25th Feb 2015 11:08
LONDON (Alliance News) - The chief executive of recently introduced UK regulator the Oil and Gas Authority, Andy Samuel, on Wednesday issued an urgent call to action for industry, government and the regulator to maximise the economic recovery of resources in the North Sea.
Samuel made his comments after releasing his initial findings on the North Sea and in response to the government's decision to assess the impact of the sharp decline in global oil prices on the UK oil and gas industry, which resulted in the Oil and Gas Authority being set up.
From the start of January, UK Chancellor of the Exchequer George Osborne cut the supplementary charge rate for the North Sea to 30% from 32% with the intention of lowering it further in the future "in an affordable way". The move is intended to encourage further investment in the UK Continental Shelf, after repeated calls for action from the offshore industry, with firms struggling with higher costs and falling world prices.
The current stir regarding the North Sea began after Ian Wood completed his Maximising Economic Recovery Review, which was a comprehensive review of the North Sea.
On Tuesday, Osborne said he was set to meet the chief executive of Oil and Gas UK, the organisation that represents the UK offshore industry, on Wednesday to discuss what action is needed by both industry and government to "ensure the long-term success of the sector".
The meeting was organised after Oil and Gas UK conducted a survey that provided "striking evidence of how rising costs, taxes and inadequate regulation have taken their toll on the UK industry?s international competitiveness," and highlighted "the urgency with which measures are needed to secure new investment and address the collapse in exploration."
Oil and Gas UK demanded "permanent change" to how the government and industry manages the North Sea to maximise recovery and increase investment, adding that even at USD110 per barrel, the North Sea would not realise its full potential.
Most oil and gas fields in the North Sea are ageing and becoming more expensive to maintain. The recent sharp slide in oil prices to about USD58 a barrel, from over USD115 a barrel last June, has put pressure on the North Sea operators and threatens tax revenue from a source that is still important to the UK's overall tax receipts.
This is evident by operators such as oil majors BP PLC and Royal Dutch Shell PLC cutting North Sea expenditure plans and making broader spending cuts. On Tuesday, oil services firm Archer confirmed it was cutting 400 jobs from its UK operations, mainly in the North Sea just hours after Oil and Gas UK revealed the poor performance of the North Sea during 2014.
On Wednesday, the Oil and Gas Authority released Samuel's report, which highlighted "the two most immediate risks" to the industry and government.
"The first risk is that the profitability of our current oil and gas fields will be insufficient to attract continued investment. This could lead to the premature decommissioning of critical North Sea infrastructure and result in valuable oil and gas resources being left the in the ground," said Samuel.
In response, Samuel said the Authority will help companies to prepare asset improvement plans and to improve operating efficiencies by 30% to 40%. However, the Authority said these improvements to operating efficiencies would not be realised until the end of 2017.
"The second risk is that a loss of confidence in the future potential of the UK Continental Shelf could result in the UK failing to secure the critical long-term investment necessary to maximise economic recovery of our North Sea oil and gas resources," said Samuel.
Samuel said the Authority will work with HM Treasury to implement a fiscal regime which will install investor confidence and will also work with companies to "revitalise exploration activity".
"The Oil and Gas Authority cannot achieve these outcomes in isolation. I have highlighted the key risks facing the industry, priority actions required and my expectations on delivery. Now industry, government and the Authority must build on the positive tripartite relationship," Samuel said in a statement Wednesday.
"The future of our oil and gas industry depends on it," he added.
Oil and Gas UK on Tuesday said there are 6.3 billion barrels of oil equivalent that are licensed or currently under development in the UK North Sea, but said there are another 3.7 billion barrels of oil equivalent that could be invested in. However, the organisation said its members have highlighted that only around 2.0 million of the 3.7 million barrels are ever likely to be developed.
The organisation added that operating expenditure rose by 8% in 2014, adding that a unit of production cost has "reached a record high" of GBP18.50 per barrel, whilst revenue from the North Sea have hit "the lowest since 1998", at around GBP24 billion for the year.
Oil and Gas UK also predicted that the amount of projects moving from investment phase to development will fall by a third in 2015, whilst planned investment is set to fall to GBP3.5 billion from the original forecast of GBP8.5 billion. There also were fewer wells drilled in 2014 than expected.
The Treasury on Tuesday said the Chancellor has "vowed to take further action to support the North Sea oil and gas industry" in response to Oil and Gas UK's survey.
By Joshua Warner; [email protected]; @JoshAlliance
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