The Guardian: Brown's energy policy ignores home truths (ShellNews.net)
Peter Odell
Saturday August 21, 2004
It is paradoxical that Gordon Brown chooses to castigate Opec's members for failing to produce enough oil to bring prices down while ignoring Britain's role as one of the world's top 10 oil and gas producing countries. He also fails to recognise that declining UK oil and gas output results from a less than proactive government policy for the country's hydrocarbons industry.
Initially, this arose from the government's ideological unwillingness to make public investments in oil and gas exploration and production. More recently, it has reflected the government's obsession with a perceived need to constrain carbon fuel use and to stimulate green energy production with generous subsidies.
Last year's energy white paper epitomised the government's anti-oil and gas attitudes. It devoted 60 lines to the UK's world-scale upstream hydrocarbons industry from a total of 5,000. Since 1974, it produced some 4,500m tonnes of oil equivalent, equating to more than 75% of the UK's total energy use in this period.
Apart from the 30 years of security of energy supply which domestic production has given, the impact on GDP, on industrial investments, on direct and indirect employment and - most of all - on its balance of trade has been formidable. Net export earnings from domestic oil and gas since 1998 have contributed almost £6bn a year to the balance of trade, while the value of the energy import substitution effect has averaged £9bn a year. Without oil and gas, the £30bn average annual trade deficit over the period would have been 50% greater.
Given these advantages, the absence of any calculations in the white paper of the resource costs for the country from the change from net energy exports of 28m tonnes of oil equivalent in 2003 to net imports of 190m tonnes in 2020 is inexplicable. At current price levels, the swing will generate an annual burden on the balance of trade of £25bn-£28bn, adding 65%-85% to the already formidable trade deficit. Moreover, the near-100% security of energy supply will be reduced by 75%.
The white paper and the policies based on it do not address these issues, nor the consequential GDP and employment losses, nor the impact of severely reduced investment to the upstream hydrocarbon industry - accounting for 16% of total industrial investment in the UK.
We need a comprehensive inquiry into the assumptions that underlie the government's acceptance of a decline in oil and gas production. Such an inquiry must include the following:
First, an examination as to why the government views the UK's remaining resources of oil and gas so pessimistically that it forecasts a 35% production decline by 2010 and 75% by 2020 - only about 16bn barrels of oil equivalent. Even the cautious estimates of oil companies suggest at least as many resources remain to be exploited as have been produced to date - 33bn barrels. Dr J Munns, a senior geoscientist at the Department of Trade and Industry, estimates there could be up to 47bn barrels of oil equivalent under the UK's North Sea section, most of which remains under-explored.
Second, an evaluation of the failure of the present antiquated discretionary concession system and its associated tax regime to ensure a continuity of exploration for, and exploitation of the UK's offshore hydrocarbons.
Third, consideration of other ways of exploiting remaining hydrocarbon resources, such as production-sharing agreements between a publicly owned entity - say, a strategic oil and gas authority - and companies. State investments in exploration and exploitation usually require a lower rate of return than those expected by the private sector, reducing the financial risk and enhancing production potential.
Fourth, a comparison of Norwegian state involvement in the exploitation of that country's hydrocarbon wealth with Britain's essentially reactive approach to oil and gas development. In the latter case, the effective decision-takers are the concessionary companies, demonstrated by the recent partial withdrawal of BP and Shell from commitments to the UK's upstream hydrocarbon activities in order to finance operations elsewhere in the world.
Fifth, consideration of the need for an entity independent of the producers for ensuring the timely development of optimal offshore pipeline networks to collect and deliver the oil and gas to markets, as with the recently formed, state-owned Norwegian company, Gassco AS.
Sixth, analysis of the degree to which actions by the regulator Ofgem to enhance competition in gas and electricity markets have discouraged investments in upstream gas developments.
More intensive exploitation of the UK's remaining resources of oil and gas will not even be at odds with the government's desire to move the country towards a "low carbon economy". The additional domestic hydrocarbons production will significantly reduce the country's high-cost imports of oil, gas and coal at a time when there are only limited possibilities of switching to renewable energy.
The creation of additional national income through full exploitation of hydrocarbon resources seems the only way to sustain the subsidies required for the establishment of a low-carbon economy.
· Peter Odell is author of Why Carbon Fuels will Dominate the 21st Century's Global Energy Economy
http://www.guardian.co.uk/business/story/0,,1287856,00.html