Evidence presented by Professor Alex Kemp, Mr. Malcolm Webb, Mr. Paul Dymond.

Q102 Mr. Dave Anderson: Professor Kemp, my understanding is that originally there were six or seven companies operating in the North Sea and now there are something like 60 or 70. Has that made things more difficult or easier in terms of regulating these companies and making sure they do the right things?

Professor Kemp: The number of companies certainly has grown and I think there are a lot more than that altogether if you include the small licensees and the Promote licences. The advantage of large numbers is that you do have diversity because not everybody sees prospects in the same way and there are different ideas. We do have trading of assets because companies have different ideas of what to do with an existing asset or a block that has not been properly explored. My view is that larger numbers are fine because there will be more players, large ones, medium-sized ones and small ones. At the moment with a lot of small fields the very large players may not find some of them very attractive because the materiality of the expected return in relation to their size would not be very interesting, whereas for a small company it could be perfectly interesting. I think the large number of companies and diversity is good because it is one factor that can help to maximise the economic recovery. It does, of course, mean that the Department of Energy and Climate Change has more work to do in their talking, watching and regulating all of these companies, but that would seem to me to be very much worthwhile doing.

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Q114 Mr. Dave Anderson: Thank you, Chairman. Professor, what exactly have we got out at the west of Shetland? What reserves are there?

Professor Kemp: What we have at the moment is in production we have got three substantial fields, Foinaven, Schiehallion and Clair. We have got some others that look promising. There have been some worthwhile discoveries on the gas side. We have two or three significant gas discoveries, quite large ones, and then a whole lot of small ones, over 20 altogether. The problem is to make these gas fields commercially viable has been very, very difficult because of the very high costs. The development costs per barrel of oil equivalent could be 20 or way up there. There is the problem of the infrastructure. If we want to get all these gas fields developed we do need another substantial pipeline and that is very expensive as well. In terms of the economics, that has been a big problem that has been studied for quite some time. In terms of reserves to make a scheme viable, things are looking a bit more promising there but the gas price, the oil price, has come right down. It is a very difficult environment. That was why we thought there was a case for giving a bigger value allowance for projects west of Shetland because all the modelling we have done over the last few years indicates it is extremely difficult with present costs and prices, and even higher prices, and the present tax regime to get a viable cluster development, which is ideally what we would like.

Q115 Mr. Dave Anderson: What is the volume of the reserves out there? Is it possible to estimate that?

Professor Kemp: Within a very big range. The Department of Energy and Climate Change has some big numbers but they are yet-to-find and quite speculative. I do not have them in my head but they are quite big. It is acknowledged that they are yet-to-find.

Q116 Mr. Dave Anderson: If the development costs are $20 a barrel, what does that equate to what you pay in the North Sea, for example?

Professor Kemp: Again, there is a range depending on where you are based in the central North Sea. In the southern North Sea it could be $12 or $15 per barrel development costs and operating costs on top of that.

Q117 Mr. Dave Anderson: At the moment I understand the oil that is being pumped out of the three fields is going into tankers. Why could that not be continued if you had the field further out rather than putting the pipeline in?

Professor Kemp: For the gas you do need a new big pipeline, that is the problem, and that is very expensive.

Q118 Mr. Dave Anderson: What sort of pipeline length?

Professor Kemp: Eventually the gas will have to come to market. The kinds of schemes that are being looked at would initially take the gas to Sullom Voe where it would be treated, the liquid separated and then you could have a dry gas pipeline coming down to St Fergus. That is one of the schemes that is being looked at but, as you can imagine, that is very expensive.

Q119 Mr. Dave Anderson: In terms of supporting the Government, do you think that the Treasury's proposed value allowance would help with this?

Professor Kemp: If we consider that what is on the table at the moment is this value allowance for the supplementary charge then if it was quite a big one for west of Shetland, given the special difficulties and very high costs there, it certainly could make a difference, yes. It is a little complicated because one of the big factors which differentiate the west of Shetland is the need for a very big joint pipeline and the value allowance is not directly geared to that, it is geared to the fields.

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Q153 Mr. Dave Anderson: The various environmental bodies have told us that regulation control is generally good but sometimes compliance is not, do you accept that?

Mr Webb: I would have said that levels of compliance within our industry on environmental issues are pretty sparklingly good, frankly.

Q154 Mr. Dave Anderson: What procedures have you got in place to make sure that they work?

Mr Webb: Do you mean self-policing it from an industry viewpoint?

Q155 Mr. Dave Anderson: Yes.

Mr Webb: We do not double up on the work of the regulators, we help the regulators who are doing that, but we do keep an open dialogue with regulators right across the piece and try and make sure that we are as constructive as we possibly can be in these areas.

Q156 Mr. Dave Anderson: Is complying with regulations a burden on the industry? Is it driving people away from investing in the UK?

Mr Webb: Is it a burden? Of course it is a cost, but I do not think there is anything we would point to where we would say because we have got these environmental regulations people are not coming to invest in the North Sea, no.

Q157 Mr. Dave Anderson: In terms of the decommissioning process, what challenges do you face there?

Mr Webb: The challenge is to try and postpone it for as long as we possibly can actually and keep this infrastructure in place so that we can get the 25 billion barrels recovered. That is the first and foremost challenge. As to the other challenges, I think we are well up to them. We have got a magnificent supply chain here and we have the confidence and capability to do it. Some of this decommissioning is already going on, by the way, we are not complete novices on this and I have every confidence that we can deal with the issue. The problem around decommissioning is the way that - I do not want to sound like I am kicking the Government all the time on these tax ---

Q158 Mr. Dave Anderson: We are used to it!

Mr Webb: --- the decommissioning regime is based upon some false premises. It is relying upon two things. It is relying upon corporate governance and bankers' letters of credits. If the banking crisis teaches us anything it is that is not where we should be and we need a new system whereby we can have properly established retirement funds for these assets financed on a post-tax basis.

Q159 Mr. Dave Anderson: The RSPB have told us that they would like a better survey of seabirds and wildlife, particularly west of Shetland. Is that something the industry would support and, if it supported it, would it help to fund it?

Mr Webb: The industry has had a good track record of working with the RSPB upon surveys in the past. We have got a lot of data and we would be very happy to share it with them and talk to them about that issue. You did say support it and not fund it.

Q160 Mr. Dave Anderson: I said support it and fund it.

Mr Webb: We are not the only users of the offshore and I think that is probably the sort of thing we should talk to all offshore users about.

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Q167 Mr. Dave Anderson: Is there any potential for expanding the skills, coming back to decommissioning, that you could build up a skills base for people solely employed in decommissioning the infrastructure rather than using the workers who do it now?

Mr Webb: I think on that point it is difficult for me to think that we should construct a separate industry called the oil and gas decommissioning industry. That is a question for the supply chain. I think the supply chain has got the ability to expand into that and deal with that. My view on that would be it is a question of building on the expertise that is already there and going back to address this market.

Mr Dymond: There are also a lot more jobs involved in maintaining and operating than there are in decommissioning. Decommissioning is very much a non-productive spend, whereas if you were taking that same money and putting it into new investment then you would be developing new reserves, more jobs and more tax revenues.

Q168 Mr. Dave Anderson: It has got to be done eventually, has it not?

Mr Webb: Yes.

Q169 Mr. Dave Anderson: In a sense it will be probably a relatively less skilled job.

Mr Dymond: Not necessarily. The technical challenge for decommissioning is actually to do what we need to do cheaper because it is a non-productive spend. That is where the challenge is and that is what we are looking for the supply chain to develop, the capabilities to be able to reduce the cost of doing what we need to do. That is the challenge there.

This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee. Neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.

The full transcript may be read here.

Promoted by Paul Foy on behalf of Dave Anderson, both of St Cuthbert's Church Hall, Shibdon Road, Blaydon, NE21 5PT