Oil entrepreneur Sir Ian Wood last week published his Government commissioned report into the future of oil and gas exploration in the UK continental shelf (UKCS).
The report comes as industry body Oil & Gas UK released its annual activity report which showed that North Sea production in 2013 fell to 1.43 million boepd (barrels of oil equivalent per day) – its lowest level for 27 years.
These 1.43 million boepd came from 346 fields – back in 1977 all of the production came from seven.
After 50 years of operation, almost 40 billon barrels have been recovered from the UKCS and the Wood Review forms part of a new focus to maximise the recovery of what is left.
Sir Ian’s main recommendation is the appointment of a new regulator with the power to bring the industry and Government together, and ensure all is done to recover the possible remaining 24 billion barrels.
Sir Ian, who founded successful oil services company the Wood Group, said: “I see this as a watershed opportunity to ultimately reshape the regulatory environment, extend the life of the UKCS, and bring at least £200 billion additional value to the economy over the next 30 years.
“We need to step up our game to maximise the recovery of our hydrocarbon reserves and attract more investment.
“My Interim Report highlighted the challenges now facing the UKCS: the number of fields has increased to over 300; new discoveries are much smaller; many fields are marginal and very interdependent; and there is strong competition for ageing infrastructure. In short, the UKCS is now a patchwork of interconnected and interdependent operations.
“There is also growing competition from many international offshore regions. At the same time, the present regulatory function in the Department of Energy and Climate Change (DECC) has halved in size over the last 20 years and now lacks the broader capability and resources to perform the much more demanding stewardship role that is required.”
An estimated 470,000 people are currently employed in the UK industry, including over 60,000 from the North East and it contributes £12 billion a year in tax revenues to the UK.
Production from the North Sea peaked at four million boepd in 1999 and has declined steadily since.
Over the last decade the nature of North Sea operations have changed as smaller operators secured assets from the majors, resulting in legacy infrastructure challenges.
London-based Serica Energy, which discovered the Columbus gas field in southern North Sea in 2006, is still trying to figure out how to get the gas onshore as it has not been able to reach an agreement to use existing pipelines to an online terminal. This is believed to be one of 20 similar examples in the last three years.
Concerns that operators are not prepared to incorporate ground-breaking technologies, until they have proved robust elsewhere are dubbed the “race to be second” in the industry.
These concerns were raised by new NOF Energy chairman Paul Charlton, chief executive of PDL Solutions in Hexham, at the annual Oil & Gas UK activity survey launch in Newcastle last week.
The North East, where three-quarters of North Sea oil and gas platforms were made, is a hot bed of technological innovation, particularly in the subsea sector. The region’s subsea companies are working together to develop the Neptune National Centre for Subsea and Offshore Engineering in the way outlined by Sir Ian.
Andrew Hodgson, chairman of industry group Subsea North East, and chief executive of remotely-operated vehicle firm SMD, said: “We are pleased the Wood Review recognises the need for a technology focus. The proposed Neptune subsea technology centre will bring people and companies together, in a way envisaged by the Wood Review, to help us ahead of the rest of the world.”
On technology, Sir Ian’s report says: “Industry and Government must work together to identify the key technology requirements and to ensure the resources are put in place to deliver them.
“As part of the annual stewardship review, operators should be challenged to demonstrate they are actively deploying the best and most cost-effective technology across the UKCS to achieve MER UK (Maximising Economic Recovery for the UK), leveraging the capabilities of the UK’s own supply chain.”
The two main areas for the new regulator will be to ensure there is greater co-operation between operators on sharing infrastructure and maintaining the UK’s lead on technology.
Further strands of the Wood Review include ensuring all is done to maintain the integrity of existing assets and to encourage greater exploration.
Sir Ian’s report has been welcomed by the region’s leading oil and gas supply chain representative body Durham-based NOF Energy.
George Rafferty, chief executive of NOF Energy, said: “The recommendations in Sir Ian Wood’s report are very timely as Oil & Gas UK’s activity report is absolutely clear about the challenges facing the industry. Unless changes are made to the way the UKCS is managed the industry will not have the optimistic future that is really within its grasp.
“The benefits of the record levels of investment currently being made into the North Sea are being felt by supply chain companies, but a drop in investment can only have a detrimental effect on businesses operating at every level of the industry.
“However, the supply chain has a pivotal role to play in helping to implement some of the improvements to the industry that Sir Ian Wood recommends.
In particular, the skills, products and services developed by our experienced supply chain will address the recommendations to prolong the life of existing infrastructure as well as the better exploitation of existing technologies to maximise the recovery of oil and gas.
“These clear and present challenges have to be addressed to ensure stability and secure the future of the industry. However, I am confident that the implementation of Sir Ian’s recommendations has the potential to boost investment and create the stability required.”
Oil & Gas UK chief executive Malcolm Webb said: “The UKCS still has significant oil and gas recovery potential, with up to an estimated 24 billion barrels of oil equivalent to be found, developed and produced offshore.
“The number of fields in operation has climbed from 90 to over 300 since the 1990s, new discoveries are typically small, production is falling, costs are climbing, and exploration is at an all-time low.
“The industry engaged strongly with the Wood Review from the start. It has acknowledged the need to re-examine the way it does business on the UKCS and recognises the growing pressure for fundamental change to maintain the basin’s competitiveness, attract investment and sustain activity for the next twenty years and more. To maximise the recovery of the country’s oil and gas resource will require a much greater degree of collaboration on the part of both industry and the Government.
“We therefore strongly welcome the proposal for a new arm’s length regulator with additional powers and resources.
“We see this as the necessary catalyst for change, ensuring that the stewardship of the country’s oil and gas resource is taken to a new level. The new tripartite approach is key and crucially important.
“All three parties have a role to play, with the industry, the new regulator and HM Treasury sharing a common vision of the steps that must be taken to deliver the maximum economic benefit for the industry and the country in this critical next phase of the UKCS’ life.
“This is a seminal moment in the history of the UKCS. The report is a game changer. We have the opportunity to secure a bright future for our industry and unlock at least a further £200 billion for the UK economy.”
Energy and Climate Change Secretary Ed Davey, who commissioned Sir Ian’s report said: “Britain will still need large amounts of oil and gas, even as we cut our carbon emissions over the coming decades. So with recent large falls in North Sea production, I commissioned this report from Sir Ian Wood to see how we can reduce the oil and gas we would otherwise import by boosting UK offshore production.
“I fully back Sir Ian Wood’s recommendations and we will start implementing them immediately. This will be good for our energy security, good for the economy and good for jobs.”
OIL & GAS ACTIVITY
Oil & Gas UK’s annual activity report on oil and gas exploration, production and investment activities forecasts capital expenditure of around £13bn in 2014, the second highest year for investment on record with spending likely to remain above £10bn next year, following a record £14.4bn in 2013.
The report also points to better than expected production last year. New developments and an increased focus on production efficiency saw an average of 1.43 million barrels of oil equivalent per day (boepd) produced in 2013, 8% lower than in 2012 but a significant improvement on the average yearly decline of 15% experienced between 2010 and 2012.
Production is expected to pick up further in 2014 and, with 25 new fields expected to come on-stream over the next two years, production is projected to rise gradually to around 1.7 million boepd by 2018.
By then, however, 40% of production will come from new field developments, underlining the continued importance of finding new reserves and bringing them into production.
Senior representatives from Oil & Gas UK unveiled the findings of the report to members of the North East oil and gas community at a briefing in St James’ Park, home of Newcastle United FC, last week.
They went on to warn about the worrying decline in exploration, saying the industry is facing its biggest challenge in 50 years.
Only 15 exploration wells were drilled in 2013, according to figures from the Department of Energy & Climate Change (DECC), continuing a steep downward trend since 2008 when 44 exploration wells were drilled.
Exploration over the past three years has been at its lowest in the history of the UKCS and in 2013 replaced just 80 million barrels.
In a press statement to accompany the launch, Oil & Gas UK chief executive, Malcolm Webb, said: “Even if currently planned wells proceed, the rate of drilling is still too low to recover even a fraction of the estimated six to nine billion barrels yet to be found.
“Britain’s waters contain an abundance of oil and gas yet to be found and it is critical we find the means to turn the current state of exploration around. Rig availability and access to capital are the two main barriers noted by our members.”
Ronan Ferguson, senior business analyst, economics, for Oil & Gas UK, highlighted how this is just one of the apparent contradictions in the UKCS today.
The production outlook, boosted by the introduction of field tax allowances, looks encouraging, yet the survey finds fewer barrels in production, under development or being considered for investment than last year.
Of the 10.7 billion boe currently in company plans, four billion boe of these have yet to secure investment and proven reserves have fallen sharply from 7.1 billion boe in 2013 to 6.6 billion boe in 2014. Unless the rate of maturing new developments increases, investment is expected to fall from £13bn in 2014 to around £7bn by 2016 to 2017.
The report reveals the positive effect tax allowances have had in driving investment on the UKCS.
Over half of all capital expenditure in 2014 is in receipt of a field allowance. Of the 26 brown field projects initiated in 2013, 23 benefit from the brown field allowance. While total investment of £39bn is currently approved on the UKCS, there is another £35bn awaiting sanction which could deliver nearly three billion boe. These projects have a greater than 50% chance of proceeding, but being marginal are particularly sensitive to any cost increases.
The report also highlights continued rising costs. Operating expenditure rose by 15.5% to an all-time record of £8.9bn in 2013 and is anticipated to rise further to around £9.6bn in 2014. Average unit operating costs have risen to £17 per boe, while the number of fields with an operating cost greater than £30 per boe has doubled in the last year.
Webb added: “This industry is being challenged on a number of fronts. It is crucial to address rising costs and improve our capital efficiency. However, without greatly increased exploration success, more conversion of discoveries into production, a significant improvement in productivity, and a willingness to deploy enhanced oil recovery, we will not realise the full economic potential of our country’s natural resources.
“Sir Ian Wood’s Review, which published its Final Report earlier this week, is therefore a most welcome and timely intervention with its recommendations for new and more dynamic approach to regulation and greater collaboration from the Government, including HM Treasury, and industry.”
He concluded: “The UK’s offshore oil and gas industry is the country’s largest industrial investor, paying more tax into the Exchequer than any other sector.
“In order to sustain this sector’s sizeable economic contribution to Britain, it is vital that a competitive environment for investment is sustained.”