The future of the oil and gas industry Contents

3Maximising economic recovery

22.In June 2013 the then Secretary of State for Energy and Climate Change asked Sir Ian Wood to conduct an independently led review of UKCS oil and gas recovery, specifically looking at how economic recovery could be maximised.41 The central recommendation was the creation of the “Maximising Economic Recovery” (MER) strategy, and the establishment of the Oil and Gas Authority to oversee it.

23.The Government accepted all the Wood review recommendations which were implemented by the Infrastructure Act 2015. In March 2016, the MER Strategy came into force. The MER strategy is a legally binding document, which covers the OGA, petroleum licence holders, operators appointed under those licences, infrastructure owners, planners and commissioners. Its Central Obligation is that “relevant persons must, in the exercise of their relevant functions, take all steps necessary to ensure that the maximum value of economically recoverable petroleum is recovered from the strata beneath relevant UK waters”.42

24.The Central Obligation was designed to address what Sir Ian Wood described as the “highly individualistic” behaviours of actors operating in the UKCS.

There [was] no thought of UK plc. There [was] no thought of the potential impact if I collaborate with whoever is next door or if I can get an exploration programme working with information that they and I may have. There is a whole range of ways in which they can collaborate. You can add a huge amount of value. That just did not exist. Worse than that […] there was actually the opposite of collaboration, which I found extremely unacceptable.43

25.The Review emphasised the need for a collaborative approach to be extended across all activities - whether in areas such as production effectiveness and efficiency, rig sharing, more effective deployment of new technology, improved shutdown coordination or sharing access to key spares or decommissioning. Colette Cohen, CEO, Oil and Gas Technology Centre, emphasised the importance of collaboration for the industry, saying that “we will not deliver MER UK unless we get this collaboration, unless we work together.” The Institution of Chemical Engineers cited sharing resources such as supply ships and helicopters and developing shared infrastructure on geographically-concentrated but separately-owned fields, as the kind of collaboration that the sector needed to see more of.44

26.The OGA has produced guides to support the sector in meeting the obligations under the strategy, including the Collaborative Behaviour Quantification Tool,45 and an Asset Stewardship Collaboration Implementation Guide, which details how an organisation can demonstrate it is meeting the OGA’s stewardship expectations.46 In addition, where the OGA believes that an operator has not acted in accordance with the MER Strategy the OGA has the power to sanction that operator.

27.The majority of commentators felt that the OGA had made a good start at encouraging collaboration within the industry but that there was further room for improvement. Professor Paul de Leeuw, Director of the Oil and Gas Institute at Robert Gordon University, said that “the creation of the MER UK strategy, and particularly the OGA, has been a hugely powerful catalyst to help the industry to work on a collaborative model.” Deirdre Michie CEO, Oil & Gas UK said that overall the level of collaboration was improving but that there remained “pockets of bad behaviours.”47 Professor Alex Kemp, Aberdeen University, gave a slightly more cautious reply noting the challenges of operating in an environment where operators and licensees were competitors:

collaborating with competitors is not so easy. I see a challenge for the OGA going forward which is to ensure that all the clear advantages of collaboration are realised, and that will require a lot of skill, because after all, companies are competitors as well.

MER and the environment

28.The main criticism of the MER strategy has come from the environmental sector. Friends of the Earth Scotland stated that the current MER strategy is “inconsistent” with meeting the UK’s emissions reduction targets, arguing that the majority of reserves in the UKCS need to remain unburnt.48 According to a 2015 study in the scientific journal Nature, an estimated third of oil reserves, half of gas reserves and more than 80% of known coal reserves should remain unused in order to meet global temperature targets under the Paris Agreement.49 Friends of the Earth recommended that the UK Government should assess the MER policy against its legal commitments under the Paris Agreement and the Climate Change Act 2008, and propose an alternative objective for the UK Continental Shelf which would be in line with it.50 Dr Dixon, Friends of the Earth Scotland, expanded on this point when he appeared before the Committee, arguing that under the current MER strategy:

“economic” depends on the price of oil. If the price of oil reflected the true cost of burning that oil to society, then we would have a very different equation in working out what maximising economic recovery was.51

29.In response Oil and Gas UK has argued that “in the foreseeable future, oil and gas is going to play a key part in the energy mix, representing two thirds of primary energy in the UK in 2035” and that in this context maximising domestic production was important because it would reduce reliance on fuel imports which can be more carbon intensive.52 Similarly, the National Union of Rail Maritime Transport Workers noted that it is “estimated that oil and gas will continue to contribute significantly to the national energy mix for decades to come “,53 and the Scottish Government’s evidence states that “Oil and gas will still provide two-thirds of total UK primary energy by 2035 according to the Department for Business, Energy & Industrial Strategy.”54

30.Claire Perry, Minster of State, BEIS told us that currently “80% of our homes are heated by gas and 65% use gas for cooking” and “ every scenario we see for our cleaner future has some element of fossil fuels in the mix.”:

I guess the view is that if we are going to be using fossil fuels, we would like to use those that are generated from our domestic assets and that employ people in the United Kingdom.55

This projection of future reliance on gas is also reflected in the National Grid’s future energy scenarios. In three of the four scenarios “gas continues to provide more energy than electricity by 2050 […and] remains the dominant form of heating well into the 2030s”, although its usage patterns will change.56

31.We believe that maximising economic recovery is the right approach for the sector and welcome the steps the OGA has taken to improve collaboration. Whilst we acknowledge environmental concerns about the MER strategy, oil and gas looks likely to form a substantial part of the UK’s energy mix for at least the next 15 years. As such, we believe it makes sense to meet as much of this need as possible from domestic sources. We will return to the sector’s environmental impact in more detail later in this Report.

Accessing remaining reserves

32.During this inquiry we heard a range of estimates about the remaining reserves in the UKCS, but the most frequently cited estimates was that there remains between 10 – 20 billion boe, although some groups placed the estimate as low as 2 –4 billion.57 The wide range of this estimate reflects the fact that it covers “existing proven and probable reserves, but [also] contingent resources, other discoveries within areas of existing discoveries, and yet-to-find resources.”58 This compares to 44 billion barrels that have been produced since 1967.59 The exact amount recoverable will depend on the oil price and how efficiently and effectively it can be extracted; the OGA’s evidence shows how the future projections scenarios have changed over time, and how it might change again if the Vision 2035 strategy is delivered.

33.During this inquiry we heard how accessing these reserves would depend on a range of factors, including industry’s willingness to invest in the exploration of new reserves, technological developments that will change the economics of exploiting smaller and more difficult to access reserves as well as the ability to transfer assets between operators who are able to make best use of them at different points in their life cycles.

Exploration

34.Exploration is the search for natural gas fields or crude oil fields, the drilling of exploration wells and drilling into established wells to recover oil and gas. Research from the University of Edinburgh suggested that the UK’s oil and gas industry is entering the last decade of significant production and that this is due, in part, to the low rate of exploration.60 The number of wells drilled in the UKCS declined in recent years to around 14 per year (see graph below).61 The OGA’s May updates show that only one exploration and no appraisal wells were drilled in the first quarter of 2018 across the UKCS.62

35.Oil & Gas UK stated they are approaching the future of the industry with “determined optimism”,63 but that there needed to be a strong investment case for companies to continue exploration activity in the UKCS, as there was significant international competition for investment.64 Sir Ian Wood told us:

Exploration is disappointing. The government quite rightly spent a lot of money on investigating [in] new areas and we’ve had quite a good licensing round but we [are] still vastly short in terms of exploration. There’s no way we’re going to get close to 20 billion barrels unless there’s some serious exploration.65

There have been some significant new investments in exploration, notably BP’s investment at Clare Ridge.66

36.The OGA regulates the exploration for, and development and production of, the UK’s offshore oil and gas resources. They are responsible for granting licenses that give companies the right to “search and bore for, and get” oil and gas. The UKCS is divided into blocks and licences are issued via periodic licensing rounds. The most recent licencing round was supported by the release of data by the OGA, including from OGA-funded seismic surveys of areas where there was believed to be untapped potential, which was available to all potential licensees to help inform their investment decisions.67

37.In May 2018, as part of the 30th Offshore Licensing Round, the OGA offered to award 123 licences to 61 companies, focussing on mature areas and undeveloped discoveries, opening up potentially 320 million boe of resource in undeveloped discoveries.68 This was followed in summer 2018 by the 31st Offshore Licencing Round which focused on less-explored areas of the UKCS—which ended on 7 November 2018. On the results of the 30th round, Professor Alex Kemp said:

In current circumstances this can be interpreted as reflecting considerable interest among investors. […] The offers are made to a wide range of players, including the major oil companies and a large number of small companies, involving many new or recent entrants. It may be that the latter are willing to pursue leads or prospects where the materiality of the discoveries may be quite modest but is still considered acceptable by small players. This view is reinforced by the interesting revelation that 14 licences have been offered to companies which will now proceed to field development planning relating to existing discoveries.69

However, Professor Roy Thompson, University of Edinburgh, stated:

The recently announced 30th round saw a large number of bids, but only a small number of committed exploration wells, suggesting that future exploration and appraisal drilling activity will remain weak.70

38.Speaking about the results of the 31st licensing round, which concluded shortly before the OGA appeared before us, we were told that the OGA received 36 bids from 35 companies, with a range of different sized companies applying. Tom Wheeler, Director of Regulation said that the OGA was pleased to have attracted more smaller companies “because they are the people who will do the detailed work at low cost to try to find some of these opportunities that then get picked up”.71 However he added that the total level of interest was not significantly higher than the previous comparable round.72

39.The OGA is proposing to build on its approach to the use of data through the creation of a National Data Repository supported by new regulations on petroleum-related information and samples.73 Hedvig Ljungerud, Director of Policy, OGA, explained that:

we have a number of data sources. We have the energy portal that enables us to interact with operators. We have on our website the open data source, which has made available for absolutely everyone more data than we have ever had out before in the UK and really moved into a world-leading position. We have had millions and millions of hits on those sites and then we are planning to build a national data repository. That will be the real step change because [… the OGA’s] powers are now coming into force where we can get pretty much anything from the companies. There are different time limits to when it can be released, but over time it will build up an almost complete repository over all the work that has been done in the UK, the wells, exploration and so forth available. I think it will really change how exploration is done.74

40.We welcome the work that the Oil and Gas Authority is doing to stimulate exploration in the sector and its innovative approach to data use. These developments have the potential to deliver much needed improvements in the rate of exploration. We ask that the Oil and Gas Authority update us on its progress establishing the National Data Repository in its response to this Report.

Role of Technology.

41.The UKCS is one of the most mature offshore basins in the world, and new discoveries of pockets of oil and gas are generally smaller and more expensive to exploit.75 Therefore, as Colette Cohen, CEO of the Oil and Gas Technology Centre, told us, more advanced technology will be needed to access these pockets—and doing so is a key part of maximising the economic return from the basin.76

42.Deidre Michie, Oil and Gas UK, said that the UK sector was already exploiting reserves that would have been viewed as impossible 20 or 30 years ago. She saw wider potential benefits in the UK developing this expertise; “the upside is that you become very skilled in it and you develop an expertise, which we as an industry can then look to export to the rest of the world… [because] every other basin is a maturing basin” and will therefore encounter similar challenges at some point in its future.77 The Wood Review states that developing new and existing technologies will “encourage the UK to build further on its position as a global centre of expertise for offshore hydrocarbon basin exploitation.”78

43.Both the UK and Scottish Governments have already invested in technological research for the sector through the establishment of the Oil and Gas Technology Centre (OGTC) in October 2016, which received £180 million in funding as part of the Aberdeen City Region Deal. Colette Cohen, CEO, OGTC said the Centre was already looking at which technologies could unlock those potential assets, and that workshops it had hosted on this topic during the recent licencing round was one of the reasons for its success.79 Oil and Gas UK have also mentioned the work being done by the OGA and OGTC on technological solutions “such as an optimised subsea infrastructure that could have an important role to play in reducing the cost of developing small pools.” Subsea engineering is one of the areas the sector deal is seeking additional investment in through the proposed underwater innovation centre of excellence.

44.Continued investment in technology will be crucial to the future of the oil and gas industry. We welcome that investment that industry and both Governments have already made in technology that will make it easier and more efficient to access smaller pockets of oil and gas, which will contribute to maximising economy recovery from the UK basin. If sector deal funding for the underwater innovation centre is to be used to support further work in this area, the Government must ensure that it will deliver additional benefits beyond what has already been funded through the Oil and Gas Technology Centre.

Transferable Tax History

45.We heard that one barrier to maximising recovery from current wells was the financial disincentives in transferring licences between companies that specialise in exploration and production to those that specialise in later life production. This is because later life producers are not willing to take on full financial liability for decommissioning costs when production ends. To address this the Government is introducing a Transferable Tax History (TTH) mechanism for oil and gas companies operating on the UKCS. This will allow a seller with an interest in a UKCS oil licence to transfer some of its tax history to the buyer of the field. The buyer will then be able to set the decommissioning cost of the field against the TTH.

46.This measure was introduced in the Finance Bill 2018. Robert Jenrick, Exchequer Secretary, told the Bill Committee that the TTH mechanism “provides new investors with the certainty that they require about the tax relief they will receive for decommissioning costs. That will allow new deals to proceed”.80 Similarly Graeme Fergusson, Managing Director, Decom LTD, told us that the policy should “allow lower cost and more nimble operators to take hold of assets and continue to produce them for longer into the future.” ensuring that “the right assets [are] in the right hands”.81

47.The Scottish Government told us it welcomed this policy, saying that it has “worked with stakeholders to support and champion the introduction of Transferable Tax Histories by the UK Government at the 2017 Budget. However, the Labour party spokesperson on the Finance Bill Committee described the policy as ”fiscally irresponsible”82 arguing that it “put the Exchequer on the hook for exorbitant future decommissioning liabilities, which the Government have set aside no money to pay for”, and cited research by Global Witnesses that “there could be a loss of over £3 billion in tax revenue for the Exchequer over 10 years.”83 Responding to this argument, Robert Jenrick, Exchequer Secretary, said that neither the Government or the Office of Budget Responsibility had seen evidence to support the figure of £3 billion loss and that the Treasury estimated that the scheme would raise an additional £65 million of revenue. When she appeared before us, BEIS Minister Claire Perry told us that this policy would “reduce tax barriers to new investment in the North Sea” and that she had received reports that prior to introduction the policy was already starting to have the desired effect with “assets changing hands and them being reinvested in.”84

48.We welcome the introduction of Transferable Tax History which should help deliver the MER strategy by enabling assets to be transferred to companies who can make the best use of them. We invite the Government to set out in response to this Report how it will monitor the impact of this policy to ensure that it is delivering these benefits.


41 Gov.uk, Wood Review Implementation, accessed 7 January 2019

42 Oil and Gas Authority, The Maximising Economic Recovery Strategy for the UK, 18 March 2016

44 Institution of Chemical Engineers (IChemE) (OGI0023)

45 Oil and Gas Authority, Collaborative Behaviour Quantification Tool, 20 April 2017

46 Oil and Gas Authority, Asset Stewardship Implementation Guides, 4 July 2017

48 Friends of the earth Scotland (OGI0026)

49 McGlade, C & Rkins P, The geographical distribution of fossil fuels unused when limiting global warming to 2C, Nature 517, 187–190, January 2015

50 Friends of the earth Scotland (OGI0026)

52 Oil & Gas UK, Economic Report, 2017

53 National Union of Rail, Maritime & Transport Workers (RMT) (OGI0012)

54 Scottish Government (OGI0027)

56 National Grid, Future Energy Scenarios, July 2018, page 5

58 Professor Alex Kemp (OGI0019)

59 Professor Alex Kemp (OGI0019)

60 Professor Roy Thompson, School of Geo Sciences, University of Edinburgh (OGI0006)

61 Professor Alex Kemp (OGI0019)

62 Professor Alex Kemp (OGI0019)

63 Q7

64 Q9

67 Professor Alex Kemp (OGI0019)

68 The Oil and Gas Authority (OGI0009)

69 Professor Alex Kemp (OGI0019)

70 Professor Roy Thompson, School of Geo Sciences, University of Edinburgh (OGI0006)

73 Oil and Gas Authority, OGA Overview, 2018.

75 Sir Ian Wood, UKCS Maximising Recovery Review: Final Report, February 2014

77 Q8

78 Sir Ian Wood, UKCS Maximising Recovery Review: Final Report, February 2014

80 Finance Bill (No.3) Committee, 4 December 2018, col 181

82 Finance Bill (No.3) Committee, 4 December 2018, col 184

83 Finance Bill (No.3) Committee, 4 December 2018, col 188




Published: 4 February 2019