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Wood Review interim report estimates an additional four billion barrels of oil could be recovered

Out-Law News | 12 Nov 2013 | 2:54 pm | 3 min. read

The equivalent of up to four billion additional barrels of oil could be recovered from UK waters over the next 20 years if the recommendations of a Government-commissioned report are implemented "fully and rapidly", according to the industry expert behind the review.

Among the recommendations set out by Sir Ian Wood, the recently-retired chair of Aberdeen-based energy services company The Wood Group, in his interim report (22-page / 1.1MB PDF) is the creation of a new 'arm's length' regulatory body tasked with encouraging greater collaboration between oil and gas companies working in the UK Continental Shelf (UKCS).

Wood is seeking feedback on his recommendations before the second phase of the review, which will focus on strategies to make the most of the economic opportunities of retrieving remaining offshore oil and gas, gets underway. He is due to produce his final report early next year.

"When you have someone of Sir Ian Wood's standing stating that a rapid intervention and realignment of how we do things in the North Sea could harvest an extra four billion barrels of oil and gas, it would be foolhardy not to listen," said energy law expert Bob Ruddiman of Pinsent Masons, the law firm behind Out-Law.com.

"He has consulted widely and taken stock of how our international neighbours go about their business and I am encouraged by his recommendations. Collaboration has been relatively good in the UKCS; but we can certainly do better in working together and sharing information and technologies for the greater good, and to the benefit of the UK balance sheet," he said.

The UKCS has already produced 41 billion barrels of oil and gas, but production has dropped in recent years as smaller companies worked to exploit remaining supplies located in smaller, harder-to-exploit fields. Although investment in the UKCS is currently at a record high, of over £13.5bn, Wood said that this figure hid some "serious underlying problems" in the sector.

"While investment levels are rising and the near-term prospects for the UKCS are strong, as one of the most mature offshore basins in the world, it faces unprecedented challenges in a very different exploration and production environment compared to when production peaked 13 years ago," he said.

The report recommends the adoption of a new shared strategy to maximise the remaining opportunities located in the UKCS. Wood calls this Maximising Economic Recovery for the UK (MER UK), and states that it must be developed collaboratively by the Treasury, the new industry regulator and the oil and gas industry itself.

The report also makes a series of recommendations to each of these three parties. The Treasury must continue to build on recent steps to incentivise future recovery, which have included the creation of new tax breaks and incentives for older 'brownfield' sites and small fields; while the oil and gas industry would be expected to commit to greater cooperation in siting fields, sharing infrastructure and stewardship of assets.

However, the biggest change would be the creation of a new regulatory body, independent of the Department of Energy and Climate Change (DECC). This body would be given a number of additional powers, such as the ability to resolve disputes between operators and to take tougher, earlier action against firms that do not comply with their regulatory requirements. Past performance against MER UK and current compliance should also become a formal measure of suitability in respect of future licence applications.

According to the report, this new regulator should be funded by the oil and gas industry in the same way as bodies like Ofgem, Ofcom and the Financial Conduct Authority are funded by their respective sectors.

"Sir Ian suggests a stronger independent and better resourced regulator would have greater powers to encourage or even enforce collaboration, and I welcome a more hands-on approach if it will provide the returns he is forecasting from resources which would otherwise remain untapped," said energy law expert Bob Ruddiman of Pinsent Masons.

"If industry has to bear the cost of this step-change in how the UK produces oil and gas, then it should be seen as long term investment which will benefit operators, Government and the end-user in terms of best use of our natural resources, while strengthening our security of supply," he said.

Energy Secretary Ed Davey, who commissioned the review earlier this year, said that the interim report had given the Government "plenty to think about". It would set out its plans to make the most of the UK's remaining oil and gas supplies "in the New Year", he said.

"Our offshore oil and gas fields are one of Britain's great natural assets, and I'm determined that they should stay that way," he said. "There are people who would try to talk down their untapped potential, but today's report shows that with strong, co-ordinated stewardship by the UK Government, working in partnership with world-class operators, we can boost future returns by at least £200bn – and potentially much more."