UK: The New North Sea – Part 1: The Revolution Begins Here

Last Updated: 23 May 2016
Article by Adam Brown and Anna Tostevin

How much of a difference will the recent reforms of UK offshore oil and gas regulation make to the industry and its stakeholders? It may be too early to say whether the creation of the Oil and Gas Authority (OGA), the articulation of the "MER UK Strategy" and the other changes introduced by the Infrastructure Act 2015 and the Energy Act 2016 will facilitate solutions to all the significant problems faced by North Sea operators, but in our view it is already clear that the changes of the last two years will have a profound impact on the industry.

Government intervention in the UK's offshore oil and gas industry is nothing new. It has taken different forms at different times, and has included, as well as numerous changes in taxation, Government participation (or at least the ability of Government to participate) in decision-making at the individual asset level through rights granted to state-owned entities.

More specifically, for almost 20 years, Government has been aware of, and has been taking action to address, the particular set of problems that the UK Continental Shelf (UKCS) faces as a mature basin.   Between 1999 and 2004, the Department of Trade and Industry and its successors took a series of steps to foster investment and innovation in the industry and improve its efficiency: a joint Government / industry report (A Template for Change) was published in 1999; task forces were appointed; changes were made to the administration of the licensing regime; new types of licence were introduced.

PILOT and small-scale regulatory changes, 1999-2004
1999

Brent at $9/barrel – a record low – in February, but recovers to $25 by December.

Oil & Gas Industry Task Force report (September) set a vision for the UKCS in 2010, aimed at increasing investment and employment, and prolonging UK self-sufficiency in oil and gas.

2000 PILOT established to take over the work of the Task Force and give effect to its recommendations
2002 PILOT "Progressing Partnership" Work Group launched to address behavioural and supply chain barriers. Initiatives include transferring "fallow" assets to those best placed to exploit them.
2003 "Promote" licences offered for the first time to attract new small players.
2004 22nd offshore licensing round: largest number of blocks since 1965.   "Frontier" licences first offered.

However, by the time that Ed Davey, as Secretary of State for Energy and Climate Change, commissioned Sir Ian Wood to carry out a review of the industry in 2013 and the Wood Review's final report was issued early in 2014, it had become clear that all the good work done after the 1999 report had not resolved or prevented some fundamental problems, and that the "vision for 2010" which it articulated had not been fully realised.   Average production efficiency declined from 81% in 2004 to 60% in 2012.  There had been a downward trend in numbers of exploration wells drilled since 2008 (with about 70% fewer being drilled in 2013 than were drilled five years before).  Perhaps worst of all, costs of production per barrel had risen fivefold in ten years.  And all that was before global oil prices began a period of sharp decline which has seen them fall to levels at which most North Sea fields are said to be uneconomic, with no certainty of a rapid or sustained recovery.

A false sense of security? North Sea licensing events highlighted in Government reports, 2005-2012
2005 24 new companies enter the North Sea as part of a record offering of 151 licences.
2006 UK a net importer of gas in value terms for the first time since the early 1980s.
2007 Legislation to allow storage of natural gas under the seabed / unloading of LNG at sea announced.
2008 Brent crude tops $100 / barrel for the first time, rising to over $140 / barrel in June and July.
2010 Largest number of blocks applied for since the first licensing round in 1964.
2011 Brent crude tops $100 / barrel for the first time since 2008.
2012 Demand for offshore licences again breaks all records (applications covering 418 blocks).

Many of the concerns that were articulated in the 1999 report and addressed in the initiatives that followed from are echoed in the Wood Report. Both reports are in favour of such things as "collaboration in place of competition", "improving relationships between licensees" and encouraging innovation, for example.  But the final results of Wood's work are very different from those of the earlier report and its follow-up.  Where the 1999 report tends to talk about "deregulation", the Wood Report has led to the creation of a new, more powerful and better resourced body to regulate the industry.  In the words of the Wood report itself: "In the early days with large fields to be found by major operators, the free market model worked well with a light touch Regulator...However, over time, the number of fields has increased, now to over 300, new discoveries are much smaller, many fields are marginal and very inter dependent, and there is competition for ageing infrastructure. Alongside this, the...Regulator has halved in size in 20 years and...is clearly struggling to perform a more demanding stewardship role."

There has been general agreement with Wood's conclusion that "a stronger Regulator with broader skills and capabilities able to significantly enhance the level of co-ordination and collaboration" would "largely resolve" the problems that his review identified.  It is rare for an industry to be so apparently united in its desire for stronger regulation – even if it was clear from the first that a regulator based on Wood's prescription would be different from many sector regulatory bodies in terms of its remit, composition, and its interactions with industry.  It has probably helped that the fall in oil prices has made the problems identified by Wood more acute, increasing the demand for a powerful independent regulator to get to work on solving them.  This, together with the compelling nature of Wood's analysis and strong political support, has enabled the necessary legislative changes to be put in place rapidly.

The Wood Review and its implementation, 2013-2016
2013 Government commissions the Wood Review of offshore oil and gas recovery (June)

The interim report of the Wood Review is published (November)

2014 Final report of the Wood Review published   (February)

Sharp fall in oil price begins (June)

Government response to the Wood Review published (July)

Clauses on MER UK (to amend the Petroleum Act 1998) inserted into Infrastructure Bill (October)

Appointment of Andy Samuel as CEO of OGA (November)

2015 Andy Samuel asked to lead urgent study of key risks to North Sea oil and gas industry (January)

Infrastructure Act 2015, including revised provisions on MER UK receives Royal Assent (February)

OGA issues "call to action" document in response to DECC's request to Andy Samuel (February)

OGA launched as an Executive Agency of DECC, carrying out DECC regulatory functions (April)

Energy Bill, dominated by provisions on the OGA, introduced into Parliament (July)

Oil & Gas UK launches efficiency task force (September)

OGA reports: call to action 6 months on (September)

OGA publishes draft corporate plan (November)

DECC launches consultation on MER UK strategy (November)

2016 Brent crude falls below $30 / barrel (January)

Government support package for UK offshore oil and gas (January)

Draft MER UK strategy laid before Parliament (January)

OGA publishes Corporate Plan 2016-2021 (March)

MER UK strategy finalised and comes into force (March)

Energy Bill receives Royal Assent, Energy Act 2016 published (May)

Why do we think that North Sea regulation from now on (or at least from the date on which the relevant provisions of the Energy Act 2016 come into force and the Regulator's staff complement is up to full strength) will be radically different from what operators have been accustomed to? There are six main reasons.

For the first time, the UK offshore regulatory regime (excluding its environmental and health and safety aspects) has a single governing principle articulated on a statutory basis – the objective of maximising the economic recovery of UK petroleum (MER UK).

Although MER UK is defined in general terms in a strategy promulgated by DECC under the Infrastructure Act 2015, its specific meaning and impact in any given situation will in large measure be determined by the Oil and Gas Authority (OGA).

The obligation to act in accordance with MER UK, as so defined and interpreted, applies – or could be said to apply – to at least one person involved in the taking of almost any commercially important decision in the offshore industry.

Under the new regime, the OGA and DECC will potentially have access to vastly more information about North Sea assets and infrastructure, the commercial intentions of those with interests in them, and the relations between them, than DECC has had to date.

The OGA does genuinely appear to be a new kind of regulator, in terms of its composition, capabilities, culture and combination of functions. It is also likely to take a more proactive approach than its predecessors.

The terms of the MER UK strategy and the robustness of the enforcement tools at the OGA's disposal suggest that it will enjoy unparalleled leverage over licence holders and others to ensure that collaboration "for the greater good" really does happen.

In future posts in this series, we will explain in more detail how the relevant provisions of the Infrastructure Act 2015, the Energy Act 2016 and the MER UK strategy achieve these results and how we think the application of the new rules by industry parties, DECC and the OGA will affect key moments in the life of North Sea infrastructure and assets.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
21 Sep 2017, Seminar, London, UK

Is there such a thing as "energy law"? What do "energy lawyers" do? And why should it be of interest to anyone else?

28 Sep 2017, Seminar, London, UK

On 26 July the FCA published its long-expected consultation paper on the extension of the SMCR to all FCA-authorised firms. The so-called "core regime" introduces the key concepts of regulator-approved senior managers, firm-approved certification staff and conduct rules applicable to virtually all staff.

3 Oct 2017, Conference, Zurich, Switzerland

As the founding Partner of the Europe-Iran Forum, Dentons Europe will once again support this year’s event. This compelling event which explores all Iran-related topics will take place in Zürich on 3rd and 4th October.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.