Oil tycoon Sir Ian Wood has led the biggest independent review of the North Sea oil and gas industry in its history, and said yesterday that production could increase by four billion barrels over coming years if major changes to the operation of the oil and gas sector are made.
Such changes would put the UK in a “stronger position” to extract nearly all of the estimated 24 billion barrels still remaining underneath the North Sea.
He calls for the introduction of a new regulator to oversee the industry, saying the current regulator is “significantly under-resourced and far too thinly spread” to effectively manage it.
But in a wake-up call to the sector, he warns that if massive changes to exploration and production are not carried out, the country could “fail to recover even a small fraction” of the remaining oil.
Sir Ian, founder of oil and gas giant the Wood Group, insisted last night that his report had no bearing on the independence debate, arguing reforms would have to be put in place by whoever was in charge of running the oil fields after the vote next year.
But SNP figures said the conclusions on the potential gains undermined claims that an independent Scotland was at risk by being so reliant on oil.
Pro-UK parties, however, said that his call for more collaboration and speedy action would be hampered if Scotland and the rest of the UK split.
Sir Ian’s report was commissioned by the UK government’s Department for Energy and Climate Change (DECC) and is the result of 80 interviews with firms engaged in the North Sea.
The UK oil and gas industry, which supports 450,000 jobs in Britain, has already produced 41 billion barrels of oil and gas from the UK Continental Shelf (UKCS). It has been estimated that a further 12 billion to 24 billion barrels remain to be recovered from undeveloped reserves and fields already in production.
Investment is currently at a record high of over £13.5bn. But Sir Ian’s interim report warns: “This masks some serious underlying problems.”
Over the last three years production has fallen by 38 per cent, costing the UK treasury £6bn in lower tax receipts.
The report says reasons for the difficulties in the sector include a lack of focus on maximising oil production by operators, instability in the tax system and a “light touch” system of regulation. It also points to the failure to maintain infrastructure, a lack of collaboration by operators and bad management.
To solve the problem, Sir Ian proposes some radical reforms, saying a new beefed-up regulator should have powers to “encourage” firms which are not utilising oil fields to sell up to another firm which is “more committed to maximising economic recovery”.
A new regulator would also be given the clout to put pressure on firms and consortiums to ensure investments are made. He concludes that DECC is currently “significantly under-resourced and under-powered”.
If his reforms are adopted, Sir Ian’s report concludes: “At the low end, the review believes the recommendations in this report have the potential to deliver at least 3-4bn boe more than would otherwise be recovered, worth approximately £200bn to the UK’s economy at today’s prices.”
At the high end, he said, total commitment to a new strategy by government and industry “will put the UK in a much stronger position to reach the 24bn boe potential”.
Speaking in Aberdeen yesterday, Sir Ian said the report should have “absolutely” no bearing on the Scottish independence debate.
He said: “We have all tried very hard, including I think probably Scottish Government, not to make this a political issue.
“This is trying to maximise the overall size of the cake for the UK – and if the composition of the UK changes, so be it.”
In line with Sir Ian, both the UK and Scottish governments opted not to focus on the implications of the report for the referendum last night.
Edward Davey, the Secretary of State for Energy and Climate Change, said: “There are people who would try to talk down their untapped potential, but today’s report shows that with strong, co-ordinated stewardship by the UK government, working in partnership with world-class operators, we can boost future returns by at least £200bn – and potentially much more.”
Scottish energy minister Fergus Ewing said the SNP government was “fully behind” the plans. He added: “Sir Ian’s report estimates that the prize from increased and effective collaboration could be an additional 3-4bn barrels of oil equivalent over 20 years, which could be worth £200bn.
“By addressing the challenges facing the industry and harnessing the opportunities, enormous benefits can be reaped by the industry and in tax revenues.”
However, party figures last night claimed the paper had backed their own side in the referendum battle.
SNP MSP for South Scotland, Chic Brodie, said: “As Sir Ian’s report outlines, North Sea oil and gas is a huge financial resource in Scotland’s waters. We know this already – despite the No campaign desperately trying to depict Scotland’s resources as a liability.”
However, Tom Greatrex, Labour’s shadow energy minister, added: “Given the global nature of this business, fragmentation of fiscal and regulatory regimes through separate arrangements in Scotland from the rest of the UK would increase risk, reduce efficiency and minimise the chances of achieving the goals this interim report sets.”
Malcolm Webb, chief executive of industry body Oil and Gas UK, said the report represented a “once-in-a-generation opportunity” for change in the oil and gas industry.
• Government and industry to develop and commit to a new strategy for maximising economic recovery from the UK Continental Shelf.
• Create a new arm’s length regulatory body, funded by industry, with additional powers and resources.
• The new regulator should, as a priority, work with industry to develop a series of strategies and set out how to maximise economic recovery in practice.
• The new industry regulator should also be charged with achieving greater co-ordination of activities and collaboration between oil companies to help maximise the recovery of remaining reserves.
• Oil companies will be required to sign up fully to the principles of the strategy and commit to collaboration in key areas such as the development of regional hubs and the sharing of infrastructure.
Analysis: Independence debate can’t ignore blueprint
Sir Ian Wood’s blueprint for the future management of the North Sea should have “absolutely” no bearing on the debate over Scottish independence, he said yesterday. But, of course, given the importance of the remaining North Sea tax reserves to the Scottish economy, anything which touches on the subject has absolutely everything to do with the independence debate.
Sir Ian’s analysis of the position facing oil firms is in line with previous studies on the North Sea. Since drills were first sunk into the ocean floor, 42 billion barrels have been brought to the surface. There are now anywhere between 12 and 24 billion left – a wide range which reflects the uncertainties over whether it will be cost-effective to hunt out the remaining reserves.
Sir Ian’s report yesterday set out how to ensure that it is. And he concluded that, should ministers and the industry follow his plans, it will ensure that three to four billion barrels, worth £200 billion to the UK economy, will be pumped up that otherwise would not be.
So who would be better leading these necessary reforms: the UK government as at present, or a new independent Scottish Government?
The SNP’s case, set out in its own recent paper on North Sea oil, is that production and investment in the North Sea has “been damaged by Westminster’s numerous tax changes”.
After independence, it says, oil firms would be guaranteed cash incentives and stability to give them the confidence to keep pumping.
Sir Ian’s report makes clear that without immediate changes, the country “will fail to recover even a small portion of the exploration potential that still remains”.
And it also poses further doubt over the viability of an oil fund. If, as the experts say, government now must reach a delicate balance between filling up its own tax reserves and incentivising firms to invest, and with public services are already stretched to breaking point, the likelihood there will be cash left over from the North Sea to squirrel away funds for a rainy day is questionable.