(The opinions expressed here are those of the author, a
columnist for Reuters.)
By John Kemp
LONDON Feb 24 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
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
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
"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
But it cannot hide the coordination problems and mounting
frustration as the North Sea oil and gas industry matures and
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
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
POWERFUL 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
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
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
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
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
(editing by Jane Baird)