The Impact of Natural Gas on the United Kingdom

MR. STAPELLS:

In 1965, fifty companies embarked, in pea soup secrecy, upon a historic search for gas under the North Sea. By late September of that year, methane gas, burping gently to the surface of the North Sea, was to British Petroleum as the sound of a trumpet fanfare to a king's ears. Gas had been discovered!

For Britain with a dwindling coal supply and dependent upon an annual three hundred million pounds sterling of imported oil, this and the subsequent successes of other companies could signal economic salvation. The Guardian chronicled the event, with that sense of dramatic overstatement for which the British are famous, in these words -

"When all proper reservations have been made, yesterdays find is a rare and exciting thing."

If these finds are indeed rare and exciting, this little poem of an unknown author of the last century may be more than apt. So I said, "Old man, for whom digg'st thou this grave In the heart of London town?"

And the deep-toned voice of the digger replied--"We're laying a gas-pipe down!"

And so while the first Earl Beatty of the North Sea and Brooksby won fame and his title with enterprise in war on the North Sea at Jutland, the second Earl is now making his contribution with enterprise in peace under the North Sea as the head of Home Oil's operating subsidiary in the United Kingdom.

We are indeed honoured to welcome The Earl Beatty as our distinguished guest. He has had a varied career in the Royal Navy when he commanded the destroyers Buxton and Boreas, and was with combined operations in Dieppe and Sicily, in both of which operations Canadians have many memories. His service in the last war culminated with the appointment as Under Secretary of State for Air. In politics, he has been a member of the London County Council, a Member of the House of Commons and, of course, now sits with the Lords. The British Commonwealth Games Council has claimed his time as its Chairman since 1952.

It is with great pleasure that I introduce to you The Right Honourable, The Earl Beatty of the North Sea and Brooksby, D.S.C., Chairman of the Board of Home Oil of Canada Limited, who will address us on "The Impact of Natural Gas on the United Kingdom".

THE EARL BEATTY:

I am very much aware of the honour you have done me by asking me to speak to you this afternoon. To follow in the footsteps of such distinguished men as the Premiers of Alberta and New Brunswick, and General Norstadt, is not only an honour but a frightening trial particularly as I have not been connected with the oil and gas business for very long-so you must bear with me as I am sure in this room there are many who basically know much more than I do of this world.

The story of natural gas discoveries in Europe all started six and a half years ago when an event occurred in Holland whose effect upon the economy of many European countries will last a great many years. This first well at Slochteren, is as famous now as the first oil well drilled just over a hundred years ago in Pennsylvania.

From this discovery has come one of the largest and most intensive searches for petroleum which the world has ever witnessed in an unproved area.

From all indications the most likely direction to search was to the North and West of Holland in the grey, cold and windswept waters of the North Sea reaching across inland to Yorkshire in England.

Once again it would seem that the North Sea and the future of Great Britain are bound in one. From the days of the Vikings, who left their mark upon the East coast of England, to its contribution to the annihilation of the Spanish Armada by its storms and violence in 1588, to the greatest sea battle between surface ships at Jutland in 1916, to this day, its history has been entwined with that of Britain.

The North Sea has a forbidding reputation to mariners, as I can vouch for, for its surface can be quickly whipped up by winds into steep and high waves because of its shallowness.

It may interest you to know that there are few places where, if St. Paul's Cathedral in London was transplanted into the North Sea, the top of its dome would not show above water. Of course, in other ways this is an advantage to oilmen.

Now, over the past fourteen months commercial discoveries of natural gas in the United Kingdom, in the seas off its coast and in Yorkshire, have ushered in a new era in the history of British energy.

It is an exciting story because this new source of indigenous energy for England can now be ranked with the first use of coal centuries ago, with the first manufacture of town gas in 1798, the use of electricity for lighting in 1881, and the development of nuclear power plants in more recent years. It is also exciting because of the rapidity with which commercial discoveries have been made in what are thought to be six different fields.

Proven and probable reserves are estimated already to be 15 trillion cubic feet. Here, in Canada you have 45 trillion cubic feet of proven reserves, thus in just over a year the United Kingdom has come a third of the way for which 20 years were required, even in your great country, Canada.

The benefits to Britain which could result from the discovery of natural gas are great-and given a proper environment for growth, this new source of energy can have

a profound effect to the British economy. The following comparisons may assist you to visualize the size of our economy, compared with yours.

In the United Kingdom we have 55 million people and we use about 85 billion therms of fuel per year. Canada with one-third as many people uses a little more than one-half as much energy. There are several differences in the make-up of energy demand in the two countries. We use proportionately more in industry, you use proportionately more for consumer purposes because of a colder climate and because many Englishmen seem to feel that it is sinful to heat any room, and certainly those not being occupied.

Unlike North America, where abundant supplies of petroleum and natural gas have existed for many years, England has never had access to significant domestic reserves of petroleum and natural gas. In North America natural gas supplies approximately 30% of total energy requirements. In England, natural gas and manufactured gas or town gas account for only 6 to 7 %.

With the introduction of liquified natural gas from Algeria and cheaper manufacturing processes based on oil, combined with the aggressive salesmanship of the Gas Coun cil, gas sales have realized substantial increases in recent years. This has annoyed the head of the National Coal Board who called it "an old flame tarted up". He was a little premature in saying this, for the gas industry in Britain is now faced with a healthy and expanding market. Recent growth has been on the order of 10% per annum-substantially higher than yearly increases in the total energy demand.

So it is against this backdrop of increasing acceptance of gas by the British user that natural gas now has been discovered. And it is important that new supplies of gas reach the market place at an early date, if this new source of relatively low-cost energy is to play a major role in Britain's economy.

It is appropriate here to say a word on the structure of the energy industries in the United Kingdom. Briefly, all components are nationalized except for the oil companies, who supply fuel oil. We have the Gas Council, with twelve Area Boards reporting to it, The National Coal Board, The Electricity Council, and the Central Electricity Generating Board with twelve Area Boards beneath it. All report to the Minister of Power. Despite their monopoly situations each of the Councils or Boards is fiercely competitive and spends millions of pounds per year on advertising in an attempt to win consumers. In this struggle for growth, electricity and gas are the main antagonists.

This organization may seem very clumsy and slow moving, but in an economy like England's largely dependent on imported energy and having until recently only high cost coal for domestic energy, it is probably necessary to keep chaos from developing. It should be remembered also that the high tax on imported fuel oil means that this element of the energy business is under a significant degree of government control.

The Gas Council is the controlling body of the British gas industry, and as such is empowered to purchase and distribute gas in England. Under the terms of an Act of Parliament licensing companies to search for gas in the United Kingdom, all gas found must first be offered to the Gas Council at a "reasonable" price, and it is over this reasonable price that the present conflict between the Gas Council and the oil companies is taking place.

One contract has been concluded to date, that between the Gas Council and British Petroleum. The three-year contract was set at five pence a therm, or close to 63 cents per thousand cubic feet. The price was set at a generous level with the express purpose of encouraging further exploration. Following the more recent discoveries, Shell-Esso and Amoco have entered into new contract negotiations with the Gas Council, unfortunately with little apparent success. The Gas Council's offers of approximately 22 cents per thousand cubic feet were turned down by both groups.

Subsequent to the refusal of the two groups to accept the Gas Council's offers a major controversy appears to have developed.

Apparently the Gas Council is prepared to offer only a cost-plus price for gas, based on cost plus a profit of about 10%. The producers, on the other hand, are vehemently opposed to a cost-plus approach and have hastened to point out the detrimental effects of such a method of pricing could have.

In looking at the matter of price I think that people are naive if they assume that a simple cost-plus type of mechanism will work. Let's face it-some exploration companies are going to make an almost unconscionable profit if they are very lucky and others are not going to get any return at all despite the expenditure of millions of dollars. This is true in the petroleum and natural gas business everywhere and we can't change the rules in England. The companies involved in the search for natural gas are spending vast sums of capital on exploration, production and ancillary activities, and they naturally expect returns which reflect the enormous risks which must be taken in prospecting for oil and gas anywhere, let alone in this somewhat virgin province.

If the price offered by the Gas Council is not good enough, when weighed with all of the other factors such as potential U.K. markets, costs of exploration and development, and opportunities in other areas-the result will be a minimum of exploration in the U.K. portion of the North Sea. So far the ratio of discoveries to wells drilled in the North Sea has been astounding, nearly half have struck gas, but one must remember that the most promising places have been no doubt drilled first, and it is almost inconceivable that success will continue at this rate.

The rate at which the market for gas is expanding will require new and extensive supplies just to meet yearly demand increases. Government and oil industry forecasts esti mate a four to five-fold increase in the demand for gas by 1975, and the vast majority of this increase could be met most economically by natural gas. But it will require a lot more North Sea gas than has been proved up to date to meet this potential demand and it is for this reason that a satisfactory price will be absolutely necessary to bring forth these supplies.

Whilst negotiations are continuing there are 2 rigs unemployed in the North Sea-expensive pieces of equipment to keep idle, and only one wildcat drilling, which goes to show the falling off of enthusiasm for exploration until the price is known.

Ideally there should be a free market price for natural gas. However, because of the nationalization of gas, coal, and electricity under one government department this will obviously not be the case. Natural gas admittedly will probably be priced somewhat below the price that it could command if unregulated, in order to satisfy the demands of the public. It should be kept in mind, however, that the argument between the Gas Council and the producers is based on a range of approximately 25 cents per thousand cubic feet or less than 10% of the average delivered cost of gas to English consumers at the present time. If large scale volumes of natural gas are used in the United Kingdom the possible savings in transportation and distribution should far exceed the present gap of disagreement. The benefits and impacts of plentiful supplies of natural gas are many. Gas goes to 12 million out of 17 million households and gas heating is already quite common in England. With the lower prices that could result from natural gas and the more efficient methods of transportation this should be a tremendous area for growth.

Air pollution is a serious problem in England, and the replacement of coal and fuel oil by natural gas can have telling results.

Of great importance is the contribution that cheap natural gas could make towards a more competitive British industry, able to compete more effectively with other European nations.

Gas has important physical properties that differ from other fuels-it is cleaner, can be more accurately controlled, and is efficient. This is particularly important in such applications as the manufacturing of steel.

Furthermore, whilst the short term benefits to our balance of payments will be slight, in the long term they could amount to several hundreds of millions of dollars per annum.

In conclusion may I say that it is now at last appreciated that the gas industry is no longer a manufactured gas industry, but a natural gas industry into which town gas takes a second place. At the present time, the United Kingdom uses 1,000 million cubic feet per day but as Sir Henry Jones, Chairman of the Gas Council, said on the 17th of February, it is not unduly optimistic to expect that reserves sufficient to support 3,000 million cubic feet per day may be discovered in a very few years, and that the industry's present plans will be developed to handle as much as 4,000 million cubic feet per day. But gentlemen, this will only occur if a satisfactory price is paid to producers, who will then bring forth the necessary supplies, I am sure, thus affording maximum benefits to the consumers and the economy.

If the Gas Council and ultimately the Minister of Power or the Government, are parsimonious, they will quickly realize that the majority of oil companies engaged in exploration have equivalent or better investment prospects elsewhere.

England stands on the threshold of great and exciting benefits associated with the development of a new source of energy. She cannot afford to throw away the advantage of the immense potential at hand. No oil company wishes to exploit the consumer, likewise no government-for political or other reasons-should risk holding back further exploration by insisting on too low a price.

Thanks of the meeting were expressed Mr. H. Ian Macdonald.