Premature decommissioning will be failure in profound UK regulatory shake-up

The UK has embarked on a profound shake-up of its offshore regulatory regime as it tries to maximize recovery of the remaining hydrocarbons in the mature UK Continental Shelf.

UK energy secretary Ed Davey

Operators will be obliged to work together in extending the life of whole regions, not just their individual fields, and may be asked to rent their infrastructure to competitors for the sake of boosting regional production.
Premature decommissioning of assets will be seen as failure, and a brand new regulatory body will be set up with a surprise £15m cash injection from the UK government.

The principles of the new approach were laid out by industry veteran Sir Ian Wood in a review commissioned by the government and published in February. The government released its official response this month giving full endorsement to the strategy, labelled Maximising Economic Recovery (MER).

Wood called on the Department of Energy & Climate Change (DECC) to set up a new arm’s length regulatory body, similar to ones in Norway and the Netherlands, because the regulator now is stretched too thin. The government accepted this but angered industry body Oil & Gas UK by following Wood’s advice in insisting that the new body would be funded completely by industry.

Then on 16 July the government changed its mind, announcing that it would contribute £15m over five years to help kickstart the new agency, to be called the Oil and Gas Authority (OGA). After five years, industry will have to foot the bill for the OGA. Applications for a new chief executive of the OGA closed on 15 July.

Although the UK Continental Shelf (UKCS) is a mature area, the Wood Review said there was a potential to extract an extra three to four billion barrels of oil and gas from it over the next 20 years if its recommendations were followed. That would be worth approximately £200bn to the UK, the review said.

But under the MER approach, operators would have to work together in a way that will seem highly unusual today. “The overarching principle of MER UK,” the government said in its response, “is to maximise economic recovery for the UKCS as a whole and not just the particular field for which the operator has a licence.”

This will require effective regional development plans, the government said, and decommissioning will be seen in a new light. The OGA “will oversee planning for future decommissioning of the UKCS, ensuring it proceeds in a logical, sound, cost-effective manner, in line with MER UK.”

Operators will be required to cooperate with the new OGA and with other operators on all aspects of field, cluster and area development, from exploration through to decommissioning. Anticipating the need to tie back smaller and more marginal discoveries into existing – and often ageing – infrastructure, the government said operators and owners “should make their infrastructure and processing facilities available at fair commercial terms and rates to third party users, subject to their own capacity requirements and technical compatibility.”

Success of the MER strategy will be the longer productive life of the infrastructure, and failure would be decommissioning too early. “It is also intended,” the government said, “that assets are not decommissioned prematurely to the detriment of production hubs and infrastructure which are needed to achieve the maximum economic extension of field life.”

“Timing is critical,” the government said in its response, “since in mature areas of the UKCS, rapid exploration of near field potential is required before existing infrastructure is decommissioned.”

Writing in the foreword to the government response, UK energy secretary Ed Davey challenged the industry to give up its adversarial ways. He said the full impact of the Wood Review would not be realised unless operators “increase their willingness to work together within fields and between fields to maximise economic recovery and, in support of this, to curb the overzealous legal and commercial activity which can often increase cost and make cooperation more difficult.”

The industry body Oil & Gas UK praised the government for endorsing the Wood Review and promised that the industry would step up to the challenge.

“We need a fresh, well-resourced arms-length regulator to put the principles of the Wood Review into practice,” said its chief executive, Malcolm Webb, adding: “The Secretary of State challenges the industry to match the Government’s commitment to Sir Ian’s recommendations. I can assure him that our industry is so committed.”