Overview: The Energy Sector

Former Labour leader Neil Kinnock keeps a small phial of oil in his London home, as a reminder of the resource that, fifty years ago, transformed the UK economy. In fact oil has been a force in British politics for longer than he has.

By the time that Kinnock joined parliament as an MP in 1970, the first licenses to extract oil had been in existence for six years – brought about by the UK Continental Shelf Act – and the substance known as ‘black gold’ had just begun its journey from underground hydrocarbon, to the revenue generator and political football it has become today.

This year, as the North Sea oil and gas industry celebrates its 50th birthday – amidst the storm of the referendum debate – oil is more political than ever.

The SNP accuses Westminster of squandering the resource, pointing to Norway’s sovereign wealth fund – based in oil revenue and guarded as a safety net for the country – as an example of competent resources management.

The fund, the result of saving the revenues generated by Norway’s oil and gas reserves, adds up to around £100,000 for every person – standing in stark contrast to the UK’s approach of using oil to bankroll government spending. Norway’s oil will help its future children, the UK’s has been spent. In the eyes of the SNP, it has been squandered.

Speaking to Holyrood last year, Kinnock – a man who was never Chancellor, but at least saved a few drops – made a similar point.

“It wasn’t just that we didn’t do the sensible thing and establish the sovereign wealth fund and the renovation fund and the compensation fund like the Norwegians did, but the fact that this country had nothing in the end to show for it all.”

He continued: “The reality is that the Tories then didn’t underplay it, they completely obscured it whilst taking the swag and I think it was one of the most untransparent and unfaithful acts of modern government in terms of the way they treated oil and its potential.”

Amazingly, when oil was first discovered in the North Sea, when the concept was still new and locked underground, and the idea of drilling was first mooted – there were protests on the streets of Aberdeen.

In fact, in the early sixties the true extent of Scotland’s North Sea oil reserves was still completely unknown. When the first licenses were issued it was hoped that there would be gas in the southern basin of the North Sea, but it was all still highly speculative. Despite the uncertainty, the Government issued a large number of blocks which included not only the southern basin, but also the central and northern waters as well.

In retrospect it is hard to believe, but although there was demand for the southern blocks, there were no takers for the central and northern waters. Subsequently though, the discoveries in the southern basin proved enormous, and ears within the fledgling industry pricked up. The seventies proved to be the boom years, with discovery after discovery propelling the industry towards its place as a powerhouse of the UK economy.

Alexander Kemp, Professor of Petroleum Economics at Aberdeen University, has advised the Scottish Government, UK Government, EU and UN on energy policy. He says: “When the Forties Field was discovered it became clear that it was going to be very big. So there was a tremendous rush for blocks in the central and northern waters. The first half of the seventies was the most exciting period in the history of the North Sea, because big discoveries kept being made, one after the other – all very, very big fields. There was high cost inflation, but everything was saved by the quadrupling of oil prices in 1973 and 74.”

He continues: “Politically, it was a time of government involvement, not only British Gas Corporation dominating but also the British Oil Corporation. It was given increased powers through the second half of the seventies under Tony Benn. Then the prices doubled again in 1979 as a consequence of the Iranian revolution, so the oil became extremely valuable. Import replacement on a big scale helped the British economy and by 1980 we were self-sufficient – which was an enormous achievement. In 1984, when production peaked, the oil price was still very high, and tax revenues were enormous – around £29 billion in today’s money, that’s really big money.”

Optimism soared alongside profits, until two events brought the industry back down to earth. In 1985, just as production had come to a peak – the oil price collapse. Huge swathes of the workforce were made redundant, with stories circulating of American workers leaving homes empty to return to the States.

The industry was hit again just a few years later with Piper Alpha – the biggest offshore oil disaster in world history. Piper Alpha had begun extracting oil in 1976 – at its peak it produced 300,000 barrels per day. Maintenance had been performed on the rig as part of its conversion towards gas but extraction was not suspended during the work. Due to the extent of the damage caused, the exact chain of events is still not known, but on 6 July 1988, a series of explosions tore through the platform, killing 167 people within two hours. Only 61 survived.

The platform design did not include blast walls, and neighbouring rigs continued to pump oil onto Alpha after the first explosion. With safety standards found to have been seriously lacking, a government inquiry was established, in November 1988, led by Scottish judge William Cullen, eventually releasing a report into the accident.

John Scrimgeour, Executive Director at the Aberdeen Institute of Energy, was on Piper in 1984, leaving four years before the disaster. He sees the incident as a turning point in North Sea safety standards.

He says: “I first went offshore in 1975, and I think about 60 or 70 per cent of the personnel must have been American – many were completely uneducated, by that I mean they were unable to read or write. There were little safety standards or norms at all – I got given a medical, consisting of – ‘well, is your dad alive? Is your mum alive?’ I said yes, so it was fine – they were old enough that I didn’t constitute any risk. They gave me boots and a hard hat and I was on a helicopter the next morning. But there was no preamble, no training.

“But now it is completely different – the conditions offshore are much improved, the safety is better, the hours are regulated. The Cullen report really was a game changer, there was a gradual, increasing awareness that safety was important but Piper was the catastrophe that caused the quantum shift. I was a petroleum engineer so I lost friends and colleagues in the disaster. I take solace in that it has caused a big shift in safety standards. I then left the North Sea in 1990 but I don’t think the Cullen report had its big impact until later. When I came back in 2003 I noticed a quantum shift in the attitude towards safety. If you could take out the travel it would be extremely safe, but it seems that the majority of fatalities you hear about today involve coming to and from the rig, so we have to improve helicopter safety,” he adds.

Hundreds of workers are moved by helicopter between rigs and the mainland everyday and in recent years the industry has been dogged by concerns over safety. The crash of a Super Puma helicopter, off Shetland in 2013, resulted in four people losing their lives. It was the fifth such incident since 2009, forcing the sector to rethink its approach to travel. The Civil Aviation Authority (CAA) responded to concerns by launching a far reaching review of safety – spanning helicopter design, operational procedures and organisational matters, pilot training, passenger safety and the role of regulation. It has recommended tighter restrictions on helicopters travelling in severe sea conditions and better safety equipment for passengers.

During the 90s the industry continued strongly, until fears emerged over depleting supplies of oil and gas, alongside the first significant concerns over the role of hydrocarbons in causing climate change. The consensus over depleting supplies changed significantly over the past decade, with most of the major operators estimating that there are many decades of hydrocarbon production left – probably 30 or 40 years of continued production. But while the stocks are not gone, things must change, the industry will be increasingly reliant on smaller wells, more difficult wells. And if scientists were wrong about depleting supplies, it is increasingly obvious they were right about the dangers posed by climate change.

For Aberdeen, a city that had grown large on the revenues from oil, concerns that the game was over would once have been disastrous. Robert Collier, Chief Executive of Aberdeen and Grampian Chamber of Commerce, knows first hand how important oil and gas is to the city.

But, while Collier does not deny the industry’s importance, he argues that it has also brought benefits that will outlast the extraction of oil and gas. He says: “As an energy base, Aberdeen has developed global expertise in sub-sea engineering and it has exported that world wide. It is now a global centre of excellence for that, so it has a future beyond extraction from the North Sea.”

He continues: “There is also increased recognition that the supply chain for oil and gas extends throughout the whole of the UK and internationally. So OGUK will tell you that there are around 400,000 jobs in oil and gas, with about 100,000 in Aberdeen, another 100,000 in the rest of Scotland, and the remaining 200,000 in the rest of the UK. So the supply chain stretches through engineering, health and safety, legal, financial, and catering and it has a substantial impact on the UK economy.

“Now these points are starting to be recognised by everybody – apart from the UK Government, which made the mistake three years ago of increasing background tax to 82 per cent. There have been some adjustments since, with allowances made for difficult fields, either high pressure, high temperature or deep water or whatever. But the current fiscal regime is probably not fit for purpose for optimising recovery – as Ian Wood’s recent report said, you need to get the fiscal regime working, the industry working together more closely and the skills problem solved if you want a rosy future,” he adds.

So yet again, oil has emerged as a political tool. Energy has always been a matter of national security and in many ways the UK’s recent foreign policy – from the invasion of Iraq, to Libya, through to concern over the Ukraine – has been defined by the hunt for oil and gas.

The black stuff has also played a key role domestically in the referendum debate – and not just in the bickering over wasted chances for a sovereign wealth fund. David Cameron held his first ever cabinet meeting outside London – in the UK HQ of Shell no less – promising oil producers that he would “continue to use the UK’s broad shoulders to invest in this vital industry so we can attract businesses, create jobs, develop new skills in our young people and ensure we can compete in the global race.”

The SNP has long trumpeted Scotland’s importance to the UK in terms of energy generation, with a recent report stating that the UK faces ‘the highest risk of blackout in a generation’. It claimed that Britain’s energy supply could not be maintained without Scotland, as a net exporter of electricity, supplying the UK.

UK Energy Secretary Ed Davey hit back, warning the parliament that an independent Scotland’s renewables industry would lose the subsidies provided by the wider UK energy market.

Claims and counter-claims are nothing new for oil, which has been used to settle political scores since its inception in the sixties. But in some ways, it is heartening for supporters of the renewables industry that it too is becoming important enough to join the tug-of-war between Yes and Better Together.

With Scottish Government targets stipulating that renewables generate the equivalent of 100 per cent of Scotland’s gross annual electricity consumption by 2020, there has been a huge push to up the industry’s capacity.

Last year Scottish Renewables reported the best year on record, with wind, hydro, solar, and biomass generating enough electricity to meet 46.5 per cent of the country’s needs.

Government figures show renewables generated enough electricity to power over 3.6 million homes in 2013. Around 65 per cent of that generation comes from wind, with Scotland’s hydro power stations making up the bulk of the rest (26 per cent).

So the key to meeting government targets will be in offshore wind. With more turbines in the UK than anywhere else in the world, the UK is already a global leader in installed offshore wind. Scotland has around 25 per cent of the potential across Europe – leading to Salmond’s famous claim that the country can become the ‘Saudi Arabia of renewables’.

But for the industry to develop, breakthroughs must be made. No one in their right mind would deny Scotland is windy, but with the water surrounding the country’s coast much deeper than that off the coast of England, there are real challenges in harnessing the potential.

Lindsey Leask, Senior Policy Manager at Scottish Renewables, says that technology is still changing to cope. Until now, offshore turbines have basically been adapted versions of onshore ones, with capacity for around two or three MWs of capacity. The next generation, currently being developed, will be bespoke offshore turbines capable of generating six or seven MWs.

Leask says: “The main difference is that the new technology will be much bigger and much more efficient. We have known that we have a huge resource out there but the difficulty was unlocking it. The world is looking to Scotland in terms of wind, we are leading in the development of next-generation turbines. Chile, Japan, Korea – they are all looking at wind and tidal, and they are looking to us.”

Wave and tidal are both a little behind wind in terms of meeting demand, but they hold huge potential. The European Marine Energy Centre, which is based in Orkney, is the only accredited, open sea testing centre in the world and, as well as transforming the island, it is attracting international attention.

Leask says: “Wave and tidal is being developed at a phenomenal rate – if you look at the rate it is being pushed into construction, it is much faster than most other technologies, it is expanding rapidly, it is amazing how fast it goes from an idea in someone’s head, to being put on paper, to being in place in the water, generating energy.”

The key for all renewables, but particularly wave and tidal, is that it gets the political support it needs to grow in power, like the North Sea oil industry did 50 years ago. The Scottish Government has been decidedly vague over its views on fracking for shale gas, with Alex Salmond recently indicating that he did not believe that the public would have the stomach for it.

Following the damage done by the Fukushima plant in 2011, when three nuclear reactors went into meltdown – and with the SNP running high in the referendum debate with an anti-nuclear stance – it seems likely that nuclear power too will be a no go for the foreseeable future. North Sea oil is bound to run out eventually, and that really only leaves one option for the long term – to develop clean renewable technology.

Leask says: “There is huge political pressure to reduce the cost of energy and there is support for any technology that can do that, and boost competition in the market. New, immature technologies like wave generation have been protected from direct competition at the moment because we can only move the technology forward by getting it in the water, increasing scale and improving viability. Still, the impact will not be felt for a while, since there will only be around 100 MW of wave generation across the UK. But it has been ringfenced and the technology does not need to compete with anyone else.”

She adds: “We need to make these investments to get to the place we want to go. The cost of renewable energy is only going down, when you look at the cost of fossil fuels – coal, gas – most of the time it is only moving in one direction, and that is up.”

Whatever the future holds – as Leask would put it, whichever way we are going – there is no doubt that the question of Scotland’s energy will continue to be a political one.