New challenges confront the UK North Sea

World Oil: How is the North Sea industry changing, as extending the life of mature fields becomes more important?

Malcolm Webb: There is a lot of collaborative work going on. A new Oil and Gas Industry Council has been launched under the auspices of the government’s Department of Business, Innovation and Skills, to enable collaborative working between the UK government, and the oil and gas supply chain. This is in addition to the long-standing government/industry work being done under the auspices of PILOT, a joint program involving the government and the UK oil and gas industry, which aims to secure the long-term future of the UK Continental Shelf (UKCS), and ensure full economic recovery of our hydrocarbon resources.

Projects that form part of this group’s work include the “access to infrastructure” program, initiated in 2012, which is looking at maintaining the availability of existing infrastructure in the North Sea as it approaches maturity, and making sure access is provided to third-party users on fair and reasonable terms.

The current PILOT Infrastructure Access work group is now focusing on ways to ensure that infrastructure is used even more effectively to further enhance the safe, timely and efficient recovery of hydrocarbons from the UKCS for the long-term benefit of the industry, and the UK economy.

This work has highlighted the need for a collaborative approach to future development that addresses the issue of aging infrastructure, declining production and reduced field size. The next phase of the project is to kick off a new study in three focus areas, which include recent changes to the industry code of practice for third party access; the identification of key infrastructure systems on the UKCS, critical to ensuring ongoing and new developments; and new commercial models being developed to address the issue of managing infrastructure in a mature province.

We should not forget there is a substantial prize still to be won, with up to 24 billion bbl of oil and gas to recover from the UKCS. These barrels will be difficult and expensive to develop and operate. However, with continued innovation, strong stewardship and continued cooperation across the industry, together with the UK and Scottish governments, we believe it can be done.

Health and safety continues to be the priority issue for the UK offshore oil and gas industry and a determining factor in its overall success. Now that many assets on the UKCS are operating beyond their originally conceived life, there is increased regulatory and operational focus on asset ageing and life extension of offshore facilities. As equipment ages, the industry faces increasing challenges in maintaining and managing the required integrity. We need to constantly ask if equipment is fit for purpose today and will it be in the future? Together with Oil & Gas UK, operators of offshore installations have, therefore, been working hard to anticipate and understand the effects of aging and life extension, and be prepared to intervene to ensure that demands are met without adverse impact on asset integrity or safety.

As part of this process, operators are able to identify trends, respond to performance issues and identify early indicators of aging and obsolescence by analyzing the outputs from regular inspection, testing and maintenance activities. The primary purpose of inspection, testing and maintenance is to ensure that the condition of the asset is always understood, and that it remains fit-for-purpose.

WO: New companies are coming in. What new approaches are they bringing with them?

Webb: It is true to say that new companies comprise a broad range of sizes and types of business. Some are focusing on taking over existing assets, while others concentrate on realizing the potential of new plays. Given this infliux of companies, exploration is predicted to increase.

WO: Is greater use of EOR in the North Sea stimulating the development of new technology?

Webb: The wider deployment of improved oil recovery (IOR) and EOR techniques across the UKCS is now a strong focus of the PILOT program. Current work is focusing on establishing the size of the prize and identifying the potential available against each of the deployable technologies. Initial estimates are that the wider deployment of IOR to maximize the outcome from optimal management of reservoirs, wells and facilities could add between one and four billion boe, whereas EOR could add up to six billion boe, depending on the processes selected and the cost of their deployment. The impact of IOR and EOR techniques has yet to be fully factored into recovery estimates for the UKCS, and will critically depend on cost, technical and commercial uncertainties, and the fiscal regime. We expect to see further engagement from both operators, and the broader contractor sector, as the technology is developed on a wider scale.

WO: How has the environment for offshore technology development changed over the years?

Webb: A number of initiatives have helped the development of technology. We look forward to the publication of the government’s new industrial strategy for oil and gas, which is focusing on anchoring key game-changing technology innovations, as defined by the PILOT initiatives and specific geographical and technological target areas. The strategy has been developed within the Department of Business, Innovation and Skills (BIS), and by Oil & Gas UK, in partnership with the industry, the Industry Technology Facilitator (ITF) and academic bodies.

WO: Are pioneering technologies still being developed in the North Sea, and to what extent?

Webb: Yes, the UK oilfield services sector is a technology-driven, diverse and versatile sector, which has developed an unrivalled range of products, services and engineering expertise. Indeed, the UK supply chain exported goods and services to the tune of £6 billion in 2012. Key export markets are reservoir and seismic and engineering, specifically subsea technology. It is anticipated that two-thirds of all new fields in the UK will be developed as subsea tie-backs to existing infrastructure, and this will increase demand for subsea goods, equipment and services. In 2012, 43% of UK production was via subsea developments. It’s estimated that the UK earns around £2 billion a year from the export of subsea technology.

WO: Is field decommissioning in the North Sea spurring it's own form of technological development?

Webb: Engineering, drilling, environmental, safety and logistics are all key skills required for decommissioning. The UKCS is a mature basin, and many of the skills developed from the experience of working in the UK can be exported.

WO: What are the main issues involved in North Sea field decommissioning?

Webb: One of the biggest concerns the industry had regarding decommissioning was whether it would continue to have access to tax relief on decommissioning costs in the future. Decommissioning in the UK is expected to cost a total of £35 billion by 2040, and with the rate of tax relief lying between 50% and 75%, the industry would face significant exposure to risk, were this to be withdrawn. The uncertainty meant that companies were providing security for the full, expected costs of decommissioning, not just for their own post-tax share. Major sums were, thus, being tied up in bonds and letters of credit, which could otherwise be invested in the asset to prolong production. The sheer weight of this potential financial burden was also hampering the sale of mature assets to companies who wanted to invest in them, but found the decommissioning liabilities too onerous. This certainty, regarding tax relief for decommissioning, was a major fix that the industry wanted from government.

This is a highly complex, technical and sensitive issue, but I am pleased to say that after nearly two years of close discussions with the UK Treasury, the government announced in its Budget, in March of this year, the introduction of contracts—called Decommissioning Relief Deeds—between the government and companies, which will guarantee the current tax rules and effective tax rates applied to decommissioning costs incurred in the future. If a future government were to reduce relief, a company under the contract will be able to claim the cash value of the change from the government.

This is a major step forward and will unlock investment, delay decommissioning and boost production. We estimate the measure could delay decommissioning of mature fields by up to five to seven years, and stimulate recovery of an additional 1.7 billion boe over time, at a value of £110 billion to the UK economy, if we assume an oil price of $100 a barrel.

WO: What role should the  British government play in maximizing oil and gas extraction?

Webb: Through the auspices of PILOT, government and industry work together to review licensing, and fiscal and regulatory regimes, that play a key part in attracting business to the UKCS. The most important role the government can play is to make sure that the regulatory and fiscal environment is conducive to investment. The UK is a maturing province, and it can no longer bear the kind of tax blows we experienced over the last decade—witness the slump in investment and exploration following 2002, 2006 and 2011. In the last two years, we have worked toward a good common understanding of the need to work in close cooperation, in order to make sure the UK remains attractive to investors.