Kenny Paton: New powers and players may turn the tide on North Sea oil

If UK PLC is to win the prize of tens of billions of pounds of oil revenue in the coming decades by extracting every possible drop of hydrocarbons from the North Sea then the key is for new fields to gain access to existing infrastructure.

The government has given itself new powers to proactively intervene in disputes over access but has perhaps, albeit unwittingly, set itself on the road to a fundamental restructuring of the North Sea.

The UK continental shelf is now mature and fields are typically smaller, harder to reach and more economically marginal, so timely and affordable access to someone else’s spare capacity in a facility or pipeline is vital.

However, the smaller companies which typically develop marginal fields contend that the voluntary infrastructure code of practice (ICOP) on how these access rights are negotiated has fallen into disrepute. They feel infrastructure owners, typically the bigger players, either simply ignore them or use them as a cash cow.

Delays can be a project killer – one owner recently took six months simply to reply to an initial request for services. It has also become the industry norm to have extremely unbalanced terms in favour of the transporter, pushing all the risk to the developer and effectively writing a blank cheque to the infrastructure owner to carry out the tie-in works.

The infrastructure owners see risks to their own production, little reward, and injustice that someone can piggyback on their infrastructure and pay a lower tariff than existing users, and even owners, without having made any initial investment.

The oil and gas industry is one of high risk and consequently high rates of return, yet many seem to expect the same reward in a less risky utility-style business.

The nuclear option for a developer was always a referral to the Secretary of State (SoS) to ask him to set the terms of access, but in almost 40 years this button has never actually been pushed. Deals would be done by the relatively small number of companies which had wide-ranging commercial relationships over many projects and continents.

However, a new breed of more aggressive, smaller North Sea explorers, combined with the Department of Energy and Climate Change’s (DECC) increased appetite to stimulate the development of marginal fields, culminated in the first application to the SoS, quickly followed by a second despite the original legislation being found wanting and preventing a determination being issued.

The new breed of developers are not afraid to become involved in David and Goliath battles, particularly if the UK Government is prepared to add to their weaponry. The Energy Act 2011 rectified the known problems and also gave the SoS the power to step in to initiate determinations without first being asked by one of the parties involved.

This opens up the possibility, and perhaps temptation, for DECC to widen its remit and radically reshape the business models of the infrastructure owners to bring transformational, even regime, change by eroding their financial returns.

There have been calls for such radical change, including something akin to nationalisation of the pipeline system. However, many in the industry wish an evolutionary rather than revolutionary approach, fearing radical change would be difficult to implement and simply replace one set of risks and problems with another.

DECC favours a continued emphasis on negotiation-based access but in my experience it has also shown a willingness to challenge fundamental pillars of infrastructure owners’ business plans. This may yet have unknown and unintended adverse consequences.

What is clear is that the status quo is not an option. The independents are prepared to force the hand of the majors to try to gain access to infrastructure and the majors are understandably keen to protect their present higher-return business models from government interference.

The government has given itself the power to intervene and reshape the infrastructure business but it remains to be seen if it has the political will and stomach to use it.

• Kenny Paton is an oil and gas partner with Bond Pearce LLP, in Aberdeen.