Given that OTC will be in full swing in Houston as this is published, and that it is celebrating its 50th anniversary, I thought it would be timely to look back over 50 years of oil and gas in the North Sea with a bit of a legal lens. We are also celebrating at CMS, since our Aberdeen office is 25 years old this year so it’s a good time for reflection.
The key which unlocked offshore oil and gas exploration was the Convention on the Continental Shelf, one of three treaties agreed upon at the first UN Convention on the Law of the Sea in 1958.
The treaty, which entered into force in June 1964, established the rights of a sovereign state over its continental shelf. The UK was quick off the mark and that same year passed the Continental
Shelf Act which vested in the Crown any rights in the natural resources of the UK’s own continental shelf, although it took another year for the UK to agree treaties to delimit the boundary between it and the Norwegian and Dutch sectors.
Clear legal rules as to ownership of natural resources are easy to overlook in a stable democracy but are the foundations on which our industry is built – the consequences of lack of clarity over ownership of oil in Iraqi Kurdistan will feature in my column next month.
As we look to frontier areas for licensing, particularly the area around Rockall in the North Atlantic, we may discover not all is quite as black and white in our own backyard as we thought.
The first oil and gas licences for the UKCS were issued, and the first (unsuccessful) well drilled by Chevron, in 1964. Then came the first discoveries, which were gas rather than oil. The first producing gas field, West Sole, came on stream 51 years ago in May 1967 – tragically that field was also the site of the first major health and safety disaster for the industry, when 13 men died after the Sea Gem drilling rig capsized in 1965.
That led to some changes to safety rules although it was not until the Piper Alpha tragedy of 1988 in which 167 lives were lost for true reform to come – the 30th anniversary of that awful event will be marked by a major conference in Aberdeen in June and I will come back to that subject in July.
Since then we have also felt the impact of Macondo, which spurred the European Commission to turn its attention to the oil and gas sector with the introduction of the Offshore Safety Directive.
The first oil in the UKCS was discovered by Phillips Petroleum in the Norwegian sector at Ekofisk in 1969, followed the same month by Amoco’s discovery of Montrose. The 1973 oil crisis spurred exploration – BP’s massive Forties discovery followed in 1970 and and Shell’s Brent in 1971 although Argyll was the first oil field to produce in 1975.
These fields helped the UK through the 1979 oil crisis – at its peak in 1982, Brent alone provided enough oil to power half of Britain’s homes. When it came on stream in 1976 Brent was expected to have a life span of 25 years and yet it both it and Forties are still producing, although Brent is a decade into a massive decommissioning project.
Of course, the industry has faced a lot of ups and downs over that period. Although CMS’s own involvement in the oil and gas industry doesn’t stretch back 50 years, over my 25 years in the industry I have experienced several peaks and downturns and sometimes it feels as if we have to reinvent the legal wheel every time there is an oil price crisis. In the 1990s, with oil prices below $20, the industry embarked on partnering and “Cost Reduction in the New Era” or “CRINE” with a focus on alliancing, standard agreements (now the LOGIC suite), functional rather than prescriptive specifications, shared working practices, streamlined prequalification through FPAL and a reduction in paperwork through the procurement process.
Acting on these objectives, the industry was able to reduce costs by 40%. However, 20 years on, after operating costs ballooned and the oil price fell again, the OGA is now seeking to encourage collaboration, standardisation of equipment, a single project culture and more use of standard agreements to reduce costs.
As well as these economic pressures the industry has faced successive reforms of the legal and fiscal regime governing oil and gas. Apart from a brief foray into direct participation in the industry through BNOC in the 1970s, the UK has largely chosen to operate a pure licensing regime, with relatively light touch regulation, and to generate revenues from the UK’s natural resources through royalties (finally abolished in 2003) and taxes. Tax rates have waxed and waned (usually waxed) with changes in political direction but are currently at historically low levels reflecting the maturity and relatively high cost of the basin.
The most dramatic change in regulation in recent years has been the creation of the Oil & Gas Authority as a regulator independent of government with more resources and increased powers, and a mandate to maximise economic recovery – I’ve written a lot about that in this column as it has the potential to create a fundamentally different relationship between operators and the state, with a far more hands-on style of regulation. Lawyers may need to brush up their administrative law skills, as we may see challenges to the regulator as it tests the boundaries of its powers.
The UK will be leaving the EU next year, subject to the proposed transitional period to the end of 2020. The impact of Brexit on the UKCS may not be as severe as in some sectors, since the EU’s greatest influence on the sector has been in relation to health and safety and the environment, areas where the UK government has indicated that it intends to maintain existing high standards of regulation – however, there will inevitably be changes to consider as the detail emerges, as well as pressures on supply of skilled labour and friction in the movement of goods across borders. Lawyers will need to develop a better working knowledge of trade law.
We all know that over the 50 years since production began in the UKCS, more than 42billion barrels of oil equivalent has been produced – much of that has been from a relatively small number of very large fields with relatively simple export routes.
The development of the 12billion barrels or so which the Oil & Gas Authority projects will be produced in the next 30 years will be different – much of it will be economically marginal and lawyers and commercial people will need to be collaborative and imaginative to find ways of bringing it to market. However, this is not new to the UKCS – in our office we have a poster commemorating the signature of the many legal agreements necessary for the establishment of the Magnus EOR Project back in 2000, a complex project which involved 23 oil companies and numerous legal agreements and there are many other examples I could give. The increasing use of technology to meet the challenges of marginal resources will require a greater number of industry lawyers with skills in intellectual property licensing while others will develop expertise in decommissioning contracts as that becomes a significant part of daily business for the sector. There again, incentivising contractors to minimise costs while maintaining safety and environmental performance will involve some of those alliancing approaches which I saw much of in the late 90s. Plus ça change, plus c’est la même chose!
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