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Securing a bright future

Published:  01 April, 2014

The British economy could receive a potential £200 billion boost over the next 20 years, through the recovery of an additional 3-4 billion barrels of North Sea oil and gas, according to a report commissioned by the UK Government. ODEE reports.

The UK is reliant for North Sea oil and gas for more than half of total oil and gas used, and will continue to need around 70% of gas in the energy mix out to 2030.

Therefore Britain will still need large amounts of oil and gas, even as it cuts its carbon emissions over the coming decades.

Maximising domestic oil and gas production would increase Britain’s domestic energy security and subsequently reduce the UK’s reliance on expensive imports.

However production has fallen by 40% in the last 3 years, and the efficiency with which oil and gas is produced has fallen to 60%, costing the UK economy £6bn.

So with recent large falls in North Sea production, the UK Energy and Climate Change Secretary Ed Davey commissioned an independently led review by Sir Ian Wood – the Wood Review. His Final Review published last month builds on his interim report released in November last year, to see how the United Kingdom could reduce the oil and gas that it would otherwise import by boosting UK offshore production.

Sir Ian’s core recommendation in his Final Review is a new strategy, Maximising Economic Recovery for the UK (MER UK), which proposes more rigorous stewardship of the UK’s remaining oil and gas resource through the creation of a new independent government regulator with additional powers and resources, strong tripartite co-operation between the regulator, Her Majesty’s (HM) Treasury and the industry, and greater collaboration between the oil and gas production companies.

Oil & Gas UK (the leading representative body for the UK offshore oil and gas industry) chief executive Malcolm Webb said: “The UK Continental Shelf (UKCS) still has significant oil and gas recovery potential, with up to an estimated 24 billion barrels of oil equivalent (boe) to be found, developed and produced offshore… The number of fields in operation has climbed from 90 to over 300 since the 1990s, new discoveries are typically small, production is falling, costs are climbing, and exploration is at an all-time low.

“The industry engaged strongly with the Wood Review from the start. It has acknowledged the need to re-examine the way it does business on the UKCS and recognises the growing pressure for fundamental change to maintain the basin’s competitiveness, attract investment and sustain activity for the next twenty years and more. To maximise the recovery of the country’s oil and gas resource will require a much greater degree of collaboration on the part of both industry and the government.”

He explained that Oil & Gas UK strongly welcomed the proposal for a new arm’s length regulator with additional powers and resources. The organisation sees this as the necessary catalyst for change, ensuring that the stewardship of the country’s oil and gas resource is taken to a new level, but he highlighted that the new tripartite approach is key and crucially important. All three parties have a role to play, with the industry, the new regulator and HM Treasury sharing a common vision of the steps that must be taken to deliver the maximum economic benefit for the industry and the UK in this critical next phase of the UKCS’ life.

He added: “This is a seminal moment in the history of the UKCS. The report is a game changer. We have the opportunity to secure a bright future for our industry and unlock at least a further £200 billion for the UK economy… Collaboration is key to safely maximising the potential of the UKCS.”

Sir Ian Wood’s key recommendations in his Final Review include:

• 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.

Sir Ian Wood’s Interim Report in November 2013, highlighted the challenges now facing the UKCS: the number of fields has increased to over 300; new discoveries are much smaller; many fields are marginal and very interdependent; and there is strong competition for ageing infrastructure. In short, the UKCS is now a patchwork of interconnected and interdependent operations. There is also growing competition from many international offshore regions. At the same time, the present Regulatory function in the UK Department of Energy and Climate Change (DECC) has halved in size over the last 20 years and now lacks the broader capability and resources to perform the much more demanding stewardship role that is required.

The Interim Report issued four core recommendations for consultation:

• Government (HM Treasury and the new Regulator) and Industry must adopt a cohesive tripartite approach to maximise the huge economic value and energy security opportunities that still lie off the UK shores. The Final Report sets out the key principles of MER UK and the role each party will be required to play.

• The creation of a new arm’s length regulatory body in charge of effective stewardship and regulation of UKCS hydrocarbons. With broader skills and capabilities, the new Regulator should play a vital role in promoting collaboration and removing barriers to encourage more efficient recovery of UKCS hydrocarbons.

• The new regulatory body to be given additional powers to facilitate implementation of MER UK and to encourage and influence collaboration in industry.

• The Regulator, working with Industry, should develop and implement strategies to under-pin delivery of MER UK.

A prerequisite for the Final Review however, was that Industry should also give a clear commitment to collaborate and demonstrably work to the MER UK strategy.

These recommendations received overwhelming support from Industry in written feedback and at various meetings, as well as positive engagement and encouragement from DECC, HM Treasury and senior UK Government ministers.

Sir Ian’s Final Report takes this feedback into account and provides more information on how he sees MER UK working. It also outlines six sector strategies for the Regulator and Industry to take forward to help achieve the MER UK outcome. These cover exploration, asset stewardship, regional development, infrastructure, technology and decommissioning.

Sir Ian Wood said: “The proposals and limited new powers are much more about stronger and better stewardship, establishing standards and procedures for collaboration and dispute resolution, as opposed to more regulation. I am clear that the development of the UKCS must continue to be led by the operators, who provide the significant investment of funds, expertise and experience. The new Regulator’s role will be licensing, supervision and stewardship. It must be low in bureaucracy, high in skills and experience, and strong and pragmatic. It must be the catalyst for maximising the economic recovery by facilitating, co-ordinating, mediating and promoting collaboration, removing barriers, and encouraging more efficient exploration, development and production. In this way, the new Regulator will influence and guide investment decisions towards achieving the MER UK strategy.”

He added that recovering more oil and gas resources from the UKCS, and ensuring a fair return to investors for their commercial risk, will attract more players and investment, and will be to the benefit of all parties.

Of key importance, he explained, will be the knowledgeable and better informed Regulator, working closely with HM Treasury, providing advice to inform fiscal decisions to meet the new challenges arising from maturity, and the opportunities from frontier areas and new plays.

To read the Wood Review in full please visit: www.woodreview.co.uk

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