The Wood Review proposes a new regulator for the North Sea. Elaine Maslin looks at SIr Ian Wood's recommendations and why a regulator is necessary.
Nearly 50 years after the first major discoveries in the North Sea, the basin’s UK industry is facing what representative body Oil & Gas UK has described as a watershed moment.
The industry is visibly buoyant. Aberdeen, the UK’s operational center, is booming: North Sea investment hit its highest in three decades, at £14.4 billion (US$24 billion) in 2013, and recruitment is high. However, recent events—the final Wood Review report and Oil & Gas UK’s 2014 Activity Survey—have highlighted that all is not well.
2013 UK North Sea production was 1.43MMboe/d—the lowest it has been since 1977. Yet, in 1977, all the production came from just seven fields. Today, the same level of production comes from 346 fields, figures highlighted recently by James Edens, vice president and managing director of CNR International (UK).
The record-high spending is expected to halve by 2016- 17, according to the Activity Survey. Operating costs have risen painfully more than expected, and will continue to do so, and exploration rates A North Sea watershed are woefully low.
The Wood Review was commissioned to assess the situation and propose solutions. It was commissioned by UK Energy Minister Edward Davey last year, after a sharp, three-year decline in production and exploration drilling on the UK Continental Shelf (UKCS).
The final report, Sir Ian Wood’s “UKCS Maximising Recovery Review,” includes recommendations to set up a new industry regulator. He says industry collaboration, regional hub developments, and increasing exploration will be keys to the basin’s future success.
Launching the final recommendations from the review in Aberdeen in February, Sir Ian, founder and former chairman of engineering services group Wood Group, did not mince his words. He said the industry was “individualistic,” and had seen too many “failures, disputes, and lost opportunities.”
The backdrop – production falls, costs rise
Production in the UKCS has fallen 38% over the past three years. Exploration drilling fell to a record low in 2011, with just 14 exploration wells drilled, and it has yet to recover. In 2013, there were 15 wells drilled, discovering just 80MMboe. The fear is that, if exploration drilling does not increase, known and yet-to-find reserves will be lost, because infrastructure will no longer be in place.
Further, fields that are found now tend to be smaller, with more complex ownership, and the ability to agree on access to third party infrastructure notoriously difficult.
“The current rate of exploration drilling is totally inadequate to exploit the undiscovered potential of the UKCS within the lifespan of existing infrastructure,” Sir Ian’s final report warns. “To highlight the size of the challenge, based on exploration performance seen over the last 4-5 years, the review estimates that less than 3 billion boe will be discovered by 2030. Even increasing exploration drilling back to that seen prior to 2008 will only lead to an additional 1-1.5 billion boe being discovered by 2030. A step change in approach is needed.”
The exploration challenge
Oil & Gas UK’s Activity Survey, published days after the Wood Review, echoed the review findings. It said exploration in the basin is facing its biggest challenge in 50 years, adding that capital spending is expected to decrease by 50% by 2016-17.
Oil & Gas UK chief executive Malcolm Webb said:
“This year, 25 exploration wells are planned, which still stands far below the 44 drilled just six years ago, and, even if all the wells proceed, the rate of drilling is too low to recover even a fraction of the potential resources.”
Overall, proven reserves on the UKCS fell from 7.1 billion boe in 2012, to 6.6 billion now, according to the survey. The problem is not limited to finding reserves. The survey found that while there is more than 10 billion boe currently in company plans, 4 billion boe of it has yet to secure investment.
Further, oil firms are struggling to keep a lid on costs, with operating costs reaching its highest annual costs, in real terms, in the life of the UKCS. In 2013, while production fell 8%, operating costs rose 15.5% to a record £8.9 billion ($14.8 billion)–or £17/boe ($28.4/ boe) on average (compared to £13.5/$22.5/boe in 2012). The figure is expected to rise in 2014, to about £9.6 billion ($16 billion). The number of fields with operating costs greater than £30/boe ($50/ boe) also doubled in the last year, according to the survey.
Work to date
The industry, with the government, has been trying to tackle the challenges. Oonagh Werngren, Oil & Gas UK’s operations director, says initiatives are underway, through PILOT, the industry/ government body, to increase exploration and recovery around existing assets, as well as helping to commercialize known but “parked” discoveries.
“There are 14 different projects the industry could get involved in and deliver significant returns from, but at $100 million a well, individual companies are unwilling to take the risk,” she told the Oil & Gas UK breakfast briefing. “Volumes companies are mostly drilling for focus on 10-20MMboe. We need a new wave of investment in different and new plays to go elephant hunting (fields over 1 billion boe) again.”
The Exploration Task Force (ETF) was recently created by PILOT to see how to boost exploration. The ETF has been looking at opening up new or neglected plays on the UKCS; improving use of seismic imaging, other new technologies, and data sharing; collaboration with other PILOT initiatives; and a comparative review, to see how the UK’s regime compares with those in other countries around the North Sea.
But, it has been acknowledged that the Department of Energy and Climate Change, which oversees the licensing regime on the UKCS, has been under-resourced and therefore unable to cover as much ground as it might wish.
A new paradigm
Summarizing the report’s main recommendations, Sir Ian said there should be a new shared strategy for maximizing recovery from the UKCS, with clear commitment from government, a new arms-length regulatory body, with additional powers to those under the existing regime, and a focus on greater collaboration in industry to enable regional, or cluster, hubs and field developments, and a reduction in delays and complexity. He emphasized that the new regulator’s role would focus on stewardship, rather than regulation.
The review outlines six sector strategies, covering: exploration, asset stewardship, regional development, infrastructure, technology, and decommissioning.
The largest section, and the biggest challenge, among these was how to increase exploration rates.
According to the review, more than 360 exploration wells have been drilled on the UKCS since 2000, leading to the discovery of 4.2 billion boe. However, post-2008, exploration activity has fallen sharply, reaching a low of 14 wells in 2011. Last year was not much better, with just 15 exploration wells reported.
According to the review, to boost exploration rates, access to geological information and the corresponding ability to evaluate new plays needs to be addressed. It suggests that “more high-quality seismic coverage of new plays could be a game changer.”
This could be through better seismic, data sharing, and government support for underexplored or new plays. New plays identified by PILOT’s ETF are listed as: West of Hebrides; Carboniferous, beneath the central North Sea, east Irish Sea, and southern North Sea; western Graben margin; fractured basement; subbasalt and cretaceous sands; high CO2 gas; Triassic west of Shetland; English Channel and southwest approaches; Permian in the east Irish Sea.
The review recommends the new regulatory body should help facilitate industry and seismic companies to carry out speculative seismic data acquisition, particularly targeting new plays, which lack up-to-date seismic coverage, with financial support if necessary.
The review also proposes creating, within 18 months, a new online, up-to-date, digital The basin in 2014, according to Oil & Gas UK, based on its 2014 Activity Survey. Malcolm Webb, chief executive, Oil & Gas UK resource containing information about the prospectively and geology of the UKCS.
It also says more should be done to enable timely sharing of well and seismic data, and that both the industry and government fail to make the best use of the British Geological Survey.
According to the review, industry also believes the current fiscal, or taxation, regime in the UK failed to provide sufficient incentive to explore, particularly in less prospective and more technically challenging areas, despite a recent string of tax allowances announced by the UK government’s Treasury. Work is currently ongoing to add a high-pressure, high-temperature field allowance.
The recommendations in Sir Ian’s review have gained strong support from industry, via Oil & Gas UK. But, the body says, they will need support from the industry and government to be implemented and to return the basin to growth in investment, jobs, and production.
“This will not be achieved without much hard work and dedication to radical change and sustained improvement, which will be required of us all, in both the industry and government–and there is no time to lose,” Malcolm Webb says. “We need to implement these changes without delay. The clock is ticking.”
Speaking at a press briefing to launch the final “UKCS Maximising Recovery Review,” Edward Davey said an implementation team to carry out the review’s recommendations was already running. He hoped to appoint a chief executive for the new regulatory body by summer, with a shadow body to be formed by autumn this year. Legislation to form the new body would also be put to the UK Government's next session.