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Collaboration vital if North Sea oil and gas industry is to continue to thrive, says PwC

Out-Law News | 02 Apr 2014 | 4:28 pm | 2 min. read

Oil and gas production in the North Sea needs to enter a "new phase of operation", with more effective collaboration between firms on decommissioning and better management of the supply chain, according to professional services firm PwC.

In a new report, the firm welcomed the recent recommendations of industry expert Sir Ian Wood, who has called for the establishment of a new arm's length, industry-funded regulatory body and the creation of a shared strategy with industry and government involvement. However these recommendations, which have now been accepted by the government, could not "operate in isolation", PwC said.

"While it's exciting to see a continuing drive to explore and develop in new areas such as West of Shetland, there is no escaping the fact that exploration and production is down on previous years," said PwC's Kevin Reynard. "The stark reality is that even if all the planned wells go ahead, the rate of drilling is still too low to recover even a fraction of the potential resources."

"But our future outlook could be so much brighter. With UK taxpayers effectively footing the bill for half the costs of any decommissioning activity in UK waters, forecast to be worth around £35 billion, is it not in our best interests to harness our own expertise and grab the opportunity ourselves? If we don't act fast, the risk is that overseas companies will raid the UK's revenue base, setting themselves up as the 'go to' global experts," he said.

PwC's report highlights two areas in which companies operating in the North Sea could either reduce costs or increase profits by working collaboratively: by taking advantage of decommissioning opportunities and related tax reliefs as facilities come to the end of their life; and by better managing the supply chain from a "one business mind-set". Currently, supply chain costs account for £27bn annually, or around half of firms' combined operating costs, according to PwC. By developing a shared supply strategy, firms could cut these costs by up to 10%, it said.

However, increasing costs were now a "defining feature" of operating in the North Sea, according to report. These were "likely to rise still further" as firms try to exploit remaining oil and gas reserves, which tend to be located in smaller, harder-to-access fields and brownfield, it said.

According to UK government figures, North Sea oil and gas production has fallen by 40% and production efficiency by 60% in the last three years. However, it has estimated that the equivalent of at least 20 billion more barrels of oil could still be extracted. In his report, which has been accepted by the government in full, Sir Ian Wood recommended the adoption of a new shared strategy between industry, government and a new regulator based on recovering the maximum amount of oil and gas from UK waters as a whole, rather than from each individual licence block.

The government has also committed to work with the new oil and gas regulator on a broad review of its tax treatment of the North Sea in order to "ensure that it continues to incentivise economic recovery as the basin matures". It has already introduced a number of incentives designed to boost production in harder-to-exploit areas, most recently a new allowance for ultra high pressure high temperature fields as part of the 2014 Budget