Wood Review: UK’s oil industry needs strong, independent regulator
Sir Ian Wood has launched the Final Report of his UK Continental Shelf (UKCS) Maximising Recovery Review calling for a new Regulator to oversee the UK’s offshore operations.
The new Regulator would be a new arm’s length regulatory body charged with effective stewardship and regulation of UKCS hydrocarbon recovery, and maximising collaboration in exploration, development and production across the Industry.
Light touch not enough
According to the report, in the early days with large fields to be found by major operators, the free market model worked well with a light touch Regulator. Some large fields were discovered and the UKCS was successfully launched into what was to become one of the UK’s greatest industrial success stories. However, over time, the number of fields has increased, now to over 300, new discoveries are much smaller, many fields are marginal and very inter dependent, and there is competition for ageing infrastructure. Alongside this, the present Regulator has halved in size in the last 20 years and, as a result, is clearly struggling to perform a more demanding stewardship role. Additionally, the UKCS is facing stiff and growing competition from many international offshore regions and we need to step up our game to attract more investment. The problems the Review has identified will be largely resolved by evolving the model to introduce a stronger Regulator with broader skills and capabilities able to significantly enhance the level of co-ordination and collaboration.
At present, the Regulator must compete for attention and resources within an extremely busy Department of Energy and Climate Change (DECC).
Wood says that the new Regulator must have a significant degree of independence and, with a strong CEO and enhanced autonomy, resources and capabilities, will be able to become far more involved and influential in the industry’s challenges. With competitive remuneration levels, it should become an employer of choice attracting some of the best young graduates as an important first career step. It should also attract experienced personnel from operators and the supply chain who will welcome the opportunity to help meet a wider UKCS challenge and play a vital role in shaping the future of the industry. The success and reputation of the Regulator will be determined by the calibre of people it attracts and retains and I am encouraged by the quality of interest already expressed in feedback received.
Greater use of powers
To be effective, the new Regulator must be prepared to make greater use of its current powers, and will be helped by the proposed additional powers which are focused on maximising economic recovery by encouraging and facilitating collaboration and removing dispute barriers. Wood explains that the additional powers are not designed to force operators to invest but major investments will only be approved if they are consistent with the MER (maximising economic recovery) UK strategy whilst providing a fair return to licensees. The Regulator will influence and guide exploration, development and production investment decisions towards achieving the MER UK strategy. Recovering more oil and gas resources from the UKCS, and attracting more players and investment, will be to the benefit of all parties.
The objective of the infrastructure strategy should be to ensure that the life of the existing infrastructure is prolonged to facilitate the processing, transport and
export of the UK’s offshore oil and gas resources, and that investment in new key infrastructure is achieved. This strategy should be developed on a regional basis by the regulator and industry, to serve both MER UK as well as the commercial imperatives of individual licence holders. This will require the Regulator to identify critical infrastructure, monitor its capacity, track current throughput and potential volumes within its catchment area, and be cognisant of the commercial drivers needed to sustain such infrastructure. The Regulator must also look to facilitate investment in key new infrastructure consistent with regional development plans.
The pace of new developments is being constrained in part by the inability of third parties to negotiate appropriate technical and commercial terms to
achieve access to existing infrastructure. As a result, developments are taking longer to implement and often end up being sub-optimal. Fundamental to the problem is a misalignment of commercial and technical interests between the owner of the hub platform and infrastructure and the party seeking access to process and transport
their well stream. The hub owner typically views the provision of processing and transportation to a third party as a low value opportunity, particularly when they have no equity interest. As a result there is little incentive for the hub owner to take on business which could add risks to their own operations and use up capacity in their facilities. In contrast, the
small operator seeking access has little bargaining power and often suffers interminable delays in trying to counter the risk issues.
Asset Stewardship Strategy
The objective of the asset stewardship strategy should be to ensure that operators are held to account for the proper stewardship of their assets and infrastructure
consistent with their obligations to maximise economic recovery from the fields under their licences and with consideration to adjacent resources. In particular, operators should be expected to develop, maintain and operate their assets and infrastructure at all times in an efficient and effective manner and should share their asset stewardship strategy with the Regulator. The Regulator should set dear expectations on critical stewardship factors such as production efficiency and recovery efficiency and work with each joint venture
partnership to ensure they are met. Over the last three years, the production efficiency of many fields has declined sharply and is now averaging 60 per cent across the UKCS.
The Review believes that urgent and full implementation of the recommendations in this report will have the potential to deliver, at the low end, an additional 3-4 billion boed over the next 20 years, worth approximately £200 billion to the UK’s economy at today’s prices, and at the high end, will put the UK in a much stronger position to get closer to the 24 billion boe potential.
Energy and Climate Change Secretary Ed Davey said that he fully backs Sir Ian Wood’s recommendations and we will start implementing them immediately.
“Britain will still need large amounts of oil and gas, even as we cut our carbon emissions over the coming decades. So with recent large falls in North Sea production, I commissioned this report from Sir Ian Wood to see how we can reduce the oil and gas we would otherwise import by boosting UK offshore production.
“The UK Government already supports Scottish energy projects worth hundreds of millions of pounds each year, and our large tax and consumer base will ensure that the potential £200 billion benefit Sir Ian Wood has identified can be realised.
“This will be good for our energy security, good for the economy and good for jobs.”
New regulator in August
According to information on the UK government’s website, DECC officials are undertaking detailed planning work around establishing the new arms-length body and aim to have the new body in operation, at least in shadow form, by the Autumn 2014.
Sir Ian’s key recommendations:
- A new shared strategy for “maximising economic recovery (of oil and gas) for the UK”, with commitment from the government (HM Treasury and a new Regulator) and the oil and gas industry.
- Creation of a new arm’s length regulatory body to oversee and develop this programme of change and growth.
- Greater collaboration by industry in areas such as development of regional hubs, sharing of infrastructure and reducing the complexity and delays in current legal and commercial processes.