Technology from Europe:
United Kingdom

Minister predicts healthy UKCS period, despite tax hike

Malcolm Wicks

Malcolm Wicks is Minister of State for Energy within the UK Department of Trade and Industry (DTI) in London. He has overall responsibility for energy issues, including sustainability and the environment, corporate social responsibility, security of energy supplies, fuel poverty, and nuclear security and export control. Accordingly, he oversees DTI’s Energy Group of five major units.

Question: How would you describe DTI’s role within the British upstream oil and gas industry? 

Answer: DTI, in collaboration with UK Trade & Investment (the government organization that supports British companies doing business internationally, as well as overseas enterprises seeking to locate in the UK), has a key role in creating the conditions for business success and helping the UK to respond to the challenges of globalization. We aim to continue to support all sectors of British business, both at home and abroad, to promote science and innovation, and to generate more inward investment. This, of course, includes the oil and gas industry.

As well as being vital to our energy needs and economy, the UK oil and gas industry is a shining example of how experience, drive and innovation can overcome hurdles presented by difficult operating conditions, and lead to success. DTI will continue to support investment in the North Sea, where many opportunities still remain, and to promote the British supply chain abroad. We also continue to work closely with the industry to ensure that we wring every last drop of oil and gas from the UK Continental Shelf (UKCS).

Q: Was your government satisfied with the amount of E&P activity during 2005? What level of activity and business do you expect for 2006?

A: Around 36 billion boe have been produced in the UK so far, and estimates suggest that there are still between 21 billion and 27 billion boe more to be recovered. The key measure for the North Sea’s future must be exploration.

There is still significant enthusiasm for the North Sea’s prospectivity. Last year, UK exploration and appraisal drilling was up almost 30% on 2004’s figure, the highest level in seven years. This is very encouraging, but there is no room for complacency. One big question, of course, is how the industry manages the situation regarding rig availability. It’s very important that this does not hold back the pace of activity.

Q: Are high oil and gas prices allowing British service/ supply firms to obtain extra business outside the UK?

A: Of course. But this isn’t just due to high prices. The UK industry continues to be recognized as world-class in oil, gas and petrochemicals. British companies are winning more business than ever.

Q: Now that some track record exists, how well have DTI’s licensing policy changes succeeded?

A: Last year’s 23rd Offshore Round was perhaps the most successful in North Sea history – I was able to award 152 licenses, covering 266 blocks. And the Promote License – aimed at attracting smaller players, who will work up or sell on a prospect – has proved a revelation. Last November, nearly half of the 21st Round Promote Licenses (awarded in 2003) were retained. From this group, 17 firm drilling commitments will result in £90 million ($158 million) of expenditure.

And I am delighted to have recently announced our 24th Round. This year, we are offering 1,411 blocks, including new areas that have not been licensed before, and we anticipate a positive response. Applicants can bid for blocks under the Traditional, Frontier or Promote Licenses, depending on which North Sea area they intend to focus on.

The Frontier License is important, as it aims to generate more exploration activity West of the Shetland Islands, where full prospectivity is promising but has not yet been fully evaluated. It is vital that we maximize exploration opportunities and do not allow licensees to sit on acreage. So, I am also very pleased that more than 80 blocks are fallow areas that have been relinquished since the 23rd Licensing Round and are now being put back into the pot for others to exploit. Full information on what is on offer in the 24th Round can be found on the DTI’s Oil and Gas website at: www.og.dti.gov.uk

Q: That having been said, is the UK government doing enough to encourage E&P activity? Should other initiatives be undertaken?

A: We are working closely with industry through PILOT, the oil and gas task force that I chair, on a number of fronts to encourage more UK exploration and appraisal. The fallow initiative is successfully making unworked acreage available for others to exploit. Our licensing innovations are encouraging unprecedented interest, from players large and small.

We are also working to maximize recovery from existing “brown” fields, which should help to extend the life of infrastructure and promote recovery from smaller accumulations that could not be economically realized without that infrastructure being nearby and accessible. The industry is working to enhance the commercial climate through Codes of Practice. These codes should ensure that North Sea deals are carried out smoothly, and that third parties are able to access infrastructure on fair and reasonable terms.

But we can’t do anything without the right people. We already have a fantastic range of talent within the industry – geologists, geophysicists, technicians, engineers and financiers, to name but a few. However, there are skills shortages, and it is vital for the future of the industry that these specialties are not lost. I have, therefore, asked PILOT to look at how the industry can respond to this challenge.

Q: Per the previous question, how do you reconcile encouragement of E&P with the additional 10% tax surcharge imposed by the Chancellor of the Exchequer on the UK industry?

A: In striking the right balance between producers and consumers, the North Sea oil taxation regime needs to promote investment and ensure fairness for taxpayers. The changes announced by the Chancellor of the Exchequer in his Pre-Budget Report of December 2005 are being made to ensure that, in view of the recent significant increases in oil prices and the outlook for future oil prices, the government strikes the right balance. This balance is between enabling the oil and gas companies to receive a fair post-tax return for their investment in the North Sea and providing the UK with a fair share of revenues from a national resource.

The changes are based on changes in oil price expectations for the medium-term and are not a short-term response to market volatility. The changes were subject to detailed analysis, to ensure that the North Sea fiscal regime continues to deliver the government’s policy objectives. The increase in the supplementary charge from 10% to 20% is unlikely to have a significant effect on the relative attractiveness of the UKCS.

In announcing the changes, the chancellor made a commitment that there will be no further increases in North Sea taxation for the life of this Parliament. That commitment will give industry fiscal certainty in the medium term, a key ingredient for investment decisions. 

If there was to be, for example, a significant and sustained downward shift in global oil prices, then the government would, of course, listen to representations that it should reconsider whether the North Sea fiscal regime remained appropriate in those changed circumstances. In deciding what fiscal arrangements are appropriate, the government gives full consideration to DTI’s objective of maximizing the economic benefit, and contribution to security of supply, from the UK’s oil and gas reserves.

I am keen that industry participates fully in the current discussions with government on the future structure of the North Sea fiscal regime as the basin continues to mature. For its part, the government wants to engage with industry to ensure that decisions are made on a fully informed basis. DTI is playing a key role in discussions about the fiscal regime.

Q: What are some major field projects, either in the UK or other regions, in which British firms are involved, that also serve as good examples of their technical offerings/ expertise? 

A: Over the last 40 years, exploration and development of the hostile and deep waters of the North Sea has allowed the UK’s extensive oil and gas industry to create an unequalled range of products, services and expertise that now plays a leading role in offshore and onshore hydrocarbon developments worldwide. UK firms have developed a vast range of subsea technology, novel offshore platform and floating production systems, compelling software, environmental management and control systems that are now utilized globally.

Energy operators of all sizes exploit UK expertise for reservoir analysis and modeling; innovative downhole tools and techniques for drilling multilateral wells; e-enabled reservoir management systems; advanced communications; process control; and measurement and support services. For example, Shell’s work on Through Tubing Drilling, where slim drilling equipment is used to sidetrack from existing wells through the production tubing, provides a good example of how innovative technology is used in the North Sea. This technique has provided a cost saving of around $4 million per well in Gannet and North Cormorant fields.

Equally, Shell’s Trident monotower has been deployed in the southern North Sea to unlock gas reserves that would otherwise be uneconomic. Of equal importance is the fact that it has provided a 25% cost saving when compared with conventional platforms and makes use of renewables for the energy package. Efficient and cost-effective products and services aren’t restricted to the operators. The UK has a large number of world-class service and supply companies, such as Aberdeen’s Red Spider Technology, which has developed a range of downhole products for flow control and artificial lift, designed to deal with sand, debris, limited access and changing well conditions downhole. These products are currently in use on the UKCS, offshore Norway and in the Middle East.

Q: How do DTI and the Blair administration view competition from aggressive Chinese oil companies and service/ supply firms?

A: The UK supplies and service industry can be seen winning business in every oil and gas producing region. We expect the service/ supply firms of other nations to be just as eager as we are to win contracts. With demand for oil growing strongly, it is natural that their oil companies are expanding activities.

We have no objections to any country, or company, investing in overseas resources – competition is, generally, a good thing. It keeps the industry alert and encourages innovation. But such agreements need to be transparent, and in line with market conditions and practices. This will help to ensure a level playing field in global energy markets and maintain a balance in global energy security. I fully expect UK companies to increase their international success and win much more business with Chinese operators.