LONDON: Britain is likely to have to ditch its hands-off approach to the oil industry for a mix of regulation, tax breaks and investment if it is to reap the benefits of the billions of barrels of hard-to-extract oil remaining under the North Sea.
Changing the way an industry has worked for decades will be no easy feat. It could involve costly legal disputes over existing contracts, and a long-term commitment from a government focused on the short-term goal of cutting its deficit.
But with many North Sea oil platforms and pipelines coming to the end of their working lives, time is running out to get at the oil, putting pressure on a government review of the industry — due to be published this month — to deliver a plan of action.
“This is urgent. It’s not a problem we can see happening in the next decade, it’s a problem now,” said David Bamford, a former head of exploration at oil firm BP, who now runs his own consultancy and sits on the board of Tullow Oil.
Production from UK waters fell by about 40 percent between 2010 and 2013 to the lowest level since the 1970s, according to industry group Oil and Gas UK. Exploration has also tapered off, with consultancy Deloitte reporting last month that only 47 test wells were drilled last year — the lowest level since 2003.
That is bad news for a cash-strapped government which in fiscal 2012-13 still relied on the oil industry for over 15 percent of all corporate taxes. It’s not that North Sea oil is running out.
An interim report from the government’s review — chaired by industry veteran Ian Wood - estimated as much as 24 billion barrels of oil could still be produced, worth about $2.6 trillion at current prices.
But the oil is getting harder and more expensive to recover. And many of the firms with the skills to do so complain they can’t get access to the infrastructure they need because it is owned by major oil companies that are focused elsewhere in the world and see little benefit from helping competitors.
High costs, including wages and taxes, are also making oil firms think twice about the North Sea. In November, for example, Chevron cast doubt over its Rosebank project in the region, estimated to have cost $8bn, saying it did not currently offer “economic value”.
There is also political uncertainty, with BP warning this month that the industry could face extra costs if Scotland votes for independence in a referendum in September.
The interim report from the Wood Review in November suggested the government should set up a stronger regulator for the industry to ensure companies work together in a way that “maximises economic recovery” of oil in British waters.
That could follow the model of Norway, where the NPD regulator is mandated both to drive cooperation between oil firms and to impose Norwegian law - which requires that resources are developed optimally.
The NPD, however, has been operating for around forty years and employs about 200 highly-skilled people with an in-depth knowledge of the North Sea, something which industry watchers say will not be easy to replicate in a short space of time.
Reuters
