It's difficult to overstate the importance of the UK Continental Shelf (UKCS) and the North Sea oil and gas industry to the UK's economic health and energy security. Oil and gas companies operating in the North Sea contributed £6.5bn in corporate taxes in 2012-13, more than 15% of the UK's total corporate tax income, while the industry employs a workforce of nearly half a million people and drives the export of UK-based O&G goods and service to the tune of £7bn a year.
From an energy standpoint, North Sea production satisfies 66% of the UK's oil demand and 50% of its gas demand. Estimates from the Department of Energy and Climate Change (DECC) project that the North Sea will continue to provide around 70% of the UK's primary energy mix up to 2030.
Though the UKCS continues to be a lucrative and vital part of the UK's energy infrastructure, 50 years of oil and gas operations in the North Sea since exploration began in 1964 have made it one of the most mature offshore basins in the world. As a result, 'easy oil' in the North Sea is rapidly drying up, increasing development costs per barrel fivefold over the last 10 years, while a host of companies work on discoveries that are increasingly small and expensive to tap. Around 2005, the UK went from a net exporter to a net importer of oil and gas.
The North Sea will witness a hike in decommissioning programmes during the next two decades.
The Wood Review, then, seems to have come along at an appropriate moment in the UKCS's long history. The review, commissioned by Secretary of State for Energy and Climate Change Ed Davey in June 2013 and led by former Wood Group chairman Sir Ian Wood, released its interim report in November in anticipation of the final report's publication in early 2014. The final report will be based on extensive interviews with 40 oil and gas companies active in the North Sea, as well as consultation with government officials and neighbouring North Sea regulatory regimes in the Netherlands and Norway.
The interim report lays out a proposed new strategy for the UKCS, called Maximising Economic Recovery for the UK (MER UK), which broadly advocates greater co-operation between industry, DECC and HM Treasury to improve efficiency and make the most of the remaining resources in the North Sea. Fundamental to the Wood Review's recommendations is the creation of a new arm's length regulatory body that would be specifically responsible for North Sea asset stewardship and encouraging co-ordination of exploration and production activities.
Maximising economic recovery in the North Sea is an obvious goal now that reserves are running low; estimates of the UKCS's remaining reserves range from 12 to 24 billion barrels of oil equivalent (BOE). Whether industry manages to reach the higher end of that estimate depends, according to the Wood Review's interim report, "on how well the UK manages the development of remaining reserves".
Wood believes the rapid implementation of the review's recommendations will, at the very least, facilitate the extraction of an extra three to four billion BOE over the next two decades, which would amount to more than £200bn in additional value to the UK economy.
But as the Wood Review argues, significant changes will be necessary to create an environment in which the broader goals for the UKCS can be collaboratively advanced in step with the industry's own aims. UK offshore industry association Oil & Gas UK's economics director Mike Tholen, who has spent the last six months working on the Wood Review, notes that the development of the North Sea oil and gas sector has put it at a disadvantage when it comes to fostering teamwork to pursue mutual goals.
"There are far more operators than ever in the North Sea, doing a whole range of things, and if anything it's much more patchwork," he says. "There were times in the past when one could probably see a much more coherent North Sea in terms of one or two operators having much bigger footprints over much bigger areas of the North Sea. And as that has changed, there is less coherence; by its nature there's more of a patchwork of people."
Indeed, one of the interim report's main concerns with the industry as it currently stands is the lack of collaboration and "overzealous legal and commercial behaviour between operators". The review dredged up more than 20 examples where the failure of rival companies to agree terms of access to processing and transport infrastructure "has led to sub-optimal (more expensive/lower recovery) developments, significant delays or in some cases stranded assets".
Maximising economic recovery in the North Sea
In short then, the thrust of the review's argument is focused on making the best possible use of the North Sea's remaining reserves through wide-ranging co-ordination and an emphasis on the bigger picture, rather than individual fields. "The idea is pretty simple," says Tholen. "It is everyone working together, with everyone looking in the same direction with what we're trying to achieve."
For the operators themselves, this means acknowledging the increasing importance of development 'hubs' as small operations cluster together. "If you're developing in the North Sea and another company has got opportunities adjacent, you may well find it's better to do something coherently together," Tholen says. "The nature of the industry is such that often by doing things together, you can maybe create a bigger field development over a wider area, which is more cost-effective and gets more out of the North Sea."
HM Treasury, meanwhile, is being encouraged to maintain and potentially expand the fiscal allowances and tax relief schemes that have encouraged record levels of investment from the sector in the last few years. For example, the interim report praises the government's recent decommissioning tax relief schemes, which have provided "much greater certainty on decommissioning liability and should facilitate a number of licence changes and release substantial funding held under guarantee". The report notes these sorts of fiscal allowances should shore up £13bn in additional industry investment, as well as enabling the extraction of an extra 1.7 billion BOE.
The Wood Review's initial suggestions for future Treasury policy include building flexibility into its fiscal incentive programmes to recognise the diversity of conditions on the UKCS, from mature oil and dry gas regions to frontier areas and developments that involve particular technical challenges. The review's industry interviewees also highlighted a need to incentivise exploration activities, which have halved over the last decade and will need to increase significantly to reach MER UK's goals.
Lessons from North Sea neighbours
The glue of the Wood Review's MER UK strategy is its proposal to create a new regulator, funded by industry and completely separate from health and safety regulation, to encourage co-operation between operators and provide a robust bridge between government and industry to achieve national resource management objectives. So what is wrong with DECC's current regulatory regime?
As Tholen explains, it's not so much a matter of any particular failings of the current body, rather the constraints to which it has been subjected. "[The regulator] has diminished in size over a period where we've seen the number of fields being operated nearly quadruple. We're probably at over 300 fields in production and operations now, compared with 90-something 20 years ago. We've seen the regulator, I think, probably halve in size over that period. One can only ask so much of people, and it's an opportune time to help the government look and see whether the function they've asked them to serve is best served in their current guise, or whether some new guise is better."
The review consulted with regulators from Australia and the US, but regimes closer to home have provided the best template for any new regulator to follow, as they seem to be a few steps ahead of the UK in asset stewardship. "Norway and the Norwegian Petroleum Directorate [NPD] stands out both in terms of the quantity and the quality of the team," says Tholen. "It's a much bigger team than what we have in the UK, it's well resourced, and it has a very clear concept of what it wants to achieve. We've used the phrase 'maximising economic recovery' - they have a slightly different turn of phrase, but they're after the same ends."
The 50 personnel working for DECC's offshore regulator compares poorly with the 220 staff at the NPD and the 100 staff in the Dutch equivalent, so it's clear that a new, more proactive regulator would have to be significantly better resourced than its predecessor to attract a larger number of high-quality personnel. The report outlines a vision of the new regulator's powers, including the ability to deal with disputes, impose sanctions to non-compliant companies and drive the MER UK strategy, as well as the right to attend consortia management meetings, which is common in Norway and the Netherlands but would be a first in the UK.
Despite the prospect of a new and more powerful regulator, Tholen says he has noticed the industry's "broad and strong support for the suggestion that there needs to be change". The Scottish government has even suggested that UK energy hub Aberdeen is "the only conceivable principal location" for a new regulator - a demonstration, at the very least, that the review's suggestions are being taken seriously by government, perhaps in part because the proposed regulator would be funded by industry.
Nevertheless, before the final report is published at some point in the first quarter of 2014 and the government has had time to evaluate its recommendations, it's impossible to say whether the Wood Review's recommendations will become a reality in the North Sea. But Sir Ian Wood and his team have made a strong and sensible case for the future of the UKCS, and ministers will almost certainly be aware that ignoring it could come with a £200bn price tag.