The Wood Review, published in February and aimed at identifying ways to stimulate North Sea oil and gas activity, proposes the creation of a new arm’s length industry regulator or agency to take on a broad industry facilitation role. When one looks at the roles proposed for this new agency, one could be excused for having a sense of ‘déjà vu’.
In the early 1980’s, Britoil, and its predecessor the British National Oil Corporation, had similarities with the proposed new agency, before its privatization and sale into BP. Of more concern with the proposals, is that there appear to be some significant risks and issues, which could exacerbate the challenges they are designed to resolve or inhibit effective implementation. One of the more interesting challenges will be finding and agreeing a name for the new body.
“The new Regulator’s role will be licensing, supervision and stewardship. It must be low on bureaucracy, high in skills and experience and strong and pragmatic. It must be the catalyst for maximising the economic recovery by facilitating, coordinating, mediating and promoting collaboration, removing barriers, and encouraging more efficient exploration, development and production.” – The Wood Review
Sir Ian Wood was tasked by Ed Davey of the Department of Energy & Climate Change (DECC) to lead a team and review ideas and options to stimulate activity and remove barriers in order to maximise economic recovery from North Sea oil and gas activity. After interviewing many organisations with interests in the sector and consulting on an interim report published in November 2013, the final report was published in February this year. The report focuses on the creation of a new independent government regulator outside of DECC, who currently perform this role. It proposes that the new agency be staffed with a team of a significant size and have responsibility for a wide range of matters, which are intended to address matters which are constraining pace and scope of North Sea developments.
In the early 1980s, Britoil and its predecessor the British National Oil Corporation (BNOC), had a role in ensuring the Government’s strategic Oil and Gas interests were protected. At the time this largely related to assuring security of supply from domestic production, but clearly in today’s world could easily be to maximise economic recovery. At a working level, many of the attributes proposed for a new agency were to be found in Britoil. Such ‘Britoil-esque’ attributes include;
- Pursuing the UK’s strategic interests
- Working with other oil companies to optimise production and enhance recovery
- Being the employer of choice, offering competitive remuneration levels and recruiting the best young graduates
- Having access to all data and right to attend partner meetings
- Ensuring optimum field development planning
- Supporting the avoidance and resolution of disputes
- Having a significant team of industry experts, independent of Government
Of course not all characteristics now proposed for an independent regulator are the same as Britoil’s; for example Britoil did not have a licensing function. However the similarities do bear some consideration.
Risks to implementation
The report accurately identifies some of the key issues impacting activity levels in the North Sea, such as cost of operation, access to data, cost effective access to existing infrastructure and simplifying commercial arrangements. However it is not necessarily clear that a new larger independent regulator would be better placed to address these matters. Some of the potential challenges and risks to implementation are discussed below;
It is far from clear if operators want more regulatory involvement in their activities, so support for the implementation may be weaker than suggested. Then there is the cost, which will be passed onto oil companies and includes the set up and running costs for the new regulator. Additional cost burden is part of the challenge the review is seeking to address. Although a light touch regulator is proposed, experience suggests that an agency with more people is unlikely to lead to a light touch outcome. It is unclear that a regulator would be effective in supporting technology facilitation and enabling cost reduction initiatives; these aspects being more usually driven by entrepreneurial organisations or breakthrough projects.
The report does not adequately address the Climate Change part of DECC’s role. Maximising economic recovery may be a worthy goal, but it needs to be taken in the context of climate change and the need to mitigate carbon emissions, including those associated with North Sea oil and gas production. There appears a risk that an arm’s length regulator is perceived as being closer to industry and further from government and therefore perceived by others to be more open to industry lobby. The creation of another new government agency, at a time of austerity and reduction in government overheads, may also be politically challenging.
Some of the aspirations, such as an obligation to ‘maximise economic recovery’ appear very subjective. To be clear what this means within a licensed area would be challenging enough, but to include an obligation beyond the licensed area will test collaboration, best practice and legal arguments to the limit. By way of example, the report implies that FPSOs (Floating Production and Storage Offloading vessels), which due to high operating costs may result in lower long term hydrocarbon recovery than fixed installations, are inferior. However this fails to reflect that the economics of a fixed installation may preclude any development at all.
The report itself suggests that uncertainty is not good for the industry, and although quoted in the context of fiscal stability, the same is true of regulatory obligations which could impact new or existing field developments. The creation of a new arm’s length regulator is likely to create some uncertainty in the industry, for example in relation to the unclear obligations for maximising economic recovery. It is unclear how the legal arrangements will evolve with regard to the need for additional powers and the transfer of powers from DECC to an arm’s length regulator.
The review touches upon fiscal aspects, whilst acknowledging that a full review of this area was beyond the remit of the study. Collaboration between Treasury, an independent regulator and industry is a worthy objective, but given current challenges of internal collaboration between DECC and Treasury it is far from clear that collaboration with an external agency would be much better. The report recognises that fiscal measures make the biggest difference to activity levels. It is unclear how an arm’s length regulator will be in any better place to direct fiscal stimuli which are controlled by the Treasury.
In creating a new arm’s length regulator, one of the more interesting challenges will be finding and agreeing a name. If the analogy is Ofgem, then we may be in for some variations on this theme. Some options could be; Ofoag – Office of Oil and Gas; Ofgom – Office of Gas & Oil Markets; Ofpet – Office of Petroleum; Ofmore – Office to maximise oil recovery; Britoil; or something completely different.
This article was written by Sam Gomersall.