Wood Review Aims to End Squabbles in UK's North Sea

By John Kemp. The opinions expressed here are those of the author, a columnist for Reuters.

Britain's North Sea exploration and production business is set to be transformed, with cooperation replacing competition and proactive, intrusive regulation replacing a light touch.

On Monday, ministers promised to back fully the recommendations contained in Ian Wood's review on maximising oil and gas recovery from the UK Continental Shelf (www.woodreview.co.uk).

A powerful new regulator will be spun out of Britain's Department of Energy and Climate Change (DECC), staffed by industry experts with salaries to match, to end the squabbling among offshore operators and promote a strategy based on shared infrastructure and regional development plans.

Government, industry and the regulator will all be officially committed to the goal of maximising economic recovery (MER) of the oil and gas that remains in offshore fields.

And the regulator will be given strong new powers, including compulsory mediation among operators and the power to withdraw exploration and production licences, to ensure that all operators behave in line with this goal.

But the problem is that the Wood review treats symptoms rather than underlying causes.

The issues facing Britain's North Sea oil and gas industry are structural rather than behavioural. Compelling more cooperation may not be enough to stem the region's decline.

Another Shale Victim
The shale revolution has profoundly altered the North Sea's place within the global oil and gas industry.

As a result of fracking, the marginal barrel of oil in the world now comes from an onshore shale play in North America. For the UK North Sea to continue developing, it must be able to compete with oil costing just $80 per barrel.

Britain's remaining North Sea oil and gas fields are mostly marginal, which is why the major oil and gas companies have mostly quit the region.

In a world of $150 oil, even the small UK fields would look like a vital resource. In a world of $100 oil, they start to look much less attractive.

Much of the infrastructure in the North Sea is ageing and will need expensive maintenance and upgrades to remain in a safe condition.

Small operators are already struggling to raise the funding to drill wells and develop fields and may not be able to pay for their share of common infrastructure upgrades.

There is little the new regulator can do about cost pressures, from high salaries to rig-hire rates, which the Wood review identifies as another problem hampering exploration and production.

Awkward Operators
"The fundamental licensing model by which the UK monetises its offshore oil and gas resources is the right one," the report insists, and development "must continue to be led by the operators".

But it cannot hide the coordination problems and mounting frustration as the North Sea oil and gas industry matures and changes.

In the 1970s and 1980s, the UK North Sea was characterised by a small number of giant fields operated by large integrated companies such as BP and Shell.

But in the 1990s and 2000s that has given way to a much larger number of mostly smaller fields and a plethora of independent operators.

Some are behaving in ways that are detrimental to maximising oil and gas recovery, according to the review, and must be given new incentives to force them to cooperate for the benefit of the industry and the country as a whole.

The Wood review complains: "The UK Continental Shelf is perceived as being one of the most difficult and adversarial legal and commercial basins in the world, disproportionately driven by risk aversion to the detriment of value creation.

"Whilst acknowledging there are genuine technical difficulties that can impact negotiations, the frequency of failure to agree between and within consortia on key issues, including access to infrastructure and development of field clusters, is very damaging," it adds.

There are a number of companies that refuse to collaborate, and "operators have brought many of the problems on themselves", the review warns.

"Industry must challenge this culture, and senior management must play a leading role in delivering change."

In case exhortation is not enough, however, the review wants a powerful new regulator to settle the disputes and enforce cooperation - if necessary by removing licenses from operators who refuse to play together nicely.

It promises the new regulator, "will play a vital role in facilitating, coordinating, mediating, promoting and catalysing collaboration, removing barriers and encouraging more efficient exploration, development and production", while being "low in bureaucracy, high in skills and experience, and strong and pragmatic".

Pwerful New Agency
DECC has just 50 specialist staff working on oil and gas licensing, exploration and development issues out of a total payroll of 1,600.

Its specialist oil and gas staff has almost halved since the 1990s, when there were far fewer fields in production, and compares with over 200 in Norway's Petroleum Directorate and 70 at the Netherlands regulator.

Within the department, the oil and gas team must compete for scarce resources and ministerial attention with much larger groups working on climate change, utility bills and investment in new power stations.

A new specialist regulator, reporting to the department but established outside it, would create a much stronger focus for oil and gas regulation.

By recommending that it have a strong chief executive and a specialist staff of geologists, engineers and commercial personnel recruited from industry, the review aims to make the regulator a key interlocutor between and principal adviser to Britain's finance ministry, DECC and offshore oil and gas operators.

Creating a new agency, rather than simply adding extra personnel within DECC, will send a "clear signal" that the government expects a "step change" in the management of offshore oil and gas resources and that this is not just a rebadging exercise.

The review wants the new agency to have the confidence and the expertise to intervene more intrusively and aggressively.

The terms of existing exploration and production licences already allow DECC to intervene but are often not used by a regulator that prefers to employ a "light touch".

The review also suggests the regulator should sponsor some speculative seismic surveys and should consider more favourable tax treatment for exploration, such as in Norway, where there have been large finds recently.

The review does not say so explicitly, but a powerful new regulator also would be in a much stronger position to lobby finance ministers to support future investment by granting extra tax breaks.

Creating a powerful agency to lobby the treasury for more tax relief could be the review's most important legacy.

Stranded Oil Resources
The UK North Sea has already yielded 42 billion barrels of oil and gas and could yield another 12-24 billion more, according to Wood.

But production has been falling since 1999, and the rate of decline has accelerated recently. New fields are mostly high-cost, small and marginal economically.

Nearly all fields now in production produce less than 15,000 barrels per day. In the last two years, just 150 million barrels of new oil and gas have been discovered. "There has not been a significant (multi-hundred million) discovery for five years," the review warns.

The review worries that much of the remaining oil and gas may be left behind unless the decommissioning of existing pipelines and platforms can be delayed and operators can be cajoled or compelled into working together to exploit adjacent fields by cooperating on joint pipelines and projects such as enhanced oil recovery (EOR).

EOR projects, like hydraulic fracturing or carbon capture and storage, could help extract billions of extra barrels of oil from old and geologically difficult fields. But they are expensive, and in fields that are already marginal they may not be competitive.

But there may be limits to what even a dynamic new regulator, armed with strong powers of persuasion and compulsion, can achieve against the structural changes that are sweeping the global oil and gas market.

The Wood review makes a useful contribution, but the new regulator may struggle to make much difference to an industry that is being gradually undermined by the superior economics of shale.

(Editing by Jane Baird)