The UK is an island of coal set in a sea of oil and gas â€“ if I am allowed a little hyperbole and the odd long word this morning. It has taken a unique ability to make a mess that we end up importing large quantities of gas, worrying about the recent surge in world oil and gas prices, and worrying about our own security of supply.
We extract less oil, gas and coal than we could for a variety of reasons. Most of them relate to actions and inactions of the government.
The main reason we are getting less oil and gas out than our geography would suggest is taxation. The government has tweaked and changed the oil tax system in a number of ways, all designed to take more money from the industry. The politics of this are good. Oil companies are assumed to be too big , too powerful and too profitable, so hitting them in the pocket book can be popular. Many people donâ€™t see it is happening, more donâ€™t care if it is, and some positively welcome it. It would be an unusual politician whom went on TV or radio to argue for higher oil company profits or lower oil company taxes, at a time when the stated nominal profits are large.
However, to understand the shortfall of oil and gas production we do need to understand the nature and purpose of oil company (or for that matter any companyâ€™s) profits. The oil companies are in the main very large companies that have invested huge sums of money. They need large sums in profits to justify and remunerate these investments, and to pay dividends to our pensions and savings funds who are the main owners of these companies. More importantly, these companies have the opportunity to invest in a wide range of risky new ventures around the world. At any given time there are more projects than there are people, cash and machines to undertake them. The oil companies have to choose, and they will choose those projects and territories where the opportunity to make a good after tax return seems best. High taxes, or unstable taxation regimes where the changes are always upwards, put oil companies off investing.
The North Sea province is relatively mature â€“ that means the easy finds have been made. It is getting dearer and dearer to find new oil and gas though there is doubtless n new oil and gas to be found. It is also getting dearer to get more of what has been found out of the ground. Oil companies leave some of the crude in the wells, as it is do difficult to bring it to the surface. The UK could make it more worthwhile to find more fields and exploit existing ones more fully by cutting tax rates. It might not reduce the revenue much or at all once the new schemes are brought on stream.
The problems with coal are different. It is difficult to get planning permission for opencast coal mining as it is not much fun living near an opencast mine. There is still a belief deep down in traditional Labour that the only mine that counts is a nationalised deep mine with miners travelling to the face on conveyors. There is also a modern ambivalence about how much coal we want to burn, with indecision about the clean coal technology which is going to be needed to bring coal back as a serious part of our energy supply.
The government should look again at the road blocks to bringing out more coal and more oil, and gas. Many of us do not look forward to increasing dependence on the Middle east and Russia, and would rather spend some money on the technology and exploitation of domestic resources, than get dragged into yet more difficult politics in dangerous countries.