Whilst I do not underestimate the pain and damage that has been inflicted by the oil price crash it is apparent to me that the industry and Aberdeen have shown great resilience in the face of huge adversity. Lesser industries and lesser cities could have panicked and folded. However, the human cost in terms of jobs lost and lives disrupted all across the industry is terrible. I hear that a total of 120,000 UK oil and gas jobs are now expected to be lost and that the number is still growing. I just do not understand why this is not headline news across the UK. In human terms, it is worse than what is sadly threated in the steel industry. In economic terms, it is quite possibly much worse.
Steel, BHS but what about the North Sea
When the awful news of 11,000 job losses at BHS broke it was widely discussed across all the UK radio and TV channels and featured as the lead story in most of the Press. However, we are talking about ten times that number job losses in the oil industry and yet in comparative terms this has received much less media attention. One problem, which has always dogged the industry, is the lack of interest in it south of Dundee and certainly south of the border. Everyone in the industry needs to work harder at spreading knowledge about these matters and the importance of this Industry right across the UK so that they receive the attention they properly deserve at the national level, not just in the North East.
Nonetheless, it has been encouraging to see purposeful action now being taken to try to mitigate the human impacts of the recent downturn and help Aberdeen diversify its industrial and economic base. I have long thought that Aberdeen needs to do that. But to enable it to happen, major investment in transport, housing, schools, hospitals and social infrastructure is urgently needed alongside a determined campaign to sell the many benefits of the region. It’s good to see the bypass now being built. Many other similar major projects will be required but the appallingly long time it took to begin the building of the peripheral road has to be a lesson on how not to do it. The defeat of Union City Gardens project is another example of a sad failure to understand the need for action to improve the city’s attractiveness to inward investors and Aberdeen’s cramped and old fashioned air terminal, where you often risk a soaking as you walk to or from the plane, has to be another. These are not the only examples I can think of. So I have to say there is plenty of scope for improvement and it needs to happen fast. However, all power to the excellent initiatives now underway and led by Sir Ian Wood and others. I trust the governments, north and south of the border, will promptly come through with all the support and substantial funds required from them for this much needed investment in a more diversified future for Aberdeen.
Making the old new
However, Aberdeen can still have a continuing, illustrious and rewarding future in oil and gas, but a new and clear strategy also now needs put in place and acted on in order to enable that to be realised.
Top of the list for me is an urgent need for change in Government energy policy. Currently, in my opinion, it is a mess of confused and conflicting objectives and it needs to be reset to recognise the inevitable and strong need for UK oil and gas production in significant quantities for decades yet to come. All too often, instead of focussing on the total energy situation, governments north and south of the border have obsessed on the issue of electricity generation. Vitally important as electric power is, it still only accounts for roughly one third of UK total energy supply. Another third relates to heat. Over 80% of UK homes are heated by natural gas, which is by far the best economic supply solution for both our domestic and industrial heating needs. The final third of our energy supply relates to transport, where oil is the only credible current technology. The idea that a majority of either transport or heating in the UK could be electrified in the next couple of decades is delusional . And as for electricity itself, thanks to Government failure to secure sufficient new large scale gas powered generation, we can now see prices, unreliability of supply and increase in particulate emissions from diesel generators all on the increase. That is a truly dismal result, which could and should have been avoided.
So why has this happened? Well a large part of the blame has to be laid at the door of the hapless UK Department for Energy and Climate Change (DECC). When DECC was first created many hoped it would deliver a better informed and focussed energy policy. Instead we got a department which was seriously under-resourced and might have been more accurately titled “Department for Climate Change and sometimes Energy”. This is not to belittle in any way the importance and seriousness of the climate change challenge but rather to say that the energy part of DECC’s brief and especially that related to the fuels which deliver over 70% of our total energy supply (i.e. oil and gas), has been very seriously under played.
Harking back to my days at Oil & Gas UK, I recall undertaking briefing sessions for each new Secretary of State having responsibility for energy policy, from Patricia Hewitt through to Ed Davey, on the important facts it seemed they didn’t know about the UK oil and gas industry. It would have been counterproductive for me to say this then, but it always raised two questions in my mind “Why don’t they seem to know all these facts?” and “Why haven’t DECC officials already briefed them on this?”
Additionally, there was almost a “revolving door” procession of Energy Ministers, which I am sure in practice meant that that few of them had enough time to properly understand the issues before they were moved on. Also, have you ever wondered how many qualified engineers there are amongst our MPs at Westminster? I believe the answer is not far from zero. The same will certainly be true for Government Ministers and even senior civil servants, including at DECC. So maybe it shouldn’t come as a complete surprise that we have a questionable energy policy if it is created by people who are often only in office for a few months and who maybe didn’t fully appreciate, or were not properly briefed on, the important technical issues.
Paving a new path
So thank goodness for the Wood Report, because, with the creation of the Oil and Gas Authority (OGA), which that Report called for, we can expect this situation to be significantly improved with the formation of a new, well-resourced regulator staffed with technical professionals drawn mainly from outside the ranks of the civil service. I know many were disappointed when the Government loaded the cost of the OGA mainly onto the industry but, even in these straightened times, I still feel that is a price worth paying. It is unfortunate that the legislation needed to properly form the OGA as a separate company has taken so long and I am concerned to hear that OGA may also be trying to act as a sort of industrial adviser to the contractor community (which is the job of the Department for Business and not DECC nor OGA) but hopefully OGA is now fully able to give expert advice on oil and gas issues to policy formers all across Government and most importantly, those in DECC, The Treasury and The Cabinet Office.
The industry certainly has need of a good regulator as it faces the worst crisis it has ever faced, which I recently heard Deirdre Michie, the excellent new CEO at Oil & Gas UK, accurately describe as a “perfect storm”. That also reminds me that I must make it very clear that I no longer speak for or with the authority, approval or support of O&GUK. All of the comments in this article are solely my own personal view and no responsibility or blame for them should fall on my previous employer or any of its staff, with none of whom have I consulted on this article. Although I would just add that the industry has never had greater need for Oil & Gas UK than it does now.
I should also tell you that, in my view, the industry must accept responsibility for a fair share of the problems it now faces. Too many people, in all parts of the industry, failed to exercise the necessary rigour on costs and allowed themselves to be lulled into a false sense of security when oil prices rose to levels which they should have known would not last.
Cutting through silos
Many companies, of all sizes, also failed to work openly and collaboratively together in pursuit of increased efficiency and improved performance. One awful example of this (and I really don’t understand how it was allowed to happen) is the Sullom Voe Terminal’s failure to accommodate the gas handling needs of the Lagan Tomore fields. That in my view is a terrible example of failure. Sadly, I can think of others but this one in my view is the worst in recent years. Too many times I have heard people blaming obstructive lawyers or divisive commercial advisers for such failures. Nonsense. Lawyers and advisers take instructions. A failure to achieve nationally important agreements is a reflection of poor leadership (in this case it seems to me within both the Sullom Voe consortium and DECC) and should not to be shrugged off or simply blamed on the lawyers or advisers who serve that leadership.
More of the ‘same old, same old’ will not do. The industry’s global economic landscape has dramatically changed. The UKCS is not going to revert back to the ‘good old days’ of high prices and high costs. In this hugely changed and challenging context, mere cost cutting and overhead trimming is not going to provide the answer. We really need to do things very differently and not pretend that marginal improvements in current behaviours will be enough. For a decade and more I have heard people repeatedly say “we need to get the right assets into the right hands” and on far too many occasions this has clearly failed to happen. It is imperative that it happens now. Indeed, a major decluttering of the UKCS is needed.
Deck reshuffle
Those oil companies, which have ceased to invest and wish to depart, should be encouraged and helped to go. Those companies which are sitting on acreage they have no prospect of properly exploring should be persuaded to give it back to the Government. And those fields which have ceased to have a sustainable future in the new lower price environment need to be decommissioned in an orderly and cost effective manner. But care needs to be taken, in this much needed ‘Spring Clean’, not to unwisely decommission any vital assets that are critical to maximising long term recovery. The OGA has much work to do here. It needs to “sort out the wheat from the chaff” and it should construct and operate a lifeboat for any vital assets, whose owners might otherwise decommission them, so that they don’t just get swept away with stuff which is no longer of use. Indeed, given the current situation, I hope the OGA has already quietly started to prepare such a lifeboat.
I also believe, for a “clean-up” to be truly successful, a new decommissioning regime is needed. Amongst other things, this needs to enable specialist contactors to come in and take over late life fields and crucially, to receive from HMT the benefit of the relevant accrued decommissioning tax reliefs. Care also needs to be taken not to retire and decommission fields solely according to the timetables of individual operators or even worse, liquidators. This needs to be done in an expert, programmed, cost efficient and fiscally fair manner. Part of this should involve the Government dropping the vexatious and counter productive provisions of section 29 of the Petroleum Act. Those provisions are an attempt to make one company liable for the responsibilities of others. In my view, if tried, this will fail with chaotic outcomes. This crude and poorly thought through “enforcement procedure” needs to be replaced with a more effective decommissioning security regime, with fiscally efficient payments (not guarantees) made into sole purpose, tax exempt retirement funds for UKCS fields. I appreciate that not all in the industry or government will like a requirement to alienate funds in this way but in my view action sometimes needs to be taken to secure the overall situation which does not fully accommodate every individual preference. I think it is vital these changes are made to the decommissioning security arrangements so as to avoid the potentially huge burden for the public purse should it all go off in a chaotic and uncoordinated manner. The deep and lasting damage which would be done to public trust in the industry and government if this all fell into a terrible heap of costly dispute, recrimination and failure is not to be underestimated.
Resilience in adversity
Whilst I believe there is a need to radically declutter the holdings and significantly reduce the number of operators on the UKCS and whilst there is certainly an urgent need to sort out the decommissioning regime, many more exploration wells also need to be drilled. If the UKCS is to have a longer term future, then the industry must start exploring with the drill bit again and soon. In the current economic environment, I realise that is asking a lot of cash strapped companies and I am afraid I don’t have a well worked out plan to propose. However, I believe the answer probably rests with the Government, acting through OGA, giving a lead and substantial encouragement to the industry. We are fortunate to now have an expert and professional OGA – so why not use it to exercise its expertise by working alongside the industry in joint ventures on exploration wells? Just for example, could the OGA be funded by Treasury to do ground breaking and truly non-recourse project financing of important exploration plays or alternatively to take significant equity stakes in these with buyout rights for co participants on the OGA share in the event of success? The investments would need to be meaningful, in both the financial and technical senses, but given the importance of the industry to the economic welfare of this nation is it really out of order to suggest that the Government should spend a very small fraction of the well over £300billion it has so far taken in taxes from this industry in order to provide a prospect of a productive future, for an industry which has a crucial role to play in securing the energy security and economic prosperity of this country? Of one thing I am certain, we need to do something new and meaningful to stimulate exploration activity on the UKCS. Given current rig rates it’s difficult to believe there will be a much cheaper time to do this than now. Further cuts in production taxes are not the answer. Funds need to be made available for good projects on reasonable terms. Someone at OGA should be working on this problem as a matter of utmost urgency.
An enduring North Sea
Despite all the many and significant challenges which it faces today, I remain optimistic about the future of the UK oil and gas industry. The case for a strong presence of oil and gas in the UK energy mix for the foreseeable future is, in my view, undeniable. This country simply cannot afford to leave its indigenous oil and gas resources in the ground. The OGA gives Government a professional understanding and ability for informed action on these matters that it has never had before. Recent events have been very testing indeed but also prove beyond doubt the resourcefulness and resilience of the Industry. The Government and the Industry now need to pool their powerful competencies and deliver continuous and significant improvement in the cost, quality and sustainability of all operations on the UKCS. Amongst other things this will require purposeful collaboration across industry and government, a decluttered and less complicated ownership structure and a new and fairer decommissioning regime. But none of this is rocket science. It is all achievable. It will also set in place the foundations for the next half century of success for and great careers in the UK oil and gas industry, both in this country and internationally. An industry for which Aberdeen must remain home base and a home in which our industry works in partnership with the local communities and along with the existing and new industries which also need to grow and prosper in and around this remarkable city.
