Responding to the Secretary of State’s commission to assess the impact of the sharp decline in global oil prices on the UK oil and gas industry, Oil and Gas Authority (OGA) Chief Executive, Dr Andy Samuel today published his initial findings and issued an urgent call to action for industry, Government and the regulator.
One year since Sir Ian Wood completed his Maximising Economic Recovery Review, the marked reduction in global oil prices has brought into even sharper focus the significant risks facing the UK oil and gas industry.
The DECC Secretary of State, through the UKCS MER Review, and HM Treasury, through its fiscal reform review, had the foresight to commission comprehensive analysis on the UKCS well before the current oil price challenges, giving insight and clarity on the serious challenges confronting companies operating in the North Sea.
While the UK remains a substantial producer of oil and gas, and significant potential remains in both the mature parts of the North Sea and across the frontier areas, profit margins are on a steep downward trend, leading many companies to significantly reduce new exploration, infrastructure investment and staffing levels over the past six months.
“I am working at pace to establish the OGA as a strong and effective regulator, which can be a catalyst for change and a facilitator of action.”
Dr Andy Samuel’s report identifies the two most immediate risks facing companies and highlights the urgent actions industry, Government and the OGA must take to protect current and future investment in this critical UK sector and sustain the considerable energy security, employment and economic benefits it delivers for this country.
The first risk is that the profitability of current oil and gas fields will be insufficient to attract continued investment. This could lead to the premature decommissioning of critical North Sea infrastructure and result in valuable oil and gas resources being left in the ground. The resulting ‘domino effect’ could have a negative impact on all areas of the industry from employment, to supply chain development, to technology innovation.
The OGA will urgently work with operating companies to take steps to protect critical infrastructure and complete rigorous economic assessments of key production hubs to explore the drivers of continued investment including fiscal levers. The OGA will require operating companies to prepare asset improvement plans and encourage a 30% – 40% improvement in operating efficiency. At the same time it recommends companies retain apprenticeship, trainee and graduate schemes, making sure that efficiency and cost reduction measures are sustainable.
“I have highlighted the key risks facing the industry, priority actions required and my expectations on delivery.”
The second risk is that a loss of confidence in the future potential of the UKCS could result in the UK failing to secure the critical long-term investment necessary to maximise economic recovery of the North Sea oil and gas resources.
The OGA will continue to support HM Treasury as it develops and implements a fiscal regime, which instils confidence and secures sustained investment. It will work with operating companies to revitalise exploration activity, encourage a programme of seismic acquisition in frontier and underexplored areas of the UKCS and improve the quality of data available to industry and the OGA.
Dr Andy Samuel, OGA Chief Executive, said: “Significant hydrocarbon resources and economic value are yet to be delivered from the UK North Sea but to unlock this potential we must create a more competitive and efficient operating environment, where costs are effectively managed and companies have the confidence to invest today and tomorrow.
“I am working at pace to establish the OGA as a strong and effective regulator, which can be a catalyst for change and a facilitator of action. It will seek to drive performance and remove unnecessary barriers to help protect current oil and gas production and secure a positive future for the industry.
“But the OGA cannot achieve these outcomes in isolation. I have highlighted the key risks facing the industry, priority actions required and my expectations on delivery. Now industry, Government and the OGA must build on the positive tripartite relationship, which has developed since the publication of the Wood Review, to demonstrate collective leadership and deliver solutions. The future of our oil and gas industry depends on it.”
Establishing the OGA with the right legislative framework, leadership capability, resources and culture are priorities set out in the report. It also outlines a series of additional priorities for the OGA during its first year of operation.