More collaboration, stronger regulation urged for UKCS

An independent review of oil and gas operations on the UK Continental Shelf has called for new attention by the government and producers to “maximizing economic recovery” (MER) from offshore development.

An interim report from the review, conducted by Sir Ian Wood, retired chairman of the Wood Group, for the Department of Energy and Climate Change, calls for a new, strengthened regulator and greater collaboration among license-holders.

The review team conducted more than 80 interviews over 4 months, 40 of them with holders of license interests representing 95% of UKCS production and investment.

Its aim was to address problems such as falling oil and gas production, a rapid decline in production efficiency, falling tax receipts, and declining exploration.

Issues identified

Related to those problems, the interim report identified these issues:

• Lack of focus on MER for the UK. Operators pursue individual commercial objectives in isolation “with limited shared commitment or obligation to MER across fields or within regions of the UKCS,” the report said. They design infrastructure for specific developments “without taking account of wider potential demand.”

• Fiscal problems. Although fiscal instability has contributed to “basin underperformance,” changes such as allowances for challenging fields and relief for decommissioning “have been well received and will help maximize long-term economic recovery.”

• Government stewardship. A “light touch” regulatory approach designed when the UKCS was relatively young “will not be adequate to manage the challenges the UKCS faces in the future.”

The DECC regulator has insufficient resources for the task of overseeing the complex, modern industry on the UKCS, the report said.

• Industry stewardship. A “rapid fall in production efficiency” indicates “poor asset stewardship,” the report said, citing “underinvestment and insufficient uptake” in improved and enhanced oil recovery. “Industry must be encouraged to invest more in these schemes to avoid leaving significant value behind.”

• Lack of collaboration and overzealous legal and commercial behavior between operators. The review found more than 20 instances in the past 3 years in which “the inability of operators to agree terms for access to processing and transport infrastructure has led to suboptimal…developments, significant delays, or in some cases stranded assets.”

• High-quality strategic thinking by PILOT (a project facilitating industry-government partnership) but poor implementation.

Addressing the issues

Recommendations of the interim report generally addressed those issues.

They included a call for the government and industry to commit to a new strategy for MER from the UKCS, an initiative that would include fiscal and licensing changes that the review team estimated could boost ultimate oil and gas recovery by 3-4 billion boe.

The review also recommended creation of an “arm’s-length regulatory body” with greater power than the existing regulator and an orientation toward MER. It recommended that the regulator, with its expanded resources and scope, work with the industry to develop strategies targeting MER.

Among other recommendations were that the regulator seek specific commitments from the industry, including:

• To principles of MER from the UKCS.

• To work with the regulator and adjacent licensees to develop “cluster plans making the most economic use of production facilities and infrastructure.”

• To “more efficient sharing of infrastructure (promoting third party access).”

• To work with the regulator to develop “new infrastructure business models.”

• To deliver on obligations regarding asset stewardship.

• To improve collaboration.

• To reduce “the legal and commercial burden of working in the UKCS.”

• To work with the government to implement the “UK Oil and Gas Industry Strategy,” launched last March by the government as part of a broader industrial strategy.

The review team plans to publish a final report early in 2014.

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