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Malcolm Wicks MP, Minister of State for Energy
INSTOK International Oil and Gas Business Conference, Stavanger, Norway, 21 August 2006
Thank you for your warm welcome and thanks to INTSOK for inviting me to speak. This is my second visit to Norway this year and I have great pleasure to meet my friend Odd Roger Enoksen again. Indeed we have met several times recently.
We flew into Stavanger yesterday and had a chance to look round the city, including a visit to the sardine museum – or as it was technically explained to me – “sprats”. Seeing this former sardine factory served as a reminder of the human dimension behind these industries and how much industry matters to any local economy.
Shipping has always been vital and now of course oil and gas are crucial. We shouldn’t forget, beyond the city and the local economy, these industries have crucial importance for the nation state. How the nation acts as a steward for industry whilst also safeguarding the environment is of critical importance.
We meet at a time of unprecedented interest in questions in energy but also questions on the subject of climate change. And while we can look back on decades of geopolitics, I think it is fair to say that energy security and global warming are set to become two of the dominant issues in politics for years to come.
We also meet at a time of rising prices so this conference really comes at a time when it is important to take stock of where we are. And I am reminded that at EU level the Commission has recently published an Energy Green Paper, and in my own country, the UK, we have just completed a major review of energy policy by the Prime Minister, Tony Blair. It is also important for bilateral relations. And let us not forget that beyond the nation state there is also the global dimension.
Investment levels in the North Sea are at an all time high with the added prosperity created by the high oil price filtering right down through the supply chain. Just look, for example, at rig prices; Semi-submersible drilling rig rates are almost 4 times what they were in 2004, with utilisation at or near 100%, even though they command rates of nearly $400,000 per day.
There is little doubt global demand for energy will continue to increase, not least because of continued growth of economies such as China. In addition, of course, there are the issues in the Middle East, and all of this creates an environment of uncertainty in the global oil market and adding further upward pressure on price.
Aside from these pressures, the world faces many social and economic challenges, and we must accept we are playing in a pond much larger than the North Sea.
With the above as a background, it is becoming increasingly important that we do everything possible to maintain production and extend the potential and life of our indigenous reserves.
Production in the UKCS has peaked, and we are now into a more mature phase. But that does not mean the game is almost over, far from it, to date we have extracted approximately 34 billion barrels of oil equivalent with the potential to recover almost as much again. Granted, of course, that the easiest resources have been harvested and it will become increasingly challenging to locate and extract all the remaining hydrocarbons.
We have however been proctive in the United Kingdom, and government and industry have been working in close partnership thorough what we call the PILOT partnership to ensure we have the right measures in place to maintain the vibrancy of the basin and also have a competitive, and technology-driven supply chain to support the basin into the future.
The UKCS remains an important global player. Rated as the world’s 4th largest gas producer, ahead of Iran, and 13th largest oil producer, ahead of countries like Algeria.
Although we are approaching, as I say, the mature phase of the North Sea oil industry, substantial quantities of hydrocarbons remain, and we are intent on making the basin viable for at least the next 25 to 30 years. We must, however, act now to ensure we maximise the use of our existing infrastructure and also maintain the momentum of new developments.
The challenge will be to fully explore the basin, including the vast area West of Shetland and perhaps west of Scotland where we are optimistic of creating a new chapter for the future of the UKCS. Major progress in this “new play” area will be dependant on considerable investment in new infrastructure and that is the reason I have given this area considerable focus in our recent review of energy policy.
I referred to PILOT earlier – I think the Norwegian equivalent is Kon- Kraft - Since becoming Energy Minister and taking on the chair of PILOT, I have been extremely impressed as to how this somewhat unique partnership between government and industry has been able to identify blockers and move issues forward as considerable pace.
Many of these measures have been tough and certainly not a win-win in the short term for some of the operators, but have never the less been accepted without recourse to regulation, and have allowed the UKCS to react and become the dynamic basin it is, and I would like to touch briefly on the most significant of these measures.
The first concerns licensing. We have made a number of innovations to our licensing system to ensure we had full activity and an environment, which would attract wider interest and investment in North Sea acreage. They include the introduction of a “promote” licence – at 10% of the cost of a traditional licence aimed at encouraging much smaller, yet dynamic prospectors and key players to become involved.
And last year we evolved the system even further by creating the “frontier” licence to encourage exploration in technically challenging areas West of Shetland. These innovations are resulting in unprecedented levels of interest in the UKCS. Last years 23rd round was a huge success and Interest in this year’s 24th round was equally encouraging.
We realised there were areas of inactive acreage, which were not attracting sufficient focus from the licence holder and we introduced The ‘Fallow’ initiative. The driver was to get acreage into the hands of those best placed to exploit it and with an appetite to actively pursue all opportunities. The process is ongoing and pressure will continue to be born on any licensee where there is inactivity.
It is also vital that we tap the potential of existing producing fields. PILOT has identified additional reserves of between 3 and 5 billion barrels of oil equivalent could be won from increased investment in existing fields, through careful well-focused investment.
My Department - working closely with industry through the PILOT partnerships - are progressing the “stewardship initiative” aimed at identifying those fields, which may not be receiving the investment they need, and gaining improvement.
This is an ongoing annual process, and although in its infancy has already been successful in raising awareness of the benefits of critically analysing the potential of each individual producing asset.
Good evidence that this approach can work is the Forties field, where Apache have invested over £100 million in additional drilling and brought daily oil production up from 40,000 Barrels to almost 65,000 barrels. This enhanced field production is a great achievement and an example of how the right focus and investment can bring about swift improvements in field performance.
There is no doubt that the supply chain faces many tough challenges too and I have asked PILOT to look at key issues and see what else can be done to maximise UK supply chain opportunities and competitiveness. A new Supply Chain code of practice has been developed.
It aims to tackle commercial behaviours in key areas covering - Planning, Contracting, Performance and Payment. There are already over 100 of the key companies signed up to this code and are committed to creating a better climate in which to do business.
We should not forget there are North Sea opportunities beyond oil and gas. Some parts of the supply chain are already keyed into the renewables market, and particularly offshore wind, where there are increasing opportunities for companies with offshore experience.
Now one of the main drivers behind the UK/Norway co-operation process launched back in 2002 was to use the process to unlock even more value, through a closer relationship to the supply chain in both countries. I would like to take the opportunity today to reinforce the success of this co-operation process to date and praise INTSOK for the part they have played in helping achieve this.
We must, however, never become complacent and we must seek to maximise the opportunities which have been created through this co-operation process. There is little doubt the reciprocal share fairs have opened up the market place, and where there was once a dark cloud of suspicion of protected markets, we are now seeing tangible evidence of high profile and high value contracts being won by companies on both sides.
The cross-border mentoring scheme has given innovative companies from both sides the unique opportunity to gain an insight into business cultures and practices in the other country. This is another area where I have been proud of the co-operation between my department and INTSOK, schemes like these are making a real difference and I am very pleased to announce to you today that building on the success of last years pilot scheme a more ambitious second phase mentoring programme is to be launched.
This is an opportunity, which some of you present today may wish to participate in – information will be available through INTSOK.
Now is the time I believe to maximise the North Sea's potential. Signs are encouraging for exploration, but we cannot be complacent. Of course Government will continue its positive collaboration with industry to maintain strong investment and increase exploration. This is why our UK Energy Review featured several long-term measures for oil and gas and made clear our desire to boost investment in the UKCS over the next 10-15 years.
Key to this is the Treasury’s discussion with industry on the effectiveness of the oil and gas fiscal framework, but there are more immediate steps that we are taking. We are working closely with industry and focusing on the DTI’s Stewardship initiative - aimed at maximising investment as I have said in already producing fields.
Our close liaison with field operators has identified a number of fields where increased investment and enhanced management of facilities should improve overall field recovery. We are establishing a Task Force for meeting infrastructure needs to the West of Shetland and supporting the development of a dynamic commercial framework to maintain reliability of supplies.
At the same time of course we must all be acutely aware of the need to reduce carbon dioxide emissions, which is why I am personally so committed to the concept and indeed production of carbon capture and storage and why next month in the UK we expect to propose a significant demonstration project of CCS.
I have also established a working group in partnership with my Norwegian counterpart Odd Roger Enoksen to jointly bring forward new work and technologies in relation to carbon sequestration and storage.
I have been very impressed with the enthusiasm and commitment of all I have met and listened to today. Together our work is creating a positive and vibrant future for the North Sea. I am sure we will be successful.
I think it is possible to square a complex circle of how we can live in a world, burning fossil fuels for the next 100 years – for our industries like glass and china production – in a way that doesn’t harm our planet.
This is through CCS and it is a new chapter in the partnership between the UK and Norway. Already the UK and Norway have formally recognised the important role that CCS could have as one of the tools to meet the challenges of climate change. Myself and Odd Roger Enoksen established a taskforce last year to find practical ways to take this further.
And in June this year our UK Chancellor, Gordon Brown, and the Norwegian Prime Minister, announced a joint project with the aim of enabling CCS in the North Sea. We know there are challenges – but I believe these are surmountable. For example we are looking at establishing the regulatory framework in the UK to make CCS legal.
So – it’s an exciting time be involved in oil and gas. It has been a privilege to address INTSOK this morning and I am looking forward to meeting many of you over the next few days here in Norway. Thank you for your attention.