UKOOA's May: Operators adapt to new phase in UK offshore life cycle

May 5, 2003
Oil and gas operators on the UK continental shelf (UKCS) are adapting to what James May calls "the new phase in the UKCS's life cycle."

Oil and gas operators on the UK continental shelf (UKCS) are adapting to what James May calls "the new phase in the UKCS's life cycle."

It's a phase, says May, director general of the UK Offshore Operators Association Ltd. (UKOOA), in which "maturity and asset materiality are the key drivers."

And it's a phase characterized by changing taxation and growing emphasis on cooperation: between companies and the government and between the UK industry and its North Sea neighbors.

May describes as "indicative of the new phase" Apache Corp.'s agreement, announced in January, to purchase a 96% interest in venerable Forties oil field from BP PLC.

Apache acquired the Forties stake for $630 million in a deal that also included purchase from BP of shallow-water assets in the Gulf of Mexico for $670 million.

The US independent will become operator of Forties, which has produced 2.5 billion bbl of oil (OGJ, Jan. 20, 2003, p. 32).

Independents' opportunity

While major oil and gas companies will remain important to the UKCS, May says, "increasing opportunity is opening up for the independents as [larger] companies review and rationalize their portfolios, disposing of noncore assets."

For independent producers, the 25-30 million boe discoveries now typical of the UKCS have more allure than they do for majors. May notes that independents "are bringing new technologies and work practices to the basin."

In 2001, a group of independent producers—EnCana Corp., Intrepid Energy North Sea Ltd., BG Group PLC, and Edinburgh Oil & Gas PLC—made the largest recent oil discovery on the UKCS: the 400 million bbl Buzzard strike under development in license areas P986/P928.

But finds that large have become rare in the UK North Sea, and deepwater exploration on the Atlantic margin has been disappointing.

The UKCS thus represents "a different game from what it was 10-15 years ago," May says. To many major companies, "the UK is noncompetitive with many of the younger basins around the world."

Much of the UKCS's remaining potential to produce oil and gas lies in fields now producing or under development—the so-called brown fields.

"New investment is important not only to extend the lives of these fields, prolonging production, jobs, and revenues, but also because their infrastructure can be used to recover reserves in marginal fields stranded nearby," May notes.

Supplemental tax

Last year, the investment outlook took a cloudy turn. In April the UK government imposed a supplemental tax for oil and gas companies with the effect of adding 10% to the 30% corporate tax all UK companies pay on profits. For fields subject to the 12.5% royalty—those that received development approval before April 1982—the supplemental tax pushed the aggregate marginal tax rate to as high as 74%. The marginal rate is the combined effect of all taxes and offsets on the next unit of earnings.

At the time of its surprise announcement last year of the supplemental tax, the government promised to abolish royalty for the 30 old fields still paying it. It didn't do so until Jan. 1.

May says the pre-1982 fields have potential to produce as much as 440 million boe more oil and natural gas.

While royalty abolition will help sustain investment in mature UKCS fields, it doesn't fully compensate for the supplemental tax.

Twelve pre-1982 fields subject not only to the corporate tax but also the petroleum revenue tax (50% of profit) still face an overall marginal taxation rate of 70%.

After last year's changes, therefore, the tax regime for UKCS producers improves to the extent all taxes now apply to profits. Because of the supplemental tax, however, the burden has increased. UKOOA estimates the extra cost, even after royalty abolition, through 2010 at £8 billion.

"Clearly it will take time for the industry to rebuild the trust damaged by recent events," May says of last year's tax change. "But the general mood is that it is now time to move on and to focus on what needs to be done to maximize the economic recovery of remaining UKCS reserves."

To that end, UKOOA works closely with a government-industry task force called PILOT, which pursues ambitious goals for UKCS development and production. Five of PILOT's industry members, which serve by personal invitation, represent operators, all of them members of UKOOA. May participates as an observer.

Through 2010, PILOT hopes to sustain UKCS investment at £3 billion/year on a 3-year rolling average, maintain production of at least 3 million boe/d, prolong UK self-sufficiency in oil and natural gas, realize £1 billion of value from new businesses, and support as many as 100,000 more jobs than otherwise would have been available.

May says PILOT soon will publish a benchmarking study on technology and practices applicable to brown fields, based on a conference last December in Aberdeen.

Median line

UKOOA also is working on issues related to a framework treaty between the UK and Norway governing work along the offshore median line between the countries.

The treaty will aim to promote cross-border cooperation, boost recovery of oil and gas from the corridor 60 km either side of the offshore boundary, and seek ways to share utilization of North Sea infrastructure to ensure security of gas supply.

May expects the framework treaty to be signed in the first half of this year.

Crucial to the effectiveness of the treaty, he says, is a review of taxes applied to tariffs earned by pipelines, platforms, and terminals.

At present, marginal tax rates on infrastructure tariffs are 30-70%, depending on the system's age, which determines whether the petroleum revenue tax applies.

"Preservation of the infrastructure legacy is fundamentally important to the health and sustainability of the UKCS," May says. "Removal of fiscal distortions on tariffs will create a level tax playing field, provide an incentive to maximize use of existing infrastructure—thereby prolonging its life—and encourage the development of stranded satellite fields."

Another government issue important to UKCS producers is publication, believed to be imminent, of a UK government white paper on energy.

"UKOOA believes that diversity of supply, at competitive prices, is fundamental to achieving security of supply for Britain," May says in anticipation of that report.

Career highlights

James May was appointed director general of the UK Offshore Operators Association effective Mar. 1, 1997.

Employment

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May joined UKOOA after 71/2 years as director general of the British Retail Consortium, the trade association for the UK's retail industry. He earlier worked for 10 years with the National Farmers' Union, where he was head of legal services.

Education

May is a graduate of Sherborne School and Southampton University, where he studied politics and law before being called to the bar as a Member of Lincoln's Inn in 1974.