December is always a good time to reflect on what we’ve seen in the past year and consider what the next 12 months might hold for the UK’s oil and gas sector.
The Oil and Gas Authority (OGA) has been proactive as the new regulator of a mature industry, driving forward many of its planned initiatives. That has included implementing a more flexible licensing system – a licence can now be extended more easily where production is continuing at its normal expiry date. The changes also implement fully the ‘innovate licence’ concept, first used for the 29th licensing round, by offering a staged work programme and a bespoke initial term.
Despite continuing difficult economic conditions, in March we saw 25 licences for challenging frontier areas offered to 17 companies. OGA’s decision on more than 800 block and part block licences which were put up for bid in the 30th licensing round in November is expected in the second quarter of 2018.
In 2017 the authority focused heavily on establishing a base line of reliable industry information with which it can measure progress. It carried out its first ever annual UK Continental Shelf (UKCS) stewardship survey and is using the results to create a number of tools, including its Recovery Factor Benchmarking and Reserves and Resources reports. The second annual stewardship survey, which should produce useful market intelligence for the year ahead, was launched on 1 November.
Other key documents, including two ‘lessons learned’ reports, were also published over the course of 2017 with input from a number of operators sharing their experiences. Among the key findings was that historically less than a quarter of oil and gas projects were delivered on time. Industry is working hard to improve that statistic as it focusses (with OGA encouragement) on efficient and collaborative working practices.
In August the OGA closed its consultation on proposed new industry regulations around the retention of data by operators and licensees, and disclosure of data received by the governing body under its powers. We await the results of this consultation in 2018.
Along with its moves to make more seismic and subsurface data open to industry operators, the authority also set out guidance aimed at helping operators maximise economic recovery within different geographic areas of the North Sea and updated the code of practice governing the process for negotiating access to third party infrastructure to reflect the introduction of Maximising Economic Recovery (MER) UK principles.
While all of this is encouraging, the OGA’s impact on the industry remains a work in progress and it is difficult to ascertain the success or not of the new regulator just yet.
Decommissioning will remain a key area of focus for the sector going forward. There is a determined effort to reduce the costs in this area with the OGA working closely with the industry in a number of areas, including its Well P&A optimisation programme. These are welcome initiatives but it is reform of the tax system that will be one of the most effective means of facilitating North Sea decommissioning. It was therefore encouraging to see the Chancellor announce in November’s Autumn Statement that hoped-for changes to the decommissioning tax relief regime will be taking effect from 1 November 2018. The proposed changes will be a world first for a tax regime, and are intended to encourage investment in late-life assets in the North Sea. Allowing a transfer of tax capacity from selling asset owners to buyers reduces the latter’s cost of decommissioning and supports the transfer of the “right assets into the right hands”, key to MER.
Decommissioning meantime continues to present a barrier to M&A activity within the industry with buyers unwilling to take on considerable uncertain future liabilities or unable to provide acceptable security to sellers.
While the forthcoming changes in the tax regime need to be fully focused on reducing decommissioning costs for buyers, those looking to do M&A deals within the market can also consider some wider innovative solutions that can further manage the burden of these liabilities. In many cases this would involve the seller maintaining the decommissioning liability but, in addition to the price they would receive from concluding a deal which might otherwise not have been possible, they would also benefit if the buyer could prolong the life of a field, meaning the seller would have to pay for its decommissioning at a much later date than it would have otherwise intended. This has been a key feature of recent North Sea M&A transactions.
Further thoughts about decommissioning innovation can be found in this previous Energy Voice article.
Since its inception, the OGA’s approach has been about encouraging and persuading industry reform. However, having instigated formal sanctions against one operator already, there are signs that it may, in appropriate situations, take a more robust position against those which fail to move far or fast enough in the right direction.
Combined with beneficial tax reforms and an upturn in deal-making innovation (in the approach to decommissioning, in closing the value gap between buyer and seller and in buyer financing structures), this approach has the potential to further aid the recovery of the North Sea oil sector in the year ahead. Critically though, a relatively stable $50-$65 (or above) oil price will assist in these aims, but is something which is beyond the control of all those involved.
Norman Wisely, partner at law firm CMS