North sea task force
In turbulent times for the North Sea oil and gas industry, Simon Frost looks at how the recommendations of Sir Ian Wood’s report are being implemented by industry, the Government and the new regulatory body.
At the time of writing, exactly a year has passed since Sir Ian Wood published his Government-commissioned review on maximising recovery from the UK Continental Shelf (UKCS), and it’s been a tough one for North Sea oil and gas.
The UKCS Maximising Recovery Review, published in February 2014, laid out four fundamental recommendations:
- Government and industry to develop and commit to a new strategy for maximising economic recovery (MER) from the UKCS
- The creation of a new arm’s-length regulatory body responsible for operational regulation of the UKCS
- The new regulator to facilitate implementation of MER strategy
- The regulator to work with industry to develop and implement strategies for exploration, asset stewardship, regional development, infrastructure, technology and decommissioning
The review was published in response to the severe challenges of increasing operating costs and heavy taxes, but the situation was intensified by a steep drop in the global oil price, from around US$110 a barrel in mid-2014 to below US$50 in January 2015 – its lowest since 2009. Exploration diminished, while oil and gas giants BP and BG Group slashed their capital expenditure and cut jobs in the region as they began to scale back operations. Shell recently announced plans to decommission its Brent platforms, which have produced 10% of the region’s oil and gas since 1976.
Figures published in Oil & Gas UK’s UKCS Activity Survey 2015 in February make it clearer still – this was the North Sea’s annus horribilis. In disastrous coordination with plummeting oil prices, the cost of operating in the North Sea rose by almost 8%, from £8.9bln in 2013 to £9.6bln in 2014. The industry experienced an overall negative cash flow of £5.3bln.
A drop in the ocean
To ease the pressure on the industry, Chancellor of the Exchequer George Osborne reduced the supplementary tax on operators from 32% to 30% in the 2014 Autumn Statement, having hiked it from 20% without consultation in 2011. ‘The 2% relief was a drop in the ocean,’ says Hamish Wilson, Technical Director at environmental consultancy SLR and President of the Petroleum Exploration Society
of Great Britain. ‘Most of the pundits are saying that the oil price is going to hover around US$50–70 for the foreseeable future. At that price, a number of oil fields in the North Sea are simply uneconomic, so most people are agreed that the North Sea industry is going to shrink. As in the 1970s, when the coal industry was shut down because it was uneconomic, some of the fields in the North Sea will shut down, and jobs will go.’
But all is not lost. Oonagh Werngren, Operations Director at Oil & Gas UK, says, ‘There is still life left in the North Sea. There are still billions of barrels of indigenous oil and gas to recover – estimates are between 14–24 billion barrels of oil equivalent (BOE). We have a strong future, provided we can address the regulatory, fiscal and cost challenges we face today.’
A new regulator
The new regulatory body comes in the form of the Oil and Gas Authority (OGA), which is headquartered, in line with the Wood Review’s recommendation, in the industry’s hub of Aberdeen. It appointed its Chief Executive, Dr Andy Samuel (former Managing Director of BG Group’s European exploration and production)
in January 2015.
‘There’s a big question in the industry about the OGA – is it actually going to do anything?’ says Wilson. ‘There’s a network of oilfields in the North Sea all connected by pipelines into major gathering stations. There are too many pipelines, and each of them is under half- or even quarter-full, which means that just to put another barrel through it, you have to pay the whole maintenance cost of a pipeline. The structural issues facing the North Sea need a very strong regulator to make change happen, so the debate is whether the OGA will have the teeth to make those big changes.’
The domino effect
The structure of the North Sea pipeline network means there is a risk that the decommissioning of rigs could cause a domino effect, whereby neighbouring fields could be decommissioned prematurely, leaving billions of barrels behind. However, Wilson notes that the industry is well informed on what areas can and can’t be shut down. ‘There has been a big study on critical infrastructure. We’ve mapped out all of the pipeline networks and looked at the hydrocarbon prospectivity around that network, so we know what the critical areas will be if some of the infrastructure is shut down,’ he says.
In fact, decommissioning could be used to the industry’s benefit, as Wilson explains, ‘I think a concern for Government is that the decommissioning liability is a tax write-off. It’s in the Government’s interest not to decommission platforms before their time, so a number of oil companies are using the threat of closing production. If the Government doesn’t budge on tax, the close of production dates will come forward, so it has quite a tricky trade-off to play.’
Exploring for the future
The first move from the OGA came in February 2015, when it published its Call to Action Report – a blueprint for urgent action to safeguard the future for the UK’s offshore oil and gas industry, commissioned by Secretary of State for Energy, Edward Davey, just a month before.
An immediate priority of the OGA’s plan is to ‘support HM Treasury as it develops and implements a fiscal regime which instils confidence and secures investment’. The Chancellor is expected to reduce the supplementary tax further and introduce a simplified investment allowance for exploration in the final budget before the election, on 30 March, in the hope of making the North Sea attractive to investors again. Exploration activity in 2014 was the lowest since the first oilfields were exploited in the 1960s, and the Activity Survey cites the inability to access capital
as the main cause.
‘The big-ticket item that industry is asking of the Government is support for exploration,’ says Wilson. ‘In Norway, oil companies get an advance on drilling wells. There, if you drill a well costing US$100m, you get a cheque for US$78m.’ Norway’s exploration tax credit was introduced in 2005, in response to a similar decline in exploration activity, and led to the number of exploration wells increasing fourfold over the following three years.
The OGA’s immediate call to industry is for the top 20 producers to present it with stewardship improvement plans by April 2015, with the aim of returning production efficiency to 2005 levels of 80%, following a 10-year decline that has left efficiency at 60%.
It is looking for collaboration similar to that of the Northern North Sea Fuel Gas Initiative, which was introduced after some platforms in the northern region became gas deficient. The gas produced from their fields was not sufficient to generate the power for production operations, making it necessary to import fuel gas. To remedy the difficulty for individual operators in sourcing a secure and reliable supply, five operators jointly obtained gas, offering the promise to the supplier of regular large volumes and a reliable supply to the operators in return.
Describing himself as ‘a geologist and an optimist’, Wilson is excited that the OGA will not only be focusing its efforts on the North Sea. ‘What I think is really interesting is that the Government has sponsored the OGA to look at new areas to explore around the UK coastline, looking all the way around the South Coast and up the Irish Sea to the west of Shetland, to see if there are any other oil provinces, because we haven’t really looked that hard, apart from in the North Sea. There’s an extensive piece of work looking at the geology of other basins to see if anything new and exciting can be found. If that’s successful, we could see other areas being explored in UK waters.’
There’s life in the North Sea yet, but successful new plays elsewhere would be welcome news for the UK’s oil and gas industry.
£14.8bln of capital was invested in the North Sea in 2014. Half of this was spent on only 12 fields.
14 of 25 expected exploration wells were drilled in 2014, the lowest number since the industry began in the 1960s.
8–13 exploration wells are forecast to be drilled in 2015.
£1bln was spent on decommissioning activity (the highest annual spend on record), representing almost
4% of total expenditure.
Statistics taken from Oil & Gas UK’s Activity Survey 2015. View the full report at www.oilandgasuk.co.uk