In the below article Oil and Gas Partner, Uisdean Vass, looks back at the Wood Review, the catalyst which led to the introduction of the MER (Maximising Economic Recovery) Strategy. Now that the Energy Act has received Royal Assent Uisdean also considers the steps the OGA (Oil and Gas Authority) now needs to take to enforce this Strategy.

With Royal Assent having been given for the Energy Act, the UK oil and gas industry is about to begin a period of unprecedented and historic change designed to ensure its longevity. The catalyst for that change is Sir Ian Wood’s comprehensive review of UKCS oil and gas regulation which he carried out for the UK Government. The Wood Review was published just over two years ago and in it Sir Ian called on the government and the industry to develop a new strategy for maximising economic recovery (MER UK) of our offshore hydrocarbon resources which are estimated to amount to up to 20 billion barrels.

Sir Ian also suggested the creation of a new arm’s length body for the stewardship and regulation of oil and gas recovery and to ensure maximum collaboration across the industry.

That led to the formation of the new regulatory agency, the OGA, which has been given broad powers over UKCS operations.  Failure to abide by the terms of licences, Energy Act or MER Strategy (finalised in March of this year) can expose oil companies to sanctions ranging from financial penalties and enforcement notices to divestment and revocation. However the message from the OGA has been consistent and unequivocal that when disagreements arise it aims to achieve its objectives by collaboration and by influencing and promoting alternative approaches rather than by sanctions.

The central obligation of the MER Strategy requires those affected to “take the steps necessary to secure that the maximum value of economically recoverable petroleum (ERP) is recovered from the strata beneath relevant UK waters.” ERP is petroleum which can be recovered at an expected market value greater than the expected cost of its extraction.

That means that for the first time, UKCS companies will have to make certain key decisions based on economic analysis and not merely firmly established legal rules.

I do envisage some debate, and perhaps considerable debate, about the application of the ERP concept. The OGA is going to have to draw up its own economic decision-making system, and not just for ERP, but for a very wide range of things. To do that, just like any private investor, the OGA will have, for example, to have some kind of theory as to where the oil price is going and that is a subject on which there is seldom a consensus. It is not clear how ERP fits into standard petroleum categorisation. For example, is ERP limited to proven reserves or can its meaning be much wider, including contingent resources or even prospective resources? For ERP to be meaningful in the exploration context for example, it likely must have a wide meaning, perhaps extending to prospective resources. Prospective resources are estimated volumes associated with as yet undiscovered accumulations. They have been identified as a result of indirect evidence such as seismic or near/adjacent field operations but have not been proven by the drill-bit.

So it is inevitable that during the exploration phase there will be uncertainty about the petroleum recoverable from a licence area making an ERP decision challenging.

The Energy Act gives the OGA four sanctions to enforce the Strategy – enforcement notices, financial penalties, licence revocation notices and operator removal notices. If an owner says it doesn’t want to comply with the central obligation because to comply would not bring it sufficient economic commercial return (SECR) then it will have to open discussions with the OGA to try to find a way forward.  If that fails then the company could be required to divest – sell it for value. However outright failure to obey the Strategy could result in a company having its licence revoked, meaning it loses everything.

Another watchword of the Wood Review is industry collaboration. The North Sea industry, according to Sir Ian, has been hurt by unduly adversarial practices. The MER Strategy requires affected companies to consider the benefits of collaboration. However, The MER Strategy also makes it clear that no application of the central obligation requires an oil company to engage in any illegal practice, specifically mentioning HS&E and Competition law. Sometimes, however, it is not always clear beforehand which conduct will or will not violate Competition Law. Industry concerns have been expressed regarding where collaboration ends and anti-competitive activity begins.

There are interesting times ahead, but if successful this dramatically changed MER regime could prove to be the saviour of the UK industry.

Article original posted on the Daily Record website