Maximising the economic recovery of UK petroleum

Even before oil prices dropped significantly in 2014, the Government had in June 2013 commissioned a review of the UK offshore oil and gas recovery and its regulation. Led by Sir Ian Wood, it is known as the Wood Review. The purpose of the Wood Review was to address issues facing the UK offshore oil & gas industry including declining production and an anticipated fall in investment as well as issues arising from a complex basin which includes a number of smaller fields, mature and marginal fields and increasing interdependence between exploration, development and production.

The Wood Review

The Wood Review issued its final report in February 2014 with three core recommendations:

• A new shared strategy for “maximising economic recovery (of oil and gas) for the UK Continental Shelf” (referred to in shorthand as MER UK), with commitment from the government (HM Treasury and a new Regulator) and the oil and gas industry
• Creation of a new arm’s length regulatory body to oversee and develop this programme of change and growth.
• Greater collaboration and commitments by industry in areas such as development of regional hubs, sharing of infrastructure and reducing the complexity and delays in current legal and commercial processes.

The Government issued its response in July 2014, accepting the Report's findings and setting out how it would implement them.

MER UK strategy

The MER UK strategy is given legal force in the Infrastructure Act 2015. Section 41 requires the Secretary of State for Energy and Climate Change to produce a strategy with the principal objective of maximising economic recovery of UK offshore petroleum, in particular through:

• Development, construction, deployment and use of equipment used in the UK offshore petroleum industry (including upstream petroleum infrastructure), and
• Collaboration among holders of petroleum licences; operators under petroleum licences; owners of upstream petroleum infrastructure; and persons planning and carrying out the commissioning of upstream petroleum infrastructure.

The Secretary of State and those bodies must act in accordance with that strategy and the Secretary of State must report each year on extent to which he and those bodies have acted in accordance with the strategy.

The first strategy is to be produced within 1 year of this provision coming into force. (It comes into force on 12 April 2015, so the first strategy must be produced by 11 April 2016.)

Oil and Gas Authority

The Government established a new regulatory body, the Oil and Gas Authority (OGA) which became an Executive Agency of DECC on 1 April 2015 and will become a Government Company (a private company limited by shares, with the Secretary of State as the sole shareholder) in 2016, once there is time after the general election to pass the necessary legislation. There is cross-party support for this. The legislation will set out the OGA's role and powers but the Government's response to the Wood Review shows that it expects such powers to include dispute resolution; a more graduated sanctions and incentives regime (including the power to levy fines and other penalties); the right to attend licence holders' meetings; and transparency and access to data.

Levy

The OGA will be partly funded by a levy on licence holders. The power to impose a levy is in section 42 of the Infrastructure Act and applies to holders of the following licences:

• Section 2 Petroleum (Production) Act 1934 or section 3 Petroleum Act 1998 (exploitation of petroleum)
• Section 4 Energy Act 2008 (unloading and storing gas)
• Section 18 Energy Act 2008 (storage of carbon dioxide).

DECC is currently consulting on the design of the levy.

Call to Action

Recently, the OGA (even before it officially came into being as a DECC Executive Agency) issued a Call to Action. It identified two key risks that require urgent focus:

• The risk that the profitability of producing fields will be insufficient to attract continued investment, leading to premature decommissioning of assets
• The risk that confidence in the future potential of the UK Continental Shelf will continue to decline, resulting in critical long-term investment not being committed

To address these risks, the OGA has set itself a number of actions, with deadlines, but it expects the oil industry to work with it and has set the industry several expectations, including:

• Prepare and present asset stewardship improvement plans to the OGA by April 2015
• Significantly modify commercial behaviours to align with MER UK by August 2015
• Establish a single forum to drive innovation and efficiency in decommissioning by September 2015
• Reinvigorate and intensify efforts to improve efficiency with a target of 30% - 40%, working with the OGA to allow effective monitoring of progress, by the end of 2017

The future

It is clear that the current government is committed to supporting the UK oil and gas industry. The creation and already significant work carried out by the OGA, coupled with the tax support given in the 2015 Budget, means that the government has taken steps to ensure that such support continues after the general election in May, no matter which party comes to power.