With regards to your reports about the Office for Budget Responsibility revising down the money it expects to receive from North Sea oil and gas, Sir Ian Wood’s UKCS Maximising Recovery makes a number of recommendations. His report includes taking regulatory responsibility away from the Department of Energy and Climate Change (DECC) and giving it to an independent body run and paid for by the energy industry.
It is clear from the report that, for some time – perhaps around 20 years – DECC has lacked the resources, specialist skills and manpower to do an effective job in maximising recovery of oil and gas. At present, the regulator, DECC, “is effectively limited to tackling the most immediate and pressing issues”. It must be relatively rare that a government department commissions a review into a part of its activities to be told that it should quickly give up that activity because it is unable to do it effectively and has been for some time. Sir Ian says that “light touch” regulation was appropriate for a young field, but not for a mature field. Over the past 20 years, the personnel in DECC involved in regulation has halved. The number is now 50.
In contrast, Norway, also with a mature UKCS field, has 200 persons in the regulatory role. (In addition it has a state oil and gas exploration company, Statoil, which is a major player in exploration in more than 30 countries. By exploration and development of oil and gas resources, Statoil adds billions of dollars to the Norwegian economy.) The Wood report is a comprehensive review of all that is lacking in the UK government approach and that of the industry to maximising recovery of UKCS oil and gas resources. There is a lack of focus on maximising economic recovery for the UK. Fiscal instability has been a significant factor in basin under-performance.
Within the industry, there has been a fall in production efficiency which the regulator, DECC, has not been able to confront adequately due to an increase in workload. Also, there has been lack of collaboration and overzealous legal and commercial behaviour between operators. This has increased costs, caused delays and led to poorer recovery.
There exists high quality strategic thinking by PILOT, a joint programme that facilitates the partnership between the UK oil and gas industry and government, but poor implementation. On issues such as exploration, infrastructure and decommissioning, integrated planning and collaboration are needed to ensure the most efficient approaches are adopted. The (new) regulator and the industry must work together to implement the strategies already developed in a number of key areas.
The Wood review heard strong views that the fiscal regime failed to provide sufficient incentive to explore. It noted the steps taken by the Netherlands and Norway to facilitate exploration.
In the Netherlands, the state-owned non-operating company routinely takes a 40 per cent stake in each well and this sharing of risk boosts exploration activity. In Norway, companies without production automatically receive tax relief in cash from exploration, a measure particularly helpful to smaller companies.
When Danny Alexander, the Chief Secretary to the Treasury, talks about falling oil revenues in an independent Scotland, he is referring to the incompetence of successive UK governments and himself in managing the energy sector.
The Wood report, if implemented, allows for a more optimistic view of oil and gas exploration and development. An independent Scotland would offer better management of energy resources for Scotland.
Dunbar, East Lothian