The UK North Sea oil industry may have reached its own Kodak moment, said Stuart Payne, a director at the sector’s regulator.
When the photography company filed for bankruptcy in 2012, it was a culmination of its failure to embrace digital photography, a technology that it invented, ironically.
Payne, the Oil and Gas Authority’s supply chain, decommissioning and HR director, believes the UKCS must not make a similar mistake by ignoring the need for integrated energy systems and decarbonisation.
“We cannot say we’re still going to need oil and gas for a bit so we’re going to put our heads down,” Payne said.
“It would be last decision we ever made. Instead we’ve said, ‘hang on, there’s stuff we can do now and there’s a role we can play in future’.”
Payne is certain net zero and maximising economic recovery, the OGA’s initial raison d’être, “do not compete” and can complement one another.
He views energy integration as a great opportunity to show that the UK continental shelf is not a “dinosaur” or a “problem”.
Instead, it can be a “gift that keeps on giving”, a “jewel in the UK’s economic crown”.
A recent OGA report calculated the integration of offshore energy systems could contribute 30% of the UK’s total carbon reduction requirements needed to meet the 2050 net-zero target.
The hopefully-forthcoming North Sea transition deal with the UK Government will be centred on a number of themes, including reducing emissions offshore, platform electrification, hydrogen production and carbon capture and storage, “all anchored in the supply chain and jobs”, Payne said.
Equally, Payne acknowledged energy integration will be exceptionally difficult. Perhaps even as difficult as the task of turning the North Sea into an oil and gas producing basin all those decades ago.
“Ask the people who installed the Brent platforms whether it was easy,” he said. “It was all hard, but no less achievable.
“If we get this right, the UKCS becomes the car showroom of energy integration for the world.
“People from the UK built platforms across the world. There’s no reason why they cannot be involved in the energy transition around the world over the next 50 years.
“But we need the supply chain”.
Everybody knows suppliers are under considerable strain amid a huge drop-off in project work.
Matters are coming to a head and operators in the UK may soon be faced with a stark choice with respect to the supply chain — “use it or lose it”, Payne warned.
He spoke out forcefully and to good effect during a webinar in May about unfair treatment of the supply chain, saying some smaller service companies had received letters from clients ordering them to cut rates by 35-40% overnight.
Several months down the line, Payne said the OGA had “intervened” on a number of occasions by trying to help operators “understand the impact of what they were thinking of doing”.
“One hundred percent of the time, the operator reflected and said ‘there’s a better way we can do this’,” according to Payne, who singled out some examples of “fantastic behaviours”.
Some clients agreed to pay services companies two weeks earlier than they normally would.
In one specific instance, a tier-one contractor approached an operator and agreed to carry out well-intervention work without charging upfront, settling instead for a share of the profits generated from resulting production enhancements.
Intriguingly, the operator in question was one of the companies the OGA had a problem with several months ago.
Payne said the regulator had gone out to other operators and asked what, if anything, was stopping them from taking similar steps.
He insisted the OGA, alongside industry bodies like Oil and Gas UK, Subsea UK, East of England Energy Group and the Energy Industries Council (EIC), was “getting into action” to save jobs, rather than just talking.
Perhaps the most well-publicised endeavour is the one aimed at getting well plugging and abandonment (P&A) projects up and running soon.
Well P&A is the most expenditure-intensive and exportable aspect of oilfield decommissioning.
Payne said the OGA was using its regulatory powers to stimulate activity, which involved getting stricter with operators by setting time limits for when wells have to permanently abandoned.
The regulator has also spent months putting together a business plan for a scheme whereby the UK Government would provide a £100 million loan to help companies afford to undertake P&A campaigns next year.
According to Payne, that proposal would save about 1,000 jobs and is being “considered” by Westminster.
He is fully aware that the government is in the difficult position of having to support just about every industry, but Payne remains hopeful of getting good news soon.
Industry could still do a lot more to help itself, not least when it comes to tendering, according to Payne, who spoke of “horror stories” in which vast sums are being “wasted” on tender processes.
“We need fair tendering, but we do not need to waste hundreds of thousands of pounds, which is enough money to cover a number of people’s jobs,” he said. “On what planet does that make sense?”
He said “a lot of money” was going into the OGA’s Project Pathfinder portal to make it “all singing, all dancing”.
The online platform provides regular updates on upcoming North Sea work.
Payne stressed that transparency and visibility of activity was “really important” to enable service companies to see opportunities and invest.
His colleague, Bill Cattanach, OGA head of supply chain, has been trying to breathe new life into brownfield projects which are at risk of being kicked into touch.
OGUK, meanwhile, has been “corralling” maintenance schedules and endeavouring to make as many Covid-19 tests for asymptomatic people available as possible to get more workers back offshore.
The EIC has worked with other trade associations to map out what export opportunities will be available in the coming 10-15 years and has identified 150 projects requiring $850 billion worth of investment.
Payne said all efforts were geared towards securing “real deliverables” and getting “runs on the board” in terms of jobs saved.
Preserving the supply chain will be critical to achieving one of the OGA’s top-tasks, reducing predicted decommissioning spend by 35%, from almost £60bn to fewer than £40bn.
The OGA set the target in June 2017 and aims to achieve the forecasted reductions by 2022.
Two years into the mission, the halfway point had been reached, with costs down 17% to £49bn on a like-for-like basis, which did not factor in new or planned infrastructure projects sanctioned.
In August 2020, the OGA said a further 2% had come off the sticker price for UKCS decommissioning.
A greater reduction would have been possible, but for a small group of operators increasing costs by £1bn.
Payne said: “The trend is for costs coming down, but some operators are still going up.
“We have to work with them to understand why that is and get under the skin of that because it’s holding back the basin averages.”
Overall, Payne is encouraged that industry has managed to lower decommissioning costs at a time when the Exchequer needs to manage outflows of cash.
However, he acknowledges that the sector is “running out of the more obvious stuff to get after”.
“It’s the more challenging stuff that’s left,” the Liverpool FC supporter said, before using a football analogy: “The second half is going to be tougher. It’s raining now and we’re playing uphill.
“If we lose the supply chain, this game gets a lot more complicated.”
The OGA is trying to reduce decommissioning spend because a sizeable proportion will have to be covered by the Treasury through tax reliefs.
These entitle operators to reclaim some of the taxes they previously paid on profits to help cover the cost of decommissioning work.
Operators and industry are careful to point out that this is their money being refunded, rather than taxpayer subsidies.
However, the Treasury will already have spent the taxes received from oil and gas companies, so the refunds will have to come from another source.
Furthermore, if an operator is unable to cover its decommissioning costs, due to insolvency or lack of available funds, responsibility flows back to previous oilfield operators.
If none exist, liability falls to the taxpayer.
According to a report from the National Audit Office in January 2019, HM Revenue and Customs forecasts that the cost of tax relief to the taxpayer because of decommissioning expenditure will be approximately £24bn from 2018-19 to 2062-63.
On the question of whose money is being used – taxpayers’ or oil companies’ — Payne said, “if HMRC says it’s a banana, it’s a banana.”
“But let’s not get hung up on the origins. It doesn’t really matter. It’s an outflow of cash from the government. We want to decommission safely while letting as little of that money as possible flow out.”