North Sea oil and gas industry sceptical that Wood Review ‘revolution’ will lead to change

Almost half (48%) of all respondents were ‘unsure’ if the Wood Review would lead to a significant change in the way the UKCS operates – this is another key finding of the 20^th annual Oil and Gas survey published today by Aberdeen Chamber of Commerce.

The strongest support for the Wood Review recommendations producing a significant change on the way the UKCS operates came from larger firms and operators.

Those who were unsure expressed the view that they had limited knowledge of the recommendations of the Wood Review, and these were typically small and medium-sized firms (i.e. those with fewer than 200 employees) and contractors.

Of the specific recommendations, the respondents thought that the likelihood of each being implemented effectively was as follows:

• Revision of the fiscal regime (61%)
• Creation of a new regulatory body (58%) (See also today’s Scottish Energy News report on the Queen’s speech)
• Creation of readily available geological data (54%)
• Development of a new strategy (53%)
• Industry-improving collaboration (51%) and
• Industry working with the regulator and sharing infrastructure (43%).

Comments on the Wood Report from firms included:

 “It underlines specific areas of improvement that we cannot ignore and must act upon”

 “The report makes sense and we see the benefits of working this way in other oil provinces, but it represents a significant mind shift for the UKCS”

 “Compiled and developed by a recognised industry expert – but how strong will the government be in ensuring implementation amongst the end-use companies”

Activity levels and business confidence

The Oil and Gas Report also paints a mixed picture for the industry. Just  over half (52%)  of contractors are working at or above optimum levels on the UKCS, the lowest level since late 2011, with this problem being felt most acutely by smaller contractors.

There has been a sharp fall in the percentage of contractors working at or above optimum levels in international markets, with just 47% doing so – down from 73% in the previous survey. This reflects increasing competition in the international market.

However, 37% of oil and gas firms are more confident about their future prospects on the UKCS than they were a year ago, compared to just 15% who are less confident, a net positive balance of 22%.

Investment Trends  

Confidence is further evidenced by the 35% of respondents who report an upward trend in investment in the UKCS over the past 12 months.

Development of new markets is the most popular area of investment expenditure, with just under half (48%) of respondents reporting an increase in investment in this area over the past year. This is followed by staff training (47%) and research and development (33%).

Half of firms (49%) are scheduling an increase in investment spend over the next two years.

Fiscal regime

Tax relief and capital allowances are the most frequently cited key constraints to UK oil and gas businesses, cited as ‘very important’ by more than half (56%) of respondents – though this is more important for contractors than operators.

This is followed by skills shortages (cited as ‘very important’ by 49%), the economic climate (40 %) and loss of staff to other companies (37%).

Uisdean Vass, Partner at the Bond Dickinson legal services company which sponsored the report, commented:  “Sir Ian Wood’s Review on maximising UKCS recovery has the potential to profoundly change the existing system of UKCS licensing. He has proposed a new independent Government Regulator with additional powers and resources run by top industry professionals.

“The Wood Review has also introduced the concept of MER UK (Maximising Economic Recovery from the UKCS). MER UK creates a new duty on the part of the licensees to maximise production from whole of the UKCS, not just their own licences and fields.

“This will entail the amendment of all existing licences. MER UK will have to be clearly defined because it will have to be a legally enforceable obligation. MER UK will probably be enacted through legislative amendment of the existing model clauses.

 “Rising costs, falling (though stabilising) production and a lack of exploratory drilling are the dark clouds over the North Sea. However, the Wood Review, in spite of the challenging nature of some of its goals, could provide a platform to positively revolutionise the province.”