Future success of UK oil and gas requires greater collaboration and urgent action on costs, says industry

Out-Law News | 02 Oct 2014 | 4:34 pm | 2 min. read

Oil and gas firms working in the North Sea will not be able to make the most of the "significant" resources that remain without urgently addressing the "unsustainably high" costs of recovery, the industry body has warned.

Oil & Gas UK also called for greater collaboration across industry and with and between governments, and "radical fiscal and regulatory reform", in its annual economic report on the current status and future prospects of the industry. Its findings build on those of a previous report, which contrasted record investment in 2013 with falling exploration rates and rising costs.

"This report reaffirms our sector's position as the country's largest industrial investor, supporter of some 450,000 jobs, successful exporter of oilfield goods and services, and a provider of secure primary energy for the UK," said Malcolm Webb, chief executive of Oil & Gas UK. "However, to support a lasting and sustainable future, today we're calling for greater collaboration - between governments, between government and industry and within industry itself to face and fight the challenges ahead."

"Full implementation of Sir Ian Wood's recommendations for regulatory reform, and far-sighted changes to the fiscal regime, are needed in the next 12 to 18 months to stimulate new investment in exploration and production. Alongside this, the industry must improve its efficiency and reduce its costs as a matter of utmost urgency," he said.

To date, the equivalent of around 43 billion barrels of oil has been recovered from oil and gas developments on the UK Continental Shelf (UKCS), according to Oil & Gas UK's report; with potentially between 15 and 24bn barrels of oil equivalent (boe) remaining. It said that "encouraging" production in the first half of 2014 meant that the industry was on course to reverse years of decline, with figures from the Department of Energy and Climate Change (DECC) showing a 1% increase in production compared with the same period in 2013.

However, the report found that unit operating costs were now around 60% higher than they were as recently as 2011, while "the recent lack of exploration success and slow rate of bringing discovered resources through to maturity" meant that it would be difficult to maximise recovery without significant change. Webb said that "over one trillion pounds of expenditure" in 2013 money would be required if the industry was to be able to extract more than 20bn boe, but that the UK had to "compete for each and every pound of that investment" with projects and regions that offered better returns.

The body's recommendations for change covered three areas: radical fiscal and regulatory reform; unsustainable, and rising, exploration and production costs; and better collaboration. These conclusions reflect those of industry expert Sir Ian Wood in his government-commissioned report on how to maximise future oil and gas production, which was published in February. The government is due to publish its proposals for reform of the tax regime alongside the Autumn Statement in December.

"We need a lighter tax burden, a simpler and more predictable system of field allowances and fiscal support for exploration," said Michael Tholen, Oil & Gas UK's economics director. "The outcome of the fiscal review must be relevant, radical and robust."

"The latest Oil & Gas UK economic report could not be clearer in identifying the urgent need for change on the three specific fronts of reforming the fiscal regime, implementing the recommendations of the Wood Review and reducing the exploration and production costs the industry currently faces," said oil and gas expert Shirley Allen of Pinsent Masons, the law firm behind Out-Law.com. "Collaboration among stakeholders is an over-used expression, but Oil & Gas UK rightly stress that we are at a tipping point and change must be immediate to ensure value is maximised."

"The report makes for an interesting read, contrasting financial information on the UKCS against other markets as well as looking at the work of PILOT and focussing on case studies analysing the opportunities West of Shetland The report also considers the current status of the UKCS supply chain," she said.