As the last edition of Energy went to press, the ink was barely dry on the final report of Sir Ian Wood’s Maximising Recovery Review and the political bandwagon was still in town.
Now we have had a month to absorb the implications of the report and late last month some of my colleagues even had an opportunity to hear from the man himself at Oil & Gas UK’s breakfast briefing.
Sir Ian faced a Parkinson-style interview from Malcolm Webb of Oil & Gas UK in front of a packed audience and then responded to a flurry of questions from the floor.
Wood’s report recognises the huge potential of the UKCS to contribute to the UK’s energy security, GDP, balance of payments and employment but is realistic in identifying the challenges it faces: a lack of sustained capital expenditure on field development, falling production stemming from too few new developments and reduced production efficiency on existing fields, exploration at all-time low levels, ageing assets facing decommissioning and a failure to take up new technologies as well as cost pressures and competition for investment from other oil and gas regions.
The issues behind these dispiriting trends are complex but Sir Ian identifies the focus of operators on their own individual commercial objectives rather than maximising economic recovery across fields or within regions, past failures of fiscal policy, an under-resourced regulator, under-investment by operators in their assets, and a lack of collaboration across industry.
Sir Ian’s main recommendation is a new tripartite strategy for Maximising Economic Recovery from the UKCS (MER UK) involving HMRC, industry and a new independent regulator.
Typically, one would expect the process of putting in place a new regulatory regime of this type to take several years – however, there seems to be real momentum behind these proposals.
Although energy secretary Ed Davey’s formal response to the report is not expected until next month, there is a dedicated team in DECC taking this forward.
Sir Ian hopes that the Government will stick to its announced timetable under which the regulator’s CEO will be appointed in the summer, with a shadow body set up in the autumn, although he recognised this was challenging and might slip a little.
The regulator will be funded by industry and will have both new powers and additional resources to engage in a much more hands-on style of regulation. Sir Ian believes there is potential for this new approach to increase production over the next two decades by at least 3-4billion barrels equivalent.
The regulator should be at arm’s length from DECC with the ability to recruit top quality personnel with appropriate industry experience.
DECC currently has 50 staff dealing with oil and gas compared to the Norwegian NPD’s 200.
If the plan is to increase the UK regulator to a similar size, this will be no small challenge given current skill shortages.
Another challenge will be finding the right person to lead the new regulator – Sir Ian also identified some of the characteristics of the ideal candidate.
The person would need to have industry experience but also be able to deal with politicians, be a strong, charismatic leader capable of inspiring staff but also a pragmatic facilitator able to get things done – he admitted that the candidate was beginning to sound like Superman (or, when pressed, Superwoman).
The report identifies six key sector strategies which the regulator will need to develop, addressing exploration, asset stewardship, regional development, infrastructure, technology and decommissioning.
What is already clear is that Sir Ian wants the regulator and the industry to take a more holistic approach, focusing on extraction of overall value from the UKCS, rather than on independent field developments.
To achieve this, the regulator should be low on bureaucracy and high on skill, with a mandate to encourage collaboration and, where needed, to facilitate mediation to reach MER UK outcomes to industry negotiations (with powers to implement a resolution if outcomes are not in accordance with MER UK).
In order to implement these strategies the regulator will need some new powers to resolve disputes, to attend operating committee meetings, to have access to data and to impose sanctions including private and public warnings, removal of operatorship and ultimately removal of licences.
However, at the breakfast, Sir Ian made the point that most of the sanctions already exist and that he expected they would be exercised rarely with most action being voluntary.
He spoke of the delays (and loss of value) he sees within the industry (once more the finger was pointed at the lawyers and the commercial advisers).
He challenged the industry to move away from looking at individual commercial outcomes: instead working a more collaborative way, with all stakeholders benefiting from a share in the increased value this would create across the UKCS.
This is a challenge he believes that the highly skilled workforce within the industry is more than capable of meeting.
Fiscal policy was outside the remit of the review, but it is hugely important to the confidence and longevity of the industry.
It was no surprise that the UKCS fiscal regime was mentioned several times at the briefing (as it is in the report), in the context of tax changes on bareboat chartering as well as recent allowances for HP/HT developments and the Decommissioning Relief Deed.
Sir Ian stressed the buy-in of Treasury to the Wood Review and he believes that the document has influenced the Treasury towards a more constructive approach, reflecting his tripartite model of collaboration between industry, the regulator and the Treasury.
The hugely attended OGUK breakfast showed the interest in the Wood Review. It has been the main topic of conversation across the industry since it was published and all the signs are that it has take-up not only within the industry but, just as importantly, within government too.
Sir Ian has challenged the industry to change its pre-conceptions, its business and its strategies. History shows that the oil and gas industry, more than most, is capable of meeting challenges, of being innovative and of working together.
Penelope Warne is senior partner and head of energy at international law firm CMS Cameron McKenna
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