By Paul Davies and Simon Tysoe
Sustained investment in offshore platforms and production installations has been critical in securing the UK’s energy supply. Despite ongoing oil price volatility, in 2016 and 2017 £3-4 billion of capital per year is envisioned for new developments in the UK continental shelf (“UKCS”). Such developments are expected to sustain production for decades, not only to meet rising energy demand, but to maximise significant project investment. Falling industry costs and improvements in efficiency have led to a decline in the operating costs of oil and gas installations – the Oil & Gas UK’s Economic Report 2015 anticipates expenditure on existing assets to drop to £2.1 billion by the end of 2016, representing a 22% decrease from the previous year.
Yet, notwithstanding cost optimisation, as oil and gas fields near depletion and therefore become unproductive, installations need to be retired or recycled. Removal requires substantial investment – expenditures of £2 billion are forecast by 2018, up from £1 billion in 2014 – to undertake the decommissioning of approximately 50 fields by 2018. More significantly, current mid-point estimates for UKCS decommissioning to 2050 is £47 billion, with a substantial portion of this being funded through tax-relief. Consequently, on 30 June 2016, the Oil and Gas Authority (OGA) published the UK’s Oil and Gas Decommissioning Strategy. The OGA, tasked with maximising economic recovery of the oil and gas lifecycle, will also issue accompanying delivery programmes to detail how decommissioning will be achieved.
Regulating Economic Recovery
The Energy Act 2016 implements the recommendations of the 2014 Wood Review to maximise economic recovery and improve regulation of the UK’s offshore oil and gas reserves. Such recommendations included the creation of an independent economic regulator for the sector. The OGA was subsequently launched on 1 April 2015 with the aim to influence, promote and regulate the UK oil and gas industry. The relevant powers and functions of the Secretary of State for Energy and Climate Change were transferred to the OGA to grant full regulatory powers over domestic oil and gas recovery, including the ability to impose civil sanctions. The OGA holds licensing and regulatory functions for oil and gas exploration and production, carbon capture and storage, gas storage, and access to upstream petroleum infrastructure, such as pipelines. It also oversees security of supply, minimising future public expenditure, industry collaboration and innovation.
The OGA was also responsible for producing the Maximising Economic Recovery UK (MER UK) Strategy, which came into force on 18 March 2016. MER UK aims to increase investment and operational activities that secure the maximum value of economically recoverable hydrocarbons – the OGA, petroleum licence holders, operators appointed under those licences, the owners of upstream petroleum infrastructure, and those planning and carrying out the commissioning of upstream petroleum infrastructure are required to take all steps necessary to optimise hydrocarbon recovery under MER UK.
Oil and Gas Decommissioning Strategy
The UK Oil and Gas Decommissioning Strategy supports MER UK and is designed to ensure that the oil and gas industry explores all viable options for infrastructure use prior to decommissioning. Field life extension is a priority, as well as ensuring that decommissioning is carried out in a safe, environmentally sound and cost effective manner. The strategy fits with new powers granted to the OGA in the Energy Act 2016, which sets out the process for consultation with the Secretary of State and the OGA before a decommissioning plan is submitted, including in relation to decommissioning costs. Notably, the Act creates an offence of decommissioning an installation otherwise than in accordance with such programme. These powers give the OGA significant new leverage in negotiations with owners of infrastructure who wish to decommission facilities that are used by third parties.
Meeting these objectives is anticipated to deliver significant value and competitive market advantage to the UK.
The Oil and Gas Decommissioning Strategy is focused on delivering:
- cost efficiency and a 35% cost reduction by 2020 in a technically competent, safe and environmentally responsible manner;
- decommissioning delivery capability in terms of supply chain expertise and capacity, supported by appropriate business models and stakeholder alignment; and
- decommissioning scope, guidance and stakeholder engagement by working with the Department of Business, Energy and Industrial Strategy (previously DECC) and other relevant parties. Such collaboration seeks to identify and evaluate opportunities to optimise and define parameters for decommissioning scope and to improve industry engagement with the organisations that regulate the decommissioning process.
The strategy is ambitious and sets out a delivery timeline reaching out to 2021. A key part will be the establishment of what is termed “transformative business models” for the delivery of late life management and decommissioning. Exactly what these may be is not clear and indeed the strategy anticipates these being outlined later this year and implemented through 2017.
Whether the strategy will effectively optimise the life and retirement of oil and gas installations remains to be seen. Many would-be investors into the North Sea have been discouraged from buying assets by the large liabilities for decommissioning associated with them and in some cases by uncertainty surrounding third party infrastructure required to provide a route to market, especially for gas. Delivery of the key elements of the strategy will be crucial to changing investor sentiment.
This post was prepared with the assistance of Alice Gunn in the London office of Latham & Watkins.
If you found this post interesting, you might also enjoy:
‘Fit for 50’ – Restructurings Likely as Oil Industry Enters New Normal
Submit a comment about this post to the editor.