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Malcolm Webb, Chief Executive, Oil & Gas UK

09.06.2014 / Energyboardroom

Malcolm Webb, Chief Executive of OGUK, the industry body championing oil and gas companies’ interests in Britain reports his take on the findings of the Wood Review, his vision for greater collaboration in the UKCS and the steps he thinks the industry needs to take to ensure production continuing into the future.

When we met in 2008, you stated that a fundamental goal of Oil & Gas UK was to draw attention to the importance of the British oil and gas industry. Do you think that the recently released budget proposals represent ‘mission accomplished’ in this respect?

I do not think we can state ‘mission accomplished’ as yet – the situation certainly represents a task still in progress. We do have some cause for celebration, yet have also faced some small setbacks. Since 2008, to reflect on what has happened, Oil & Gas UK has grown considerably, from around 100 members then to over 450 now. The organisation has every type of operator in the UK as a member, and a broad representation of the supply chain, both big and small are affiliated to Oil & Gas UK.

As an all-encompassing industrial trade body, we have made significant progress. Alongside this, the organisation has gained a heightened profile within the industry and across the country as well. The extent and breadth of our political engagement has increased substantially, which has resulted in some positive developments. In 2013, the UK Government, encouraged by Oil & Gas UK, for the first time ever published an industrial strategy for the oil and gas industry, featuring goals for both producers and supply chain businesses. That has grown usefully, an entire industry strategy has been formed and there is even an important meeting to this end planned, which will be chaired by Vince Cable MP, the secretary of state for business, in London.

There is a paradox in the UK Continental Shelf (UKCS) at the moment, as challenges remain. On the one hand, there is record investment, and on the other, all-time-low levels of exploration.

The move to commission the Wood Review was an excellent signal of the Government taking this industry seriously, and we were exceedingly pleased to hear the Chancellor of the Exchequer announce in the recent budget proposals a full fiscal review of how the industry is taxed. I should mention, however, it was a shame that the UK Government decided to press ahead with its plans for bareboat charter, increasing costs for this part of the industry.

A third sign of the importance that the budget attaches to the oil and gas industry is the announcement of a new Ultra High Pressure High Temperature (u-HPHT) field allowance.

Over the last few years, Oil & Gas UK has been heavily involved with negotiating field allowances of one kind or another. This has been useful in increasing capital investment in the basin, with record capital investment last year and significant capital investment this year – expected to be around 13 billion GBP.

Since 2008, Oil & Gas UK has also achieved two things said to be impossible. Firstly, having negotiated with the treasury and delivered certainty over decommissioning relief. This was a tremendous step forward, and brings security for that part of the fiscal regime and allows the industry to move security arrangements for decommissioning from a pre-tax to post-tax basis. This means that considerable amounts of capital should be freed up to back these decommissioning liabilities.

Lastly, we also managed to persuade the EU commission from implementing a Europe wide safety regulation. Instead, a directive was implemented that allowed local regulation to address the needs of the regulation. This was hugely important, as this would have required the removal and replacement of our existing safety regime with a European one. The industry feels quite positive about its current safety regime and is pleased to have seen it retained.

The Wood Review, as you mention, highlights the fact that exploration is at an all-time low ebb. Do you think a resurgence in exploration is possible, and if so, how – or is the golden age of exploration over entirely?

In all fairness, we are not going to get back to the glory days of the peaks in the North Sea. However, the bar must be raised substantially from where we stand at the moment. 15 exploration wells were drilled in the entire North Sea last year – a depressingly small number, which needs to be increased by a factor of three or four.

Also, not only are too few wells being drilled, too little is being found by the wells that are drilled. The industry needs to be bolder and seek bigger plays and accumulations, and move away from simply searching for oil close to existing proven resources. Stratigraphic traps are one example of where searching could be fruitful. New and existing technology, applied correctly, can add greatly to our exploration capabilities. I am not convinced, for example, that subsurface techniques are being used to deliver all that they could.

Technology can also boost advanced oil recovery. A great deal of existing technology can help greatly, but if you look at the UKCS, many fields are still being decommissioned with more oil left in situ than that which has been extracted from that site – recovery factors can be lower than 50 per cent, and the industry should aspire to increase this figure through the application of further technology.

Gas is proposed to be a replacement for coal in the electricity generation mix. To what extent does unconventional gas represent a route to promote energy security and reduce carbon emissions simultaneously?

The detailed economics of unconventional gas is still to be proven. Whilst there is a significant resource of gas that can be accessed, the question remains as to whether it can be economically accessed. There is still no location with sufficient wells to demonstrate costs involved in production. It may be eight to ten years before shale resources will contribute in any substantial way to energy resources.

It would be, however, be a national scandal if this resource was not properly investigated. It does offer the prospect of improving energy security, and also in decarbonizing the UK’s economy. It is a travesty at the moment to see the UK burning more coal at the expense of gas in the energy matrix. The more indigenous and secure gas sources we have the better on this front.

Some parties have spoken of the positive elements of the budget, including the fiscal review proposed. But to what extent do you think the new regulator will be able to promote collaboration, a factor that the Wood Review suggested would be highly useful to the development of the North Sea?

I think this new regulator is important for a whole range of reasons. Not only is it needed to act as a catalyst within the tri-partite relationship between the industry, the Treasury and the Department of Energy & Climate Change (DECC), I think that it will be useful to prompt parties into action when initiatives are not progressing at a satisfactory rate.

Costs are one of the reasons holding back enhanced oil recovery- the fiscal regime, some parties have stated has no further allowances for EOR- to what extent do you think the budget has promoted the ‘glamorous’ HPHT whilst ignoring one key target for the industry- improving oil recovery from brown-field wells?

I would not criticise in any way the HPHT allowances- I think they are a very positive development. This was needed, and some important investments can go ahead in the light of these allowances.

The budget also announced a full fiscal review. This is where the industry needs to bring forward suggestions for changes to the system particularly where this may promote brownfield development and in turn the advanced oil recovery technologies as well. None of the current allowances are really sufficient to touch those. Reshaping the fiscal regime might be useful. One can argue that the current fiscal system is very bespoke, that it is too specific, and operates too often in a ‘case-by-case’ basis. A more standardised approach might be useful. The tax system now, has too high a headline rate, and is too complicated. As such, final tax take on a project can be difficult to predict and a more structured approach would be.

There is a strong argument to suggest that lower headline rates of tax could actually deliver more revenue to the treasury, as more projects would go ahead. Something does need to be done to support advanced oil recovery, though further complication should be, as I have stated, avoided. Exploration is one other area which should receive attention and support from government.

Human resources; companies are losing time and suffering expense locating staff; what would be your key comments with regard to the state of skill development, and do you think there is a culture of ‘moving for a penny’ within the oil and gas industry- how could this situation be alleviated if this is the case?

I was reading a report the other day which focussed on the number of people placed in new jobs in Aberdeen. Actually, the number of new jobs was, relatively speaking, small, and personnel do tend to move around in the system here a great deal -which may create additional pressure on rates.

Increasing the supply of labour to the market is one route to alleviate this issue. Industry costs are increased by human resources costs, which are not beneficial for the industry overall.

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