Summary

The title given to Sir Ian Wood’s “UKCS Maximising Recovery Review: Final Report” (published on 24 February 2014), should ensure that his name is immortalised as the abbreviation most will use, the “Wood Review”, and rightly so. This former chairman of oil field services company Wood Group has become a figure-head for reform and has set a CEO-style vision, in addition to his Government remit to make recommendations to: “enhance economic recovery of oil and gas reserves in the future”.

With this in mind, the Wood Review is not overly compromised with detail. The central proposal is for a new, independent, and much more proactive regulator to maximise economic recovery (MER).  This could be criticised as fragmenting current regulation, but Sir Ian’s pragmatic rationale is clear: “a new body…to focus solely on MER will give a clear signal. The Review believes that simply increasing the resource…within DECC is likely to be perceived as a re-badging with little material change.”

Context

The imperative for MER is production apparently falling by 38 per cent between 2010 and 2013 and a sharp decline in exploration and discovery.

Given the right “stewardship,” the UK is said to have the potential to recover an additional 3-4 billion barrels of North Sea oil over the next 20 years, with a resultant £200 billion boost to the UK’s economy.

The final Wood Review is consistent with and builds upon its Interim Report, published in November 2013.

Obstacles to overcome

The Wood Review identifies outdated “light touch” regulation as a key hindrance to the exploitation of hydrocarbons in the North Sea. A regulatory regime designed for an era of large fields and large operators has apparently not evolved to adapt to the new reality of a basin with over 300 fields, much smaller new discoveries, many marginal fields and far greater interdependence in exploration, development and production.

Specific obstacles to growth highlighted in the Review include fiscal instability, insufficient collaboration between industry players in respect of third party use of infrastructure, a lack of sharing of geophysical information, excess time spent on commercial and legal negotiations and inadequate use of technology (including Improved and Enhanced Oil Recovery (EOR)). Floating Production Storage and Offloading vessels are for example noted to have higher operating costs and poorer field recovery than using existing infrastructure where available. Over 20 instances in 3 years of “operators” failing to agree terms for access to processing and transport infrastructure, has led to more expensive / lower recovery developments.

Key recommendations of the Wood Review

The Review advocates a tri-partite strategy involving HM Treasury, industry and the proposed MER regulator. Whilst collaboration may be implicit, it is notable that the involvement of existing regulatory bodies is not emphasised. Some re-alignment of regulatory responsibility is suggested with the new MER regulator perhaps being given responsibility for carbon capture and storage, and with a potential on-shore remit. The Review also recommends new sector strategies be developed for: exploration; asset stewardship; regional development; infrastructure; technology and decommissioning.

The Review envisages that the proposed new MER regulator would be encouraged to make more robust use of existing enforcement powers and may be given new powers or access to licensees, both in the practical sense (for example by being able to attend operational and technical meetings; make recommendations; have greater data access; and to implement a “non-binding” dispute resolution function), and by way of potential new licence terms (relating to maximising economic recovery, achieving acceptable production efficiency and agreeing collaboration on cluster developments). It is further suggested that consideration of past MER performance, should be specifically taken into account for future licence applications. Formal sanctions to encourage MER compliance may include a system of issuing private and public warnings, before removal of operatorship or suspension or termination licences. Interestingly, it is said that the MER regulator should have the right to apply sanctions to the whole consortium or just those who are deemed to be failing to meet licence obligations, or indeed, MER requirements. Whilst it appears there is significant detail to be ironed out here, the collective responsibility intention is notable.

Flexibility

There is also a recognition of a need for flexibility where necessary. The four year exploration and four year development terms in Traditional Seaward Production Licences are noted as appropriate for mature areas, but the Review suggests that six year periods are more suitable for frontiers like the West of Shetland, where the drilling season is short, and in High Pressure High Temperature plays. It is said that licensees shouldn’t be compelled to drill commitment wells where new information suggests they would be unviable. The flexibility theme is also discussed in the context of the almost exclusively gas producing Southern North Sea, which is in danger of apparently premature decommissioning, given the lower market value of gas.

Competitive disadvantages of the UKCS versus the Netherlands are another interesting theme and is, in part, attributed to the Dutch Government’s active ownership of infrastructure. Differences in commercial models are also noted whereby, for example, NOGAT BV (whose business model is solely to operate pipelines and processing facilities) actively seeks to attract new transport business, versus the apparent reluctance of UKCS operators to facilitate third party infrastructure use business as an adjunct to their core production business.

Fiscal incentives

Such issues are intended to be bolstered by HM Treasury’s better use of: “fiscal levers to incentivise MER”, perhaps including: extension of field allowances to incentivise EOR; or incentives for seismic and the drilling of exploration or less prospective wells by operators who currently lack production. In addition, a need for commitment to a simpler and more stable fiscal regime is acknowledged (although tax is beyond the specific remit of the Wood Review).

What is next?

Government and industry appear to publically welcome the initiative, which is to be industry-funded. Indeed, Ed Davey (Secretary of State for Energy) has announced that legislation to implement the new body, will be introduced in the fourth parliamentary session (ie. autumn 2014) but it would be expected to become law in 2015, and may be dragged out by a need for secondary legislation. Ed Davey has hinted at an informal “shadow” arrangement in the meantime. Such break-neck speed perhaps seeks to capitalise on the Review’s current good will, and will hope to minimise potentially significant industry delay in making new investments, pending uncertainty as to the new regulations.  It may also reflect the UK Government’s desire to show oil and gas policy leadership before September’s referendum on Scottish independence, and the spring 2014 publication of detailed Scottish oil and gas proposals for maximising economic recovery, which also intends to consider the Wood Review. Time will tell whether all remain so keen, once detailed provisions take effect, particularly given the Review’s criticism of some current areas of apparent self interest which are to be targeted.  As currently proposed, reforms may touch all areas of the UK oil industry from operators down, both on and off-shore.