with Malcolm Webb, Chief Executive, Oil & Gas UK
This decision was taken after the realization that there was no organization in the UK capable of speaking on behalf of the entirety of the offshore industry in the country, and that it was important to correct this situation. UKOOA was an association for operators in the UKCS which was largely dominated by the bigger oil companies, while the Industry Leadership Team was a relatively small collection of operators and some supply chain companies which had been set up under the PILOT initiative several years back. By 2007 it became clear that it would be of great interest for all parts of the value chain to have an association which could act as a single (though not exclusive) voice for the industry, particularly in order to raise our profile amongst the government and the general population.
Indeed, despite its enormous importance, the UK’s oil and gas industry has been a very well kept secret to most people in the country. The story of UKCS exploration and production is little known, and the amazing engineering that has developed over the years is even more unheard of to the British people. After coming together to form this association there were many doubts about our ability to achieve deep and constructive discussions between operators and the supply chain, but I believe that in reality we are having great success in this regard. Having both operators and contractors sitting at the same table has greatly enhanced the quality and breadth of our discussions.
In its short life, Oil & Gas UK has grown rapidly in terms of membership which originally brought in about 20 companies from UKOOA and a similar number from the Industry Leadership Team. Almost immediately we integrated several new companies, reaching a total of over 70 members. Though we have the aspiration to become an even larger organization, we have not been actively seeking to increase partnership yet because we have been in a phase of proving our model first.
How would you describe the role that Oil & Gas UK plays in today?
Oil & Gas UK is basically the spokesbody representing the sector in different government forums, such as PILOT in particular, which is an initiative that brings together public authorities and industry leaders in order to talk about the sustainable future of the North Sea’s oil and gas activity. In addition, there is a great deal of interaction with government at all levels, doing our best to articulate the industry’s message to Westminster, Holyrood and at more local levels. Moreover, the association is very much involved with European issues due to the fact that decisions taken at the EU are of high consequence to our industry, particularly on environmental and social aspects. Accordingly, and in addition to our main offices in London and Aberdeen, Oil & Gas UK has a small representation in Brussels.
More broadly speaking, the association engages with members and aims to improve the business climate for companies involved in the UK’s oil and gas industry, and supports their efforts. In this regard, we also carry out a lot of intra-industry activities, sponsoring different forums, gatherings, events, etc. Furthermore, Oil & Gas UK promotes the sharing of best practices in terms of operations among its members, heavily focused on the safety and skills development agendas. On the safety side, we have a subsidiary organization called Step Change in Safety which works on enhancing safety and related issues in the UKCS. Concerning skills training, we have been instrumental in having the Oil & Gas Academy put under the industry’s wing and are therefore able to ensure progress is made on this key matter as well.
Another fundamental task we undertake is to draw attention to the importance of the UK’s oil and gas industry. The association highlights, on one hand, the very high value of being an important oil and gas producer. On the other hand, we point out the importance of the supply chain which has provided support for UK operations over decades, and is today worth about 11 or 12 billion pounds annually in turnover. The supply chain companies are growing at an annual average of 10%, exporting their products and services to the tune of around 6 billion pounds per year. One of our key messages is that the UKCS will still be producing oil and gas 30 to 40 years from now, even if in smaller volumes, and that the supply chain can outlive production if we manage to make the UK an international hub and centre of excellence for oil and gas. That is one of the main challenges to address now and towards the future, because it is going to require hard work and high levels of investment.
In Oil & Gas UK’s recently published economic report it states that though there is a sharp increase in activity in the UKCS, it is mostly focused on development. What are the main things holding back companies’ willingness or ability to invest in exploration?
The inescapable truth is that the North Sea is not one of the easiest places on earth to operate. It has always been challenging because it is practically all offshore, and gradually we have been getting into even more difficult waters. The technical challenges related to temperature, pressure and overall geology are also increasingly significant. Discoveries have gotten smaller and, as a result, the price of producing a barrel of oil has risen. Even in the current business environment with record-high oil prices there are many developments which are on stand by because they do not pass the test of economics.
However, the fact is that there is an important amount of oil left in the fields and the government should create further incentives for companies to invest in these circumstances. Though most (not all) fields are small, it is very difficult to get companies interested in them under the current conditions. At Oil & Gas UK, we believe that the key to overcoming this situation is through increased capital allowance for companies. The same prescription could also help unlock the reserves which are still sitting there, waiting to be developed. In the northern part of the North Sea, special incentives could also contribute to the exploitation of the heavy oil which is found there.
No less important is the need to help the industry improve the recovery rates in existing fields in the UKCS. With an average recovery rate of about 45% in oil fields, if we were able to raise that by 5% or 10% there would be a significant impact on the overall production of the basin and its longevity. This has not been done yet simply because it would be extremely expensive to retrofit the new operations to already ageing infrastructure. The industry spends about 1.5 billion pounds per year just to maintain and extend the life of these facilities built in the 1970s and 1980s, so this is another big challenge facing companies in the UKCS today. This high cost environment is the biggest risk to the industry’s ability to come through with the estimated 25 billion barrels of oil which can be produced over the coming decades. Based on current plans, we can confidently expect about 10 billion barrels of oil coming out, but for the remaining 15 billion the UKCS will require massive new investments.
Over the last several years there has been a clear trend of the majors selling some of their mature assets to smaller new entrants in the UKCS. What makes the opportunities in the UKCS interesting for these different types of operators, and what can further be done to attract new ones to the area?
The majors are certainly handing over some of their assets to the new players willingly, and this is a natural evolution for an oil basin such as the UKCS. There some great examples of new companies entering the North Sea in this regard, many of them of a relatively small size. Some are British companies, such as Venture Production which is specialized in turning around and maximizing older assets, and there is also Fairfield which is a new player that has taken over some assets from Shell recently. Many of these new entrants are from the United States or Canada, including for example Apache from the US which has managed to raise Forties’ production and Talisman of Canada. There is also the recent example of TAQA which as taken over a chunk of Shell’s ageing fields.
Despite all these examples, I believe that the UK is not doing these types of deals quickly enough. It seems to take a long time to get the transactions through, and we have to ask ourselves why this is happening in order to find solutions which will allow to accelerate the process. Bureaucracy could still be improved, but it is not solely to be blamed. One reason is that the assets are very old and therefore have a very long history full of complexity. There are also other issues in this regard, such as the traditionally large size of licences and the UK’s peculiarity of not having offshore land registry, which could be addressed in order to facilitate and speed up asset transactions.
Nonetheless, the single most important issue impeding greater progress of these deals is the decommissioning liability. According to estimations, the total cost of decommissioning old infrastructure will amount to approximately 20 billion pounds in several years’ time. The government is understandably concerned about this and keen on ensuring that it is the oil industry and not the taxpayers who end up paying the bill. In this regard, the official policy is to outsource the liability to the major oil companies, reserving government the right to require any company which has ever had a stake in a field to assume the full decommissioning cost. As the oil majors have been involved in the vast majority of developments to date, this means they they invariably end up faced with a potential liability for full costs. This is understandably driving the major companies to look for security against this liability when selling assets, which at the very least delays the whole process and adds significant extra cost.
Oil & Gas UK has made proposals on this matter, such as the establishment of dedicated retirement funds for decommissioning when the time comes. However, the unwillingness of the Government to allow these funds to be tax deductible has blocked the use of such mechanisms. On the other hand, it is only fair to recognize that the current high price environment does not make the agreeing on the price of assets any easier either.
As oil prices have sky-rocketed in a very short time, the industry has been getting attention at the highest level of government. For example, PM Gordon Brown and Chancellor Alistair Darling visited the Oil & Gas UK Board last May. What were the main points you made to them, and did you get the feeling the government is ready to truly commit to supporting the industry more than it has before?
The first message we sought to get through was that there is no magic switch that can change the production profile of the UKCS overnight. The only way to achieve this is through sustained capital investment, this is billions of pounds which need to be spent if we are to recover the full 25 billion barrels of reserves estimated in the basin. To this end, the industry needs to have the right business climate, meaning on one hand fiscal stability and predictability, which as not been the case in the UK over the last 5 or 6 years. On the other hand, we need specific stimulus to capital investments in order to start seeing a more positive trend in a few years’ time.
Our message to the government was that the focus should be in three different areas. The first is to create incentives so that UK offshore fields spread throughout the continental shelf become economical, including many small fields but not only. The second focus should be specifically for the West of Shetlands area which will require special attention and support in order to finally get going. And the third basic issue to address is how to use largely existing technology for enhanced oil recovery in the offshore environment of the UKCS.
The Prime Minister and Chancellor’s visit to the Board of Oil & Gas UK became a long and open discussion, and I honestly believe there was a good engagement on their part and our messages were understood. We have reasons to believe that they really paid attention to what we had to say, and we are hoping this will eventually materialize in order to support the oil and gas industry in the UK.
One of Oil & Gas UK’s stated objectives is to raise the profile of the industry, in order to increase awareness about its importance among the general population. Why do you think that a sector that supports 450,000 jobs, pays over 20 billion pounds in taxes a year, and covers to a large extent the UK’s energy needs does not get the recognition it deserves?
I believe that we have failed as an industry to get our message out to the public. For all these years, the oil and gas industry went on with its business without bothering to engage society or communicate about the marvellous things we were doing offshore. The industry kept out of the limelight, not least because of the myths and image issues we have faced, keeping a low profile while going about its business professionally. The problem is that we later realized that when this happens you become politically irrelevant. For all this time, the industry did not have a trade association representing the whole sector and each segment was in its own separate camp. We are now aware of the importance of engaging different players in society and of addressing the public image issue.
Sometimes unexpected things help in this regard, such as the Prime Minister’s visit has raised our public profile. But just prior to that there was an industrial dispute at the Grangemouth refinery which resulted in the shutting down of the Forties pipeline system, which carries half of the UK’s oil production and gas production representing a third of its gas demand. As we pointed out at the time, this meant a daily loss of over 25 million pounds for Exchequer. This seems to have suddenly woken people up to the importance of our industry. These are just examples, and of course we cannot depend on incidents to raise our profile, so we are acting as an industry to advance in this regard.
There is a lot of talk about reducing dependency on oil and gas in order to move towards more ‘environmentally friendly’ energy sources, particularly at a time of record high oil prices. Where does Oil & Gas UK stand in this discussion?
There is certainly a great desire among many people to move beyond fossil fuels, and go to new horizons in terms of energy. We’re not saying that is not a legitimate aspiration, but it remains very uncertain at the moment. If you look at the UK, 75% of the energy supply comes from oil and gas, and government forecasts actually show that this is set to increase to 80%. So whilst we can and should have these aspirations to move towards a lower carbon economy, oil and gas remain hugely important in sustaining the nation’s wealth. New technologies are still very far from being able to replace oil and gas as main sources of energy, and other possibilities such as nuclear have limited capacity in the UK and would take a very long time to increase. For this reason we are concerned that people have taken their eye off the ball and need to realize that it is fundamental to continue investing in the oil and gas industry.
Looking at the environmental side, the greater use of gas in the UK has actually had a very positive impact. If the UK had not largely passed from the use of coal to gas for its electricity generation, we would never have been able to make our carbon reduction targets in the first phase. These stories are well understood, but there is certain wishfulness among many regarding the true potential of alternative energies as we have them today. This is also where organizations like Oil & Gas UK have an important role to play in informing government and the general population about the reality of the energy sector.
What is the importance for the UK of enhancing Aberdeen’s reputation as a global centre of excellence for oil and gas?
I strongly believe that Aberdeen has enormous potential, but often wonder if they realize themselves just how much they could achieve. There is a sot of fear there as if all this could end tomorrow, which is very palpable in the atmosphere there. That fear is fed by the wrong perceptions regarding the importance and potential life of oil production in the UKCS, and the strength of the local supply chain. If we look at these two aspects together, it is clear that Aberdeen is a place of national importance for the UK. It will be vital to the economy of this country that it has a long and successful future in oil and gas. We all have to make sure that it works because there are many lessons learned in the mature UKCS which we can apply in other oil provinces throughout the globe.
In my view, the main thing that the supply chain needs is a constant flow of investment and a strong local industry to support in the UK, so it can have the local anchor but be active around the world. There is every reason to be optimistic about what the UK supply chain can do, and it is making big inroads in international markets already. I consider that where government comes in for the supply chain is in making sure the climate for investment in the UK is right, and in establishing the necessary infrastructure for this industry to operate properly. In this regard, Aberdeen already has a lot of good things going in its favour, such as the quality of life it offers people and the schools and universities there. However, there is still some room for improvement in terms of roads and other infrastructure including the airport. Furthermore, we must continue to invest in the skills and training of the industry’s most important resource, its people, who are ultimately the force driving the industry forward.
What are the main opportunities and challenges for the UK’s oil and gas industry in the coming years?
The main issues for the industry, which Oil & Gas UK is actively working on, are to sustain the level of capital investment and exploration activity in the UKCS to and make sure we can get projects approved quickly in order to keep the infrastructure alive and delay the decommissioning. There is a window of opportunity which we have to seize now, because afterwards it will simply be gone. We have to find formulas which will allow to bring the smaller fields on stream while the infrastructure is still there. This will be the big challenge over the next several years, and if we are successful the production story in the UKCS can still go for a long time. And of course, production in the UKCS means greater opportunities for the supply chain.
What is your final message to the readers of OGFJ on Oil & Gas UK?
The UK offshore industry has had a glorious history so far of over 40 years, and there is still a lot of life left in it. In reality, we are only half-way