010 of the European Parliament and of the Council of 20 October 2010 Back

85   Regulation (EU) No. 994/2010, Article 6 (1) Back

86   Ev 229 Back

87   Ev w144 Back

88   HM Government, Securing Britain in an Age of Uncertainty: The Strategic Defence and Security Review, Cm 7948, October 2010, p50 Back

89   Qq 486-487 Back

90   Q 487 Back

91   "Pipeline gives Moscow the edge in gas supply balance of power", Financial Times, 6 September 2011 Back

92   Q 483 Back

93   Ev 198 Back

94   Q 51 (Stern) Back

95   Ev 198 Back

96   Ev w131 Back

97   Ev w144 Back

98   Q 404 Back

99   Ev w52 Back

100   "Shareholders", Nabucco GmbH, Back

101   "Nabucco Signs Pipeline Accords", European Dialogue, 22 June 2011 Back

102   Ev w40 Back

103   Q 404 (Barysch) Back

104   Ev 229 Back

105   Q 46 (Stevens) Back

106   Q 46 (Stevens) Back

107   Q 404 (Barysch) Back

108   Q 46 (Stern) Back

109   Q 6 (Stern) Back

110   Ev 229 Back

111   Energy and Climate Change Select Committee, Fifth Report of Session 2010-12, Shale Gas, HC 795 Back

112   Ev 229 Back

113   Q 478 Back

114 Back

115   "South Stream's credibility problems deepen after Brussels promotional event", European Dialogue, 22 June 2011 Back

116   Q 403 Back

117   Ev w85 Back

118   Q 404 Back

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Prepared 25 October 2011