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UK government review recommends new regulator for offshore oil & gas

11 November 2013

The UK should set up a new regulator to encourage oil and gas companies to collaborate to help counter plunging North Sea production rates, a government-commissioned review said in its initial findings on November 11. The government launched the review of UK offshore oil & gas, the first in more than 20 years, following a fall in output of a third between 2010 to 2012. 

Led by Sir Ian Wood, former chairman of the Wood Group oil services firm, the report outlined plans to pump 3 billion to 4 billion barrels of oil equivalent (boe) more than would otherwise be extracted over the next 20 years. While production has been in decline since 1999, the big drop in recent years has seriously affected economic growth.

Five months into his review, the former chairman of Wood Group recommended a three-pronged strategy for maximising economic recovery of oil and gas, involving members from industry, the Treasury and a new regulatory body, established outside of the “severely under-resourced and too thinly-spread” Department of Energy and Climate Change (DECC). 

The new "arm's-length" regulatory body would drive collaboration between different companies, maximising the barrels pumped.

Industry experts have long said that Britain's North Sea, with its large number of operators, would be more efficient if there were more coordination between smaller companies and if larger companies were encouraged to allow other parties access to infrastructure they own.

The extra output, equivalent to at least 17% more production than the current estimate of 18 billion barrels still to come from the North Sea, would bring over 200 billion pounds ($320 billion) of additional value to Britain's economy, the review said.

"It is essential for the UK's future growth and prosperity that we maximise recovery of our offshore oil and gas resource. It is therefore crucial that industry and government act now to invest in this shared vision if they are to achieve these goals," Wood said in a statement.

The government's Department of Energy and Climate Change (DECC) would set up the body with "additional powers" to force collaboration and coordination between companies.

The companies, which the review recommended would fund the new regulator, would commit to collaborate in certain areas such as sharing pipelines.

Companies and government will now have an opportunity to comment on the initial findings before Wood publishes his final report early next year.

With the North Sea in its fifth decade of pumping oil and gas, new discoveries tend to be small and costly to exploit, while old platforms and pipelines need more maintenance, cutting output and profits.

The biggest oil companies, such as BP and Shell , are still active in the region but are concentrating on new projects off the West of Shetland in the North Atlantic. The older areas, where there is less oil left to be extracted, are managed by dozens of smaller companies.

Industry experts have also said maximising oil production from the North Sea will depend on appropriate tax incentives. Recommendations on taxation, however, were not within the scope of Wood's review.

Offshore industry association Oil & Gas UK said it welcomed the recommendations. Malcolm Webb, Chief Executive, Oil & Gas UK commented:

“The UK Continental Shelf (UKCS) is a highly competitive environment, with a record £13.5 billion being invested in 2013.  Yet the industry has changed considerably over the past twenty years.  It is much more complex, with the range of companies active in the North Sea growing in diversity.  The number of fields in operation has climbed from 90 to over 300 since the 1990s while the average size of new discoveries and daily production rates are falling.  

“This is a changing landscape but the challenge remains constant – how to maximise economic recovery of the UK’s remaining oil and gas resource.  

“It is clear from today’s record investment that there is an appetite to do business here in the UK.  The industry made it clear in its response to Sir Ian Wood’s consultation that there is also an appetite to examine how we do business here and recognition of the need for a fundamental change of approach if we are to secure the next phase of offshore oil and gas development in the UK.  

“A new level of collaboration will be required.  The catalyst for that will be the proposed arm’s length regulatory body to take on the stewardship role for this new era.  We welcome this proposal as an opportunity to build on the existing regulatory regime and take it to a new level.  The creation of a well-resourced arm’s length Regulator will, we believe, provide the single-minded focus required to deliver the maximum economic benefit for the industry and the country in this critical next phase of the UKCS’ life.

“But there is no time for delay.  To maintain high investment in this basin and prevent premature decommissioning of infrastructure, the Government needs to move swiftly ahead with these proposals.  Oil & Gas UK looks forward to the publication of the final report early next year and the opportunity to work with Industry and the Government to put these recommendations in place.”

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