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The annual dinner of the Scottish Oil Club: opportunities for the North Sea
The UK’s future sources of economic growth are currently the focus of much political debate, as is the shape of its energy mix. In this speech Simon Henry, Royal Dutch Shell’s Chief Financial Officer, describes the potential contribution of the country’s oil and gas industry against this backdrop: as a powerful engine of growth and employment, as a provider of cleaner-burning natural gas to the UK’s power sector, and as a crucible of the world’s nascent carbon capture and storage technology industry.
The annual dinner of the Scottish Oil Club: opportunities for the North Sea
It’s always a pleasure to be back among friends in this beautiful city.
This evening I’d like to say a few words about the future, now that prospects for the North Sea have brightened after a grim couple of years.
First, I’ll focus on the opportunities for hydrocarbon exploration and production in Scotland and the UK. In so doing, I’ll highlight the outstanding potential of our industry as a powerful engine of growth and employment for many years to come.
The second opportunity I’ll emphasise is natural gas. As the energy policy debate cranks up on both sides of the border, the industry needs to make the case for gas-fired power in the UK.
And, third, I’ll briefly discuss CCS, not just because it will allow natural gas to remain competitive for decades to come, but also because it offers significant opportunities to businesses right here in Scotland.
North Sea: engine of growth and employment
So, first, the big picture opportunities.
In the UK, the question of growth has shot back up the political agenda. And on both sides of the border policymakers are striving to identify the sectors that will deliver long-term prosperity.
The energy industry is prominent in their thoughts because it is one sector guaranteed to mobilise large sums of capital over the next decade, creating thousands of jobs in the process.
Much of the focus is on using this capital to lay the foundations of a thriving renewable energy sector; one that is rooted in Scotland and the UK’s geographic advantages and capable of exporting its expertise around the world.
But amid all the focus on offshore wind, there’s a risk of one critical point being written out of the script: that a competitive oil and gas sector can drive huge growth and employment in the UK for many years to come.
We already know that our industry is the country’s biggest payer of corporate tax. This financial year it is expected to contribute more than 10 billion pounds, up from around 6.5 billion pounds last year, benefitting both Scotland and the UK.
We also know the industry supports 440,000 jobs, a very high proportion of which are well-paid and highly skilled. And nearly half of which are based right here in Scotland.
But there’s also an optimistic story to be told about the future.
Put simply, the world will need more oil and gas, thanks to rising demand and declining production rates in developed fields.
At Shell, we think that by 2020 the industry will need to bring about 40 million barrels per day of new oil on-stream from fields that haven’t been developed yet. That’s equivalent to four times the current production in Saudi Arabia and ten times that of the UK and Norwegian North Seas.
And the UK continental shelf can make a highly significant contribution to the country’s energy security. After all, we know that more than 20 billion barrels of oil and gas remain to be tapped here. Which means that, at the end of this decade, the UK’s domestic sources could still supply nearly two-thirds of its oil.
It also means that the North Sea is still a trillion pound opportunity for the UK.
That’s why Shell remains strongly committed to the UK continental shelf. All told, the UK accounts for some 7% of Shell’s total oil and gas production.
Offshore, we have interests in more than 50 field licenses and operate more than 30 platform installations, as well as more than 30 subsea installations.
We were delighted to win four exploration licence blocks in the 26th – and most recent – licensing round, two in each of the Central and Southern North Seas.
Also in the Central North Sea – and with our partner OMV – we brought the Bardolino field on-stream in October via a sub-sea well tied back to the Nelson platform. And we expect production to average some 4,500 barrels of oil equivalent per day.
More broadly, new sources of capital have continued to enter the UK continental shelf, with utility companies and national oil companies featuring prominently. And on one estimate, new oil and gas projects will create more than 15,000 jobs here over the next five years.
Moreover, the sector hums with expertise forged over more than three decades in some of the industry’s toughest operating conditions. And this expertise is in strong demand around the world, especially in fields like sub-sea engineering and enhanced oil recovery.
In Shell’s Aberdeen office, for example, our engineers are working on projects in locations from Nigeria to Norway and from sub-Arctic Russia to Gabon.
Then there’s the UK’s highly competitive oilfield services sector, among our most underrated national assets. The estimated turnover of the UK oil and gas chain last year was some 18 billion pounds. And, for our part, Shell spent more than 3 billion pounds with some 4,500 suppliers here last year, on both our domestic and international activities.
These businesses exert an increasingly imposing global presence in maintenance and asset management, in the process industry and in high-end engineering; in some cases, grabbing market share from the global manufacturing giants.
A buoyant North Sea would encourage them to continue developing their expertise in Scotland and the UK, using it as the lifeblood of their worldwide expansion.
This would also generate significant export earnings: Shell’s overseas activities account for around one-third of the money we spend on goods and services procured in the UK, while the broader oilfield goods and services sector earned some 5 billion pounds in exports last year.
In this context, we should remind ourselves that worldwide capital spending in the upstream oil and gas sector was budgeted to be around $470 billion in 2010, more than seven times the amount invested in wind in the course of the previous year.
So the message is clear: the UK’s oil and gas industry can make an enormous contribution to the country’s economic growth for many years to come.
Taking the opportunity
I see three critical steps to making that happen.
Above all, the industry must maintain a relentless focus on safety and achieving the highest operational standards.
On North Sea safety, I believe that the UK government's response to the Deepwater Horizon tragedy was the right one. At Shell, we agree that the UK regulatory framework for the North Sea is robust and, indeed, among the best in the world.
And we were glad that the US Presidential Commission’s report recognised the value of the “safety case” approach used here and in Norway. In fact, Shell uses the North Sea “safety case” approach throughout the world.
But we agree that there’s no room for complacency. And we welcome the move by the Department for Energy and Climate Change to increase environmental inspection capacity in the UK Continental Shelf, as well as its other measures.
Shell is also actively involved in the Oil Spill Prevention and Response Advisory Group, and playing a leading role in the International Association of Oil and Gas Producers’ bid to improve capping, containment and spill response capabilities.
And we will give our full co-operation as DECC conducts its review of the oil and gas regulatory regime in the North Sea in the coming months.
As a second priority, the industry must foster the North Sea’s reputation as a centre of technological innovation. For example, tapping smaller and costlier fields has, inevitably, been a major priority.
More flexible and mobile drilling operations would raise the profitability of these fields, thus boosting production. For some years, Shell has used light land rigs in the Netherlands that allow us to move between smaller onshore fields more rapidly and cheaply, increasing their profitability.
We are now working on a project to use this technology offshore in the North Sea. And we plan to commission our first so-called SWIFT rig in the first half of this year.
We are, of course, driving technological advances on a range of fronts in the North Sea, and are even considering an opportunity in offshore tight gas. While an extremely challenging technical proposition, this is an area with enormous potential.
My third plea is for a taxation and regulatory framework that allows North Sea oil and gas to reach its full potential.
The previous UK government made some smart moves here with its Field Allowance measures. But maintaining a stable framework that incentivises investment will be critical to maximising production. And it remains the case that oil and gas production is still taxed at a higher rate than other businesses in the UK.
The UK power sector: natural gas
Mention of policy frameworks leads on to my second opportunity for the UK industry: natural gas.
Over the next 10-15 years the UK will have to either upgrade or close – in part or in full – nearly half of its total installed power generation capacity. And it must balance this with some ambitious CO2 emissions reduction targets.
At Shell, we believe that the country should take the quickest, cheapest and most pragmatic path to CO2 emissions reductions.
And in the power sector, that means expanding the presence of natural gas.
Affordability matters because the UK will have to spend somewhere in the region of 110 billion pounds on new electricity generating capacity over the next decade – the equivalent of ten Channel Tunnels that have to be delivered on time, on budget and working.
Meanwhile, restoring the UK’s public finances to health will be a long, hard slog. So, for major capital projects, budgetary discipline and strong risk management matter more than ever. That in turn places a premium on proven technologies with a low unit capital cost.
New natural gas power plants are cheaper and quicker to build than any other new-build source of electricity. For example, gas has a capital cost of about an eighth that of offshore wind on a load factor basis. That means installing offshore wind costs tens of billions more than installing gas fired power. And the indications are that the long run costs of carbon capture and storage technology in combination with gas-fired power are lower than for offshore wind.
There’s another point to make here about wind. Very cold spells in winter are associated with still weather conditions. In the coldest days around the 21st of December, wind produced a meagre 3% of its nameplate capacity. So when we needed it most, the wind failed to blow.
But for the UK to benefit from the reliability and cost-effectiveness of natural gas, we must nail the myth that it will weaken the UK’s energy security.
We all know that the UK has become a net importer of gas. But, as with oil, that should not obscure the fact that its domestic sources can make a significant contribution for years to come.
Gas accounts for almost half the production in the UK continental shelf. As recently as 2009, the UK’s gas production stood at around 60bcm, two-thirds of then demand. And at the end of this decade, domestic sources could still supply as much as 40% of the UK’s demand.
With our partners, Shell has spent hundreds of millions of pounds on the North Sea’s gas infrastructure. For example, we have upgraded the St Fergus and Mossmorran onshore plants, extending their life to 2021.
And over the longer-term, the UK will benefit from a reliable and increasingly diverse group of gas suppliers.
In part, that’s thanks to the changes sweeping through the global gas market.
The supply picture in North America has been transformed by the unconventional gas production boom. So much so that it now has a total resource base big enough to cover its gas consumption for well over a century.
At first sight, you might think this has little relevance to the UK. But the North American production surge has eased price volatility, enhancing the competitiveness of natural gas. It has also freed up vast quantities of LNG for Europe and Asia that had been reserved for customers in the US.
On top of this, global LNG production could more than double this decade, on the back of new suppliers and customers. And the UK will be a prime beneficiary. By 2020 LNG could account for more than a third of the UK’s gas, and from suppliers as diverse as Qatar, Algeria, Nigeria, and even the USA.
The North Sea will still be front and centre, by the way. In addition to the UK continental shelf, the Norwegian pipeline could potentially supply more than one-third of the country’s gas.
Moreover, expanding natural gas at the expense of coal is the fastest and most effective way to reduce CO2 emissions in the power sector over the next decade. Modern gas plants emit between 50% and 70% less CO2 than coal plants.
So the UK has every reason to back natural gas as a secure and sustainable energy supply, and every reason to make the most of its domestic resources.
All of which leads directly onto a third opportunity for the industry: carbon capture and storage technology.
Carbon capture and storage
Because of CCS technology, gas-fired power will be able to compete with renewables and nuclear power for decades to come. And it could create significant opportunities for Scottish businesses.
The IEA has said that if rapid deployment of CCS can start this decade, it could account for 19% of the total CO2 reductions needed by 2050.
In the case of gas-fired power, CCS would cut net CO2 emissions by 90%.
In fact, CCS will be most effective when attached to a gas-fired power station. That’s because it would only need to deal with half the CO2 emissions of an equivalent coal-fired plant, requiring only half the underground storage space.
Moreover, the combination of natural gas and CCS could be very cost effective. A recent report by Mott MacDonald for the UK Department of Energy and Climate Change indicates that the overall lifetime cost of gas with CCS will be cheaper than coal with CCS and even the much-improved offshore wind technologies hoped for after 2017.
Nevertheless, we must also attach CCS to the coal-fired power stations that, like it or not, will continue to be built in the years ahead. After all, in China, coal still comprises nearly three-quarters of the primary energy mix.
CCS also matters because it will bring opportunities for Scottish and British businesses. The IEA forecasts that the global CCS industry will require some $1.3 trillion of investment by 2050.
And the North Sea oil and gas industry is well-placed to spearhead the development of this technology.
We have the technical skills, thanks to decades of experience in process engineering. And we also have plentiful CO2 storage sites in the form of depleted oil and gas fields and saline aquifers. In fact, between them, the UK, Norway and the Netherlands could cover around 40% of the EU’s storage needs.
But to turn potential into reality, industry and government must work together to deliver a series of successful demonstration projects at an industrial scale.
That’s why Shell is involved in a number of CCS projects around the world, including right here in Scotland.
The projects we are currently working on might be recognisable to some – namely Longannet and Peterhead. Yet we must also acknowledge that, in bringing them to fruition, there are numerous technical, regulatory and economic hurdles to overcome.
That is an appropriate place to stop. So I’ll just finish with a word of thanks to the Scottish Oil Club for inviting me to your annual dinner, and to wish you all the best for the year ahead.