Let's be sure Britain makes the best of the North Sea

The UK Energy Review may not have provided the final word on policy when it was published in the summer, but in an area such as energy perhaps we should be relieved that the government is not rushing to conclusions.

The challenge of guaranteeing security of energy supply in particular has come under much sharper scrutiny in the last couple of years, in large part for geo-political reasons. It is right that we take our time and work through solutions that will provide long-term confidence in energy markets’ ability to deliver.

Overall, we are encouraged by some of the central conclusions and recommendations of the energy review, even if more detailed policies will need to be built around them. What do I mean by that? Let me give you some examples.

First, there is a clear recognition that the UK government needs to adjust the current UK Continental Shelf (UKCS) oil and gas tax regime if we are to extract as much oil and gas as we can from this province, which is in decline.

In our view, the fiscal regime needs either to be overhauled or significantly adjusted to reward those companies that are investing in real exploration activity designed to extend the life of the UKCS and maximise production.

My own company is investing considerable sums in the UKCS — and we have been rewarded by five new discoveries in the last 12 months. Our latest find, just a few weeks ago, could be the largest in the UKCS for three years. BG currently produces around 7% of total UKCS gas and we aim to increase our hydrocarbon production from the province over the next two years at least. This involves significant levels of investment at a period in the North Sea’s life when accumulations tend to be smaller than some of the big finds of the past; in addition, they are often technically challenging, risky and extremely costly.

There has been a lot of focus on the effect of high oil-prices on company profits but we need to bear in mind the fact that, in the UKCS, the exploration success rate is only 15% because of the maturity of the province. At the same time, industry costs have increased sharply with commodity prices up and rig rates tripling. This means that fields that were marginal two years ago, before the oil-price increases, are still marginal today.

The energy review acknowledges that, if current investment levels can be maintained, instead of a 9% decline rate, the province could decline at just 4%. Those figures represent very different futures for the UKCS and it’s obvious to all of us which option is preferable — for both the industry and UK plc.

The indications are that both the DTI and HM Treasury have now accepted the need for a fiscal regime with a new emphasis to try to bring about the optimal outcome. Whether this point has been truly taken onboard is likely to become clear after the current Treasury review of the UKCS tax-regime.

The review calls for ‘concrete proposals for boosting UKCS investment over the next 1015 years’. This is clearly welcome — but what might such proposals look like?

We at BG are urging the government to bring in enhanced allowances for exploration investment. We’ve also suggested lower tax rates for production from prospects that are the most costly to drill — for example, frontier acreage and high pressure, high temperature wells.

We’re also arguing for a mechanism to spare the industry from the current 20% supplementary corporation tax rate (SCT) in the event of oil prices falling back. SCT was imposed partly in response to high prices. We believe a simple sliding scale linking SCT to oil price would enable government to benefit when prices are high and give the industry a cushion should its revenues dip due to lower prices.

The energy review states: ‘We need to ensure that the right conditions are in place to attract investment in exploration, development and production’. We believe that, thoughtfully implemented, our proposals would go a long way towards achieving those goals.

Another aspect of the review that is welcome is the government’s acknowledgement of the need to offer incentives to deliver the new investment required for major energy infrastructure schemes. The consultation designed to produce a simplified planning process and avoid lengthy delays to strategic energy infrastructure projects is also welcome.

Let me conclude by welcoming the fact that some proposals are not in the energy review. As a representative of an industry that has made a major contribution to UK energy supply security via market mechanisms since privatisation a couple of decades ago, we welcome the fact that the government has resisted calls to ditch its commitment to the market and return to more centralised planning of the energy mix. Central planning is inefficient and it adds to cost.

We also welcome the fact that the government has not skewed the energy market to give nuclear power an unfair advantage over other fuel sources, as many people had forecast. We hope that this is a position that holds.

We also welcome the government’s resistance to calls from some industry ‘experts’ to introduce a system of centrally-controlled strategic gas storage. This could have killed off commercial storage initiatives and undermined the market in gas supply. We can’t be complacent about the UK’s need for increased gas storage capacity, but the last thing we need is a return to centralised energy planning.

So, in summary, there is still more to be done before we arrive at the answers to some of the key energy questions addressed in the energy review. However, the report reaches some important conclusions on which we can build.

If the outcome of this review is a shot in the arm for hydrocarbon exploration activity in the UKCS, if it reaffirms the government’s commitment to market mechanisms in energy policy, if the government resists a ‘quick fix’ for nuclear power and more centralised energy policy planning, then ignore what the cynics say about this exercise: it will have been a success.

Mark Carne is BG Group Executive Vice President, Europe & Central Asia.