UK government responds to declining offshore activity

The UK government is responding to the recommendations outlined in Sir Ian Wood's "UKCS Maximising Economic Recovery Review" with a series of proposed tax incentives and structural changes within the regulatory regime.

PaganieDavid Paganie • Houston

The UK government is responding to the recommendations outlined inSir Ian Wood's "UKCS Maximising Economic Recovery Review" with a series of proposed tax incentives and structural changes within the regulatory regime. The goal is to spur development, and to reverse declining UKCS drilling and production. The latest is a proposed cluster area allowance designed to support investment in the development of ultra high-pressure/high-temperature projects, and to encourage exploration and appraisal within cluster areas. A statement by the HM Treasury suggests the cluster area allowance would operate similarly to existing field allowances, by exempting a portion of a company's profits from the supplementary charge – reducing the effective tax rate on that portion from 62% to 30% at current tax rates.

Some of the UK's largest remaining untapped resources are the high-pressure/high-temperature gas/condensate fields in the central North Sea, writes Offshore Editor-Europe, Jeremy Beckman. These extend from the Conoco Phillips-operated J-block in Quadrant 30 northwest to the Britannia satellites in Quadrant 15. Beckman's in-depth review of North Sea HP/HT challenges and opportunities begins on page 34.

The depletion effect

As a higher percentage of the ultimately recoverable resource base is produced, the finding and development costs per barrel tend to rise. In its latest industry review, consulting firm Deloitte Petroleum Services Group suggests that it's now almost five times more expensive to extract a barrel of oil from the North Sea than it was in 2001. Moreover, the remaining fields to be developed in the conventional production areas are smaller and more challenging, and the tendency is to move in to deeper water depths which enhance project complexities.

The cost of operations on the UKCS is rising at an unsustainable pace as well. According to a recent survey by Oil & Gas UK, in the space of 12 months (2013) about 300 MMboe of reserves are no longer considered recoverable as a result of operating cost increases. Operating expenditure has risen to an all-time high, and this pace is expected to continue through the end of this year.

Wood's review suggests that many of the new, smaller developments in the UKCS will only be viable through collaboration to form hubs/clusters to achieve the most economic and efficient development. This model, aka hub-and-spoke, has paid dividends elsewhere, especially in the US Gulf of Mexico.

The rise of Oil and Gas Authority

An earlier response to Wood's report was the launch of a new regulatory body for UKCS licensing, exploration, and development. The UK government concurred with Wood's assessment that the current regulator had not sufficiency evolved with the industry and a new approach was needed. The new body, Oil and Gas Authority (OGA), assumes the role previously held by the Department of Energy & Climate Change (DECC). The DECC intends to establish the Authority as an Executive Agency by the end of this year. The establishment of the OGA in its final form, subject to primary legislation, is expected by 2016.

For more, see this month's regulatory column on page 32.

Industry response

Tax breaks can encourage investment, and it appears that this has been the trend of late in the UKCS. According to Oil & Gas UK, in 2013, about half of the £14.4 billion of investment was in some way incentivized by an allowance. A recent example is Premier Oil's $2-billion Greater Catcher Area development. The government's small field allowance helped the partners reach project sanction.

Time will tell if industry response is equally favorable to the proposed HP/HT allowance and ongoing regulatory changes.

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