25/02/2014 Newsnight Scotland

Tonight on Newsnight Scotland: The oil industry says it's facing its

biggest challenge in oil industry says it's facing its

exploration stutters and costs soar. A new report comes just a day after

Sir Ian Wood proposed wholesale changes in the way the industry is

regulated. Do hopes that Scotland has an oil-rich future now look like

a pipe dream? Or could a new regime make sure the over 20 billion

barrels of oil left in the North Sea are actually exploited?

Good evening. Figures out today deliver an ambiguous verdict on the

North Sea oil industry. Oil Gas UK - an industry body - reports that

near-record investment in the current year means output is likely

to start to increase after years of dropping. But increases in the cost

of exploiting the stuff means the industry has to face up to some

major challenges. And the governments who set such store by

natural resources will also have to come up with some fresh ideas to go

with the political rhetoric. In a moment, we'll hear from some

industry experts. First, Suzanne Allan reports.

For 40 years it has been one of Britain's's biggest industries.

Yesterday, it was at the centre of a tug-of-war between the Scottish and

Westminster governments, both eager to prove their vision of the future

as the only way. But in a report alt today, Oil Gas UK see the sector

is facing its biggest challenge in 50 years. Production have been

rising and there are low levels of exploration. Production itself is

down. Less is being brought ashore so the cost of extracting each

barrel is up 27% to ?17. Exploration drilling is down from 44 wells to

15. But there is record investment. ?13 billion in 20 13 will stop

production is expected to rise after years of decline. The man behind

this report says poor weather is partly to blame for a lack of new

drilling. When we asked why not as many wells were drilled, Rick

availability and access to capital were at the top of the list. We have

to try to work on both of those issues. We had some of the most

hostile waters in the globe so there has been a lawful an awful lot of

waiting on whether. It is estimated there are could be another 24

billion barrels left. Yesterday, area port recommended a regulator

should be set up to get the maximum that is left. A regulator would be

more about facilitating, encouraging, removing blockages,

helping make things happen. I don't see this as trying to curb the big

bad oil companies. It couldn't be further from the truth. We have some

good and effective operators in the North Sea who are very professional.

But they aren't good at collaborating and that's the key

role a regulator will have. With sufficient teeth to give it the

back-up that's necessary. Some companies are focusing their

investments in countries with better returns so can we compete on a

global market? Multinationals have a choice on where they invest their

capital and one of the difficulties is getting hold of oil rigs to do

the exploration. The UK has a lot going for it in terms of the skill

set and infrastructure, although the infrastructure is ageing, but it is

a competitive global market. Today, we face a challenge. Levels of CO2

in our atmosphere are rising. Much of this is from burning fossil

fuels. Yesterday, multi-million pound funding was announced from the

UK Government or a plant carbon capture and storage place at

Peterhead. The First Minister has accused the Westminster government

of taking too long to commit to funding. Politicians are being urged

to take heed dog today's report. The oil and gas industry is a massive

wealth producer for the UK and it needs more government time and

attention than it has had. I hope we will get that. Whatever the outcome

in the referendum, the oil and gas industry is sure to be a central

plank of the case for or against an independent Scotland.

I'm joined now in the studio by Professor Stewart Haszeldine, a

carbon capture and storage expert at Edinburgh University. And by David

Hunter, an energy analyst with Schneider Electric, whom you may

have seen in the film there. And in Aberdeen, we have Professor Alex

Kemp, an oil economist from Aberdeen University. Can you try to explain

to us in simple terms why exploration in the North Sea tries

to be -- appears to be falling off? That is one of the features we are

experiencing now. Over the years, the exploration potential has been

substantial. But the average size of new discovery has been going down

with respect to the majority of the whole basin. The average size of a

new discovery is around Harrell 's of oil equivalent. In the

1970s we were talking about 500 million barrels. So the major

companies are not all that excited about finding a small field. A lot

of the exploration is being undertaken by smaller oil companies,

independents. And they have difficulties in finding finance,

which was mentioned in your report. That is one of the reasons why

explorations are operating at a low level. And the availability of rigs

has been mentioned as well. Hopefully the current downturn in

exploration will be temporary, but with the election -- some action

needs to be taken. I hear what the oil industry is saying about the

availability of rigs and finance. If this is the case it is a temporary

phenomenon, there is nothing temporary about the reserves in the

North Sea that could explain this? The Department of Finance is under

review and estimate about 22 billion barrels of oil equivalent. It is

very substantial compared to for example, we have about 41 billion

barrels extracted to date. But mostly, those reserves will be in

small reservoirs and the cost per barrel will be relatively high. It

will be challenging to access and economically produce these reserves.

We have current difficulties of access to finance and the

availability of drilling rigs. There access to finance and the

is a bigger victory here isn't there? All this being true but

whether reserves in the oil see are exploited depends on hydrocarbons

around the globe and on oil prices, as it does on anything that happens

in the North Sea posture Mark this picture of increasing costs is not

something that is solely related to Scotland. From oh man to Canada, you

talk about people -- hear about people talking about the rapidly

rising cost of oil because we're looking for it in deeper waters.

What we are seeing is the cost of extraction rising and also

operational costs going up. Is the North Sea on a level playing field

with these areas? Canadian oil has huge reserves but it is expensive to

get out. Or is the North Sea, because if you like, we are getting

to the end of its life, or more than halfway through, is it going to be

at a disadvantage in terms of cost? Not necessarily of being a

disadvantage, because it has the advantage of being a mature basin

and has the infrastructure. Although it is ageing and needs maintenance,

that instilled infrastructure and skill set so close in Aberdeen is a

massive bonus as well. As Alex Kemp said, the issue here is, you will be

talking about smaller discoveries, smaller fields and smaller

companies. In that context, is Ian Wood talking about beefing up the

regulator so we can bang heads together and possibly get legal

powers to together and possibly get legal

companies to explore more, is that a good idea?

companies to explore more, is that a idea. We have seen enormous global

sized fields at the start of the North Sea. They were explored and

discovered by single companies. You can do that with single fields. But

when you get a smaller amount of oil, there is no need to build two

pipelines side by side to both go to Saint Fergus. You might as well

cooperate and share that asset. You might as well build related

platforms to tie into an offshore platform that makes it much cheaper

for the offshore facilities. We also have a transition we can choose to

take if we want. One of the things I think we can do is use the same

offshore skills and offshore platforms and pipelines to not take

oil out of the ground but at carbon dioxide back into the ground so we

have the benefits. One colleague suggested to me is that what Ian

Ward was suggesting, even though he was being diplomatic, it was also

quite radical? There is also a time for radical steps. There is this

difficulty with exploration and production in decline quite sharply

over the last few years. The industry, at various meetings in

particular, it has been pointed out consistently the industry needs to

get its act together and needs help from the government to do so. A

couple of years ago we looked at the third increase in the supplementary

charge from the UK Treasury, in which what ever you feel about the

mix between private company profit... I am not going to ask you

to explain. That point about more help for the industry, Nick Butler

in the Financial Times has written this evening, what non-of the

politicians want to talk about, is if you really want to get production

in the North Sea to its potential, you have to have a tax regime which

is appropriate to the type of Strutt Jet to the industry you describe to

us a few minutes ago, and not the old style of big oil companies

exploiting the North Sea. I think there is some merit in that. At the

moment the tax structure does not particularly help. It does not help

investment and household recovery in the old fields which are subject to

an 81% tax rate. And for the newer players for exploration and they

don't get search a good tax relief as existing players. Some

enhancement to the tax incentive for new players could be useful. And

some enhancement to the enhancement of the company schemes and also some

enhancements for increasing integrity. One of the problems at

the moment is it has gone down from around 80% ten years ago to over 60%

now. So, there needs to be a substantial increase in investment

to enhance the production and back could be good in the medium-term.

Carbon capture and storage, approval given for Peterhead. How important

is that? That is a big step forward. Scotland has been trying to produce

a carbon capture and storage project and so as the UK since 2005. The UK

Government wasn't ready at that time, even though it would have got

a low price project at that time. BP tried again in 2000 game. The UK

still wasn't ready. We don't want the history. Now we are here. Shell

have searched the world or a gas plant for a high integrity storage

field. In global terms, isn't the big one carbon capture and storage

of coal-fired? We need to do both. For the UK we are moving rapidly

towards burning more gas, particularly if the Westminster

government gets its wish to produce tonnes of shale gas, we will be

burning fat. What is happening, is that a proof of concept? This is

money to get the designs ready in 2015 to decide if you want to build

it or not. So we are still further back. I am furious as to what you

make of this. I know some people think it could be a fantastic idea.

It could also help increase the yield from older fields. Some people

are sceptical it will ever happen? The possibility of enhanced recovery

from the 45% to above 50% The possibility of enhanced recovery

the major increase in the volume of oil we could produce. It can make a

significant contribution to that. We think in the North Sea there is a

possibility of cluster development which could bring major increases in

oil production over the next 20 years. But it is very, very

expensive and some tax incentives will be needed to get the whole

process underway. You need to join up the oil companies in the same way

that Ian Wood is wanting. Is it a good idea? We should have spent a

lot more money improving it earlier than we have. Is it still feasible?

It is too early to say now, but it is a big price to go after.

Now a quick look at tomorrow's front pages.

That's all from me. Police blunder lets IRA bomb suspect go three and

then on the right, North Sea is facing the biggest crisis in 50

years. That is all we have time for to night.

Good night. Heavy showers will move into western

Scotland. They will be wintry across the higher routes for Scotland and

northern England. Showers should send out considerably.