In 2013, it was apparent that the UK offshore industry faced three significant challenges, each posing a very serious threat if not overcome.
We had an uncompetitive tax regime, weak and ineffective regulator within the Department for Energy and Climate Change (DECC) and a cost base which was, frankly, out of control.
We at Oil & Gas UK therefore adopted as our top priority the tackling of these three very serious threats. Following much work within our organisation and across the industry and government, I think we can regard the overall situation as now improving quite considerably.
However, we are by no means out of the woods and there is one challenge on which we have not made enough progress.
The coalition Government’s decisive restructuring of the North Sea tax regime in the 2015 Budget has now largely restored the international competitiveness of the UK offshore oil & gas tax regime.
There remains some detailed work to be done on the new Investment Allowance, but this is uncontentious business which should complete early in the life of the new Parliament.
The Government also took decisive action on regulation, importantly commissioning Sir Ian Wood to conduct an independent review. The full implementation of that report, with which the industry was in overwhelming agreement, including establishing the important new Oil & Gas Authority, is well under way.
We can therefore look forward to implementation of a new tripartite approach to maximising production from the UK Continental Shelf (UKCS), as recommended by Sir Ian, in which Treasury, the Industry and the OGA will be required to play their part to the full.
However, while it is clearly evident that fiscal and regulatory improvements are in train, I have to say that, to date, we have yet to see the same advance on the huge cost and efficiency challenge which the industry still faces.
Unit operating costs rose at the frightening rate of 13% per annum from 2003 to 2011, and from 2012, it was 20% a year.
Over that same period, average production efficiency across the North Sea fell from 80% to 60% and has only partially recovered, to about 65%.
Truth is that the UKCS, with its large number of complex and technically challenging fields plus ageing infrastructure, has become the most expensive province to operate in the world.
This was a serious problem even with $100 oil. But at today’s $60 or so per barrel this has become an immediate and serious threat to the very future of the basin. Many existing fields do not produce sufficient cash income to cover their operating costs.
Tough decisions must now be made and implemented to enable restoration of the province’s cost competitiveness, and jobs and investment secured medium to long-term.
This need was recognised well before the oil price plunged. PILOT, the Government and industry body established a Production Efficiency Task Force in May 2013. The following year, Oil & Gas UK’s Cost Efficiency Task Force was set up to facilitate pan-industry initiatives to tackle the fundamental issues driving cost escalation. A target to reduce unit operating costs by 40% per barrel by 2020 has been set and work is under way under five themes.
The 1st looks towards efficient deployment of people, of course without any slackening of health and safety performance. We must find practicable and immediate opportunities to improve the efficiency and effectiveness of both the on- and offshore workforces.
2nd is to maximise production time and hence efficiency by, for example, improving the execution of planned turnarounds (TARS), when platforms are shut down for annual maintenance.
This theme will also look to draw on the expertise of the Oil & Gas Technology Leadership Board, which is considering better use of technology, including new methods for well construction and the use of remotely operated robotic devices to enhance the safety and efficiency of installation inspections.
3rd is logistics planning. Here, progress has already been made on sharing spare parts, helping supply chain and inventory managers to accelerate replacement of critical equipment. Other proposals include rig and vessel clubs so operators can share rigs, boats and associated support services.
4th relates to simplification and standardisation of processes and procedures, such as in training and competence and equipment procurement.
Two recent subsea projects are to be assessed and analysed in order to see where better efficiencies could have been achieved. Step Change in Safety is addressing duplication of standards relating to safety critical roles and tasks, while OGUK is encouraging helicopter companies and oil & gas operators to adopt a standard approach to preparing and undertaking audits in response to the Civil Aviation Authority’s recommendation to reduce the cost of those, without in any way impairing their effectiveness.
5th – management of late-life assets, with the aim of achieving a major cut in decommissioning costs while ensuring a seamless transition from operations to cessation of production. OGUK is exploring a proposal for a new decommissioning operating model and collating examples of good practice which can be shared.
Let us be clear on one point in particular – the remedy for our current ills cannot be to simply cut costs – we must address, in a serious and fundamental way, our processes and behaviours.
Just putting this sector on a crash diet would leave it weakened and without the entrepreneurial drive it needs to survive and thrive. As with all crash diets, the risk is that they cannot be sustained and so, in no time at all, there is a reversion to the old bad ways and an even larger waistline.
So our challenges abound but they are not insurmountable. By making fundamental changes to improve efficiency, we can channel our collective efforts to create a leaner, stronger more resilient business model.
I am confident that Deirdre Michie, in her new position as CEO, along with the rest of the strong team at OGUK, will continue to support this great sector and its world-class supply chain on this work, and to great success.
There has never been a more important time to network and discuss current challenges with industry peers. The OGUK conference in June provides an excellent opportunity for us all to discuss and review to the full these matters as an industry.
Only by working together will we deliver lasting change. Our goal must be to be smarter, more effective and more efficient than anywhere else in the world. The North Sea has been in that position before. It can be there again.
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