On FEBRUARY 24 this year, Sir Ian Wood published his final report setting out his proposals for maximising the potential of the North Sea (UKCS Maximising Recovery Review:
Final Report). The Report has been favourably received. The UK Government has pledged to fast track its implementation.
There is little doubt the report scores highly in identifying key problems presently experienced and in making logical proposals to address these issues. This column comes in praise of the report; however no one should be under any misconception about the scale of the task at hand. Nor should we overlook some inconvenient truths which the broad sweep of language in parts of the report does not address in detail.
In proposing a new government strategy for Maximising Economic Recovery from the UKCS (MER UK), Sir Ian envisages - a tripartite collaborative and cohesive partnership among HMRC, a new, independent, and much larger and stronger, government regulator, and the oil and gas Industry.
There are many challenges. First of all there is the time, effort and cost needed to re-base a system held together by statute, licensing regime and contract which has evolved over the last 50 years. Then there is the likelihood that while some processes lend themselves more easily to uniformity, others are less well suited to standard forms. There is also a paradox between the "Industry" welcoming sweeping changes with enhanced regulatory powers which may come into conflict with the commercial interests of individual companies from time to time. Is the new regulator any more likely in future to use powers which the existing regulator currently has today but rarely uses? Could the aim of attracting new investment conceivably be undermined by some of the proposed features of the new regime ?
Since the first exploration licences were issued 50 years ago, some 42 billion barrels of oil equivalent (boe) have been produced, with the UK Treasury benefiting from receipts in excess of £310 billion in production taxes, as well as large gains in employment, exports, a positive effect on balance of payments, and the skills and experience gained during that process. But oil production peaked in 1999, and in recent years has fallen steeply, by 38% between 2010 and 2013. This has been accompanied by a further worrying drop off in exploration activity. It is against this background, and with an estimated 12 to 24 billion boe remaining to be extracted if economic conditions support the effort, that Sir Ian was invited to review and report. The consequence of failure, and the economic prize upon success for UK plc or an independent Scotland, is clear for all to see. In Sir Ian's words, the report "has the potential to deliver at the low end an additional 3-4 billion boe over the next 20 years, worth approximately £200 bn to the UK's economy in today's prices, and at the high end will put the UK in a much stronger position to get closer to the 24 billion boe potential."
Implementing Sir Ian's report will necessitate a hive of activity and attendant cost to change the current regime. That is not to be criticised, if this is genuinely what it takes to achieve its objectives. Whether it can be delivered successfully remains to be seen. Some may say we have been here before in the industry with previous initiatives and commitments to collaboration and alignment, but this is on a much larger scale. Implementing these recommendations will need considerable political will and commitment.
Change takes time, and there are many recommendations in the report. For example, the new regulator may need to employ an extra 150 personnel on oil and gas industry scale packages, in an already tight market.
There may also be occasions when the use of the term the "Industry" belies the fact that it comprises many companies with different roles (operating companies; supply chain companies, etc), and different assets and competing commercial interests. Industry bodies may favour a strong regulator enforcing a collective good, but individual companies may feel the opposite when the regulator's opinion on MER conflicts with that company's commercial objectives for its own assets.
There may well be plenty for lawyers to be getting on with - an unintended irony perhaps given some mild criticism in the report levelled towards the industry, including the lawyers, for a perceived tendency to risk aversion and complication in negotiations and documentation.
There may also be a risk that implementing the report is perceived by oil companies and investors as increasing costs in the UKCS, and also increasing uncertainty especially if the regulator's discretion on various matters is wide. In conclusion though, let me repeat. The report is to be complimented. In the final analysis, the main challenge is that which has been laid down by Sir Ian to Government and the industry bodies. They will have to match all the positive noises with action.
Robin Clarkson is an Aberdeen-based partner of law firm Burness Paull, who specialises in the oil and gas sector