Wood Review alone insufficient to save UK oil industry, says GCA

Key recommendations for the North Sea oil and gas industry in the Wood Review are welcome, but are unlikely on their own to be sufficient to reverse its downward trend, a new article from Gaffney, Cline and Associates (GCA) states.

Just days ahead of UK Chancellor George Osborne’s Autumn Budget Statement the GCA article also argues that urgent tax adjustments are needed to keep the industry alive, structured in a manner that will require the industry to re-inject the financial benefit back into the region.

The article from Principal Consultant Charles Goedhals of GCA questions the ability of the new regulatory body, the Oil and Gas Authority, to make necessary changes in the short time frame given its remit.

“With falling UKCS oil production rates and tumbling oil prices, the Chancellor faces some challenging issues in making his Autumn Statement this week,” Goedhals says.

“UK Government tax revenues from oil and gas production are falling fast and now represent less than 1% of the total UK tax take.  With rejuvenated supplies of oil from North America and elsewhere and the currently reduced demand from the developed and emerging nations, lower prices will result in falling investment and activity levels in high cost areas such as the North Sea unless key changes are made.”

Mr Goedhals says that the focus on the new regulator will distract attention from the industry’s more fundamental and urgent needs.

He adds that, while there are a number of things that need addressing in terms of cost and regulation, the UK taxation regime is a key driver for increasing investment, activity and production levels and the new regulator has no direct involvement in this. 

If oil prices fall further in to early 2015 these issues will be even more critical.

The article analyses oil and gas production based upon Department of Energy and Climate Change (DECC) data and highlights the growing number of fields approaching the end of their economic life. Of critical importance are the production hubs in the North Sea Basin, the 48 key facilities through which production is collected and sent ashore.  The analysis indicates that many of these 48 hubs will reach unsustainable levels of production in the next four to five years even at US$100/bbl, let alone the US$70/bbl oil is touching currently.

According to Oil and Gas UK, current average operating cost is around US$29/bbl. Goedhals highlights that this will rise rapidly to become unsustainable in the face of declining production, and that some rationalisation of infrastructure is inevitable.  If done correctly, this would allow unit Opex costs to be stabilised in the region of US$30 to 35 per bbl.

DECC has suggested that enhanced recovery from existing fields could result in an additional six billion barrels of oil being produced, but Goedhals claims the sheer scale of the investment to develop this potential is large and required now at a time when costs have been increasing and oil prices dropping.  Neither the cash flow, nor economic fundamentals, are there today to drive this level of future performance.

“Even ignoring the cost and capability to construct and install such incremental infrastructure, the current UK fiscal regime means that the UK is regarded internationally as an unattractive environment for oil and gas investment dollars. The lack of attraction will continue to affect exploration as well as development decisions.”

The Wood Review contains much relevant analysis.  The thrust of the report is to create a new regulator with a brief which far exceeds that held by DECC, and with powers to drive cooperation between industry and the Treasury.  GCA works with regulators all over the world and considers two aspects that have not received enough attention.

• The UK is competing for investment worldwide and even a regulator with enhanced powers is unlikely to be able to force investment if it is not in the interests of the investor.
• There appears to be an assumption that the oil companies will be responsible for the maintenance of existing infrastructure.  Other beneficial approaches taken around the world encourage other parties such as utility companies to enter the market as infrastructure operators.  If it has been considered, this point does not appear to have made sufficiently vigorously.

“While the government response to the Wood Review has been swift and the regulator is being put in place at present, the timescale for those wider powers to be able to drive significant action is unlikely before 2016/7, and the impact is unlikely to be felt before 2018 at the earliest,” says Goedhals.

“In this light, we have laid out some of our ideas to achieve a progressive investment environment for the UKCS and these are outlined in our paper.  They focus upon simplifying the tax structure and directing the savings to reinvestment, removing the system of complex field allowances and introducing a new financial instrument around abandonment to encourage new market entrants.

“GCA’s opinion is that these actions are urgent given the forecast fall in production rates.  It is also the case that such a proposed progressive fiscal regime is not within the remit of either DECC or the new regulator. The responsibility lies with the Treasury and in that sense the Wood Review is not sufficient. “

For a full copy of the article click here.

Adapted from a press release by David Bizley

Read the article online at: https://www.oilfieldtechnology.com/drilling-and-production/03122014/wood-review-alone-insufficient-to-save-uk-oil-industry-says-gca/