Sir Ian Wood was appointed earlier this year by the Secretary of State for Energy and Climate Change to review the regulation of the UK offshore oil and gas industry. He has now presented his interim report.

  1. The Wood Review

The aim of the Wood Review is to outline sector strategies and implementation plans to maximise the economic recovery from the UK Continental Shelf (UKCS), including the immediate creation of a new arm's length regulator with powers of enforcement and intervention. The findings recommend that the new regulator should also regulate the onshore oil and gas industry in due course (including shale oil and gas). It is the first review of the UK upstream sector in more than 20 years; the full report is due to be published in early 2014.

Whilst the number of UKCS fields has increased from 90 to 300 in the last 20 years, 90% of current fields produce less than 15,000 barrels per day with an average annual discovery size of less than 25 million barrels. To date 41 billion barrels of oil equivalent (boe) have been produced from the UKCS, but in the last three years annual production rates have fallen by 38 per cent.

It has been suggested that the full and rapid implementation of the recommendations made in the interim report could lead to at least 3‐4 billion boe more than would otherwise be recovered over the next 20 years, which, in turn, would add over £200 billion of value to the UK economy.

  1. 6 main reasons for the decline in production

The interim report identifies six reasons for the decline in UKCS production:

  • lack of focus on maximising economic recovery for the UK, as operators have pursued individual commercial objectives in isolation with limited shared commitments;
  • fiscal instability over a number of years;
  • lack of Government stewardship due to an under-resourced upstream regulator;
  • lack of industry stewardship, including poor asset stewardship which has in turn not been challenged by the regulator;
  • lack of collaboration between operators;
  • lack of implementation of initiatives coming out of PILOT, the body which facilitates the partnership between the UK oil and gas industry and Government.
  1. Evidence gathered from industry and other regulators

The interim report reflects evidence from 40 active players in the oil and gas industry representing more than 95% of UKCS production, key government figures, and regulators from neighbouring regimes such as Norway and the Netherlands as well as the USA, Canada and Australia.

Whilst the UKCS fiscal regime is out of the scope of the Wood Review, the interim report notes that HM Treasury will play a critical role in securing the industry's future.

  1. Maximising economic recovery for the UK

The key finding of the interim report is that Government (both HM Treasury and the Department of Energy and Climate Change as the current regulator) and the UK offshore industry have to adopt a cohesive tripartite strategy referred to as Maximising Economic Recovery for the UK (MER UK) to maximise the significant economic and energy security opportunity that still lies off of the UK’s shores.

The interim recommendations aim at improving the tripartite co-operation which is already in place between DECC, HM Treasury and the UK offshore industry to improve stewardship across the UKCS combined with better collaboration between operators.

The interim report recommends that:

  • DECC establish a new arm’s length regulatory body for the UKCS, to be financed by industry (as is the case for Ofgem and other sector regulators). In order to be effective, the new regulator would have to be appropriately resourced and have additional powers so as to achieve greater co-ordination of industry activities. The recommendation for this body has been influenced by the roles played by Dutch and Norwegian upstream regulators. The new body would be tasked with developing and implementing key strategies in areas such as:
    • exploration;
    • third party access to infrastructure (including potentially unbundling infrastructure from existing developments);
    • production efficiency; and
    • decommissioning.

The new regulator would also have the right, for the first time, to attend operator consortia management meetings. The finding's recommend that the regulator identifies where competition law may prevent companies from working together effectively and acts as an independent external party to facilitate coordination and interpretation of data (for example regarding the sharing of seismic data.)

  • HM Treasury continues to build on the steps already taken to incentivise future recoveries (e.g. the creation of brownfield and small field allowances) and developments.
  • Industry players are required to sign up to the principles of the MER UK strategy, potentially by means of a new model clause in their petroleum licences. In particular, industry players should:
    • co-operate in key areas such as the development of regional hubs and the sharing of infrastructure, achieving effective field cluster developments and achieving greater asset stewardship etc.;
    • reduce the complexity and delays in current legal and commercial processes; and
    • be held to account by the new regulator.

If implemented, MER UK would constitute a comprehensive overhaul of the current regulatory regime of the UK upstream sector.

  1. Comments invited for final report

Comments from interested parties are invited by 13 December 2013; the final report, which is due to take into account feedback on the interim findings, will provide more detail on the evidence base and consider sector strategies and implementation plans to maximise the economic recovery from the UKCS, is expected to be published in early 2014.

Interested parties can comment on the interim report through a dedicated website: www.woodreview.co.uk.