The UK has for many decades become accustomed to the bounty of North Sea oil and gas that has filled government coffers and provided employment. For a number of years exports helped our balance of trade and oil and gas on our doorstep provided energy security. Oil and gas production peaked at 4.72 million barrels oil equivalent (boe) per day in 1999 but has since undergone a relentless decline that has accelerated in recent years (Figure 1). The UK is now a net importer of oil and gas and coal with a net cost to UK balance of trade near £22 billion in 2012 (Figure 2). It was against this backdrop that Secretary of State for Energy and Climate Change, Ed Davey, invited Sir Ian Wood to conduct a review of the North Sea oil industry in order to identify key problems and to make recommendations for maximising the economic recovery – MER UK. Sir Ian’s interim report was published on the 11th of November 2013. This article provides a brief overview of the report’s findings, focussing on some of the key issues.
Figure 1 The history of UK oil and gas production according to the BP statistical review of world energy 2013 (data up to the end of 2012). It is worth noting that in the Wood Review they come up with a figure of 41 billion boe to the end of 2012 and the DECC official estimate is 42 billion boe (email) and summing BP data I get 43.6 billion boe using 1 bcm of gas = 6.6 million barrels of oil (BP conversion ratio). Since statistics are very important, one of the issues the Wood Review may want to address is energy reporting standards. We can only know where we are and where we are headed from a common datum.
Figure 2 The value / cost of energy imports and exports to the UK economy provided to me by DECC. To put this in context, the UK current account deficit for 2012 was £59.8 billion. About one third of this is down to spiralling energy imports. The recommendations in the Wood Review aim to redress this situation.
The Scope of The Review
The Review team conducted 80 interviews with 40 companies that represent 95% of North Sea production. The findings of this review must therefore reflect the expert opinion of those companies involved in the day to day operations in the North Sea.
The role of The Regulator
The regulation of UK oil and gas exploration and production currently lies within the Department of Energy and Climate Change (DECC). You have to look hard at the organisational structure of DECC to find 3 posts out of 109 that are assigned to oil and gas which is extraordinary considering the North Sea provides 66% of UK oil and 50% of UK gas demand. The Review team discovered that only 50 personnel are assigned to the task of overseeing over 300 producing fields in the UK compared with 220 personnel in Norway and 100 in The Netherlands. The Review found:
it was the unanimous view from the evidence received that the Regulator is now significantly under resourced and under-powered to effectively manage the increasingly complex UKCS
One of the key recommendations of the report is to create a new “arms length” regulator that would be tasked with delivering MER UK over the next 30 years.
The arm’s length principle is the condition or the fact that the parties to a transaction are independent and on an equal footing – Wikipedia.
The report recognises that the financial interests of individual companies may not necessarily be aligned with the sovereign interest of MER UK and it will be part of the function of the new regulator to promote collaborative activity and to facilitate collaboration between license holders to develop resources that are currently stranded (see below). It is proposed the new regulator is staffed by top industry professionals and funded by the industry itself. The term “light touch regulation” is used which seems contradictory to a beefed up and heavily involved regulator. I think this means the regulator should facilitate and not obstruct activity.
The Review recognises that a significant number of UK oil and gas discoveries are not being developed because they require the collaboration of a group of companies that may have diverse interests. For example a small field may lie close to a platform owned by a third party (or a consortium group of third parties). Under the new regime the platform owner will be committed to assisting the field owner to bring the field into production to the benefit of both parties and The State.
The report lists 8 commitments that operating companies will be expected to make including commitments to MER UK, to share infrastructure, to work with the regulator and to improve collaboration.
The Review team say this…
At the low end, the Review believes the recommendations in this report have the potential to deliver at least 3-4 billion boe more than would otherwise be recovered, worth approximately £200 billion to the UK’s economy at today’s prices…
One of my main criticisms of the report is that it does not specify what “would otherwise be recovered” actually means. This prompted me to revisit the question of UK Oil and Gas Reserves where I conclude that absent intervention, and with continuation of the current decline trend, a further 4.5 billion boe will be recovered from the UK North Sea. This number is similar to the official proved reserves reported by DECC and proved reserves reported by BP. My interpretation, therefore, of “3 to 4 billion boe more” would be 4.5+4=8.5 billion boe recoverable with implementation of Sir Ian’s recommendations. To that may reasonably be added another 1 to 2 billion boe for yet to find reserves bringing the total to 10 billion boe. There will be one or two monsters lurking out there somewhere. But Sir Ian also says this:
Some 41 billion barrels of oil equivalent (boe) have already been produced from the United Kingdom Continental Shelf (UKCS) and it is estimated that a further 12 to 24 billion boe could be produced
This statement is not referenced and no verification of these numbers is provided. If State regulation of the North Sea and operating practices of the operating companies is to be overhauled in the wake of this review then there must be a means for measuring the effectiveness of these measures. I strongly urge Sir Ian to be explicit in his final report about what will happen if we do nothing and what will happen if we act boldly and quickly as he proposes.
Sir Ian is explicit about where the additional 3 to 4 billion boe will come from:
The benefits derive from the following opportunities, all of which contribute to a positive outlook for the UKCS and are unlikely to be achieved unless the recommendations within this report are implemented. Many of the elements overlap and a conservative estimate of 3-4 billion boe has been used. Key components:
- Effective implementation of EOR – 0.5 – 1 billion boe – ranging up to 6 billion boe in a best case scenario
- Increased rate of exploration estimated to deliver an additional 1 – 1.5 billion boe
- Improved use of infrastructure allowing an additional 0.5 – 2 billion boe to be recovered
- Postponing of decommissioning (by five years on average) adding an additional 1 billion boe
EOR stands for enhanced oil recovery. In any reservoir most of the oil is left behind as micro-droplets either stuck to mineral grains or encased by water in pores. There are a variety of chemical methods that can be used to mobilise this oil, for example injecting methane gas as BP is currently doing on the Magnus Field, or injecting fresh as opposed to salt water as BP proposes to do on their west of Shetland fields. But potentially the greatest reward comes from injecting CO2 – if only we could find a source!
Relevant posts on Energy Matters