UK offshore oil and gas - Energy and Climate Change Contents

4  West of Shetland

83. The most significant remaining areas of prospectivity in the UKCS are in the area to the west of Shetland and the Hebrides, which is estimated to hold potentially 3 - 4 billion barrels of oil equivalent (around 17% of the UK's oil reserves) and 10% to 15% of the remaining UK gas reserves.[106] We were told that 3.4 billion boe might be recovered from west of Shetland in the period up to 2035, assuming a barrel price of $80. However, weather conditions are difficult, the area is around 400 km from the nearest gas terminal, existing gas pipelines are not sufficient to support significant development in the near future and the gas discoveries made to date are not of a scale to justify the necessary infrastructure on their own.

84. The Government has recognised the difficulties faced in exploiting resources west of Shetland and established a joint Taskforce with industry in 2006 to facilitate exploration and development in the area. The industry representatives are those with gas projects with prospects of starting in the next 5 years:

Total      - operator of the Laggan and Tormore fields

Chevron      - operator of Rosebank and Lochnagar

BP      - operator of the Clair field

ExxonMobil    - operator of Tobermory

DONG Energy    - participant in Laggan, Rosebank and Tobermory.[107]

85. The Taskforce has examined options for a multi-field development with the capacity for gas export to mainland Scotland. It considered, but rejected on cost grounds, alternative means of utilising the resources, such as power generation and the production of Liquified or Compressed Natural Gas near the source of production. However, the Taskforce found four technically viable options for gas gathering hubs, three located offshore and connected by direct pipeline to St Fergus, and one onshore at the Sullom Voe terminal in the Shetland Islands. DECC's evidence describes progress:

    In September 2007 a well was drilled by Total into the Tormore prospect close to the Laggan field which identified additional gas. At the same time Chevron commenced an extended appraisal programme of their Rosebank/Lochnagar discovery in the growing confidence that they had a viable development further to the west. These developments offered better prospects for development, and the Laggan/Tormore and Rosebank/Lochnagar partners co-sponsored an independently managed process in the autumn of 2008 to test the appetite for third party investment in a basic engineering study and ultimately, in the collective project. This revealed a potential requirement for about 18 million cu. m/year of gas transportation capacity (equivalent to about 5% of UK annual demand), involving 10 licensees in 3 separate licence groups.

    Total have now commissioned the basic engineering study for Laggan/Tormore and the work is proceeding primarily on the basis of an onshore gas gathering hub located at the existing Sullom Voe Terminal in the Shetland Islands.

    For the gas export pipeline, there are two options…A direct pipeline from Sullom Voe to St Fergus on the Scottish mainland, or an indirect route using a new shorter pipeline to connect Sullom Voe to the existing, 100% Total-owned Frigg UK gas pipeline and then via Frigg to St Fergus. In either case, the pipeline is expected to have capacity for the 18 million cm/d of gas identified in the third party investment process. We understand that the partners consider that there is a commercially viable development option for Laggan/Tormore, with development sanction in September 2009 and first production in late 2013. The parties interested in developments west of Shetland are now moving towards a decision on development later this year which will be followed by a submission of a development plan to the Department for consideration. The Department considers that this collaborative process has a real prospect of providing infrastructure to deliver gas to the market in 2013/14. It will be a collective solution that reflects the requirements of players in the west of Shetland area prepared to commit to development.[108]

The map on the following page shows potential gas pipeline routes for west of Shetland developments:

Source: DECC (Ev 82)

86. Industry representatives told us about the potential for production west of Shetland, but struck a cautious note about its viability. Oil & Gas UK told us that the area could "potentially yield up to a fifth of the country's remaining oil and gas reserves" but that despite many years' exploration and promising discoveries "development has been restrained by the deep, hostile marine environment, extreme weather and the shortage of infrastructure to transport oil and gas to market. This makes projects in the region high risk, technically challenging and therefore extremely costly."[109] They also note that the recent falls in oil and gas prices has made the area less attractive to invest in. In order to improve the attractiveness of investments they have called for "fiscal measures such as a reduction or the abolition of the supplementary corporation tax rate or tax incentives for exploration".[110]

87. One of the main barriers to production west of Shetland is the high cost of production and specifically the construction of a pipeline to connect to the mainland, which would almost certainly need to be used jointly by different companies given the relatively small scale of the individual fields. This would involve a 'cluster' development of different operators using the same infrastructure. The financing of such a joint initiative is problematic, as Professor Kemp told us:

    A common carrier could be done by investors themselves acting on their own and over-sizing it from the first fields if they were reasonably confident that later on more gas was going to be coming in from new ones. They are very cautious about that and that is quite risky and involves a lot of upfront money. In the past we had lots of discussion about common carrier gas pipelines in the North Sea that were studied at enormous length and eventually did not go ahead. The one in the North Sea did not go ahead because the banks would not finance a pipeline unless there was pretty well guaranteed large throughput from a very big field and that was not going to be the case, so the second North Sea gas pipeline did not emerge under private sector arrangements. If you want to think more radically then there could be something like a government guarantee to enable the banks to take a very generous view of things. That kind of thing is possible but brings in the question of State Aid and all of that and that would be quite complex.[111]

88. We raised the issue of a west of Shetland "common carrier" with Oil & Gas UK. While Malcolm Webb, the Chief Executive, could see advantages of scale in sharing costs in the longer term, he noted that there were difficulties in getting such a scheme off the ground and financing it until a range of fields became operational. He warned against placing the financial onus on the first companies to be active in the area, as this could make costs prohibitive and drive them away. He posed the rhetorical question:

    Do you saddle those developments with the incremental cost of a common carrier pipeline that could sink the economics of those developments? I think the answer to that is no. There is a gap there that needs to be filled if you want to do the common carrier. Who is going to pay for that? I do not think the Government is going to pay for it in the short-term. The best answer for the west of Shetland is to go back to look at some of the fiscal incentives that we can put in place to make sure we get as much as we possibly can on the back of the existing development, which means improving the economics of the development.[112]

89. Clearly, getting the necessary shared infrastructure in place to be able to exploit resources west of Shetland is a complex but key issue. Inevitably, Government will have a role to play. Broadly, there are three positions which might be adopted by the Government: as a funder or co-funder of a common carrier infrastructure, with charges or taxes then being imposed on the users; as a regulator of the shared arrangements; or as a facilitator, working with the companies trying to get voluntary arrangements which are viable and durable. The Energy Minister made it clear that he did not favour the first option:

    if the state were to intervene and fund such a common carrier, it is difficult. Although we would get taxation from it, we think that this is the sort of thing that the private sector really ought to do. The infrastructure system has worked reasonably well…in the North Sea. Moving into west of Shetland, obviously we have an area which is going to be difficult to exploit…but the state intervening to tell the companies how we are going to lay the infrastructure out, making decisions for them about it and then, presumably, charging them substantial amounts for access to it, seems to me to be not the way to go. I would suspect it will mean that many of the companies who would otherwise be looking there will say, "Look, if we could go there and decide how we want to do it, we would go, but if you are going to decide, Government, how to do it, we are not going to go."

90. The Minister was also not keen on regulating access to shared infrastructure west of Shetland:

    At the moment, west of Shetland we have got a number of companies interested, Total, Chevron, BP. They are all looking at various permutations of putting in infrastructure if they decide to carry out their exploitation there, and there are issues about whether there should be connections from Sullom Voe, whether it would then go down to St Fergus or whether it would go across to the Total pipeline at Frigg. These are all issues which I think, in the end, are commercial ones more than ones that you want to determine by regulation. As far as access to infrastructure is concerned, we have got the guidelines. Those guidelines have worked reasonably well since 2001… Do we now want to go into a situation where we put in place regulations which oblige larger companies (and it will be by and large them) to put in infrastructure and then oblige them to put particular links in for the smaller companies by law? In which case, they will simply say, "All right, if you want us to do that, we are going to charge for that and those charges will have to go somewhere or we will decide not to carry out that job because it will not be economic any more." I think you are intruding into areas where I do not think the Government necessarily needs to go at the moment.[113]

Having eschewed the option of funding or regulating a common carrier arrangement, the Minister described the Government's preferred approach as "more of a dialogue rather than a diktat" and said "that is probably the better way of engaging, unless we have to do it some other way".[114]

91. We understand the Government's argument for not wanting to interfere in a heavy-handed way in the establishment of a common carrier arrangement for oil and gas west of Shetland. But two things are clear: west of Shetland resources offer enormous potential - possibly a fifth of our remaining oil and gas resources; and putting in place a shared infrastructure to exploit those resources is expensive and complex. The Government should continue its dialogue with industry and agree a timescale for the establishment of such a shared infrastructure and the arrangements governing its use. If progress does not meet that timescale the Government should be prepared to take a more active role, probably through regulation but not precluding assistance with funding. The UK must appreciate the importance of the resources west of Shetland.

92. The other mechanism by which Government might have been expected to support development west of Shetland is through the fiscal regime. As we noted above, Oil & Gas UK have requested "fiscal measures such as a reduction or the abolition of the supplementary corporation tax rate or tax incentives for exploration".[115] BP told us that it "operates the first, and currently only, fields in production [west of Shetland]….Many of the other discoveries which have been made west of Shetland are marginal and BP believes that a reduction in the fiscal burden is required if more of the potential west of Shetland is to be unlocked both from new discoveries, existing undeveloped discoveries and fields in production. The Government's proposed Value Allowance mechanism only partially addresses the basin challenges as its scope is limited exclusively to certain narrowly defined categories of new fields. It is important that investment incentives are also made available to encourage investment in existing fields and should be applied as widely as possible, including west of Shetland".[116]

93. As we have seen, no specific support was provided for west of Shetland in Budget 2009. BP, which had called for all new fields west of Shetland to be eligible for the value/field allowance, was disappointed:

    In particular, the absence of any fiscal assistance for fields currently in production - and for the area west of Shetland - deprives both BP and, we believe, the industry as a whole of the fiscal incentive which might mark a significant improvement in today's difficult conditions.[117]

Also responding to the new field allowance, Oil & Gas UK told us:

    Its impact on exploration activity will be negligible and it will not boost west of Shetland or tight gas development.[118]

The Independents' Association also said that all west of Shetland fields should qualify for the field allowance:

    Having created the Field Allowance we would encourage Government to look at additional qualifying targeted areas. The two areas that we would focus on would be assets west of Shetland and Non Conventional Gas.

    Assets in the area west of Shetland face considerable challenges with respect to weather and infrastructure - additional fiscal assistance is required to accelerate activity.[119]

94. We support the call by industry for all fields west of Shetland to be eligible for the field allowance. This is appropriate given the difficulties inherent in exploiting the resources there. In fact, we believe it would be only of modest assistance and recommend that the Government consult with the industry on further options for incentivising production west of Shetland.

95. Concerns were raised with us about the potential adverse effects on the environment and biodiversity of oil and gas production in the area west of Shetland and, to a more limited extent, in the UKCS generally. We turn to these next.

106   Ev 69,para 25 Back

107   Ev 69-70, para 26 Back

108   Ev 70, paras 27-31. Back

109   Ev 113, para 3.6.1-3 Back

110   Ibid, para 3.6.5 Back

111   Q 123 Back

112   Q 132 Back

113   Q 187-188 Back

114   Q 190 Back

115   Ev 113, para 3.6.5 Back

116   Ev 55, paras 9-10 Back

117   Ev 57, para 6 Back

118   Ev 116, para 2.1.6 Back

119   Ev 107 Back

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