Gordon Brown’s announcement in Banchory last week that he plans to increase North Sea oil production by up to 70,000 barrels a day was confirmation, if any were needed, that the country is in the grip of a fuel crisis.

In the space of five months, the oil price has climbed from $100 to $135 a barrel. Rising energy costs are affecting motorists, consumers and businesses, forcing people to think twice before driving to the shops, filling up their cars or turning up the central heating. By the end of the year, annual gas bills could cost more than £1,000.

In an attempt to alleviate the pressure, the prime minister confirmed that two new North Sea developments, West Don and Don South West, would come on stream early next year, producing, at their peak, up to 50,000 barrels a day. Extra oil and gas fields could also be carved out of unprofitable parts of around 30 existing fields, yielding an additional 20,000 barrels a day.

Such an increase, however, is still just a tiny fraction of the 1.8m barrels consumed daily in the UK.

As our domestic habits begin to change and talk turns towards inflation taking a hold in the wake of a sustained increase in the price of oil, I embarked on an investigation into Scotland’s relationship with the “black gold”.

It’s worth remembering that Britain is a significant oil producing nation. In fact, it produces more oil than Kuwait. Yet, south of Aberdeen, the country’s oil capital, it seems very few people know or appreciate that.

Alex Salmond highlighted the issue last week when he claimed there was “fury” in Scotland that revenues from North Sea oil continue to flood into the Treasury while Scots are left struggling with soaring prices at the pumps.

The question of ownership, however, could soon be redundant.

Environmentalists and some oil experts have been predicting the demise of oil since the 1950s. A few believe that global oil production is perilously close to peaking and from then on, supplies will dwindle away to nothing.

In time-honoured tradition, however, no two experts agree about the life expectancy of the reserves off Scotland’s shores. Jeremy Leggett, chairman of Solarcentury, an energy consultancy, predicts the crunch will come as soon as 2010. Others, including Professor Peter O’Dell of Erasmus University in the Netherlands, dismiss such ominous predictions and claim that supplies of oil will flow for decades to come.

O’Dell estimates that only about half of the available oil from the North Sea has been extracted so far and he holds out the prospect of new finds in parts of the UK continental shelf that have never been examined in any depth.

This view would appear to be supported by the announcement last month that Dana Petroleum found a new oil field in the North Sea at West Rinnes.

Calculating oil reserves is not an exact science, however, and this has made it difficult over the years to weigh up the true wealth of oil beneath the North Sea.

Oil producers have tended to play down their reserves. The markets do not cope well with shocks, so companies take the view that it is better to pleasantly surprise them than disappoint them. In 2004, Shell stunned shareholders when it revised its proven oil and gas reserves, slimming the figure by 20%.

The revelation had a devastating impact on the company’s share price and has served as a lesson to the industry ever since.

The first minister, who is a former oil economist, says there is another motivation for oil companies’ reticence. “If oil companies said, ‘Look we’ve got lots of reserves in the future’, the immediate response of government would be to stick taxation up,” says Salmond. “So there was a kind of incentive for the big companies to underplay the significance of the province.”

That is hardly surprising. Since the late 1960s, the oil companies have paid £140 billion in taxation to the Treasury. If you translate that into today’s money it amounts to £230 billion.

Sir Bernard Ingham, who was press secretary in the Department of Energy when North Sea oil first came ashore, admitted that government negotiations with the oil companies always boiled down to the same thing: taxation. “The whole political calculation is how much brass can you get out of North Sea oil without driving the oil companies away,” he says.

The one thing that surprised me during the course of my investigation was that the proven reserves in some of the region’s oldest fields are in fact rising. The Forties Field, one of the biggest and most iconic, is still producing oil 33 years after the first crude was pumped ashore.

Five years ago, BP sold the Forties to Texas-based oil exploration and production company the Apache Corporation. Since then Apache has invested $2 billion in the field’s sub sea network, its platforms and in re-evaluating how much oil still exists. According to Apache regional vice-president and managing director Jim House, flow rates from the field have increased and the amount of recoverable oil has also increased.

“Forties was definitely showing her age when Apache took it,” says House. “At the time it was sold, pre-developed reserves were in the region of 150m barrels. We ended last year with 200m barrels on our books.”

However, industry experts acknowledge that this is down to improved techniques for getting oil out the ground. Fields previously believed to have been exhausted are now worth a second look with better drilling technology that is helping to extend activity in the North Sea.

John Forrest, Talisman Energy’s general manager for the Flotta Catchment Area, says his company is now drilling wells that they were unable to drill five to ten years ago. “We’re bringing on fields that we’ve known were there for quite a long time but they just weren’t economic or we didn’t have the technologies. We recently brought on a field without drilling any more wells. We just had better technology,” he says.

The downside to operating off the coast of Scotland has always been the relatively high cost, including off-shore installations and flying workers to and from the mainland.

To manage costs, Shell has been selling off some of its core assets in the North Sea to newer and more aggressive companies such as Fairfield Energy. Through shooting seismic surveys and drilling fresh wells these new players are extending the life of North Sea oil fields.

John Gallagher, vice-president technical at Shell in Aberdeen, says his company is still committed to the area. “We’re bringing on four new fields this year. We’re talking hundreds of millions of pounds. The plant rejuvenation work that we’re doing is hundreds of millions of pounds and the work we’re doing cross border, linking up Norway and the UK which is a growing trend in our industry, is again hundreds of millions of pounds,” he says.

The same high oil price that makes it harder for the rest of us to drive to the shops on a whim is making it easier for companies to take a gamble on previously undeveloped parts of the North Sea. With a simple oil well costing $22m dollars to drill, exploration companies are taking a huge gamble.

The Canadian oil exploration company Oilexco last year drilled 39 out of 140 exploration and appraisal wells in the North Sea despite rising costs. Arthur Millholland, the company’s chief executive, says: “In 2004 we were paying approximately $55,000 a day for a drilling rig. Today we’re paying $350,000 a day. So even though the price of oil today is higher than it was in 2004, our costs of doing business here have increased just as dramatically.”

Nevertheless, the investment continues with the restructured industry better placed to shoulder the costs. Smaller firms with lower overheads, it seems, can go after smaller pockets of oil and still make a decent profit.

The question remains, however, how long will North Sea oil last? The answer to that depends on many factors, including market conditions, future government initiatives and constant technological improvements.

The North Sea has many features in its favour. It has world class geology which makes it attractive to those wanting to harvest its rich reservoirs. Compared to many of the world’s oil producing regions, it is governed by a relatively stable political and economic regime.

The market price of oil is a much more volatile factor, but at current prices the oil that still lies beneath the North Sea is becoming more and more valuable every day.

Truth, Lies, Oil and Scotland is on BBC 1 Scotland on Wednesday at 10.40pm

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article4039359.ece