The Future of the UK North Sea: A New Game with More Rules
On 24 February 2014, Sir Ian Wood delivered his Final Report (the "Report") on the future of the UK Continental Shelf ("UKCS"). The Report sets out a number of conclusions and recommended actions relating largely to more stringent regulation, a focus on regional development and better industry co-operation. If the recommendations are implemented, they will fundamentally change the North Sea oil and gas industry.
The Report's overriding message is that for production from the UKCS to be prolonged, a change to both the regulatory and commercial landscapes will be required. The Report proposes a new regulator (the "Regulator") which would sit within the government department currently responsible for the oil and gas industry in the UK, the Department of Energy and Climate Change (or "DECC"). The Regulator will be tasked with developing strong relationships with both UKCS operators and the Treasury, and will enjoy a significant degree of independence and operational freedom. The Report envisages that the Regulator would be staffed with experienced personnel from industry as well as attracting top new graduates. To achieve this, the Regulator would "“ the Report suggests "“ be funded by UKCS operators and should offer agreed levels of service in return for such funding. On the commercial side, the Report supports much greater co-operation between operating companies, led by the introduction of regional development, increased third party access to infrastructure, wider sharing of data and streamlining of legal and commercial negotiations between parties. Any failure to co-operate in furthering these principles could subject the relevant party to sanctions from the Regulator, including the loss of a licence.
The Report's executive summary sets out these key principles as 4 main recommendations: (1) maximising economic recovery from the UKCS; (2) creation of the Regulator; (3) additional powers for the new Regulator; and (4) development and implementation of important sector strategies.
Recommendation 1: Strategies to Maximise Economic Recovery
To maximise the economic recovery from the UKCS, the Report proposes six major strategies relating to:
- exploration, including increased data sharing and promotion of UKCS exploration opportunities internationally;
- asset stewardship, meaning the efficient development, maintenance and operation of assets and infrastructure, assessed against measures set by the Regulator in relation to production and recovery;
- regional development, including increased third party access to infrastructure on fair and economic commercial terms;
- infrastructure, meaning extending the life of existing infrastructure and driving investment in new key infrastructure;
- technology, ensuring that existing technologies are deployed to their full effect and that new technologies are developed to maximise recovery; and
- decommissioning, achieving maximum economic extension of field life and preventing premature abandonment.
- the right to attend meetings of licence holders (as an observer only);
- the power to undertake a non-binding mediation process for disputes over licences or collaboration;
- the right to sanction licence holders that do not act in accordance with new requirements imposed to implement the Report's strategies. The potential sanctions are significant and range from a notice requiring remedial action to public formal warnings, then facilitation of a change of operatorship, suspension of the licence and, finally, termination of the licence (including the ability either to sanction the non-compliant member or the consortium as a whole); and
- a role to ensure that enhanced data sharing between operators would not trigger competition law issues.