Offshore in depth

In its June 2016 publication, A Sea Change—the future of North Sea Oil & Gas, consulting firm PwC reported on the views of 30 senior industry stakeholders, and presented recommendations to keep the UK offshore industry viable during an era of “lower for longer” oil prices. In an urgent call to action, the authors write, “A number of fundamental issues will need to be addressed in the next 24 months, if the basin is to avoid a rapid and premature decline.”

UK basin is waning. Since 1964, more than £50 billion has been invested in UK waters to install more than 300 platforms, drill over 4,000 wells and produce 45 Bboe. The UK North Sea still holds potential reserves of 20-30 Bboe West of Shetland, in the Atlantic Margin and on the marine border with Norway.  Large projects, like Clair Ridge, Kraken, Catcher, Mariner, Laggan-Tormore, and Shehallion Quad 204, are slated for the near term.

While North Sea oil and gas development has been a major success, the UK sector appears to be in long-term decline. From 1999’s peak of 4.5 MMboed, production has fallen to 1.64 MMboed. Operating costs are high in the UK and few, if any, assets are profitable while producing oil at today’s $44/bbl. Since oil prices began to collapse in 2014, the UK oil and gas industry has lost 120,000 jobs. Only six exploration wells have been drilled in the UK during 2016.

Industry self-diagnosis. The PwC report, co-authored by Craig Stevens and Adrian Del Maestro, describes the challenges and possible solutions in transforming the North Sea industry, to maximize economic recovery from the basin.

“Unlike most consultancy papers that issue pronouncements, the answers in this report came from industry,” Stevens told World Oil. PwC interviewed senior executives from operators, service companies, regulators and financial institutions. “The industry was self-diagnosing and recognized that there was a ticking clock, and that the oil basin only had a short time to achieve one last upward cycle.”

Working together better. One of the report’s key findings is that the various players in the industry need to work together better, recognizing the shared interests of all participants. More cooperative work relationships, shared use of helicopters and support vessels, standardized equipment, and common back-office services can reduce costs for all concerned.

To optimize collaboration, PwC proposes the concept of a “super-JV” that “consolidates smaller and fragmented assets under one sole operator.” By combining small fields, the super-JV could achieve economies of scale, extend the lives of marginal assets, and enable coordinated decommissioning to avoid stranding reserves. A super-JV also could obtain more financing at better terms than single-asset operators. Consortia of lenders could combine their resources to support the consolidated operators. The super-JV concept could be applied to the service sector, with a vertically integrated set of support services managed and delivered by one entity.

Cost control is an ongoing concern throughout the oil and gas industry, and especially in high-cost basins like the UKCS. Rather than relying on temporary price concessions from the service sector, North Sea operators need to embed cost efficiency into the manner in which they do business. “The oil and gas industry has been an engineer’s playground,” Stevens said. “Every project is different, with bespoke equipment. Standardization is needed to bring costs down.” Costs can be lowered by reducing complexity, and by implementing the long-expected digital oilfield. “We may have reached a tipping point for deploying the digital oilfield, big data and other new technology,” Del Maestro said.

Government involvement needed. The tax regime also has a big influence on E&P activity. Industry executives were pleased by recently enacted lower tax rates for North Sea production, as well as incentives for brownfield development. However, the UK government could do more to encourage exploration. The Norwegian government’s 78% tax rebate on exploratory wells has encouraged majors and independents to drill in new areas of the Barents and North Seas. Executives interviewed by PwC suggested that the UK could introduce similar, although more modest, measures to reduce taxes and streamline regulation of exploration activity.

PwC describes decommissioning as “the elephant in the room.” Smaller oil companies that buy mature assets from the majors may not have the financial resources to decommission platforms and other offshore infrastructure. Government involvement in establishing a decommissioning guarantee scheme, as well as financial contributions from original asset owners, may be needed to remove structures without damage to the environment.

New UK industry champion. The PwC study identified the need for leadership to champion the transformation of the UK North Sea. Six months after the report’s publication, PwC’s Stevens is pleased that the Oil and Gas Authority (OGA) is doing a good job of guiding the industry through this transition. The OGA was formed in April 2015 as an executive agency within the UK government’s Department of Business, Energy and Industrial Strategy, based on recommendations from the 2013 Wood Review. In October 2016, the OGA was established as an independent government company with regulatory authority.

The OGA’s remit includes dispute resolution, meeting with operators, regulatory enforcement, and ensuring cost-effective decommissioning. Most important, the OGA provides guidance and support to maximize economic recovery of the UK’s oil and gas reserves. Industry leaders have responded favorably to the new agency. 

About the Authors

Ron Bitto

Contributing Editor

Ron Bitto has more than 30 years of experience as a technology marketer and writer in the upstream oil and gas industry. RON.BITTO@GMAIL.COM