Governments must set aside the constitutional matter and concentrate on the oil industry, writes Brian Wilson
Sir Ian Wood is right. The measures which he proposes for extending the life of the North Sea need to be implemented regardless of the Scottish constitutional debate.
Apart from anything else, the need for action is urgent as the precipitate fall in North Sea production confirms. Production is down by 38 per cent over the last three years. The figures for the past year are much worse than predicted due to ageing infrastructure.
As the review warns: “If such a trend continues, the UK will fail to recover even a small proportion of the exploration potential that remains.” There are major investment decisions pending which will certainly be influenced by the government’s response to the Wood recommendations.
Due to the tortoise-like timescale set by Mr Salmond for the referendum, many of the actions which flow from the review should be under way before it even takes place. So the over-riding message is: Get on with it, protect 450,000 jobs and forget about the constitution.
Retrospectively, it is worth pausing to compare and contrast Sir Ian Wood’s findings with the cavalier assurances that Salmond was issuing just a few months ago. “Every man, woman and child” in Scotland was to have £300,000 from the North Sea, if only we would vote for independence.
Sir Ian Wood’s sober review of the realities confirms just how childishly irresponsible it is for any politician to make promises about what the North Sea will yield when its whole future as a major, oil-producing province is so uncertain. Spending the money before it is earned tempts political as well as geological providence.
Credit where it is due. The UK government’s decision to commission this report was, as Sir Ian says, “timely” due to the “urgent need to avoid significant value erosion for both industry and government”. But it is by the speed and flexibility of their responses that they will now be judged – and this is only an interim report. Progress will be closely observed.
To some extent, we have been here before, albeit for different reasons. In the late 1990s, the price of oil fell to under $10 a barrel and the implications for North Sea investment were alarming. This led to the creation of a body called Pilot which brought together government and industry to look for ways through the crisis.
It was counter-intuitive for the oil industry to co-operate in this way with government and indeed to share information within its own circles, but it turned into an extremely successful exercise – chaired at that time by plain Ian Wood. So he has been over the course and I can see in his latest recommendations a strong thread of continuity since the challenges now are very similar.
At that time, a lot was done to encourage smaller, more nimble oil companies with lesser expectations than the majors of the industry to take a stake in the North Sea. Licences to explore were freed up. Technological innovation made many smaller fields viable. There were sensible fiscal incentives. And then, pretty quickly, the oil price recovered.
There are now far more players in the North Sea and there are 300 fields operational today compared to 90 less than 20 years ago. “Gone are the days,” says the Wood review, “when a handful of major companies operated large fields in isolation.” But if this more diverse industry is to remain competitive, then there has to be co-operation among the operators in order to share infrastructure and costs.
That doesn’t seem to have happened. The momentum of the measures that were introduced at that time has not been maintained and successive governments reverted to being more interested in what they could take out of the North Sea than in ensuring its long-term development – a trend only recently reversed through the incentives to develop west of Shetland. Eventually, the “taking” approach becomes counter-productive and the fall in production over the past three years has cost the Treasury £6 billion in lower tax receipts.
Investment levels are currently high but, as the review notes this “masks some serious underlying problems”. Indeed, it is almost meaningless to quote investment figures in the North Sea without reference to the hugely increased costs of getting the oil and gas out.
As Sir Ian states: “Discoveries are generally smaller and more expensive to exploit… the resulting development costs per barrel have risen fivefold over the last decade. Many developments will only be viable through collaboration and co-operation to form hubs or clusters to achieve the most efficient development.”
The message of Sir Ian’s report is that a collaborative approach needs to be revived and I note that he sees a key role for Pilot which has just about survived but without anything like the profile of its early days. On issues like exploration, infrastructure and decommissioning, there is a need for strategic planning and co-ordinated implementation.
All of this poses an ideological challenge for the coalition government which it should be capable of overcoming when the fiscal stakes are so high.
Leaving everything to the market and decision-making by individual companies will not deliver the goods. That is why Sir Ian calls for “the creation of a new arm’s length regulatory body” with the power to enforce collaboration where it is not being volunteered or is resisted.
When I was energy minister, I had the highest regard for the DTI officials who were dealing with the North Sea. The successful implementation of the Pilot measures was largely due to their efforts. But what has happened since? As Sir Ian notes: “The UK now has over 300 fields in production but the regulator is down to less than 50 personnel, working on more complex licensing and stewardship issues.” The Norwegians have 220 and the Dutch 100 doing the same jobs.
Once again, the foolishness of short-term “savings” in the form of staff cuts is exposed. Sir Ian writes: “With the increasing interdependence between operators… industry is clearly saying they want a strong regulator, able to become proactively involved, minimise disruption and delays, and facilitate and accelerate progress.” This is one highly visible area in which Sir Ian’s recommendations should lead to immediate action.
Sir Ian’s interim report offers a clear route map for action. It also offers an equally clear warning that nothing about the future of the North Sea can be taken for granted.
We now need concerted action in the interest of jobs and prosperity rather than silly boasts about £300,000 for every man, woman and child.