Wood Mackenzie assesses the key issues for the UK North Sea oil and gas sector in the event of constitutional change in Scotland in light of the Scottish Independence referendum on Thursday 18th September 2014, with the future of the oil and gas sector continuing to be a key issue in the debate. Wood Mackenzie says the issues to be addressed in the event of a ‘Yes’ vote include fiscal (un)certainty, the offshore boundary and regulatory change.
Wood Mackenzie says that oil and gas companies will be closely following the result of the referendum, and the potential issues which might arise in the event of a ‘Yes’ vote, but of more pressing concern to the industry is the underperformance of exploration and production on the UK Continental Shelf (UKCS).
The key facts are:
- Following record levels of investment, the UKCS' long term production decline is expected to be temporarily arrested with production increasing to 1.46 million barrels of oil equivalent per day (mmboe/d) in 2018, from the current level of 1.43 mmboe in 2014.
- Post 2018, decline is forecast to set in once more with production dipping below 1 million barrels of oil equivalent per day (boe/d) by 2023, less than a quarter of the 1999 peak according to Wood Mackenzie.
- Operational issues continue to impact UKCS production levels. Although production decline rates slowed in 2013 compared to the two previous years, they were still higher than expected. The factors contributing to this underperformance were unscheduled maintenance, project delays and poorer than expected recovery. If these issues persist, even the temporary recovery forecast to 2018 could be at risk.
In 2013, 53 exploration and appraisal (E&A) wells were spudded and only 19 exploration wells have been spudded to date in 2014. Volumes discovered have also been disappointing with less than 330 mmboe of reserves discovered since the beginning of 2011, compared to around 2,540 mmboe which has been produced over the same period.
The consequence of this low level of discovered reserves combined with the cost challenges facing operators mean that, notwithstanding the total level of reserves that can be produced over the life of the North Sea, future Scottish production is under pressure.
Despite the current North Sea investment boom, there is an uncertain project pipeline with two principal factors contributing to this situation. The current high cost environment has led to projects being put on hold or deferred, such as Rosebank and Bressay, and poor exploration success has resulted in fewer discoveries, and therefore fewer new projects.
In the event of a ‘Yes’ vote Wood Mackenzie highlights several issues for the country’s oil & gas sector that an independent Scottish Government would need to address:
- Fiscal uncertainty is a chief concern of oil and gas companies in the UKCS and there is an ongoing review of the industry’s fiscal terms. Regardless of which government is in charge of the industry, companies will seek stability and simplicity around existing fiscal terms as well as tax incentives for harder to produce reserves. Industry engagement will be paramount to maximising value for both government and companies.
- We estimate that by 2030 nearly US$9 billion of tax relief will be claimed in respect of decommissioning spend on Scottish fields. This relief has been guaranteed through the Decommissioning Relief Deeds (DRDs) that exist between licence holders and the UK Government. The Scottish Government has stated that it will provide similar contractual certainty on decommissioning tax relief in the event of independence.
The offshore boundary
A border for oil and gas activities would need to be negotiated. A prolonged dispute could cause uncertainty and negatively impact the investment plans of companies active in the disputed area.
Wood Mackenzie forecasts that the bulk of UK oil and gas reserves lie in Scottish waters, and forecasts that an independent Scotland would control the vast majority of production as well as the most prospective acreage. In terms of remaining reserves, Wood Mackenzie estimates that circa 15.3 billion barrels of oil equivalent remain in the UK. This comprises reserves which are being produced, yet to be produced and yet to be found: the Scottish portion of commercial reserves is 84%.
The creation of a new regulator, the Oil and Gas Authority (OGA), was announced in June 2014. Based in Aberdeen, this new regulator is expected to take a more active role in the stewardship of the UKCS than DECC does currently. The Scottish Government would take on the regulatory and stewardship responsibilities of the Upstream industry and companies will want consistency and a seamless transition to ensure that delays, and an additional administrative burden, do not creep into the approvals process for upcoming projects and existing developments.