North Sea Future: Innovation Needed

North Sea Future: Innovation Needed
After the 'no' vote in the Scottish Referendum, attention now turns to the Wood Review and this December's Fiscal Review about how best to extract the remaining hydrocarbons from the UK North Sea.

A month after the people of Scotland elected to stay within the United Kingdom, the oil and gas industry is now shifting its attention away from political arguments and focusing on what is now to be done in the North Sea and the UK Continental Shelf in general. While the debate during the run up to the referendum on independence focused on how much oil and gas remained in the UK North Sea and how long meaningful production from the region could be sustained, now the focus is about implementing the recommendations made in the Wood Review – Sir Ian Wood's report on maximizing recovery on the UKCS.

It seems that the industry is on the same page as Sir Ian Wood, with oil and gas firms and the sector's advisors agreeing with the Wood Review recommendations. Meanwhile, they also want to see a positive Fiscal Review, expected to be announced by the UK government in December, which will encourage the industry to exploit the remaining hydrocarbons on the UKCS.

The Wood Review's Three Core Recommendations:

A new shared strategy for the UK for maximizing economic recovery, with commitment from the government and the oil and gas industry.

The creation of a new arm's length regulatory body that will oversee and develop a program of change and growth.

A greater collaboration in areas such as the development of regional hubs, sharing of infrastructure and reducing the complexity and delays in current legal and commercial processes.

In the immediate aftermath of the Scottish Referendum "no" vote, consultancy firm EY noted that because oil and gas was a "key battleground" in the independence debate it would seem "inconceivable" that the fate of the basin would slip down the political agenda.

Colin Pearson, a partner at EY's Aberdeen office, commented: "For the oil and gas industry to flourish, the findings of the Wood Review should be implemented as soon as possible and the impetus that has been created by the ongoing oil and gas fiscal review embraced."

Not long afterwards, at the end of September, Oil & Gas UK called for greater collaboration across industry and government. Publishing its Economic Report 2014, the industry organization pointed out that there are (possibly) still as many as 24 billion barrels left offshore on the UKCS but that radical fiscal and regulatory reform are "urgently needed" to maximize recovery of these hydrocarbons. Meanwhile, Oil & Gas UK said the industry "needs to act immediately" to address its unsustainably high, and rising, costs.

Oil & Gas UK Chief Executive Malcolm Webb said:

"Full implementation of Sir Ian Wood's recommendations for regulatory reform, and far-sighted changes to the fiscal regime, are needed in the next 12 to 18 months to stimulate new investment in exploration and production. Alongside this, the industry must improve its efficiency and reduce its costs as a matter of utmost urgency."

Oil & Gas UK Economics Director Michael Tholen added that the Fiscal Review "must be relevant, radical and robust" in order to deliver "a lighter tax burden, a simpler and more predictable system of field allowances and fiscal support for exploration".

North Sea Firms Biding their Time

So, the ball is now firmly in the court of the UK government. Indeed, business consultancy Deloitte believes that North Sea firms are sitting on new investment decisions until the future of the North Sea becomes clearer.

In its most-recent report on drilling, licensing and deal activity across northwest Europe, Deloitte found that significantly fewer wells were drilled during the second quarter of 2014 compared to previous quarters. It also found that there were also fewer asset deals between oil and gas companies completed during the quarter.

The North Sea industry has been grappling with rising operating costs that are having an impact on activity and investment decisions, according to Derek Henderson, a senior partner at Deloitte's Aberdeen office.

"It's no secret that the costs facing oil and gas firms on the UKCS have been a significant issue for some time now. Understandably, it tends to be more expensive to operate in mature fields where oil is much more difficult to recover. Research suggests it's now almost five times more expensive to extract a barrel of oil from the North Sea than it was in 2001," Henderson said.

Hiren Sanghrajka, CEO of oil and gas consultancy Upstream Advisers, believes that the North Sea industry needs to take a more stealthy approach to field development. This means smaller, independent firms that have been taking over fields from the larger majors need a service sector more in keeping with their scale.

"The current service companies are big and many times financially much stronger than the small operators who have acquired licenses from majors," Sanghrajka told Rigzone.

"The new type of operator has to make money by being cost efficient and that means keeping overheads low, headcount to a minimum and making use of outsourced technical services, etc. The current service companies, being large themselves and focused on delivering large projects (modifications or operations support) … will be challenged to provide cost effective outsourced services to the new, small, lean operators.

"This is where the service sector will also have to adapt to the cost challenges set by the new operators: by being innovative in their approach to design, construction and operations. I imagine that, like the new operators, there will be room for smaller companies who are niche providers of specialist technical, engineering and operations services who work in close cooperation with the new generation of operators. Maybe the risk/reward mechanism may also have to change to reward the services sector in a different way, [such as] equity or success-based upside remuneration."

In short, an innovative approach is going to be required to extract the remaining hydrocarbons that currently exist in the North Sea.

"Easy oil has gone. New technology will be the key enabler, along with a stable, responsive fiscal regime to reward the risk taking of the new, lean operators. Investors will still look for a decent return from their assets and government can play a vital role in ensuring a fiscal backdrop which encourages this," Sanghrajka added.

 



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