Can UK oil and gas regulator save N. Sea ‘Jurassic Park’ industry from extinction in $60-barrel climate?

Jurassic-rig2By PETER STRACHAN

and ALEX RUSSELL

The recent loss of thousands of North Sea oil jobs has sent an icy chill down the spine of an oil industry whose fortunes were amassed with ease when oil prices were over $100-barrel but whose future now looks as grey as a North Sea swell now that oil stands at around $60-barrel.

Indeed, Brent crude oil prices fell more than 8% on Wall Street to $56.54-barrel on 6 July, albeit mostly in response to market fears about the risk of contagion from Greece voting ‘No’ to the proposed EU bail-out for its sovereign debt.

The loss of confidence in the future of the North Sea oil industry is not surprising. A gloom laden report published in 2014 had forecast that there would be up to 35,000 job losses in the industry by 2019.

Unfortunately this prediction is now well and truly on the way to realisation and in due course may be seen as having been an optimistic view of the dire state of the industry.  

The industry’s decline and possible demise has been brought about, inter alia, through crass neglect by Westminster in its failure to assist engineering aspects of the oil industry, the result of which has been the loss of thousands of jobs to competitor nations such as Korea.

The problem has also been exacerbated by the long term prevalence of poor work practices across the industry, the consequences of which were masked by the high bottom line windfall profits that resulted from high oil prices.

These Jurassic practices were given prominence in 2012 when Oil and Gas UK, PILOT and the Department of Energy and Climate Change (DECC) established a Production Efficiency Task Force (PETF) to address the issues. Indeed, PILOT itself had been established to try to iron out inefficiencies in the industry’s practices.

Everyone is aware that the North Sea oil industry has struggled for years due to an ageing infrastructure, rising costs and little prospect of new large scale field discoveries. Indeed, the creation of PILOT and PETF could be viewed as a rearguard effort to keep the industry alive.

ALEX RUSSELL is Professor of Petroleum Accounting, Robert Gordon University. PETER STRACHAN is Professor of Energy Policy, Robert Gordon University.
ALEX RUSSELL (right)  is Professor of Petroleum Accounting, Robert Gordon University. PETER STRACHAN is Professor of Energy Policy, Robert Gordon University.

There was a brief period of optimism when the Wood Review was published on 14 February 2014 as its Maximising Economic Recovery (MER) recommendations appeared to be a way of generating a spirit of camaraderie throughout the industry and were applauded by Oil and Gas UK.

Wood’s most significant recommendation was that a new Regulator should be established for the industry and industry veteran Andy Samuel has been appointed to lead the newly established Oil and Gas Authority (OGA).

The intention behind the creation of the OGA is that it will be a proactive catalyst in helping to maximise economic recovery (MER) from the rapidly depleting North Sea oil reserves. The OGA’s proactive capabilities stem from the radical powers that are vested in the post of Regulator.

For example, the OGA can compel North Sea Operators to reveal details of their future activities so that the Regulator can assess how these plans might impact on adjacent oil plays.

In light of that analysis the Regulator can force Operators to act in a way that maximises economic outcomes across the whole sector rather than just in their own area of interest. Under certain conditions drilling licences can be withdrawn from operators.  

This all sounds nice in theory but in practice it is at odds with basic free market principles where companies have the right to act in the interests of their own shareholders. Perhaps that is why compulsion is at the heart of the new idea, but compulsion seldom leads to fruitful outcomes.

The idea of N Sea operators sacrificing some of their profits for the good of others is an oil pipe dream divorced from reality.

Some more substantial mechanism needs to be put in place to safeguard the industry. The flaws in the current rationale for setting up the OGA are not hard to find.   

First, the Wood Review’s recommendations were pertinent to the situation that existed when the price of a barrel of Brent Crude was $114; no one envisaged oil falling to around $65 a barrel so soon after the publication of the Wood Review. Further, the forecast data that assisted the analysis were provided by Oil and Gas UK and DECC dating back to 2012, and are now only of historical relevance in assessing the inadequacy of such data.

Fatally, in assessing the views of parties on the way forward, no lawyers that represent Operators were consulted on the legal implications of the Regulator having the right to intervene in the commercial decision-making of those Operators.

Is there a case for revisiting the Wood Review’s recommendations? Such a review would start by defining what is meant by maximising economic recovery as that was a material omission from the original review.

Second, the North Sea oil industry is an industry historically characterised by a desire to conceal information of any commercial value.

In an end-game situation – such as the final rounds of a world heavy weight boxing bout, rather than revealing the final telling tactics – the boxers will at first do their utmost to mislead his opponent and only in the final round strive for a knockout punch.

In the case of the North Sea oil industry, the knockout punch could be a takeover of a competitor with better assets, or the sale of assets to that competitor at an inflated price.

Co-operation amongst operators is as likely as the boxers hugging each other in the final round and raising their chins to give the opponent a better target.

Thirdly, one of the game changing tactics that the UK Government could have employed has been, unbelievingly, thrown away in a moment of madness.

There are enormous costs to be incurred when the North Sea oil industry tries to clear away the debris that litters the North Sea. A modest estimate of those costs would be £70 billion.

In order to encourage Operators to stay the course in the North Sea before entering the final decommissioning phase it was indeed sound tactics to offer assistance from the Government to help with those costs.

But it beggars belief that Westminster have agreed that the UK taxpayers should pay 50% of those costs without first contractually tying down the operators to a requirement to extract a specified percentage of the viable reserves in their licence areas.

The decommissioning ace up the Westminster sleeve has been used to trump a deuce and is no longer available to be played by the effete OGA.  

Fourth, the delay in getting the OGA up and running has weakened its hand. The industry is focused on retrenching and minimising future losses. The outside view is that the time for seeking the efficiencies necessary to save the industry has passed. That view can and should be challenged but is the OGA really the answer to the industry’s problems?

Finally, the remit of the OGA is to seek efficiencies throughout the industry. Offshore workers’ salaries have been slashed and their working conditions changed which means they work longer for less pay. Yet, the salaries paid to the directors of the OGA are high by anyone’s standards.

Is the message to operators from the paymasters of the OGA: “Do as I say but not as I pay”?

Some of the work previously done by the Department of Energy (DECC) is now being done by the OGA. Indeed, OGA is sponsored by DECC.  Those directors who currently chair committees in the OGA would, in all probability, now be chairing similar committees in DECC in the absence of the OGA. Has the OGA simply been an expensive exercise in rearranging the DECC Chairs in a titanic effort to try to save the North Sea oil industry?

There is a viable alternative to Wood and OGA.

Over 90% of remaining reserves of oil and gas in the North Sea lie in Scottish waters.

The Smith Commission’s recommendations relating to devolution of powers to Holyrood are derisible and a million miles removed from the promises made by Clegg, Brown and Cameron (the main UK political party leaders) prior to Scotland’s Independence referendum.

It may well have been better for Holyrood to stick with the powers they already possessed and to play a waiting game but the political reality of situation left little alternative other than accept those powers.

But it would have been so much better for Smith to have delivered real power to Holyrood by recommending devolution of full fiscal control of all economic activity in Scottish land and offshore territory.

Holyrood is far better positioned to make the right decisions that affect Scottish economic activity than Westminster. Such devolution has the real potential to save the North Sea Oil Industry.

The tax scaremongering from unionists should not be allowed to lead to the early demise of North Sea oil.

ALEX RUSSELL is Professor of Petroleum Accounting, Robert Gordon University and Chairman of the Oil Industry Finance Association. PETER STRACHAN is Professor of Energy Policy, Robert Gordon University.

Scottish Energy News welcomes expert contributions.

Send to: Editor@ScottishEnergyNews.com

Driving more power generation value with a shared view of big data

Dr Liane Smith, founder and MD of global well integrity management specialists, Wood Group Intetech
Dr Liane Smith, founder and MD of global well integrity management specialists, Wood Group Intetech

By Dr. LIANE SMITH

A growing number of power generation companies are gathering valuable business intelligence from mining the vast volumes of data generated by their operational processes and systems. If such data was shared securely industry-wide, the benefits could be much greater.

McKinsey & Co (2011) defines big data as “datasets whose size is beyond the ability of typical database software tools to capture, store, manage, and analyse.”

It is often associated with other terms such as ‘industrial internet’ or ‘internet of things’, which describe the convergence of advanced computing, analytics, low-cost digital sensing and new levels of connectivity.

This convergence promises greater levels of speed and efficiency for almost every type of business and in every industry sector.

There would be great benefit to the transport industry, for example, if the different ‘data stacks’ across rail, aviation and roads were pooled and collated to create a shared view. In the UK, Transport for London (TfL) has committed to syndicating open data to third parties and to engaging developers to deliver and innovate using its open data. More than 200 travel apps covering all modes of transport are now available.

Powered by TfL’s free open data, these apps help millions of customers make better-informed journey choices and optimal use of the transport network. The economic value of time saved has been estimated at up to £58 million per year, according to the International Association of Public Transport (UITP).

Meanwhile, the Airport Collaborative Decision Making (A-CDM) initiative developed by Eurocontrol, a European-wide organisation concerned with air traffic management, enables airlines, ground handlers, air traffic control and airport staff to share the latest and most accurate information about the status of flights for better-informed decision-making.

Using A-CDM, the progress of each plane is shown as it comes in to land, throughout its turnaround and subsequent departure. This means operational staff at airports can calculate more realistic timings for each flight. Alerts are generated automatically if an aircraft looks likely to miss its slot, so airport staff can react swiftly.

 A-CDM has been fully implemented at 15 European airports handling 28 per cent of European passenger traffic – equivalent to 480 million passengers a year. According to Airports Council International (ACI), these 15 airports are delivering tangible benefits – including lowering their airline partners’ operating cost base by over £44 million a year.

 

Hearts and minds

TfL’s open data and A-CDM are just two examples of the types of initiatives discussed recently at the ‘Connected Data’ transportation workshop hosted by the UK’s Royal Academy of Engineering.

Further workshops have been held during 2015 focusing on other sectors such as manufacturing, healthcare, energy and the built environment.

Although data models and systems could be managed and maintained as assets, the Royal Academy of Engineering believes that a change in ‘hearts and minds’ is necessary to capitalise on the opportunities that better data and improved connectivity provides.

One of the barriers to realising the shared benefits of opening up data is that individual organisations perceive value and thus competitive advantage in the proprietary data they hold.

Any firm that has invested time and money in recording a large dataset is more likely to make it available if they have confidence in the security or anonymity of the shared dataset, and confidence in a common high standard of data quality.

 

Building the business case

Companies must be prepared to re-evaluate their systems to find smarter ways of managing and extracting value from the data they collect.

The sheer volume of data, and the speed at which it is collected, makes it difficult and costly to store, while a query can take too long to return an answer unless the right technology is in place. It is also difficult to review and compare broad trends if the required information is scattered across multiple assets, operations and back-office functions, especially where companies have inflexible legacy systems and lack enterprise-wide analytic tools.

In the power generation sector, a plant may have to respond to variable demands from the grid, caused by demand side response changes, and the inflow of power to the grid from other, more variable, energy sources such as wind or solar.

The need for near real-time data to make critical business decisions – i.e. keep the plant operational to meet rapidly changing demand – is therefore driving huge investment by businesses.

Some large power generation companies are investing in central systems that are focused on optimising generation productivity, and support a diverse range of applications – from reliability and availability of plant equipment and sub-components, to identifying the most cost efficient energy source at any given moment in specific conditions.

In addition, risk assessment analysis from shared data also optimises cost benefit analysis. By comparing performance data, companies can make more informed decisions about reliable equipment selection, as well as designs and processes. This in turn will minimise maintenance and operational expenditure.

 

Component reliability data applications

Power generation companies capture vast volumes of operating data on a daily basis in order to monitor the integrity of production-critical or safety-critical components operating in specific conditions.

Accurate and precise information on the status of such components must be completely dependable if plants are to identify weaknesses and predict the life cycle of critical generation components.

This data will then enable power generation companies to make informed, proactive decisions about maintenance schedules that, in turn, improve plant productivity and enhance the safety and resilience of critical infrastructure, such as electricity networks.

Getting accurate reliability figures for components requires access to a statistically significant database. Although most plant operators collate component reliability information from their own assets, broadening the statistical basis for informed decision-making – i.e. sharing data across the global industry – would enable power generation plants to benchmark component performance against the global industry average.

Power generation companies could also extract component RAM (reliability, availability and maintainability) numbers to make judgements on the probability of component failure, regardless of whether they have ever employed that piece of equipment.

In this way, operators could make judgements on equipment reliability, and design and process efficiency, based on risk assessment analysis they couldn’t possibly generate alone.

While the industry recognises this need, a key challenge has been the reticence of power generation companies to make data such as component reliability and failure rates available externally.

In addition to concerns over data confidentiality, any efforts to build such a database have tended to be limited to individual companies, or primarily focused on specific components. Others have suffered from poor quality of data, or issues with usability and access.

 

Realising industry value

In response to industry demand, Wood Group Intetech has launched a global database of component performance data.

This online experience database utilises a reliability analysis tool, iQRA, and is already in use in the oil and gas industry where it is providing operators with access to global well and oilfield component performance information.

Subscribers can substantially reduce operational expenditure (OPEX) by adopting risk-based inspection frequencies and performance-led maintenance schedules instead of corrective remedial work.

Risk-based analysis allows operators to determine where component testing or inspection can be safely performed less frequently. In addition, the insight into equipment performance gained from an understanding of historical data results in more reliable equipment selection. Vendors too, could improve component performance by highlighting areas for existing product modification, or by identifying approaches for new development.

Performance data analysis therefore allows the industry to achieve effective management of component problems that may be dominating and interfering with generation.

As demonstrated by the success of iQRA thus far, connecting data requires firms in all industries to work more collaboratively not just internally between business functions such as operations and corporate IT, but externally between third parties.

Wood Group Intetech has enabled this through iQRA by ensuring that data sources are kept strictly confidential. Sensitive data is anonymised and access to system functions is protected, using password strength gates and a robust set of user roles and privileges.

Data upload from spreadsheets or direct from third-party systems is supported to make life easier for subscribers with large legacy test failure databases. Meanwhile data integrity is assured because all data submitted to the system is automatically passed through a quality assurance workflow incorporating multiple validation steps as well as manual checks by engineers.

Importantly, the benefits of a global database of component reliability extend far beyond component integrity and the power generation sector – they apply equally to any process-intensive industry sector reliant upon many instruments and control systems, and where cost pressures and increasing regulatory requirements demand informed decision-making based upon a risk evaluation approach.

Dr. Liane Smith is Managing Director and Founder of global well-integrity management specialists Wood Group Intetech.

She was the winner of the Inspiring Leader category at the recent offshore achievement awards in recognition of her contribution to the UK’s oil and gas sector and her pioneering work in the fields of well integrity management and corrosion engineering.

 

New EU rules require large UK companies to carry out energy-efficiency audits

JAMIE PITCAIRN Director Scotland of Ricardo-AEABy JAMIE PITCAIRN

Energy efficiency has a fundamental role to play in the transition towards a more competitive, secure and sustainable energy system. While energy powers our societies and economies, future growth must be driven with less energy and lower costs.

There is, of course, a role to play for renewables but the priority should always be given to efficiency.

In my view, we are not realising renewables’ full value if much of that renewable energy is then lost through inefficient processes or leaky buildings. Only efficiency or energy reduction will truly protect businesses from rising energy prices.

Within the EU and especially the UK we have been able to de-couple economic growth from energy consumption through increased energy efficiency driven by a mix of rising costs and by an increasing number of energy efficiency policies.

The most important of these is the Energy Efficiency Directive, which lays down rules designed to remove barriers in the energy market and overcome market failures that impede efficiency in the supply and use of energy.

There are several energy efficiency regimes that the industry is covered by, such as the mandatory EU Emissions Trading Scheme (EUETS), the voluntary UK Climate Change Agreements (CCAs), the UK Carbon Reduction Commitment (CRC) energy efficiency scheme and new the Energy Savings Opportunity Scheme (ESOS).

 

The new kid on the block: Energy Savings Opportunity Schemes (ESOS)

ESOS is the UK Government’s response to Article 8 of the EU Energy Efficiency Directive which requires all Member States to introduce a regime of regular energy audits for ‘large enterprises’ (non-SMEs) to promote the uptake of cost-effective energy efficiency measures.

These mandatory audits must be undertaken by 5 December 2015 and then at least every four years thereafter.

 In a way it may target an existing market failing. At the moment energy audit reports are completed but often (apart from the no cost and low cost measures) little is implemented. Perhaps, and as I will explain, ESOS has the opportunity to change this and ensure that more energy saving measures are implemented.

The objective of ESOS will only be achieved if businesses actually implement the identified energy efficiency measures.

However, it is possible, and indeed likely, that businesses will, unless they are given the right kind of support, simply meet the requirements of the regulations by conducting the audits – tick the box.

This would be a waste of time and a missed opportunity. Businesses need more than simple auditing support – they need implementation support. This makes the difference between an opportunity being identified and an opportunity being realised and savings being made. This is an area Ricardo-AEA has made a real difference to our clients over the years.

In simple terms, ESOS requires participants to do three things: 

  1. Measure your total energy consumption
  2. Conduct energy audits to identify cost-effective energy efficiency recommendations
  3. Report compliance to the Environment Agency (as the scheme administrator) 

The crux of the scheme however is that, like Carbon Reduction Commitments, a director must sign off on compliance before the company can notify the Environment Agency of its compliance. Based on these requirements, the scheme is estimated to lead to £1.6bn net benefits to the UK, with the majority of these being directly felt by businesses as a result of energy savings.

  

Energy costs will rise

From 2004 to 2013, average industrial prices for electricity supplied through the grid rose from 3.3p/kWh to 8.1 p/kWh in nominal terms (i.e. by 142%, compared to general price inflation of 23%). The industrial and commercial sectors could see a 30-45% increase on energy bills to 2030, according to latest projections from the independent Committee on Climate Change (CCC).

So there is an interesting question – if the costs are rising why are more businesses not implementing efficiency measures? 

 

Energy-efficiency needs a higher profile

Ricardo-AEA has been involved in hundreds of business energy and resource efficiency projects which have delivered large energy efficiencies and major cost savings for our clients. However, for every successful project there are many with sound business cases providing good returns on investment that are not implemented.

 

So what is the problem?

There are many barriers, the usual suspects are: lack of time and money, associated risks and a lack of confidence in the solution. Of course these are all legitimate barriers but not ones that are insurmountable when presented with a strong business case.

Also, having worked with many businesses it is apparent that the commonly cited barriers are not always genuine. For example, even savings which require no capital investment are still not implemented.

Businesses have stated that a payback period of two years is generally acceptable. However there are many recommendations that are still not implemented even with a payback of two years or less. So there is something else effecting a business’ decision to implement.

In my view there is something more fundamental and structural affecting the likelihood of organisations to take action. Social scientists call this ‘bounded rationality’. Decisions by individuals are constrained by their attention, resources and ability to process the information.

The effect is that with limited resources and time, and also faced with an unfamiliar language (a new heating/lighting system will only be installed every 10 years so this information will be new to many managers), energy efficiency is not actively pursued within an organisation.

The limited cognitive resources within an organisation will focus on core activities such as production process and cash generating elements of the organisation. The result is that energy efficiency becomes a peripheral issue and is only reviewed when it becomes a strategic issue – health & safety or breach of regulation.

For most businesses, energy costs are a small proportion of total business costs – between 3-4% on average for the UK manufacturing sector.

In contrast, employment costs represent around 18% of the total. While a substantial single cost to any business it does not command the same attention as other core business functions. So the profile and benefits of energy efficiency needs to be raised.

 

Why is ESOS needed?

Can ESOS address this issue? Yes, but it is not the whole solution as ESOS will not require businesses to implement but it will require ‘sign-off’ from a senior manager – thereby raising the profile of the opportunity.

There are many reasons why perfectly good energy efficiency projects are not implemented – many of which are not related to the conventional barriers that are regularly cited. Hence the need for Regulation.

ESOS in my view will help address a specific failure – not a market failure but a failure to recognise energy efficiency as a real business opportunity. ESOS is designed to do precisely that, to focus senior management attention on projects which would not otherwise pass across the directors table.

Also helping shine a light on these opportunities and encourage greater implementation of opportunities identified in the audit will be investor pressure. A point shared by Miles Alexander, Director of Energy Efficiency, the Green Investment Bank

“The Energy Savings Opportunity Scheme is a great chance for shareholders to engage more with energy efficiency. Companies will have to identify energy savings opportunities by the end of this year. Shareholders will then be able to see the value of implementing energy efficiency to reduce company costs, to increase profits and to raise dividends.”

 Added value – supporting implementation

So simply conducting the audit is not going to increase the level of implementation per se but it will help. Implementation rates will increase through supporting the decision-making process and building confidence in the technologies through experienced impartial advice. ESOS advice and support needs to go further than just building a sound business case.

What is important is good clear decision-making support to executives and decision-makers – the added value of a Ricardo-AEA consultants. The chances are they will not have made a large investment decision on energy efficiency and so instilling confidence and trust is paramount. Support must be provided to guide senior managers through the investment process and technology choices.

 JAMIE PITCAIRN is Director Scotland of Ricardo-AEA

The historic long term average price of crude oil is just $30-barrel

John Richardson, ICIS ConsultantBy JOHN RICHARDSON

OIL and petrochemicals markets have behaved from mid-February until today as if the world is about to return to the way it was in the first half of last year. Here is the thinking behind this behaviour:

What happened from around September 2014 onwards in crude market until mid-February of this year was only a temporary “supply side” problem – and not a demand problem. The supply problem was that the world had underestimated the rise of shale-oil production.

Most people had also thought that Libyan output would be lower than it has been. Most importantly of all, the vast majority of analysts did not anticipate that OPEC, led by Saudi Arabia, would prefer to defend market share rather than the oil price.

“Temporary” ended up being a lot longer than most had expected, granted, but the assumption held that supply of oil would eventually start to match the new price. Cuts in production would have to result in a price recovery – if not to $100, at least to levels much-higher than we saw in January.

 And sure enough, February saw a rally in oil prices and, in the case of Brent, greater stability around $60-barrel.

Crude oil price averages $30-barrel 1861 - 2013
Crude oil price averages $30-barrel 1861 – 2013

So we have seen restocking by many petrochemicals buyers as they respond to both the rise in crude and its new-found stability. No purchasing manager for a plastics converter or a big consumer-goods manufacturer wants to be accused of failing to buy raw materials today, when the consensus view says that they might well be more expensive tomorrow.

This is the biggest factor behind the rise in Asian petrochemicals pricing since mid-February. Supply factors in some of the petrochemicals markets themselves are also having an influence – for example, most notably at the moment in polyolefins.

But what this rally really comes down to is end-users changing their approach from the “hand-to-mouth” buying, which was the dominant approach in September 2014 until mid-February of this year, to “buying ahead of further oil-driven petrochemicals price rises”.

There is nothing wrong with this strategy, of course. Traders, producers and buyers of petrochemicals have been absolutely right to follow this short term trend.

Most traders, producers and buyers of petrochemicals will also be right if they demonstrate extreme caution as we get closer to Q2. The reason is that the second quarter could well see another sharp retreat in oil prices. Some analysts think that longer oil supply could drive prices down to $30-barrel, perhaps even $20-barrel.

But in H2 of this year, one assumption is that oil pricing will rebound – not to $100 a barrel granted, that’s probably over for good –  but to around today’s level.

 This assumption rests on the notion that what could happen in the second quarter will again be temporary because of high US inventory levels, the end of cold weather in the US and refinery turnarounds. But first of all, you need to ask yourselves this question: Why exactly did oil prices recover in February?

The rally appears to have been driven by oil traders who made use of misleading stories about US rig counts. Although the number of rigs in operation in the US has fallen, production has continued to increase.

“Oil investors are making money buying and storing oil because of the difference between the current price of oil and the price of delivery in far-off months,” wrote the Associated Press recently.

You then need to take into account these arguments: Oil supply will not be turned off as quickly as many people think. In the US, for example, a few dollars above variable cost margins on a barrel of oil are better than no dollars at all when you have large debts to service. Saudi Arabia is also playing the ‘long game’ as it tries to win back market share. This reduces the chances of an OPEC production cut.

Demand is the thing. Yes, a lot more money is now in the pockets of consumers because oil is cheaper, but when deflation takes hold, people spend less rather than more money. It is very hard to make the case that deflation is not a major global problem.

 Once again it must be stressed that this is not ‘business as usual’ in China – the problems with China’s economy will take many years to be fixed. The global consequences of this reform process are huge.

 And on the subject of supply again, supply of energy is vastly above demand because central bank stimulus so badly distorted our view of real, underlying demand growth. As energy-company debts left over from this critical mistake are restructured, this will add to global deflation.

So what is the right price for oil? The long term average price of crude since 1861 until 2013 was actually just $30 a barrel, inflation adjusted.

You would be very unwise not to at least build $30 a barrel into your scenario planning.

And you would be very, very unwise indeed not to plan for extreme volatility in oil prices over the next few months and years, as the world adjusts to its ‘new normal’ – whatever you think that New Normal is.

John Richardson is Senior Consultant, Asia, for ICIS Consulting. He writes the ICIS ‘Asian Chemicals Connection’ blog and is co-author of the influential ebook ‘Boom, Gloom and the New Normal’.

What the ‘circular economy’ means to £40bn North Sea decommissioning market

decommissioning oil rigsBy MALGORZATA OLESIEWICZ  

and SAM GOMERSALL

With the major decommissioning challenge – and a possible £40 billion market opportunity –  being faced by the North Sea oil and gas sector, does the Circular Economy provide a useful perspective for enhancing value and reducing waste in this major emerging sector?

In September 2014, the European Commission (EC) adopted a zero-waste programme that became the legal framework for development of an EU-wide Circular Economy.  The model assumes reuse of resources, minimisation of waste and encourages efficient use of the assets at our disposal.  

The economic system upon which the developed world has relied since the Industrial Revolution is largely based on the ‘linear’ throughput of materials, essentially operating in a one-way manner: there is currently very little value travelling back to replenish the source and ensure long-term sustainability.

The circular economy, on the other hand, broadly accepts that sustainable economic growth should be based on the model ‘‘resource-product-regenerated resource’’, which incorporates a mechanism of efficient resource use and waste reduction. 

Many multinational businesses have endorsed the Circular Economy approach, although the take-up in the oil and gas sector has been limited.

A circular economy seeks to rebuild capital, whether this is financial, manufactured, human, social or natural.  This ensures enhanced flows of goods and services.  The systems diagram below illustrates the continuous flow of technical and biological materials through the ‘value circle’.

As the North Sea oil and gas province matures, an increasing number of offshore platforms, subsea facilities and pipelines will need to be decommissioned.  These assets represent “end-of-life products”.  

Linear thinking treats decommissioning as an offshore demolition activity, with waste to be disposed of.  

The Circular Economy approach seeks to find new uses for assets and their components, consistent with commercial and sustainability objectives.  

If the industry develops approaches to support ways of putting back components from those assets into a re-use, refurbish, recycle loop, the burden of decommissioning North Sea oil and gas assets would become more attractive.  

decomissioning circular-economy-systems-diagram

The Circular Economy approach to decommissioning brings a new perspective that considers the re-use and regeneration as critical aspects, to be considered along with other matters from the earliest stages of decommissioning planning.  

Such thinking needs to be embedded in contracting strategy, decommissioning option development and commercial models.  The approach also requires considerable cross asset and cross company development to maximise ideas generation, learning and create new markets for regenerated products.

The Circular Economy approach has the potential to add value to the North Sea decommissioning sector.  It will require some new thinking and an open mind at the earliest stages of decommissioning strategy development and planning.  

Malgorzata Olesiewicz is an Energy Business Analyst and Insight Hunter at Pale Blue Dot Energy. Sam Gomersall is Commercial Director and Ideas Spark.

If you would like to read more from Pale Blue Dot Energy, follow them at:  www.twitter.com/PBDEnergy

Scotland’s marine energy array subsea cabling project to be showcased at Edinburgh wind and wave expo

 

Subsea cabling - the Achilles heel of the offshore renewables sector.
Subsea cabling – the Achilles heel of the offshore renewables sector.

A £2.5 million marine energy array cabling project for Scottish Enterprise is to be showcased at a flagship UK wind and wave power expo in Edinburgh.

The event, which is expected to attract over 500 delegates, will also include a keynote address by Fergus Ewing, Scottish Energy Minister.

Cabling is the Achilles’ heel of the offshore renewables industry and subsea engineering and training company, Jee Ltd, will also share its experience in the field of offshore renewables and marine energy at the conference and exhibition next month.

Drawing upon 10 years’ experience in the offshore renewables and oil and gas industry, Gary Howland, Business Development Manager, Jee Ltd, is also one of the speakers at the conference in Edinburgh on 25-26 February.

Jee is an independent subsea engineering and training company with offices in Aberdeen and London. Its multi-disciplined capabilities and integrated services cover the spectrum of subsea engineering for the whole project lifecycle for the global oil, gas and renewables industries.

Presenting in the session ‘Next Generation Enabling Technologies for the Wave and Tidal Sector’, Howland will discuss a contract that Jee was awarded in June 2014 to develop pioneering solutions for locating, securing, protecting and recovering electrical subsea cables as part of Scottish Enterprise’s Marine Energy Array Cabling Solution Development project.

Howland said: “The expanding renewables industry has introduced marine energy as an effective solution to help decarbonise the UK’s energy supply, increase energy security and reduce our dependence on imported fossil fuels. The Department of Energy and Climate Change (DECC) estimates that wave and tidal energy combined has the potential to deliver around 20% of the UK’s current electricity needs, demonstrating the importance of bringing it to the commercial market.

“This wave and tidal conference and exhibition represents a showcase in providing innovative, subsea engineering services to the renewables sector with the aim of reducing the costs and risk associated with the project lifecycle. Our engineering capabilities cover the complete project lifecycle, from design through to installation, operations, and decommissioning.

“It has been forecast that the global wave and tidal market will be worth around £50 billion by 2050, which further highlights the viability of adopting the energy for commercial use and the importance of these development projects in making it possible.

“The Scottish Enterprise project, which aimed to accelerate the development of solutions to a critical tidal energy technical challenge, is an important step in the commercialisation of marine energy in Scotland, a sub-sector that has been prioritised by Scottish Enterprise in its efforts to realise the economic potential of the renewables industry.”

Howland’s presentation will outline the development programme, the key findings, the challenges that were encountered and explain the solutions that Jee identified during the project.

Radical re-think needed on renewable energy innovation in the whisky sector

Balmenach distillery

By TIM DUMENIL

Distilleries are large users of energy, with all aspects of the energy trilemma (security of supply, energy cost and carbon emissions) becoming increasingly more prominent.

Following a decade of fast growth, the demand for Scotch whisky is levelling off.  Whilst there is confidence in the long-term future of Scotch, with many projects for new distilleries underway and upward of £2bn of capital investment committed by producers, the sector is under pressure to reduce costs resulting in some new build projects being deferred and an increasing focus on cost control opportunities.  

Energy efficiency is now fully back in the spotlight, given energy costs are in the top three costs alongside wheat/malted barley and salary costs.

Carbon emissions are becoming increasingly important. Under the stewardship of the Scotch Whisky Association (SWA), the sector has been progressive in regards to its environmental responsibilities with the majority of the industry signed up to a regularly reviewed Environmental Strategy which contains progress against a number of ambitious goals, e.g. the sector is on track to deliver a 20% reduction in carbon emissions by 2020.

However, Scotch manufacturing is not a sector which innovates easily. The general approach used has not changed significantly across the decades, it is after all a traditional industry.  

Whilst in the period 2008 to 2012 specific energy consumption decreased by 6%, carbon emissions decreased by 8% and non-fossil fuel use increased from 13% to 16%, (2013 SWA environmental report data for 2012), this has largely resulted from building and expanding new large scale capacity coupled with some heat recovery synergy and bioenergy innovation.

Whilst the distilling industry is to be commended for its progress to date, a radical rethink is required to meet the key aspirations that safeguard the sector’s future; specifically the 80% reduction in carbon footprint by 2050.  

This needs to go well beyond minor energy efficiency gains and swapping out fuel sources, to unpicking the fundamentals of energy use within the process.  There is a significant opportunity for further innovative thermodynamic options to deliver energy reduction/emissions reductions driven by an ambitious future target for specific energy consumption.

Typically the energy use within a malt distillery is split 80% fuel (heat) and 20% electricity, of which over 90% of the fuel energy is spent generating steam for use within the distillation process with a very uneven demand profile.  This derives from a history of direct coal fired pot stills converted to internal steam coils/pan fired by oversized heavy fuel oil boilers.

The whisky industry is delivering on reducing carbon emissions through swapping out fuel type, primarily through moving from heavy fuel oil (HFO) to natural gas where the gas pipe infrastructure allows, and also embracing bioenergy, albeit with mixed success.

LEDs are now delivering an improved quality of light at less than 20% of the energy use when compared with traditional incandescent light bulbs.  Can an equivalent breakthrough be achieved in delivering the same, if not improved, spirit flavour with significantly less energy?  

Understanding that the current pot distillation process produces over three times more distilled water than spirit and the latent heat associated with the then disposed of distilled water is key to unlocking an innovative solution.  We don’t need to look far, as the technology required already exists.  It’s about bringing a different perspective and having the courage to drive change whist being cognisant of spirit quality and tradition.

In addition to the thermodynamic breakthrough, the industry needs further driven collaboration to ensure the wholesale adoption of known energy efficiency solutions across the estate, further innovation on primary energy supply, a different approach to thermal storage, integration of renewable energy, maximising value of waste/co-products and exploration of cross site boundary opportunities.

To elaborate; vapour recompression on spirit condensers has delivered energy savings in the region of 30% for decades, but these have not been implemented across the industry.  

A significant number of distilleries have no form of heat recovery preheating wash or low wines.  In a hectic manufacturing environment we may be too busy to look at small matters like efficient lighting, yet case studies for similar sites show that LEDs installed across a large distillers estate would deliver improved lighting, reduced maintenance costs and estimated energy savings of £300k per annum at a payback of less than two years.  

Diageo’s leading distillery at Roseisle has much to be commended for environmentally. In particular is the heat recovery synergy associated with not just its adjacent maltings but also a second maltings three miles away.  

What further potential exists for district heat solutions if a distiller were to collaborate beyond their site boundary?  Could a single combined heat and power energy centre solution, coupled with heat recovery and thermal storage, deliver a district heat solution for the community and six large distilleries in the small village of Dufftown?

The distilleries based on Scottish islands import HFO or kerosene to fire their boilers. The Scottish Government and many others are heavily investing in both onshore and marine renewable electricity in the same locations. The likes of Orkney are regularly having to reduce renewable electrical generation to avoid overstressing a constrained grid.  Are large energy users such as distillers being actively engaged and encouraged to convert their heat demand from fuel to electricity?

Different perspectives and great ideas need encouraging and nurturing.  The sector has considerable opportunity to make investments in energy saving projects which will deliver commercial returns.  Financial support is often available to support these energy projects.  

Getting started requires a combination of innovative thinking, deep sector understanding, wide awareness of energy options and understanding of finance options to be distilled, to develop and deliver the case for energy related project investments.

TIM DUMENIL is Creative Spirit and Energy Consultant at Pale Blue Dot Energy.

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Industry must invest in new technologies to unlock even more N. Sea oil reserves

By Professor Mehran Sohrabi

Professor Mehran Sohrabi, Heriot Watt University
Professor Mehran Sohrabi, Heriot Watt University

Researchers from a Scottish university are a step closer to maximising oil reserves from the North Sea by developing methods that can more cleanly and cheaply extract valuable remaining oil from existing fields.

The Centre for Enhanced Oil Recovery within the Institute of Petroleum Engineering at Heriot-Watt University has been working on new technologies that could add decades to the life span of oil reservoirs in the North Sea and help secure the future of the oil industry in the region.

At least half of the original oil still remains in the North Sea reservoirs but there are great challenges in extracting it using Enhanced Oil Recovery (EOR) techniques.

These include limited platform space and large well spacing, making extraction too expensive to pursue. Following years of research at Heriot Watt University we now believe we can overcome these challenges.”

The Centre has been researching low-salinity water injection which is an innovative area of research that could be a game changer for the industry.

Low-salinity water injection is relatively inexpensive and can be economically implemented in the North Sea reservoirs. This system works by reducing the salt levels in sea water which is already injected in reservoirs. It has the potential to make a huge impact on the current output of the North Sea’s oil production.

“We have developed a robust method to screen oil reservoirs to identify the ones that would respond positively to low salinity water injection. This allows us to estimate the size of incremental oil recovery which is vital for economic calculations of Enhanced Oil Recovery projects.

This is a massive leap forward, especially in an off-shore setting. The process is relatively inexpensive meaning the costs for EOR could fall dramatically, while yields could rise. It’s also cleaner as you’re removing the need for potentially toxic chemicals.

For reservoirs that have already been flooded with water, the EOR Centre at Heriot-Watt University has been working for the past 17 years on developing improved gas injection technologies. In water flooded reservoirs, gas injection will recover the trapped oil more rapidly compared to low salinity water injection.

Gas injection is a robust process but it is difficult to simulate its performance accurately as it happens under a complex three-phase flow regime. We have developed an algorithm for accurate prediction of gas and water alternating gas injection performance in oil reservoirs.

After 40 years of production, the North Sea oil reservoirs are now mature and in rapid decline.  Urgent action is needed now. The Government and industry must invest in new gas and water technologies, in order to reverse that decline.”

Heriot-Watt University’s Institute of Petroleum Engineering was established in 1975 to satisfy the industry’s growing requirement for professional petroleum engineers – the year in which oil was first produced from the North Sea. It has been working since then on new technologies that could add decades to the life span of oil reservoirs in the North Sea and help secure the future of the oil industry in the region.

Professor Mehran Sohrabi is Director of the Centre for Enhanced Oil Recovery within the Institute of Petroleum Engineering at Heriot-Watt University.

Airborne Energy: Introducing a new approach to vertical-axis urban wind turbines

Airborne Energy logoAirborne Energy Ltd was formed in May 2010 to develop a different approach to capturing small wind opportunity in urban environments. Its innovative vertical axis wind turbine (VAWT) is designed to operate in locations where the wind conditions may not be ideal.

The airborne design seeks to take advantage of changing winds from all directions and speeds. Given the variable nature of urban wind, the familiar “propeller” design and operation is not always appropriate for built up, commercial or public locations.

The turbine design comprises three vertical blades which steer, as the turbine rotates, to maximise the power gained when moving downwind and yet minimise drag when moving upwind.

The returning blade effectively reduces drag by aligning itself into the wind direction in preparation for “going about” to be next to catch the wind, whilst the driven blade presents itself perpendicular to the wind to take full effect of the wind thrust. “

The turbine consists of a rotating structure which supports the blade shafts, the blade steering mechanism and an electrical generator all within a weather shroud at the bottom; above the shroud the blades; and at the top, shrouded cross-bracing and a vane which directs blade steering for sudden changes in wind direction.

Airborne Energy turbine

Electrical Innovation

Airborne Energy – based near Edinburgh – is designing an electrical generator that can operate at low rotational speeds. The aim is to generate electricity quietly and reliably in all conditions and yet meet the standards required by the Micro generation Certification Scheme.

New opportunities

Airborne Energy will be well positioned to take advantage of the small wind forecast doubling by 2017 and trebling by 2018 particularly in the as yet untapped urban environment locations where planners will seek silence, safety and aesthetic design.

 

For more information:

info@airborne-energy.co.uk

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Get your ‘pillars of protection’ against turbine failure

 

Gaby Amiel, Commercial-Manager at Wind Prospect.
Gaby Amiel, Commercial-Manager at Wind Prospect.

GABY AMIEL, Commercial Manager at Wind Prospect Ltd, examines contractual rights that mitigate operational and construction risk on UK wind farm investments.

In the UK, something approaching a market standard approach to warranties given by manufacturers in turbine contracts has been developed over time

This article explains the three most common contractual ‘pillars’ which provide protection to a project owner in the event of turbine failure or underperformance

The warranties and liability limits in the Turbine Supply Agreement (TSA) and Maintenance & Service Agreement (MSA) define the allocation of such risk between project owner and OEM (Original Equipment Manufacturer).

 1. Defects Warranty (covered in TSA)

2. Availability Warranty (covered in MSA)

3. Unscheduled Maintenance (covered in MA)

 The contract in which a particular obligation or warranty is included is significant, because it affects the duration and magnitude of the protection and the liability cap applicable in case of default. Generally speaking, the liability cap under the TSA will be much higher than under the MSA, but the warranty will apply for a shorter period of time.

 

Defects Warranty

The OEM is typically obliged, at its own cost, to fix all defects in the equipment occurring within the defects notification period. The period is typically two years from the date of formal wind farm takeover but may be longer, particularly where the technology does not have an extensive track record.

Since the defects warranty appears in the TSA, a relatively high liability cap – often 100% of the contract price – should apply. Good initial protection is thereby given to the project owner against repair costs during this initial period. However, depending on the wording of the liability clause, the cost of repairs undertaken may be deducted from the liability cap. Owners should ensure they have clear legal advice on this point.

OEMs typically seek to limit the timeframe of the warranty by triggering the ‘defects notification period of protection’ as early as possible in the commissioning phase and stipulating that only defects of which they are notified within the period are covered.

 Just one day late and the warranty no longer applies. Timely end of warranty inspections are recommended.

 

Availability Warranty

 What the TSA does not commonly provide is compensation for loss of revenue for failure of the equipment supplied.

 Instead, under the MSA, the OEM guarantees availability of the turbines up to a certain threshold (typically 95-97%) and pays liquidated damages (LDs) where this level is not met. This availability warranty is the second ‘pillar’ of protection against turbine failure.

LDs for availability are calculated based on either actual or theoretical revenues. A common approach, but not necessarily the simplest, is to use the actual yield over the preceding 12 months (corrected up to warranted availability) and the market power price.

A complex series of status and alarm logs recorded in the SCADA system are used to allocate all time to either ‘available’ or ‘not-available’ according to the contract terms. The agreed effect of the relevant logs is set out in the contract.

For example, where the following logs are recorded, turbine down time will often, by agreement, be treated as available:

  •  
  • Interruption in the grid connection
  • Wind speed outside of operating range (though this is often resisted by the owner)
  • A negotiated allowance for unscheduled maintenance

 The availability warranty normally applies for the duration of the MSA. LDs payable under the availability warranty will be capped. The cap may be annual or cover the duration of the MSA; it may be a flat figure or set by reference the annual fee under the MSA. However defined, the cap will generally be formulated to cover at least a 10% loss in availability.

 Where the cap is linked to MSA fees, project owners need to be keenly aware of the connection during negotiations; a last minute reduction in price will reduce the level of availability LDs that may be claimed.

 

Unscheduled Maintenance

 The third pillar of protection constitutes the OEM’s duty under the MSA to perform Unscheduled Maintenance to repair faults occurring after expiry of the defects notification period. The cost of such maintenance is the responsibility of the OEM.

The OEM’s liability for failure to fulfil the repair obligation will be limited contractually. The level of liability cap is normally negotiated to reflect the track record of the turbine technology; a stronger history of reliability will justify a lower cap. Typically the cap will not be less than 100% of the MSA fee either annually or on an aggregate basis. Same as for the defects warranty, the cost of repairs made may be deductible against the cap depending on the wording of the liability clause. However, In this case the potential for the cap to be exhausted is much greater.

Where a lender to the project is not satisfied with the liability cap which applies to Unscheduled Maintenance, for example if the turbine model has a history of serial defects, they may require the owner to pay revenues into a maintenance reserve account before distributing to shareholders.

A word of warning: It is not always clear how ongoing repair works will affect a liability cap for Unscheduled Maintenance.

 In some cases, a specific clause relating to serial defects is included to cover, for example, a manufacturing fault in a batch of key components across a proportion of turbines (typically 10-25%). Once the clause is triggered, the OEM must investigate the root cause of the fault, report to the owner and, if appropriate, proactively replace the relevant parts on all turbines in the wind farm.

A word of warning: It is not always clear how on-going repair works will affect a liability cap for unscheduled maintenance. If a gearbox is replaced, does it follow that the OEM’s liability and obligation to make further repairs is correspondingly reduced by the value of the works? Answer: it depends on the wording of the liability limitation, so seek legal advice.

 

Looking Ahead

For better or for worse, wind power supply contracts are more often than not, formulated based on the three ‘pillars’ of protection. However, a market standard is seldom static and will undoubtedly shift over time.

 Instead of a time-based Availability Warranty, some turbine manufacturers are moving towards guaranteeing actual production of electricity. Although more complex to formulate and administer, it would surely be a positive development for the market for such mechanisms to become more widely used.

Furthermore, by adding in an incentive element on production we could end up with a much closer alignment of interests between the OEM and the project owner

The term of MSAs has varied a great deal over the years and these days. Currently, the tendency is towards longer terms, often 10-15 years. The stability this provides make it more attractive for institutional investors such as pension funds to hold wind farms as stable, low risk assets. For this reason, the trend is likely to continue.

 As technical adviser, Wind Prospect is at the forefront of market trends. Our role is to ensure that contracts are carefully tailored to the specific project design and technology and deliver a level of protection that is acceptable to project owner and lender alike.

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