Development of United Kingdom North Sea Oil and GasStephen Dow

CEPMLP, University of Dundee

Conditions are different…

UK oil and gas contextFirst gas finds in the 1960sNo serious oil production until late 1970sHigh cost province – not attractive until after 1973Reserve around 30bn barrelsThe easy half has been producedThe difficult half (small fields found further from

infrastructure) is left…

Conditions are different…

Small fields are not attractive to big companies Old fields are in decline – big companies are

selling to small producers who can afford to extract more oil

Big producers have high overheads – their economic decommissioning point is earlier

There is no UK state company Regulatory system is designed to manage decline

Policy goals

To get the rest of the oil out before the infrastructure (especially main pipelines) gets too old

Develop a contracting (service) industry which will prosper internationally as the local industry declines in volume

Safety; environmental protection Tax…

Legal regime

UK has petroleum licences Transfers state right to a producer (or group) State right offshore is to explore and exploit

Not full ownershipContrasts with full ownership onshore

Acreage award is highly transparent Criteria and scorecard set in advance

The UK legal regime is slightly different from most…

Licence transfers facilitated by Minister (govt) Master Deed system Liability regime is across whole jurisdiction Industry mutual hold harmless Standard form documents JOA has no pre-emption Field agreement approval system

Even licences are slightly different…

regime designed to force pace of work Licence is paid for in work not cash

No signature bonus Three stages of a licence – and relinquishment

between stages Fallow fields and re-licensing of surrendered acreage Frontier area licence “promote” licence

Onshore…

UK has had onshore oil and gas law since 1918 Prospectivity extremely low Hardly any production… BUT THERE MIGHT BE SHALE GAS…. Shale gas (non conventional) discoveries are

being tested

What does shale gas need in regulatory terms?

Unconventional gas (and oil) is characterised by high costs – only attractive at very high oil prices

UK is a marginal gas importer – shale gas could bring back gas independence

The nasty parts… cost; fracking; and cleaning up the water/fluid

UK has a sophisticated regime for environmental protection already

Environmental consents

UK has a formidable regime surrounding environmental impact assessment (EIA)

Requirement to establish each risk; and then show mitigation of it to acceptable level

Shale gas controversy over small earthquakes from fracking

Indications are that the risks could be made acceptable to current system

Clean up is likely to be the biggest hurdle for industry development

tax

UK does not have a resource tax for new fields Old (declining) fields pay a resource tax Attempt to make new small fields attractive! Complicated system – particularly as

adjustments to the corporation (company) tax regime have been introduced to capture rent from higher oil prices (supplementary charge)

And special corporation tax rates for producers

UK story

Initial UK development was quite fast The UK is now studied as an example of…

Possible waste of the initial revenues – no oil fund or sovereign wealth fund

Initial development around big fields, which encourages infrastructure, which can then be opened to small fields

Regulatory changes in an effort to reduce rate of decline as province matures