According to the latest Oil & Gas UK Business Sentiment Index, the UK offshore oil and gas industry currently has a pessimistic outlook for the first time since 2009. In this three-part series, we consider the factors contributing to the industry’s current mood and efforts to secure maximum economic recovery from one of the most mature offshore basins in the world.
Addressing the Challenges Faced by the UK Continental Shelf (UKCS) Oil and Gas Industry
Part One of this series identified factors contributing to the current negative outlook for the UKCS oil and gas industry. Recognising the need for Government intervention to secure the future recovery of oil and gas from the UKCS, in June 2013, the Secretary of State for Energy & Climate Change commissioned Sir Ian Wood to conduct an independent review of offshore oil and gas recovery in the UKCS (the Wood Review). The Wood Review published its final report in February 2014 (the Final Report).
The Wood Review made four principal recommendations to address the challenges faced by the UKCS oil and gas industry:
- Government and Industry should develop and commit to a new strategy for Maximising Economic Recovery from the UKCS (MER UK).
- A new arm’s length regulatory body should be created and charged with effective stewardship and regulation of UKCS hydrocarbon recovery, as well as maximising collaboration in exploration, development and production across the industry.
- The new Regulator should take additional powers to facilitate implementation of MER UK.
- Develop and implement important sector strategies.
The Wood Review estimated that the full and rapid implementation of the above recommendations could deliver 3-4 billion barrels of oil equivalent more than would otherwise be recovered over the next 20 years (2016-2035), estimated to be worth around £200 billion in additional revenues to the UK’s economy at today’s prices (gross, undiscounted).
Reducing the Legal and Commercial Burden of Working in the UKCS
According to evidence gathered by the Wood Review, the UKCS is perceived as “one of the most adversarial legal and commercial basins in the world, disproportionately driven by risk aversion to the detriment of value creation”. The Wood Review found a significant number of disputes and disagreements arising in the UKCS, mainly on access to processing and transport infrastructure and new field cluster developments, both of which have a significant impact on maximising economic recovery.
In order to alleviate the legal and commercial burden of working in the UKCS, the Wood Review recommended:
- The industry should, at least in the interim, commit to using standardised agreements, processes and procedures, such as the Joint Operating Agreement, Confidentiality Agreement, Proximity Agreement, Pipeline Crossing Agreement and Decommissioning Security Agreement.
- The new Regulator should work with the industry to develop protocols and processes, based on past learning, for dispute resolution (including the use of expert assessors where appropriate).
- Power should be given to the new Regulator to provide recommendations on disputes and disagreements within an agreed timeline and structure, ending with a recommendation to the parties concerned. Although the recommendation would be non-binding, a failure to accept the outcome could, in certain circumstances, result in sanctions. This process would not impact upon the any party’s rights to commence dispute resolution proceedings.
- The new Regulator should have the right to attend Joint Venture meetings, particularly where areas relating to delivering MER UK or disputes are to be discussed, in order for the Regulator to fully understand the challenges faced by the industry.
The Wood Review’s recommendations received substantial industry support and positive engagement from DECC, HM Treasury and senior Government Ministers. However, those recommendations are unlikely to have any meaningful impact on the future of the UKCS unless they are implemented by the UK Government. In the final part of this blog series, we will outline the efforts made by the UK Government to date in this regard.