Regulator aims to be collaborative rather than punitive in maximizing North Sea recovery
Operators need not fear the UK’s new policy of squeezing the most out of North Sea oil and gas, with the regulator preferring a collaborative rather than sledgehammer approach.
Under the strategy, producers on the UK Continental Shelf will be obligated to either pursue maximum economic recovery or divest those assets to a party that is able to achieve maximum recovery. The strategy does not favor large or small companies but instead envisages more collaboration between operators of late-life fields as a way to cut operations and decommissioning costs.
Parliament will debate whether to approve the strategy in April. The draft offers several recommendations but remains vague on what constitutes a reasonable price for those assets. what operators can consider as satisfactory returns or how the new regulation will be enforced. However, the OGA will be granted new powers later this year, including being able to issue and enforce financial penalties and revoke licences.
Questions of viability
Some of the proposed solutions may not be viable under current low oil prices, Paul Brindley, Late-Life and Decommissioning Consultant for DCSL, told Upstream Intelligence.
“In a lot of the cases these fields have been used for over 20 years and they are efficient at $65 per barrel but not at $30/bbl, even when operators cut costs to the bone,” he said.
“The problem is that a company then has to go out and find an investor in a field which may not be worth investing in. If it is unable to do that it has to sell at a fair and reasonable price. But it is not clear what a reasonable price should be,” Brindley said.
The Oil and Gas Authority (OGA) shied away from defining “a reasonable” price in the draft proposal because that price varies from company to company and field to field, according to a source familiar with the matter. The regulator envisages a solution will be reached through a dialogue with operators, or potentially by bringing together several operators interested in a related group of fields.
The OGA also has a big team looking at asset stewardship, the source said. If it feels that an operator has expectation of returns that are unrealistically high at current prices or that it does not want to invest in the field, it will encourage them to find a solution.
Through its position as industry regulator, the OGA is privy to the plans of the various operators and is in a position to encourage sharing of information and a possible joint solution. Although confidentiality issues mean it must tread carefully, the OGA will aim to foster more collaboration to help operators share the financial burdens of late-life fields, according to the source.
Decom central to considerations
Another question is how pursuit of maximum economic value will affect later decommissioning liabilities, namely in cases in which fields are transferred from majors to smaller operators. Equipment must still be in working order for a field to be decommissioned. Yet there are concerns that if the last company to operate the field is not liable for decommissioning, it may not feel obliged to spend money on maintaining equipment.
Although the draft is not very specific on that issue, the 2016 budget has offered a sweetener to companies with decommissioning liabilities.
“The budget gives clarity on the tax relief available to the original field owner should they sell the field and keep the liability. This is meant to encourage companies to sell on the fields so that more oil can be extracted rather than trying to decommission sooner,” the source close to this matter said.
The tax relief has also been introduced for new entrants who have no financial history working in the North Sea and who until this budget would not have been able to write off some of the expenses against tax. This was designed to give a financial incentive to new and usually small companies.
If dialogue fails, the OGA will have powers to penalize companies and even potentially revoke licences. Despite the stick, there has been no case of a licence being revoked so far and, if anything, the regulator is far more likely to look for amicable solutions than push for a strict penalty.
By Vanya Dragomanovich