This is the fourth in a series of researched articles on the oil and gas industry, the situation in the North Sea 
and the relation of this overall picture to a potentially independent Scotland.
We are publishing these as a series because oil is one of the most important, complex, contentious – and fascinating – matters of wide interest, given its role in the ongoing campaigns for independence from the United Kingdom and for the retention and revisioning of that union.
Articles – some short, some longer – will cover, in this order:
- The Industry Today
- Europe and Shale Oil
- The North Sea
- The Wood Report
- North Sea Investment
- Refining
- The UK Refineries
- Grangemouth – the game changer
The purpose of the series is to inform, not to promote any political stance, although there are political indicators in the facts of the matter.
The interim Wood Report
The first article in this series looked at the situation in today’s oil industry – where American shale oil and gas has had a formative impact in the shape of developments worldwide – with the industry currently fighting to get the US government to lift its restriction on exporting LNG to countries with whom the USA does not have a free trade agreement.
The second article looked at the situation with shale gas in Europe; and the third brought the investigation back home to the North Sea, currently a hot topic here in Scotland – and likely to remain so in the run up to the independence referendum in September 2014.
In 2012-13, the oil and gas industry contributed £6.5 billion to the exchequer in corporate taxes on production. This amounted to 15% of all corporate taxes raised in the UK.
This fourth article follows on from the focus on the industry in the North Sea in looking at the interim outcome of the UK Government’s commissioning of Aberdeen-based Sir Ian Wood to review ways in which the UK might best maximise the economic recovery [MER] of what resources remain in the North Sea.
The interim report – UKCS [United Kingdom Continental Shelf] Maximising Recovery Review – is focused on how best to squeeze out the remaining North Sea oil and gas resources – which Wood estimates would free up a value of £200 billion, over time, for the UK economy.
The Wood report is, in our view, an irrelevance which we see largely as encouraging the government to spend a lot of money in subsidies and tax reliefs to flog a dead horse.
Its irrelevance is not because its key plank of getting the industry to work in an internally collaborative manner would not be more efficient. It is because that solution does not fit the nature of the industry and that therefore attempts to induce it are unlikely to deliver. And for the major industry players, the return on investment in scraping up the dregs in the North Sea does not – at the present time – stack up sufficiently.
The situation in the North Sea is one of an asset inevitably declining in its maturity.
This decline is not just in the volume and quality of the residual resource. It is in the industry’s degraded North Sea infrastructure, which has seen no serious reinvestment since the mid-1990s.
Indeed, with North Sea production effectively beginning in 1976, there are platforms dating from back then [like Brent Bravo] which are still in use, forty years on.
The issue of asset integrity, of the ‘stewardship’ of the assets companies are licensed to operate’ is a matter for which the oil and gas industry, in pursuit of the fast buck, has had scant regard. And of course, the longer they’ve left maintenance, upgrading and long overdue decommissioning, the more it has become someone else’s problem – ours.
The hard figure for the impact of such failures in ‘stewardship’ on the performance of the North Sea industry is, as Sir Ian cites, production [in]efficiency which in 2012 was running at an average of 60%.
This slow pace of investment and reinvestment in efficient production cost the Treasury £6 billion in lost production revenues in 2012
The report says that, although North Sea investment is seeing a record high of over £13.5 billion invested in 2013, with new fields being brought into production, this situation ‘masks some serious underlying problems’, which are:
- ‘Over the last three years production has fallen by 38%, with the UKCS producing around 500 million boe less over the period. 360 million boe of the decline is due to the rapid fall in production efficiency [from 70% to 60%].
- ‘The fall in production has cost HM Treasury (HMT) up to £6 billion in lower tax receipts.
- ‘The decline in exploration led to less than 50 million boe being discovered in 2012. ‘
- ’A failure by the industry to invest meaningfully in Improved Oil Recovery [IOR] and Enhanced Oil Recovery [EOR] techniques.
These days, discoveries are usually smaller and more expensive to exploit. Sir Ian says that the average North Sea discovery size over the past ten years has been 25 million boe; and that 90% of its current fields in production are producing fewer than 15,000 boe per day.
The resulting development costs per barrel have risen five fold over the last decade.
Sir Ian’s conclusion is that ‘if such a trend continues, the UK will fail to recover even a small portion of the exploration potential that still remains across the UKCS, which DECC estimate to range from 6 – 16 billion boe.’
The industry is not responsible for energy security or for growth and sustainability in national economies. These matters are down to governments. The industry is responsible only for making a profit for its shareholders for as long as possible.
It is not in the industry’s interests – yet – to invest vast sums in scraping out what is left in the North Sea.
So the purpose of the Wood review is conflicted in trying to bring together industry and government in a mutual commitment to ‘maximising economic recovery’ of North Sea resources.
This is of far greater importance to Government than to Industry, which has other games to play, or other plays to game.
For the UK government, the North Sea is its major oil and gas resource – so getting the marginal barrell out is very much in its interests. The industry, with other assets in other places, really couldn’t care less – unless the Government makes it worth its while.
It is fair to say that the heart of the Wood report is about making it worth the industry’s while to get involved in hoovering as much as possible of the residual resource out of the North Sea.
There is a passage in the report demonstrates the industry’s commercially understandable lack of interest in investing in maximising the recovery of remaining North Sea resources – and that the solution is to make it worth their while. GThe passage is: ‘The consequences of a past lack of investment are also becoming increasingly apparent. While ageing assets are a factor, there are strong signs that under-investment in assets and insufficient uptake of Improved Oil Recovery (IOR) and Enhanced Oil Recovery (EOR) techniques will have a significantly adverse effect on maximising economic recovery for the UK. It is acknowledged that some Enhanced Oil Recovery (EOR) schemes are costly and complex to operate, but industry must be encouraged to invest more in these schemes to avoid leaving significant value behind.’
But the key solution offered by the report runs counter to the historical nature of the industry.
The report puts its major emphasis on the imperative for industry players to collaborate with each other and with government in the effort to clean out the North Sea; and, through the regulator, to be induced and compelled to do so.
Sir Ian talks about the efficiency of the industry sharing facilities, equipment, knowledge, data and the interpretation of data.
The report says: ‘the ready access to timely data is a prerequisite for a competitive market and this is even more important in an industry which relies on good data to create value and support its safe operation.
‘The new Regulator should give consideration as to how this should be achieved and include this in the licence terms accordingly.
For example, to promote greater openness on asset performance, the Regulator should require production data to be provided within timings to be determined, typically within three weeks of the end of the month in question.’
But these are cats who traditionally stalk alone. They bid – competitively – for block exploration licences on the basis of their own researches and tests. They keep results and performance figures close to their chests.
The notion of this, above all industries, acting collaboratively in the sharing and interpretation of data is about as improbable as it gets.
The report admits: ‘operators have pursued individual commercial objectives in insolation, with limited shared commitment or obligation to maximise economic recovery across fields or within regions of the UKCS’.
It says: ‘lack of cooperation and collaboration across industry has increased costs, caused delays, and led to poorer recovery. For example, the Review has found more than 20 instances in the last three years where the inability of operators to agree terms for access to processing and transport infrastructure has led to sub-optimal (more expensive / lower recovery) developments, significant delays or in some cases stranded assets.’
This underlines the fact that this is an alpha male industry. So why does Sir Ian imagine that a new regulator will come up with a wheeze to transform its players into touchy-feely collaborators?
The baits to induce the industry at least to go through the motions include titbits that will cause public concern.
The principal focus of the proposed new ‘arms length’ and more independently empowered regulator would be on facilitation not regulation.
This leads to one of many internal contradictions in Sir Ian’s argument.
He admits that: ‘Ageing infrastructure brings increasing pressures on standards and safety. Thus, maintaining ageing infrastructure and encouraging new infrastructure investment is vital for maximising further production.’
Then the report specifically suggests that the regulator: ‘should not cover the regulation of Health and Safety nor Environmental matters.’
It also, on several occasions, slips into play the need to delay decommissioning. This move leads to another major contradiction in the argument of the report.
Sir Ian repeats the need for investment to make the maximising of recovery of the remaining North Sea resource achievable.
But then he says: ‘New infrastructure is typically designed only for specific developments and without taking account of wider potential demand. Over the last three years, ten Floating Production Storage and Offloading vessels (FPSOs) have been selected for new fields. These have enabled the development of fields that would otherwise have been uneconomic, but have higher operating costs and poorer field recovery. Greater efforts must be made to use existing infrastructure where available.’
It seems contradictory to plead for investment and then to complain at demonstrable instances by the industry in investing successfully in the ‘development of fields that would otherwise have been uneconomic’ – simply on the grounds that this investment might have been more efficiently managed in a collaborative regime.
This is the sort of first class asset management the public sector needs but which the ‘play the cards close’ private sector oil industry sets at a discount.
Then there is what might well turn out to be a contradiction in terms – the consequences of the funding of the new and substantially well resourced ‘arms length’ facilitating regulator whose establishment Sir Ian recommends.
The industry has presented Sir Ian during his review period with a wish list that reads more like a letter to Santa but which Sir Ian nevertheless puts forward.
Talking of the ‘field allowances’ tax relief the Treasury introduced to incentivise the industry to invest, Sir Ian first reports that, in his review:
- ‘Interviewees warmly welcomed the allowances and believe they will make a significant contribution to maximising economic recovery. A significant number of Interviewees also suggested that Government should consider further extension of field allowances to incentivise EOR [enhanced oil recovery] as the business case emerges. This would promote new technologies, increase recovery and encourage major refurbishments of existing fields, thereby prolonging field life and [our emphasis] postponing decommissioning.
- ‘Interviewees also suggested looking at end-of-life fiscal plans to encourage business models which retain essential infrastructure, and combine late-life operations and decommissioning.
- ‘Interviewees expressed the view that bespoke allowances should be at a minimum within a simpler and stable fiscal regime within each area/play of the UKCS. This would enable better industry planning and significantly reduce the present level of work on bespoke applications.
- ‘The Review found strong views on the need to stimulate exploration, particularly in less prospective areas.
- ‘Interviewees suggested the need to incentivise seismic and exploration wells for operators who currently lack production and also for less prospective areas. The rate of Exploration drilling has halved over the last ten years and the UKCS must see a significant step up in exploration over the next 5-10 years to achieve MER UK [maximising economic recovery].’
Assume a situation where the sort of facilitating regulator Sir Ian recommends was established and was delivering the sort of subsidies and tax reliefs proposed in this fairly unbuttoned wish list above.
If such a regulator were funded by the industry in the model put forwards in the report, the regulator might well be at arms length from the government – but would it be at arms length from the industry?
At heart, what the Wood report is recommending is less a regulator than an advocate – and one better than the best lobbyist with the highest level of access. This ‘advocate /lobbyist’ would actually be empowered to take independent decisions on a spectrum of helpful matters.
A hilarious footnote which looks like a deliberate attempt to wind up the environment lobby is the report’s recommendation that: ‘Industry should look for areas to work in collaboration with offshore renewables where mutually beneficial cost savings can be found: for example, the potential for offshore wind farms to provide power to oil and gas platforms.’
The conjunction of offshore wind farms with the carbon emissions from the oil and gas platforms is quite wonderfully provocative.
The Wood report may prove an irrelevance – but it does provide a few grins.
Note: The full text of the Wood Report is here.
The photograph above – of ageing platforms in the Brent Field – is by Arne List and is reproduced here under the GNU Free Documentation licence.