19 December 2013

UKCS Maximising Recovery Review: Interim Report – PwC response

The UK Oil and Gas industry makes a substantial contribution to the economy, energy security and employment in the UK.

Recognising the vital role played by the industry, in June 2o12 the Secretary of State for Energy and Climate Change, Edward Davey MP commissioned a review of UK offshore oil and gas recovery and its regulation. Sir Ian Wood, chairman of the Aberdeen-based engineering company, Wood Group, was asked to lead the review.  

On11th November 2013, an interim report was released alongside a request for feedback and comments from the industry.  The report makes a series of recommendations aimed at maximising the economic benefit from the UK’s remaining offshore resource including:

  1. Government and industry to develop and commit to a new strategy for maximising economic recovery from the UKCS.
  2. The creation of a new arm’s length regulatory body with additional powers which will hold the industry to account.  
  3. The regulator and industry to work together to develop and implement strategies in areas such as exploration and infrastructure.

The final report will be published in early 2014.

A summary of our response

We broadly welcome the Interim Report recommendations and believe they will help improve the attractiveness of the UKCS for investment.

An arm’s length regulatory body - A new regulatory body has the potential to create huge value for the industry and should be created at pace. However, the set up may not be straight forward and demonstrating the necessary strategic leadership will be an extremely challenging task.  For example, finding, attracting and retaining the right skills and experience necessary to operate the regulator will be critical but difficult in the current competitive market. Appropriate remuneration needs to be balanced with a value for money approach.

Changing the game - Collaboration is the principal theme of this report and is one that we whole heartedly support. The stark reality is, however, that operating companies are more likely to work together when there is an alignment of economic interests.

Gavin Sanderson, partner in the UK Oil and Gas team, comments:

“An enhanced regulator could play a key role in nurturing greater collaboration among companies.  For example the regulator could help facilitate commercial solutions or more direct incentives that will provide the necessary environment for the industry to work together, such as fiscal stimuli to improve the use of infrastructure.  

“Forging the right relationships with both Treasury and the industry will also help to deliver success.  Incentives that could support overall returns and especially exploration activity include a reduction in high effective tax rates. This alone would give the industry a huge psychological boost.”

Putting it all into practice - With broad industry alignment seemingly in place, the challenge will become one of implementation and specific work is needed on creating catalysts for implementation.  We believe that focus around a small number of critical projects with transparency on participation and progress will help.  For example:

  • Developing appropriate stimulus packages to create shared economic interests for cluster planning and collaboration
  • Specific attention to SNS which has found less traction to date and faces difficult challenges in the immediate environment of gas supply and prices
  • Leadership by the new regulator on decommissioning strategy (covering planning, risk sharing, financing) and the role of government as a stakeholder.
  • Allow for the regulator to act on efficiency levels and to resolve associated infrastructure dependencies impacting this
  • Access to capital, especially at exploration stage -  proper explanation of risks to attract investors including stability of fiscal regime

Richard Spilsbury, partner in the UK Oil and Gas team, added:

“While this is a far reaching report, there are a number of areas out with its scope that could benefit from further investigation and collaboration, particularly between industry and the UK Government.  

"In our Northern Lights series we've outlined the challenge facing the industry in developing and retaining talent and around the role of the supply chain and it’s vital that this remains high on the agenda.  We should also further explore the relationship between the UKCS and Norwegian CS and whether there are lessons from other industries that could be relevant.

“Nevertheless, these recommendations, once set in the broader energy policy context, will go a long way to improving conditions to encourage investment and maximise recovery.” 

If you would like a copy of our full response or would like to discuss any of the topics mentioned above, please contact:

Gavin Sanderson       tel: 0207 212 8793  or by email
Richard Spilsbury      tel: 01224 210100  or by email  
Michael Hurley          tel: 0207 804 4465 or by email

 

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