Opinion: What is the real future of oil and gas in the UK?

Gioia Falcone

Ahead of the General Election, I read with interest the Oil & Gas UK Blueprint for Government – 2017 that outlines four key priorities for the next UK Government to help secure the future of the North Sea oil and gas industry.

And yet I was surprised to find no explicit mention of the 120,000 jobs lost since the 2014 plunge in oil prices, nor the redundancies looming. The cited 330,000 jobs that are supported by the UK oil and gas industry is last year’s figure, apparently unrevised as part of the Oil & Gas UK Business Outlook 2017. Quite an oversight.

An article published in Oil Industry News this month discusses the impacts of massive lay-offs, with unemployment benefit claims in the north-east of Scotland shooting up by a staggering 72% in December 2015. The UK Government’s Oil and Gas Workforce Plan, published in July last year, received a lukewarm reception from unions and there is tension over proposed cost-cutting measures. And yet the sector has shown its resilience by adjusting to low oil prices and increasing efficiency, and there is a unique opportunity for it to become a hub of expertise in late-life asset management and decommissioning, for future know-how and technology export. What we are currently undergoing is what other petroleum basins worldwide will experience in a few years’ time, but the stark reality is that the North Sea has started to require fewer workers.

And so more help is needed for our beleaguered oil and gas workforce, to help them re-skill for new sectors. I recently watched the moving BBC documentary, The Last Miners, about 450 men who lost their jobs when Kellingley Colliery in North Yorkshire shut its doors. Finding new careers in industries completely unknown to them, with little preparation or support, was a challenging experience. Surely, we do not wish the same fate to befall our oil and gas workforce.

The D-word

And then there is the “D word”, which is barely mentioned in the blueprint. Decommissioning is the elephant in the room. The high oil prices that permitted mature high operating expenditure fields to continue to produce commercially are gone, replaced by a ‘lower for longer’ environment that has forced some operators to consider ceasing production. I argued this very point last month at the Society of Petroleum Engineers’ Latin America and Caribbean Petroleum Engineering Conference, and Wood Mackenzie, the leading energy consultancy group, estimates that more than 50 fields will soon enter the ‘lighthouse mode’ to avoid paying abandonment expenditure (Abex). Crudely speaking, that means operating at a loss.

Currently, new entrants to the UK Continental Shelf, who have only paid Corporation Tax, can claim a maximum Abex relief of 50%. This has consequences for asset transfers. To seal a deal, the original owners may take on some Abex liability, but risk having this passed on in perpetuity if the new owners cannot meet their obligations. Also, decommissioning programmes are still discussed on a case-by-case basis due to the lack of protocols based on transparent definitions of environmental baselines. Operators must be told what to monitor, when, and with what time and spatial resolution, to select structured, cost-effective and integrated monitoring approaches to abandonment. With a liability regime that forces operators to implement complex bilateral agreements when trading assets, a lack of clarity on who can claim tax relief for Abex and no standardisation of Decommissioning Security Agreements, the decision to abandon or not on the UKCS is a complicated one.

Wood Mackenzie predicts oil companies will spend £53bn from 2017 on decommissioning, with almost half expected to be recouped from the Treasury via tax relief. Indeed they go further, saying that the North Sea will become “a significant annual expenditure for government, rather than a provider of income”. Such pronouncements understandably unsettle UK tax payers, who need reassurance from North Sea operators that they will honour their Abex liabilities and not let the tax payer foot the bill. However the Oil and Gas Authority’s (OGA) model of maximising economic recovery (MER) may be at odds with the responsibility of the Department of Business, Energy and Industrial Strategy (BEIS) – its sole shareholder – to protect the tax payer. The OGA is focused on extending field life and leaves the charge of ensuring funds to cover Abex liabilities are in place at the end of field life to BEIS.

How we can support the industry

Better and more transparent reporting of reserves in the UK would help, and I welcomed the OGA’s announcement last August that it was changing the way resources are reported to comply with the latest Society of Petroleum Engineer’s Petroleum Resource Management System (PRMS). Reserves overstatement is an issue, as the implementation of PRMS caused a net reclassification of 600 million barrels of oil equivalent, previously claimed to be reserves, now to be reported as contingent resources. I fear that the regrading may not stop there. The PRMS states the end of a field’s commercial producing life is when its net operating cash flow (NOCF) becomes negative, which defines its reserves. In its pursuit of MER, the OGA allows some North Sea field operations to continue at negative net operating cash flow to defer Abex, which implies that these sub-economic produced volumes should also be reclassified as contingent resources.
Continuing the reporting theme, the promised update of the Petroleum Production Reporting System (PPRS) is welcomed, but I would be disappointed if UK data are still reported on a field basis. Prior to 2000, the PPRS provided detailed monthly data on a well-by-well basis, allowing more reliable reserves evaluations, which could trigger innovative MER solutions. The relaunch is an opportunity to reinstate the old PPRS way of reporting production data, but will the OGA grasp it?

In conclusion, I would encourage ‘riding two horses’; managing mature assets whilst gradually implementing renewable energy options in petroleum projects. Our work across the petroleum and renewable energy sectors shows that they can coexist and learn from each other. Several “go green” deadlines have already passed and there is a growing acceptance that the UK must become more efficient in using its traditional energy resources. But I strongly believe that implementing hybrid solutions may help slow the demise of the petroleum industry. For example, projects for solar-assisted thermal enhanced oil recovery and geothermal energy utilisation from co-produced water already exist in other parts of the world. And we need to remember the energy dilemma is not just a regional one: Transitioning to a broader energy mix requires national involvement, with extended and fairly-distributed funding to research, technology, training and education organisations across the entire country.

So the future for oil and gas in the UK may not be as rosy as Oil and Gas UK imply, but neither is it as bleak as some might fear. But for a secure and prosperous future, we have to be innovative with what we’ve got (both in terms of resources as well as infrastructure), we have to support the people who have dedicated their lives to it (many of whom know no other way of life), and we have to work towards reducing our reliance on traditional energy sources and move towards a better energy mix and cleaner energy solutions for our future generations.

Professor Gioia Falcone is head of the Oil and Gas Engineering Centre, Cranfield University.

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