:00:09. > :00:19.Tonight on Newsnight Scotland: The oil industry says it's facing its
:00:20. > :00:24.biggest challenge in oil industry says it's facing its
:00:25. > :00:27.exploration stutters and costs soar. A new report comes just a day after
:00:28. > :00:30.Sir Ian Wood proposed wholesale changes in the way the industry is
:00:31. > :00:35.regulated. Do hopes that Scotland has an oil-rich future now look like
:00:36. > :00:38.a pipe dream? Or could a new regime make sure the over 20 billion
:00:39. > :00:43.barrels of oil left in the North Sea are actually exploited?
:00:44. > :00:46.Good evening. Figures out today deliver an ambiguous verdict on the
:00:47. > :00:49.North Sea oil industry. Oil Gas UK - an industry body - reports that
:00:50. > :00:53.near-record investment in the current year means output is likely
:00:54. > :00:56.to start to increase after years of dropping. But increases in the cost
:00:57. > :00:59.of exploiting the stuff means the industry has to face up to some
:01:00. > :01:03.major challenges. And the governments who set such store by
:01:04. > :01:06.natural resources will also have to come up with some fresh ideas to go
:01:07. > :01:09.with the political rhetoric. In a moment, we'll hear from some
:01:10. > :01:18.industry experts. First, Suzanne Allan reports.
:01:19. > :01:29.For 40 years it has been one of Britain's's biggest industries.
:01:30. > :01:32.Yesterday, it was at the centre of a tug-of-war between the Scottish and
:01:33. > :01:37.Westminster governments, both eager to prove their vision of the future
:01:38. > :01:42.as the only way. But in a report alt today, Oil Gas UK see the sector
:01:43. > :01:47.is facing its biggest challenge in 50 years. Production have been
:01:48. > :01:55.rising and there are low levels of exploration. Production itself is
:01:56. > :02:00.down. Less is being brought ashore so the cost of extracting each
:02:01. > :02:10.barrel is up 27% to ?17. Exploration drilling is down from 44 wells to
:02:11. > :02:18.15. But there is record investment. ?13 billion in 20 13 will stop
:02:19. > :02:23.production is expected to rise after years of decline. The man behind
:02:24. > :02:30.this report says poor weather is partly to blame for a lack of new
:02:31. > :02:36.drilling. When we asked why not as many wells were drilled, Rick
:02:37. > :02:39.availability and access to capital were at the top of the list. We have
:02:40. > :02:48.to try to work on both of those issues. We had some of the most
:02:49. > :02:57.hostile waters in the globe so there has been a lawful an awful lot of
:02:58. > :03:05.waiting on whether. It is estimated there are could be another 24
:03:06. > :03:08.billion barrels left. Yesterday, area port recommended a regulator
:03:09. > :03:14.should be set up to get the maximum that is left. A regulator would be
:03:15. > :03:19.more about facilitating, encouraging, removing blockages,
:03:20. > :03:23.helping make things happen. I don't see this as trying to curb the big
:03:24. > :03:28.bad oil companies. It couldn't be further from the truth. We have some
:03:29. > :03:33.good and effective operators in the North Sea who are very professional.
:03:34. > :03:35.But they aren't good at collaborating and that's the key
:03:36. > :03:44.role a regulator will have. With sufficient teeth to give it the
:03:45. > :03:47.back-up that's necessary. Some companies are focusing their
:03:48. > :03:51.investments in countries with better returns so can we compete on a
:03:52. > :03:57.global market? Multinationals have a choice on where they invest their
:03:58. > :04:02.capital and one of the difficulties is getting hold of oil rigs to do
:04:03. > :04:08.the exploration. The UK has a lot going for it in terms of the skill
:04:09. > :04:12.set and infrastructure, although the infrastructure is ageing, but it is
:04:13. > :04:19.a competitive global market. Today, we face a challenge. Levels of CO2
:04:20. > :04:24.in our atmosphere are rising. Much of this is from burning fossil
:04:25. > :04:29.fuels. Yesterday, multi-million pound funding was announced from the
:04:30. > :04:39.UK Government or a plant carbon capture and storage place at
:04:40. > :04:42.Peterhead. The First Minister has accused the Westminster government
:04:43. > :04:55.of taking too long to commit to funding. Politicians are being urged
:04:56. > :04:58.to take heed dog today's report. The oil and gas industry is a massive
:04:59. > :05:01.wealth producer for the UK and it needs more government time and
:05:02. > :05:09.attention than it has had. I hope we will get that. Whatever the outcome
:05:10. > :05:12.in the referendum, the oil and gas industry is sure to be a central
:05:13. > :05:19.plank of the case for or against an independent Scotland.
:05:20. > :05:22.I'm joined now in the studio by Professor Stewart Haszeldine, a
:05:23. > :05:24.carbon capture and storage expert at Edinburgh University. And by David
:05:25. > :05:28.Hunter, an energy analyst with Schneider Electric, whom you may
:05:29. > :05:31.have seen in the film there. And in Aberdeen, we have Professor Alex
:05:32. > :05:37.Kemp, an oil economist from Aberdeen University. Can you try to explain
:05:38. > :05:47.to us in simple terms why exploration in the North Sea tries
:05:48. > :05:54.to be -- appears to be falling off? That is one of the features we are
:05:55. > :06:00.experiencing now. Over the years, the exploration potential has been
:06:01. > :06:05.substantial. But the average size of new discovery has been going down
:06:06. > :06:10.with respect to the majority of the whole basin. The average size of a
:06:11. > :06:19.new discovery is around Harrell 's of oil equivalent. In the
:06:20. > :06:26.1970s we were talking about 500 million barrels. So the major
:06:27. > :06:31.companies are not all that excited about finding a small field. A lot
:06:32. > :06:37.of the exploration is being undertaken by smaller oil companies,
:06:38. > :06:43.independents. And they have difficulties in finding finance,
:06:44. > :06:48.which was mentioned in your report. That is one of the reasons why
:06:49. > :06:56.explorations are operating at a low level. And the availability of rigs
:06:57. > :06:58.has been mentioned as well. Hopefully the current downturn in
:06:59. > :07:07.exploration will be temporary, but with the election -- some action
:07:08. > :07:13.needs to be taken. I hear what the oil industry is saying about the
:07:14. > :07:17.availability of rigs and finance. If this is the case it is a temporary
:07:18. > :07:25.phenomenon, there is nothing temporary about the reserves in the
:07:26. > :07:32.North Sea that could explain this? The Department of Finance is under
:07:33. > :07:36.review and estimate about 22 billion barrels of oil equivalent. It is
:07:37. > :07:45.very substantial compared to for example, we have about 41 billion
:07:46. > :07:54.barrels extracted to date. But mostly, those reserves will be in
:07:55. > :08:00.small reservoirs and the cost per barrel will be relatively high. It
:08:01. > :08:05.will be challenging to access and economically produce these reserves.
:08:06. > :08:09.We have current difficulties of access to finance and the
:08:10. > :08:12.availability of drilling rigs. There access to finance and the
:08:13. > :08:18.is a bigger victory here isn't there? All this being true but
:08:19. > :08:26.whether reserves in the oil see are exploited depends on hydrocarbons
:08:27. > :08:33.around the globe and on oil prices, as it does on anything that happens
:08:34. > :08:36.in the North Sea posture Mark this picture of increasing costs is not
:08:37. > :08:46.something that is solely related to Scotland. From oh man to Canada, you
:08:47. > :08:49.talk about people -- hear about people talking about the rapidly
:08:50. > :08:58.rising cost of oil because we're looking for it in deeper waters.
:08:59. > :09:03.What we are seeing is the cost of extraction rising and also
:09:04. > :09:07.operational costs going up. Is the North Sea on a level playing field
:09:08. > :09:13.with these areas? Canadian oil has huge reserves but it is expensive to
:09:14. > :09:20.get out. Or is the North Sea, because if you like, we are getting
:09:21. > :09:24.to the end of its life, or more than halfway through, is it going to be
:09:25. > :09:31.at a disadvantage in terms of cost? Not necessarily of being a
:09:32. > :09:34.disadvantage, because it has the advantage of being a mature basin
:09:35. > :09:39.and has the infrastructure. Although it is ageing and needs maintenance,
:09:40. > :09:45.that instilled infrastructure and skill set so close in Aberdeen is a
:09:46. > :09:50.massive bonus as well. As Alex Kemp said, the issue here is, you will be
:09:51. > :09:56.talking about smaller discoveries, smaller fields and smaller
:09:57. > :10:00.companies. In that context, is Ian Wood talking about beefing up the
:10:01. > :10:04.regulator so we can bang heads together and possibly get legal
:10:05. > :10:09.powers to together and possibly get legal
:10:10. > :10:13.companies to explore more, is that a good idea?
:10:14. > :10:18.companies to explore more, is that a idea. We have seen enormous global
:10:19. > :10:26.sized fields at the start of the North Sea. They were explored and
:10:27. > :10:31.discovered by single companies. You can do that with single fields. But
:10:32. > :10:36.when you get a smaller amount of oil, there is no need to build two
:10:37. > :10:40.pipelines side by side to both go to Saint Fergus. You might as well
:10:41. > :10:48.cooperate and share that asset. You might as well build related
:10:49. > :10:53.platforms to tie into an offshore platform that makes it much cheaper
:10:54. > :10:58.for the offshore facilities. We also have a transition we can choose to
:10:59. > :11:02.take if we want. One of the things I think we can do is use the same
:11:03. > :11:08.offshore skills and offshore platforms and pipelines to not take
:11:09. > :11:17.oil out of the ground but at carbon dioxide back into the ground so we
:11:18. > :11:21.have the benefits. One colleague suggested to me is that what Ian
:11:22. > :11:30.Ward was suggesting, even though he was being diplomatic, it was also
:11:31. > :11:35.quite radical? There is also a time for radical steps. There is this
:11:36. > :11:38.difficulty with exploration and production in decline quite sharply
:11:39. > :11:46.over the last few years. The industry, at various meetings in
:11:47. > :11:50.particular, it has been pointed out consistently the industry needs to
:11:51. > :11:54.get its act together and needs help from the government to do so. A
:11:55. > :11:58.couple of years ago we looked at the third increase in the supplementary
:11:59. > :12:02.charge from the UK Treasury, in which what ever you feel about the
:12:03. > :12:12.mix between private company profit... I am not going to ask you
:12:13. > :12:16.to explain. That point about more help for the industry, Nick Butler
:12:17. > :12:23.in the Financial Times has written this evening, what non-of the
:12:24. > :12:26.politicians want to talk about, is if you really want to get production
:12:27. > :12:30.in the North Sea to its potential, you have to have a tax regime which
:12:31. > :12:34.is appropriate to the type of Strutt Jet to the industry you describe to
:12:35. > :12:46.us a few minutes ago, and not the old style of big oil companies
:12:47. > :12:50.exploiting the North Sea. I think there is some merit in that. At the
:12:51. > :12:58.moment the tax structure does not particularly help. It does not help
:12:59. > :13:05.investment and household recovery in the old fields which are subject to
:13:06. > :13:10.an 81% tax rate. And for the newer players for exploration and they
:13:11. > :13:16.don't get search a good tax relief as existing players. Some
:13:17. > :13:26.enhancement to the tax incentive for new players could be useful. And
:13:27. > :13:32.some enhancement to the enhancement of the company schemes and also some
:13:33. > :13:40.enhancements for increasing integrity. One of the problems at
:13:41. > :13:46.the moment is it has gone down from around 80% ten years ago to over 60%
:13:47. > :13:53.now. So, there needs to be a substantial increase in investment
:13:54. > :14:03.to enhance the production and back could be good in the medium-term.
:14:04. > :14:14.Carbon capture and storage, approval given for Peterhead. How important
:14:15. > :14:16.is that? That is a big step forward. Scotland has been trying to produce
:14:17. > :14:24.a carbon capture and storage project and so as the UK since 2005. The UK
:14:25. > :14:30.Government wasn't ready at that time, even though it would have got
:14:31. > :14:37.a low price project at that time. BP tried again in 2000 game. The UK
:14:38. > :14:42.still wasn't ready. We don't want the history. Now we are here. Shell
:14:43. > :14:48.have searched the world or a gas plant for a high integrity storage
:14:49. > :15:01.field. In global terms, isn't the big one carbon capture and storage
:15:02. > :15:08.of coal-fired? We need to do both. For the UK we are moving rapidly
:15:09. > :15:11.towards burning more gas, particularly if the Westminster
:15:12. > :15:21.government gets its wish to produce tonnes of shale gas, we will be
:15:22. > :15:28.burning fat. What is happening, is that a proof of concept? This is
:15:29. > :15:34.money to get the designs ready in 2015 to decide if you want to build
:15:35. > :15:42.it or not. So we are still further back. I am furious as to what you
:15:43. > :15:46.make of this. I know some people think it could be a fantastic idea.
:15:47. > :15:53.It could also help increase the yield from older fields. Some people
:15:54. > :15:58.are sceptical it will ever happen? The possibility of enhanced recovery
:15:59. > :16:06.from the 45% to above 50% The possibility of enhanced recovery
:16:07. > :16:18.the major increase in the volume of oil we could produce. It can make a
:16:19. > :16:25.significant contribution to that. We think in the North Sea there is a
:16:26. > :16:29.possibility of cluster development which could bring major increases in
:16:30. > :16:35.oil production over the next 20 years. But it is very, very
:16:36. > :16:42.expensive and some tax incentives will be needed to get the whole
:16:43. > :16:49.process underway. You need to join up the oil companies in the same way
:16:50. > :16:55.that Ian Wood is wanting. Is it a good idea? We should have spent a
:16:56. > :17:03.lot more money improving it earlier than we have. Is it still feasible?
:17:04. > :17:10.It is too early to say now, but it is a big price to go after.
:17:11. > :17:13.Now a quick look at tomorrow's front pages.
:17:14. > :17:18.That's all from me. Police blunder lets IRA bomb suspect go three and
:17:19. > :17:23.then on the right, North Sea is facing the biggest crisis in 50
:17:24. > :17:23.years. That is all we have time for to night.
:17:24. > :17:49.Good night. Heavy showers will move into western
:17:50. > :17:53.Scotland. They will be wintry across the higher routes for Scotland and
:17:54. > :17:56.northern England. Showers should send out considerably.