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UKOAA sees British upstream renaissance
Malcolm Webb is chief executive for the UK Offshore Operators Association (UKOOA) in London. He is responsible for day-to-day management of UKOOA and serves as one of the offshore industry’s primary spokesmen.
Question: What is UKOOA’s role in the British upstream industry?
Answer: UKOOA represents producers operating on the UK Continental Shelf (UKCS). We have 31 full members and five associates, including independent E&P firms, as well as major operators.
We are encouraged to see newcomers to the North Sea joining our ranks, such as Apache, Perenco, Nexen and Venture. Our role is to engage with the industry’s varied stakeholders – and the UK government in particular – on behalf of our members on issues affecting their operations in Britain. There is also a growing European dimension to our work. Having a diverse membership is very important, so that we harness a wide range of views and opinions and are truly representative.
Q: What is your assessment of last year’s market for British firms?
A: In 2004, confidence returned to the North Sea after two lean years that followed the unexpected tax hit on producers in 2002. This was when the UK Treasury introduced a supplementary corporate tax rate on the industry, resulting in a marked slump in activity.
However, the number of exploration and appraisal wells drilled last year was 63, the best total since 1998. The government’s 22nd Round was one of the most successful in years, with nearly 100 licenses awarded. Interest in exploring the northeastern Atlantic was revived by launching the new “frontier license” for large areas to the west of Shetland on attractive terms. In addition, there were 27 new projects approved, almost double 2003’s number. Capital spending, including exploration, picked up strongly in second-half 2004, at about £4 billion ($7.69 billion) for the year.
It has taken three years for the industry to recover to 2001’s level, but the recent, more positive outlook is encouraging. However, we are not out of the woods yet. Current activity will need to be sustained, if the industry is to maximize recovery of the basin’s remaining hydrocarbons and reduce the decline rate. This will require further substantial investment from upstream companies, as well as on-going constructive engagement with the UK government to maintain confidence and stability. We need to preserve the North Sea as an optimal business environment. Volatility and/or uncertainty need to be avoided at all costs.
Q: What is your prognosis for 2005?
A: UKOOA’s Activity Survey, published in January, painted a more optimistic UKCS outlook, in both investment and production. Total expenditure in 2004, including operational, exploration and capital costs, was around £8.9 billion ($17.1 billion), and it should exceed £9 billion ($17.3 billion) this year. Capital and exploration investment for 2005 is predicted to rise to £4.31 billion ($8.29 billion), up from £4 billion ($7.69 billion).
For the first time in four years, the survey showed an increase in predicted output. The production forecast to 2010 is up 2% on last year’s projections, halving the previously predicted decline rate to 7% per annum. We project that the UK will produce around 3.6 million boed in 2005, declining to 2.6 million boed in 2010; I hope that we will improve the latter figure.
Joint efforts by industry and officials to reduce the UK’s decline rate appear to be paying off. This will help to extend economic UKCS activity, protecting jobs, revenues and Britain’s primary source of energy. In all, 260,000 people rely on the industry for jobs. We estimate that next year, this sector will contribute £6 billion ($11.54 billion) in tax to the Treasury. By slowing the decline rate, we also predict that the UK will remain self-sufficient in oil until 2009, extending previous forecasts by a year.
However, rising operating costs are an issue and threaten to undermine the UK’s competitiveness. Unit operating costs rose sharply in 2004, by £500 million ($962 million) to £5 billion ($9.62 billion), and this year are predicted to rise by 18%. This reflects the increased costs of maintaining the basin’s aging assets and infrastructure. It also highlights the importance of challenging anything that could add to costs, including inappropriate regulatory and fiscal changes, and the need for all stakeholders to remain engaged.
Q: Are British firms obtaining extra business outside the UK?
A: Part of the work of PILOT, the joint government/ industry forum, has been to promote diversification into new sectors and markets. For example UK supply firms take part in “share fairs,” to help them gain access to contracts in the Norwegian North Sea. The most recent, held in Aberdeen in March, attracted over 300 delegates from across the UK to hear details of opportunities in Norway, estimated to be worth about £2 billion ($3.85 billion) annually.
Q: How well have the government’s licensing policy changes succeeded?
A: The DTI has taken a highly innovative approach to finding new ways to heighten interest in exploring on the UKCS and has introduced a range of measures to stimulate activity.
The frontier license is revitalizing exploration in the more difficult areas west of Shetland. The promote license, introduced in 2003, has attracted a new set of small explorers into the region, who are encouraged to reassess opportunities, and to work up prospects within the license’s initial two years. The first batch is now coming to term, and their potential impact on longer-term activity will be revealed shortly.
The fallow blocks process is also beginning to bear fruit. Introduced in 2002, it identifies licensed blocks where no activity has occurred for four years or more, and encourages license-holders to develop work plans or relinquish the tracts. There are 983 blocks on the UKCS. Since 2002, 532 have been identified by the DTI as fallow. Today, however, fewer than 150 blocks are without clear work plans. I believe DTI hopes to reduce this number toward 50 by the end of the year.
Q: Is the government doing enough to encourage activity?
A: PILOT is proving to be highly effective for constructive engagement between the industry and the UK government. Recent discussions produced two innovations that aim to stimulate further E&P activity on the UKCS.
The first is the industry code of practice on access to upstream infrastructure, launched last September by Energy Minister Mike O’Brien. This voluntary agreement is designed to influence corporate behavior in the North Sea and has attracted participation by over 50 oil and gas firms. It aims to improve shared access to UKCS pipeline systems and encourage investment, both in new developments and projects associated with existing infrastructure.
Details on infrastructure availability, and service levels and specifications, which were hard to find in the past, are now freely available from a central website (www.ukdeal.co.uk) for about 20 pipeline systems across the North Sea. The code also includes a provision for the Secretary of State to be automatically invited to step into negotiations, if a timely deal is not concluded. A number of new negotiations have started in the last six months. We expect to have terms of the first deal under the new code posted on the website shortly.
In 2005, we will also see a new process introduced to manage producing assets more effectively. This resulted from major work carried out jointly by DTI and industry over the past 15 months, focusing on brown field activity. The stewardship initiative will target fields that risk failing to achieve their full potential. The new process will promote the good management practices and investment decisions necessary to maximize economic recovery from existing producing fields.
Q: What field projects exemplify British technical offerings/ expertise?
A: The following projects spring immediately to mind: Clair, to the west of Shetland, exemplifies BP’s commitment and determination to overcome geological complexity and remote location, and see it through development and into production almost 30 years after discovery. Total’s HPHT Elgin/ Franklin field is another example, as is Talisman’s pioneering work on Beatrice to integrate renewable energy into hydrocarbon production.
Q: What are the more significant upstream technical trends?
A: The work on brown field activity also focused on identifying technologies used elsewhere, but which are under-utilized in the North Sea and could impact development. These include through-tubing rotary drilling, well stimulation, downhole water control, cost-effective platform workovers, 4D seismic (resolution and uptake), EOR, downhole sand control, produced water treatment and cost-effective subsea interventions. The next step is to overcome reluctance to pioneer these technologies in the North Sea by inviting companies to collaborate to share risks. A collaboration model for through-tube rotary drilling will be developed and piloted this year.
Q: Toward which areas are operator interest and money moving?
A: There is no doubt that the UKCS has to compete against lower-cost provinces, such as the FSU and the Middle East. However, the North Sea remains a world-class basin, with remaining reserves of up to 28 billion boe.
Its appeal for investors lies in political stability, as well as a skilled workforce and long-established, highly professional contractor base. The UKCS is also well-serviced by existing infrastructure, providing an extensive network of installations and pipelines. That the province remains attractive is demonstrated by the fact that over 30 new companies, new entrants and new ventures, have invested in producing fields over the last five years. Last year, 15 new entrants were offered acreage in the 22nd Licensing Round.
Q: What is the medium-to-long-term UKCS future?
A: The UK North Sea is a mature basin and operators here have to manage many risks – price and the exchange rate, as well as geological, technical and investment risks. To develop the full UKCS potential will rely on attracting diverse investors willing to take on different levels of risk. One element is constant – fiscal stability is essential to maintain investor confidence. This was damaged by the tax changes in 2002. Further changes at this time could have a much more damaging impact.
The UK has produced 34 billion boe and could have another 28 billion boe to come. Discoveries are smaller and more expensive to develop; we must compete globally against lower-cost provinces to attract investment. However, economic viability of UKCS reserves depends increasingly on access to existing infrastructure, for which integrity and lifespan must be maintained.
The UKCS faces two possible futures. The industry and DTI are working together, through PILOT, to secure a long, healthy North Sea future. If we get it right, the UK will have an active future beyond 2020. If we get it wrong, 40% of infrastructure will be decommissioned by 2020, and the opportunity to recover significant remaining reserves may be lost forever. 
Malcolm Webb is Chief Executive of UKOOA. A graduate of Liverpool University, he is a qualified solicitor with extensive upstream and downstream knowledge. Mr. Webb began his oil industry career as a legal adviser with Burmah Oil in 1974, transferring to British National Oil Corp. when it acquired the majority of Burmah’s North Sea assets in 1976. In 1981, he left BNOC to join Charterhouse Petroleum, which was acquired by PetroFina in 1986. At PetroFina he served in roles of increasing responsibility, culminating as managing director of Fina plc, the group’s UK subsidiary. Prior to joining UKOOA in February 2004, Mr. Webb spent three years as director general at the UK Petroleum Industry Association. He is a member of PILOT, the government/ industry forum.
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