A government-commissioned report into the future of the UK’s oil and gas industry has recommended the creation of a new industry-funded arms-length regulatory body with powers similar to those seen in Norway and the Netherlands.
The new regulator’s work would include developing and implementing strategies for exploration, third party access to infrastructure, production efficiency and decommissioning. It would also have the right, for the first time, to attend operator consortia management meetings.
Image: Taqa's Tern platform in the North Sea.
It would also have powers enabling it to have a role resolving disputes over issues such as access to infrastructure, within an agreed timeline and structure, and ending in the regulator making a recommendation to those concerned.
Interim report
The recommendations are contained within an interim report on the UK Government-commissioned UKCS Maximising Recovery Review, being led by Sir Ian Wood, the founder and former chairman of Wood Group. The review’s aim is an independent assessment of UK offshore oil and gas recovery and regulation.
Sir Ian, said the review recognized the complex nature of the UK's maturing offshore industry, where an increasingly diverse range of operators are investing at record levels in new developments, yet exploration and production rates are falling, and activity is fragmenting into a “patchwork” of smaller fields with a lack of strong stewardship.
He said the number of producing fields has from rapidly from 90, in the early 1990s, to more than 300 today. These are operated by a diverse mix of companies, which are far more interdependent than in the past. Yet, staffing at the UKCS regulator overseeing development had fallen from 90 to 50 in the same period. In contrast, the Norwegian Petroleum Directorate has 220 staff and Energie Beheer Nederland BV, in the Netherlands, has about 100.
“Gone are the days when a handful of major companies operated large fields in isolation,” said Sir Ian. Discoveries are generally smaller, averaging 25MM boe over the past 10 years, and 90% of current fields produce less than 15,000 boe/d, he said. “Many developments will only be viable through collaboration and cooperation to form hubs or clusters to achieve the most efficient development,” says Sir Ian.
Access to third party infrastructure has been an increasing issue in recent years. The review found “a very significant number of disputes and disagreements on commercial and technical issues between and within licenses, mainly on access to processing and transport infrastructure and new field cluster development.”
A new regulator
The interim report recommends a new regulator would be responsible for the economic and operational regulation of the UKCS, focusing on supervising the licensing process and maximizing economic recovery of the UK’s oil and gas reserves—a strategy labelled MER UK in the interim report.
It would have stronger capability than the current department, including additional leadership, commercial, legal, petroleum engineering, economic, geological and geophysical posts. It would be responsible for ensuring government and industry have a coherent strategy over the next 30 years
The recommendations include adding a new clause into current and future licenses, which “would make clear that in all areas of development and operation the license holder must act in such a way that is consistent with the principle of MER UK”. This would include setting expectations in areas including production efficiency, effective utilization of infrastructure, and collaborative behavior for development of regional clusters.
The new regulator would have the power to resolve such disputes within an agreed timeline and structure, ending in the regulator making a recommendation to the parties concerned. Failure to accept the outcome could fall within the new MER clause.
“Industry will be required to sign up fully to the principles of the MER UK strategy and commit to collaboration in key areas such as the development of regional hubs and the sharing of infrastructure,” according to the findings. “It will also be tasked with reducing the complexity and delays in current legal and commercial processes which clearly on occasions hinder progress on important developments and efficiencies.”
80 interviews to date
The review team, led by Sir Ian, has to date conducted more than 80 interviews, 40 with companies with a license interest in the UKCS, accounting for more than 95% of UKCS production and investment. The review has also taken evidence from key government figures, and regulators from neighboring regimes such as Norway and the Netherlands, as well as Australia and the US.
“The evidence is clear,” says Sir Ian. “We need to strengthen the capacity and capability of our stewardship regime to enhance collaboration significantly across the North Sea if we are to meet the challenging demands of maturity and diversity and maximise the economic benefits for both the country and the industry.
"The UKCS has changed radically over the last 20 years. While some regions are mature, there are still frontier areas and significant emerging potential where technology is opening up important new plays. It is therefore an opportune time for Government and the Industry to take stock and reshape the stewardship regime that will be required for the decades to come.
"A better resourced arm's-length regulator with a strong economic focus, capable of attracting top quality personnel with appropriate industry experience, will be able to work more closely with the industry and facilitate the development and progress we need. This will require fundamental changes in operator behavior but, as my interviews confirmed, they are clearly up for it.”
To date, 41billion boe have been produced from the UKCS. Estimates of production still to come vary from 12-24billion boe – at current oil prices.
Sir Ian said he believes that full and rapid implementation of the recommendations would deliver at least 3-4billion boe more than would otherwise be recovered over the next 20 years, bringing more than £200 billion additional value to the UK economy.
Comments on the review’s initial findings and recommendations are now invited, which will be considered when compiling the final report due to be published in early 2014.
The review was commissioned in June by Edward Davey, the UK’s secretary of state for energy and climate change.
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