Out-Law News 3 min. read

UK government to "fast-track" Wood's recommendations for maximising remaining North Sea oil and gas recovery

The UK Prime Minister has promised to "fast-track" steps identified by industry expert Sir Ian Wood to maximise recovery of the North Sea's remaining £200 billion worth of oil and gas supplies, including the creation of a new independent regulator.

In his final report (72-page / 6.9MB PDF), Wood said that between three and four billion more barrels of oil equivalent (boe) could be recovered than would otherwise have been produced through greater collaboration between government and industry and between energy companies themselves, and through more efficient awarding of production licences.

Energy expert Bob Ruddiman of Pinsent Masons, the law firm behind Out-Law.com, said that with government backing, the formation of a new industry regulator would boost investment and exploration activity in the North Sea.

"Sir Ian Wood's report clearly identifies the need for a regulator with the powers and resources to match an oil and gas industry which has been transformed in the last 10-15 years," he said. "It may be viewed as a radical change but it is absolutely necessary and this has the potential to be a game-changer by influencing future investment and ensuring that industry has the support to facilitate the maximum oil and gas recoveries possible."

Ruddiman explained that oil and gas production on the UK Continental Shelf (UKCS) had evolved over time from being an industry dominated by a few major players to now featuring participants of all sizes, ranging from 'super-majors' to small independents, and a far broader range of exploration and production activities.

"This transformation needed to be recognised and Sir Ian's measures views on what needs to be done to ensure maximum economic recovery emphasises the positives that will come from establishing a new regulatory body. With a change of stewardship, there will need to be an evolution and transition from the existing arrangements with a clarity of powers and additional resources, including more people who are skilled and qualified to execute those powers," he said.

The UKCS has already produced 41 billion barrels of oil and gas, but production has dropped in recent years as smaller companies work to exploit remaining supplies located in smaller, harder-to access fields and brownfield sites. Although production has fallen by 40% and production efficiency by 60% in the last three years, according to UK government figures, it has estimated that at least 20 billion boe more could still be produced.

Industry expert Wood, the recently-retired chair of Aberdeen-based energy services company The Wood Group, was commissioned to study how best to extract maximum value from the UK's remaining oil and gas supplies by the Department for Energy and Climate Change (DECC) in June. His interim report, published towards the end of last year, made a number of recommendations including the establishment of a new arm's length regulatory body to supervise the licensing regime and ensure maximum collaboration between operators.

Wood has recommended the adoption of a new shared strategy, called Maximising Economic Recovery for the UK (MER UK), to be developed collaboratively between industry, government and the new regulator. Under this strategy, government and industry would commit to ensure that production licences are awarded on the basis of recovering the maximum amount of oil and gas from UK waters as a whole, rather than from each individual licence block. They would also be expected to collaborate in relation to sharing infrastructure and geophysical information, and to reducing regulatory 'red tape'.

The new regulator would be independent of DECC and should be given a number of additional powers, such as the ability to take tougher, earlier action against firms and to resolve disputes between operators, according to Wood's recommendations. It would also be expected to use past performance against MER UK and current regulatory compliance as a formal measure of suitability when granting future licence applications. This regulator should be industry-funded in the same way as bodies like Ofgem, Ofcom and the Financial Conduct Authority are funded by their respective sectors, according to the report.

"The evidence I have received has been consistent and clear," said Wood. "The UKCS is facing a new set of challenges, which are not insurmountable, but will become more difficult to address if we do not act quickly. We must strengthen the capacity and capability of our stewardship regime to significantly enhance collaboration across the UKCS if we are to meet the demands of maturity and diversity, and maximise the economic benefits for both the country and the industry."

He said that the proposed new powers for the regulator were "much more about stronger and better stewardship than more regulation".

"I am clear that the development of the UKCS must continue to be led by the operators who provide the significant investment of funds, expertise and experience. The new regulator's role will be licensing, supervision and stewardship. It must be low on bureaucracy, high in skills and experience and strong and pragmatic. It must be the catalyst for maximising the economic recovery by facilitating, co-ordinating, mediating and promoting collaboration, removing barriers and encouraging more efficient exploration, development and production," he said.

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