The UK oil&gas industry has a considerable challenge on its hands to maximise recovery of the nation’s remaining 25billion barrels of oil&gas from beneath the seabed.
To achieve this, the industry will need not only a government boost to capital investment as called for by Oil & Gas UK this year, but also a smarter, more modern and supportive regulatory system from the newly created Department for Energy and Climate Change.
As the UK Continental Shelf (UKCS) has matured, it has become evident that a range of firms, such as Apache, Talisman, TAQA and Venture Production, are able to recover oil&gas from fields that might not be economical for larger companies.
If we are to ensure optimal investment into the UKCS, these companies with new business perspectives must have two important things, access to both of which is currently being hampered by weak regulation.
Firstly, companies that can extract most value from reserves, and are therefore willing to inject the necessary capital, must be able to gain access to the fields themselves. Rather worryingly, over the last 10 years, the number of assets changing hands on the UKCS has fallen by 75%, from an average of 80 per year to 20 per year (the average number of asset deals measured over three years).
While volatile oil&gas prices make it difficult for buyers and sellers of assets to agree a price at which to transfer an asset, the industry has developed initiatives such as the Master Deed, the Standard Agreement and the DEAL information repository to increase the ease with which assets can be traded. But they will not work on their own. To really be effective, they require strong regulation and support from government.
So what is inhibiting the rate of asset transfer?
Peculiarly, there is not a registry for UK offshore licences. Given that the licences awarded for early oil&gas developments covered large areas of the seabed, proving the long and complex history of asset transfer for all the fields that currently fall within a licence is time-consuming and costly, even more so when this needs to be repeated for every transfer. The complexity of multiple blocks or sub-areas on the same licence further complicates the process of approval.
Therefore, Oil & Gas UK believes that the provision of a registry and a push to separate the terms for multi-block licences would greatly help facilitate and speed up asset transactions and improve the efficiency of costly legal resources. Also, there is considerable uncertainty around companies’ liabilities for, and the future fiscal treatment of, decommissioning costs, which are expected to total £20billion.
Decommissioning must be considered and accounted for when an asset is sold, so lack of clarity in this area not only creates an unstable backdrop against which to invest but also deters the trading of assets to companies likely to invest more heavily.
As with tracing the history of asset ownership, it is hugely time-consuming and costly to put in place security arrangements to cover decommissioning costs. In response, the industry launched a new standard decommissioning cost provision deed which, in tandem with the use of a dedicated retirement fund for decommissioning, could speed up this process, reduce duplication of securities arrangements and therefore help boost asset trading.
The UK Government has committed to encouraging the use and monitoring of the effectiveness of this deed. However, it is unwilling to recognise any direct payment of funds into the accompanying trust for tax purposes, which effectively blocks their use as an alternative guarantee mechanism to banking letters of credit.
Secondly, companies prepared to invest in oil&gas fields that are unattractive to larger companies must be able to access the infrastructure needed to bring the resources ashore. The industry has taken significant steps to ensure this is the case, but concerted implementation of the mechanisms already in place must now be provided by government.
The Infrastructure Code of Practice (ICoP) was launched in 2004 to help open up access to infrastructure on the UKCS for new users so that small adjacent fields could be made economically viable to maximise oil&gas recovery.
This non-statutory code sets out the principles and procedures to guide those negotiating third-party access to infrastructure and stipulates that technical data and the key terms and conditions of all agreements made between parties should be published on the web.
However, some years on from the launch, the industry felt that the effectiveness of ICoP could be improved and, in 2008, published comprehensive guidance notes to accompany the code.
One aim of the guidance is to improve the effectiveness of the Automatic Referral Notice (ARN) process – where the Secretary of State is automatically invited to intervene if a deal between the infrastructure provider and a potential user is not concluded within six months. The guidelines note that structured requests to use infrastructure should lead to an initial kick-off meeting where, assisted by a “champion”, the deal can progress to detailed negotiations. Oil & Gas UK is now running a series of workshops to allow practitioners on both sides of the table to increase their understanding of the benefits of following the ICoP. But again, this will not happen without effective supervision from the regulator. ARNs must be closely monitored by the relevant government department, using field teams to track the progress of deals and ensure issues are escalated appropriately.
Oil & Gas UK looks forward to working with the Department for Energy and Climate Change to improve the effectiveness of our regulatory regime so that government and nation as a whole, as well as the industry, can achieve the desired return from our considerable remaining oil&gas reserves.
Malcolm Webb is CEO of Oil & Gas UK