UK oil & gas extraction - regulatory revamp
Working in the oil and gas industry, I am often asked ‘How much longer will it last?’ to which the somewhat trite answer is ‘As long as it is economic to produce it’ and to answer that requires a whole lot more questions.
Chief among these is ‘What is the price of oil?’, closely followed by ‘What tax will be levied?’. Then there is the question of exploration and development costs, the operating costs and finally the decommissioning and abandonment cost. But the premise of the initial question is correct, since it is not about how much oil remains in the ground but rather how much of it can be economically extracted.
While only those of a King Canute disposition would dispute that overall UK oil and gas production rates are in decline, the rate of that decline, the timescale and by integration the total amount of oil and gas that will eventually be extracted depends very much on decisions taken by the UK Government and industry over the next few years. So in June 2013 Energy Secretary Ed Davey invited Sir Ian Wood, recently retired chairman of Wood Group, to lead a review and take a fresh look at the situation with regards to maximising the economic recovery of the UK’s offshore oil and gas resources. His interim report, published in November, makes four very sensible recommendations. With apologies to Sir Ian for paraphrasing somewhat, these are:
1. We can’t go on like this. A new strategy is required – less focus on maximising recovery from individual fields and more action on the development of clusters and hubs to access the smaller, stranded assets.
2. Time for a change. A new, arm’s length regulator is needed that is separate to, and with sufficient operational freedom from, the current set up within the Department of Energy & Climate Change (DECC). The new regulator should be larger, better staffed and funded by the industry in much the same way as Ofgem and Ofcom are funded by the energy and telecoms companies.
3. More teeth. The new regulator should have additional powers, including dispute resolution on commercial and technical issues, mainly on access to processing and transport infrastructure. Incredibly, the Review found more than 20 instances in the last three years where the inability of operators to agree terms for access to infrastructure has lead to sub-optimal developments, delays and even cancellation of some projects. Furthermore, the Regulator should have the right to attend the licence consortia Operating and Technical Committee meetings, to get a better understanding of the challenges faced. The new regulator should also promote much greater transparency and access to data on asset performance, production efficiency and well data, including seismic.
4. Get the priorities right. The new regulator should start by working with industry to address some key areas such as asset stewardship, regional development plans, data management, and decommissioning.
As you would expect from someone who took his family-owned business from a small ship repair and marine engineering firm in Aberdeen to an international energy service company with around US$7bln annual revenue, Sir Ian is highly regarded in the industry and his interim report was met with broad agreement. I look forward to reading his final report due in spring 2014 and, more importantly, seeing what the Government does about it.