Wood Review: Necessary, but Sufficient?
Wood Review: Necessary, but Sufficient?
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
Charles Goedhals – 25th November, 2014
1
© 2014 Gaffney, Cline & Associates. All rights reserved. Terms and conditions of use: by accepting this document, the recipient agrees that the document together with all information included therein is the confidential and proprietary property of Gaffney, Cline & Associates and includes valuable trade secrets and/or proprietary information of Gaffney, Cline & Associates (collectively "information"). Gaffney, Cline & Associates retains all rights under copyright laws and trade secret laws of the United States of America and other countries. The recipient further agrees that the document may not be distributed, transmitted, copied or reproduced in whole or in part by any means, electronic, mechanical, or otherwise, without the express prior written consent of Gaffney, Cline & Associates, and may not be used directly or indirectly in any way detrimental to Gaffney, Cline & Associates’ interest.
Disclaimer Statement
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
The material and opinions expressed in this presentation are those of the authors. While they reflect what is believed to be informed opinion, they are not represented as being the opinions of the SPE/WPC/AAPG/SPEE/SEG or any other party. Readers are urged to obtain independent advice on any matter relating to the interpretation of the information and guidance contained herein.
2
Agenda ▪ Current Status of Production ▪ Future Possibilities ▪ Challenges Faced ▪ The Wood Review and Government Response
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
▪ Synthesis
3
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
Current Status of Production
4
Number of Fields in Production in 2013
Current Field Status – CNS & NNS Oil only 80 70 60 50 40 30 20 10 0 1,000
3,000
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
> 1,000 bpd > 0 bpd
5
▪ ▪ ▪ ▪
6,000
2009 141 186
10,000
30,000 60,000 Barrels Per Day
2010 141 188
2011 123 187
100,000
2012 104 175
200,000
2013 106 175
73 fields out of 248 have ceased production, 4 abandoned. 11 fields (net) out of 248 ceased production since 2009. 69 fields producing less than 1,000 bpd in 2013, up from 45 total 5 years before. Based on DECC data.
Production by Hub – C & N North Sea Oil Only 700,000 Curlew FPSO Berge Hugin FPSO Beatrice Kittiwake Buchan A Ekofisk Statfjord Douglas Heather Magnus Anasuria FPSO Athena FPSO Bleo Holm FPSO Gryphon FPSO Fulmar a Ettrick FPSO Judy Northern Producer FPF Nelson Beryl ETAP Piper Cormorant Buzzard
600,000
Oil Production, Bbl/d
500,000
400,000
300,000
200,000
Alvheim FPSO Montrose Bruce North Sea Producer Armada Balmoral Brittania Janice FPU Everest Sevan Voyageur Global Producer III FPSO Sevan Hummingbird Elgin-Franklin Clair Harding Alwyn North Tern Triton FPSO Ninian Brae Foinaven Captain Forties
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
100,000
0 2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
▪ Decline of Existing Production only – no allowance for investments in discoveries. ▪ Clear that not all hubs will survive. 6
2030
Production Efficiency 40%
Average NS Lost Production
35% 30% 25% 20% 15% 10% 5% 0% 2004 2005 2006 2007 2008 2009 2010 2011
Causes of PE Loss 2010-2013
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
Equipment Failures Annual Shutdowns Planned Maintenance Well work Reservoir Losses Export Systems Source: Oil & Gas UK, Pilot, BP for Forties Graphic
▪ ▪ ▪ ▪ 7
PILOT programme to improve efficiency to 80% established in 2009. Reported £1Bn extra spent on integrity in 2012 and 2013. “Average 60% Production Efficiency expected in 2012” (Reuters). PE is not age related in a maintained system – implication is maintenance expenditure needs to rise to improve PE.
44% 21% 7% 10% 10% 8%
OPEX (Existing Fields), 2013 Prices
Annual UKCS Opex (£ Bn)
14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: UK Oil & Gas
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
▪ Expectation of future decline in overall Opex due to field abandonment offset by increasing expenditure on repairs and maintenance. ▪ Figures for total UKCS – Central and Northern North Sea Oil share would be around US$8 Bn p.a. ▪ Note that £18/Bbl is around US$29/Bbl. 8
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
160
40
140
35
120
30
100 80 60
Opex (US$/Bbl)
Opex Cost (US$/Bbl)
Opex per Barrel: Do Nothing vs Retirement
25 20 15
40
10
20
5
0
0
▪ Assumes 65% of total UK opex in NS, 80% to Oil. ▪ Conclusion: Rationalisation, cost reduction, improved PE, EOR. ▪ New Developments are essential to the near future.
9
Retirement Rates 160
Fields in Prod - 80% PE No of Fields / Hubs Operational
140
Hubs in Production - 80% PE
120 100 80 60 40 20 0
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
▪ Assumes price of US$100/Bbl received at field level. ▪ Assumes price of US$100/Bbl for all production at Hub level. ▪ Neglects the “Domino Effect” of cost sharing. 10
Estimate of Oil OPEX – UKNS Mature Oilfields 4,500
Opex, 80% PE Total Annual Opex (GBP MM)
4,000 3,500 3,000 2,500 2,000 1,500 1,000
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
500 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
▪ GCA estimate based on previous retirement rates, i.e. managed Opex at around US$35/Bbl. 11
The Grim Reaper
Source: AllSeas Website
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
▪ “Delivery of the completed topsides lift and pipe-lay vessel is expected in the second half of 2014, ready for offshore operations early 2015. The jacket lift system will follow later…. In November 2013 AllSeas announced plans to build a second single-lift vessel larger than Pieter Schelte, to be delivered in 2020. It is intended for installation and removal of the very largest existing platforms.” Source: AllSeas Website
▪ AllSeas has not spent €1.3 Bn and are not commissioning this vessel today, without having done market analysis. 12
▪ NB: This will de-risk, rather than reduce costs of, abandonment.
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
Future Possibilities
13
Oil Reserves vs Time
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
Developed: 4,185 MMt
▪ Source: UK Oil & Gas “UK Oil Reserves and Estimated Ultimate Recovery 2014”. ▪ GCA estimate of developed resource production to 2050. 14
Potential – One Scenario 1,400,000
Oil Production (bpd)
1,200,000 1,000,000 800,000 600,000 400,000 200,000
Historical Developed Possible
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
0
▪ DECC 2012 Study: 6 BnBbl of EOR/IOR potential. ▪ 900 MMBbl of approved and yet to be approved heavy oil. 15
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
Challenges
16
Cost ▪ Current Projects: – Capex of US$20 to US$40/Bbl – Opex at US$30 to US$40/Bbl
▪ Current project screening at US$70/Bbl oil price.
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
▪ Competing internationally for investment, shale oil is the current favourite.
17
Scale 45,000 40,000 35,000
£ Million
30,000 25,000
US$100 Oil Effect?
20,000 15,000 10,000 5,000
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
0 2000
2001
2002
2003
E&A
2004
2005
CAPEX
2006
OPEX
2007
2008
2009
Total Income
2010
2011
2012
Source: Oil & Gas UK
▪ To deliver the potential, Capex of the order of US$25Bn/year needed. ▪ Illustration: Gas flood to achieve 5.7 Bnbl incremental recovery means perhaps 20+TCF of HC gas, CO2 or nitrogen, much of which will not be recovered. 18
Retirement Rates 160
Fields in Prod - 80% PE No of Fields / Hubs Operational
140
Hubs in Production - 80% PE
120 100 80 60 40 20 0
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
▪ Opportunities are disappearing fast: implies that new investments may be standalone. ▪ That means higher Capex and Economic Limit/CoP cutoff production rates. 19
Abandonment and Taxes 250 Revenue Tax Opex
200
US$ MM
Abandonment Cost Economic Limit
150
100
50 Tax-Driven CoP 0 1
2
3
4
5
6
7
8 9 Years
10 11 12 13 14 15
Source: UK Treasury
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
▪ Illustrative example – 3 year tax claw-back for abandonment could shorten field life – example of unintended consequences of complex tax rules. ▪ Tax claw-back and Decommissioning Relief Deeds not available to service/utility companies. ▪ Complex allowances intended to stimulate, but in reality are only deferring the inevitable, adding to the fiscal uncertainty. ▪ Oil & Gas tax only about 1% of total UK tax take, reducing and volatile. 20
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
The Wood Review and Government Response
21
Wood Review Observations ▪ The review identifies several market trends that contribute to the current state and concern about the UKCS:
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
– New developments will be completed by 2018 and capital investment is forecasted to drop drastically after that point; – Remaining smaller developments require collaboration between operators in order to achieve infrastructure and marketing efficiencies; – Production efficiency has dropped to approximately 60% from a peak of 80%+; – Exploration is at its lowest point since the early stages of the basin, only 150 MMboe has been discovered over the past 2 years; – Infrastructure is aging and requires both investment and optimization between operators in order to maximize their economic life; – Technology of late life and complex discoveries needs to be incentivized and implemented; – Cost escalation over the last decade has increased development costs dramatically; – Competition in the global marketplace has resulted in operators and the necessary services/technology moving elsewhere with their resources. 22
Key Issues Identified ▪ Operators to Focus on Maximising Economic Recovery – FPSOs vs existing infrastructure
▪ Fiscal Stability consistent with the challenges of Maturity – Allowances well received by industry
▪ Greater Resourced and more proactive Regulator – DECC under-resourced for the challenges
▪ Need for significantly improved asset stewardship – Production efficiency and poor take-up of EOR/IOR
▪ Far greater constructive collaboration between operators – “Overzealous legal and commercial behaviour”
▪ Better implementation of Industry Strategies – UKCS now requires integrated planning and collaboration
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
▪ 29 Action items outlined for the new Regulator, some of which are building on PILOT initiatives ▪ Two critical issues that are addressed in passing within the Review: – The UK is competing for investment internationally – and will find it difficult at 62%, let alone 80% marginal tax rates; and – The need for infrastructure to be operated as a (regulated) utility, as are the gas, telecoms and power grids and offshore pipelines in Norway, GoM and Netherlands. 23
Swift Government Response ▪ Recommendations Accepted. ▪ New Oil and Gas Authority (OGA) created. ▪ Will be based in Aberdeen. ▪ Will have jurisdiction over onshore, offshore including shale. ▪ Seed funding of £5 MM over 5 years provided. ▪ DECC providing bridge support. © 2014 Gaffney, Cline & Associates. All Rights Reserved.
▪ New CEO Appointed – takes position 1st January, 2015. ▪ Staffing due for 2015. 24
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
Synthesis
25
Observations of a Martian ▪ “MER UK” is undefined.
To operators it means maximising post-tax NPV, to HMRC it means maximum tax income. To the UK economy, it should mean maximum barrels recovered (each barrel recovered is potential US$100/80 reduction in balance of payments). Who represents this latter interest?
▪ Much is expected of the new Regulator: cutting the Gordian knot of current commercial and fiscal arrangements carries great risk. Energy Bill 2011 provides the framework for intervention on TPA and costs, but is untested.
▪ The task is URGENT. Staffing the Regulator in 2015 means that reviews © 2014 Gaffney, Cline & Associates. All Rights Reserved.
will not happen till 2016, and material action is unlikely till 2018. Compare with the retirement trend.
▪ Lower oil price makes this all the more urgent.
26
Suggestions ▪ Additional tax burden is no longer appropriate. Review PRT and the Supplementary Charge – this is an industry about to die on it’s feet and the contribution to the overall UK budget is negligible. ▪ All the brown-field, small field, heavy oil and other allowances then fall away. Unnecessarily complex, and just breeds uncertainty in the fiscal regime. ▪ Introduce an Abandonment Fund, tax deductible, as % of net cash flow at ringfence level. Based on annual assessments of abandonment liabilities, current fund value. Will allow non-oil companies to invest in infrastructure. ▪ Grandfather the Decommissioning Deeds. Allow them to become part of the Abandonment Fund. © 2014 Gaffney, Cline & Associates. All Rights Reserved.
▪ This will allow operation of hubs and export routes as regulated utilities, with service level agreements. Separates O&M (tariff) cash flow from oil revenues. ▪ This trades short term loss of tax against longer term CT, Income Tax and VAT receipts.
27
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
Charles Goedhals – 25th November, 2014
1
© 2014 Gaffney, Cline & Associates. All rights reserved. Terms and conditions of use: by accepting this document, the recipient agrees that the document together with all information included therein is the confidential and proprietary property of Gaffney, Cline & Associates and includes valuable trade secrets and/or proprietary information of Gaffney, Cline & Associates (collectively "information"). Gaffney, Cline & Associates retains all rights under copyright laws and trade secret laws of the United States of America and other countries. The recipient further agrees that the document may not be distributed, transmitted, copied or reproduced in whole or in part by any means, electronic, mechanical, or otherwise, without the express prior written consent of Gaffney, Cline & Associates, and may not be used directly or indirectly in any way detrimental to Gaffney, Cline & Associates’ interest.
Disclaimer Statement
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
The material and opinions expressed in this presentation are those of the authors. While they reflect what is believed to be informed opinion, they are not represented as being the opinions of the SPE/WPC/AAPG/SPEE/SEG or any other party. Readers are urged to obtain independent advice on any matter relating to the interpretation of the information and guidance contained herein.
2
Agenda ▪ Current Status of Production ▪ Future Possibilities ▪ Challenges Faced ▪ The Wood Review and Government Response
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
▪ Synthesis
3
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
Current Status of Production
4
Number of Fields in Production in 2013
Current Field Status – CNS & NNS Oil only 80 70 60 50 40 30 20 10 0 1,000
3,000
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
> 1,000 bpd > 0 bpd
5
▪ ▪ ▪ ▪
6,000
2009 141 186
10,000
30,000 60,000 Barrels Per Day
2010 141 188
2011 123 187
100,000
2012 104 175
200,000
2013 106 175
73 fields out of 248 have ceased production, 4 abandoned. 11 fields (net) out of 248 ceased production since 2009. 69 fields producing less than 1,000 bpd in 2013, up from 45 total 5 years before. Based on DECC data.
Production by Hub – C & N North Sea Oil Only 700,000 Curlew FPSO Berge Hugin FPSO Beatrice Kittiwake Buchan A Ekofisk Statfjord Douglas Heather Magnus Anasuria FPSO Athena FPSO Bleo Holm FPSO Gryphon FPSO Fulmar a Ettrick FPSO Judy Northern Producer FPF Nelson Beryl ETAP Piper Cormorant Buzzard
600,000
Oil Production, Bbl/d
500,000
400,000
300,000
200,000
Alvheim FPSO Montrose Bruce North Sea Producer Armada Balmoral Brittania Janice FPU Everest Sevan Voyageur Global Producer III FPSO Sevan Hummingbird Elgin-Franklin Clair Harding Alwyn North Tern Triton FPSO Ninian Brae Foinaven Captain Forties
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
100,000
0 2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
▪ Decline of Existing Production only – no allowance for investments in discoveries. ▪ Clear that not all hubs will survive. 6
2030
Production Efficiency 40%
Average NS Lost Production
35% 30% 25% 20% 15% 10% 5% 0% 2004 2005 2006 2007 2008 2009 2010 2011
Causes of PE Loss 2010-2013
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
Equipment Failures Annual Shutdowns Planned Maintenance Well work Reservoir Losses Export Systems Source: Oil & Gas UK, Pilot, BP for Forties Graphic
▪ ▪ ▪ ▪ 7
PILOT programme to improve efficiency to 80% established in 2009. Reported £1Bn extra spent on integrity in 2012 and 2013. “Average 60% Production Efficiency expected in 2012” (Reuters). PE is not age related in a maintained system – implication is maintenance expenditure needs to rise to improve PE.
44% 21% 7% 10% 10% 8%
OPEX (Existing Fields), 2013 Prices
Annual UKCS Opex (£ Bn)
14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: UK Oil & Gas
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
▪ Expectation of future decline in overall Opex due to field abandonment offset by increasing expenditure on repairs and maintenance. ▪ Figures for total UKCS – Central and Northern North Sea Oil share would be around US$8 Bn p.a. ▪ Note that £18/Bbl is around US$29/Bbl. 8
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
160
40
140
35
120
30
100 80 60
Opex (US$/Bbl)
Opex Cost (US$/Bbl)
Opex per Barrel: Do Nothing vs Retirement
25 20 15
40
10
20
5
0
0
▪ Assumes 65% of total UK opex in NS, 80% to Oil. ▪ Conclusion: Rationalisation, cost reduction, improved PE, EOR. ▪ New Developments are essential to the near future.
9
Retirement Rates 160
Fields in Prod - 80% PE No of Fields / Hubs Operational
140
Hubs in Production - 80% PE
120 100 80 60 40 20 0
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
▪ Assumes price of US$100/Bbl received at field level. ▪ Assumes price of US$100/Bbl for all production at Hub level. ▪ Neglects the “Domino Effect” of cost sharing. 10
Estimate of Oil OPEX – UKNS Mature Oilfields 4,500
Opex, 80% PE Total Annual Opex (GBP MM)
4,000 3,500 3,000 2,500 2,000 1,500 1,000
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
500 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
▪ GCA estimate based on previous retirement rates, i.e. managed Opex at around US$35/Bbl. 11
The Grim Reaper
Source: AllSeas Website
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
▪ “Delivery of the completed topsides lift and pipe-lay vessel is expected in the second half of 2014, ready for offshore operations early 2015. The jacket lift system will follow later…. In November 2013 AllSeas announced plans to build a second single-lift vessel larger than Pieter Schelte, to be delivered in 2020. It is intended for installation and removal of the very largest existing platforms.” Source: AllSeas Website
▪ AllSeas has not spent €1.3 Bn and are not commissioning this vessel today, without having done market analysis. 12
▪ NB: This will de-risk, rather than reduce costs of, abandonment.
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
Future Possibilities
13
Oil Reserves vs Time
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
Developed: 4,185 MMt
▪ Source: UK Oil & Gas “UK Oil Reserves and Estimated Ultimate Recovery 2014”. ▪ GCA estimate of developed resource production to 2050. 14
Potential – One Scenario 1,400,000
Oil Production (bpd)
1,200,000 1,000,000 800,000 600,000 400,000 200,000
Historical Developed Possible
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
0
▪ DECC 2012 Study: 6 BnBbl of EOR/IOR potential. ▪ 900 MMBbl of approved and yet to be approved heavy oil. 15
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
Challenges
16
Cost ▪ Current Projects: – Capex of US$20 to US$40/Bbl – Opex at US$30 to US$40/Bbl
▪ Current project screening at US$70/Bbl oil price.
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
▪ Competing internationally for investment, shale oil is the current favourite.
17
Scale 45,000 40,000 35,000
£ Million
30,000 25,000
US$100 Oil Effect?
20,000 15,000 10,000 5,000
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
0 2000
2001
2002
2003
E&A
2004
2005
CAPEX
2006
OPEX
2007
2008
2009
Total Income
2010
2011
2012
Source: Oil & Gas UK
▪ To deliver the potential, Capex of the order of US$25Bn/year needed. ▪ Illustration: Gas flood to achieve 5.7 Bnbl incremental recovery means perhaps 20+TCF of HC gas, CO2 or nitrogen, much of which will not be recovered. 18
Retirement Rates 160
Fields in Prod - 80% PE No of Fields / Hubs Operational
140
Hubs in Production - 80% PE
120 100 80 60 40 20 0
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
▪ Opportunities are disappearing fast: implies that new investments may be standalone. ▪ That means higher Capex and Economic Limit/CoP cutoff production rates. 19
Abandonment and Taxes 250 Revenue Tax Opex
200
US$ MM
Abandonment Cost Economic Limit
150
100
50 Tax-Driven CoP 0 1
2
3
4
5
6
7
8 9 Years
10 11 12 13 14 15
Source: UK Treasury
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
▪ Illustrative example – 3 year tax claw-back for abandonment could shorten field life – example of unintended consequences of complex tax rules. ▪ Tax claw-back and Decommissioning Relief Deeds not available to service/utility companies. ▪ Complex allowances intended to stimulate, but in reality are only deferring the inevitable, adding to the fiscal uncertainty. ▪ Oil & Gas tax only about 1% of total UK tax take, reducing and volatile. 20
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
The Wood Review and Government Response
21
Wood Review Observations ▪ The review identifies several market trends that contribute to the current state and concern about the UKCS:
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
– New developments will be completed by 2018 and capital investment is forecasted to drop drastically after that point; – Remaining smaller developments require collaboration between operators in order to achieve infrastructure and marketing efficiencies; – Production efficiency has dropped to approximately 60% from a peak of 80%+; – Exploration is at its lowest point since the early stages of the basin, only 150 MMboe has been discovered over the past 2 years; – Infrastructure is aging and requires both investment and optimization between operators in order to maximize their economic life; – Technology of late life and complex discoveries needs to be incentivized and implemented; – Cost escalation over the last decade has increased development costs dramatically; – Competition in the global marketplace has resulted in operators and the necessary services/technology moving elsewhere with their resources. 22
Key Issues Identified ▪ Operators to Focus on Maximising Economic Recovery – FPSOs vs existing infrastructure
▪ Fiscal Stability consistent with the challenges of Maturity – Allowances well received by industry
▪ Greater Resourced and more proactive Regulator – DECC under-resourced for the challenges
▪ Need for significantly improved asset stewardship – Production efficiency and poor take-up of EOR/IOR
▪ Far greater constructive collaboration between operators – “Overzealous legal and commercial behaviour”
▪ Better implementation of Industry Strategies – UKCS now requires integrated planning and collaboration
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
▪ 29 Action items outlined for the new Regulator, some of which are building on PILOT initiatives ▪ Two critical issues that are addressed in passing within the Review: – The UK is competing for investment internationally – and will find it difficult at 62%, let alone 80% marginal tax rates; and – The need for infrastructure to be operated as a (regulated) utility, as are the gas, telecoms and power grids and offshore pipelines in Norway, GoM and Netherlands. 23
Swift Government Response ▪ Recommendations Accepted. ▪ New Oil and Gas Authority (OGA) created. ▪ Will be based in Aberdeen. ▪ Will have jurisdiction over onshore, offshore including shale. ▪ Seed funding of £5 MM over 5 years provided. ▪ DECC providing bridge support. © 2014 Gaffney, Cline & Associates. All Rights Reserved.
▪ New CEO Appointed – takes position 1st January, 2015. ▪ Staffing due for 2015. 24
© 2014 Gaffney, Cline & Associates. All Rights Reserved.
Synthesis
25
Observations of a Martian ▪ “MER UK” is undefined.
To operators it means maximising post-tax NPV, to HMRC it means maximum tax income. To the UK economy, it should mean maximum barrels recovered (each barrel recovered is potential US$100/80 reduction in balance of payments). Who represents this latter interest?
▪ Much is expected of the new Regulator: cutting the Gordian knot of current commercial and fiscal arrangements carries great risk. Energy Bill 2011 provides the framework for intervention on TPA and costs, but is untested.
▪ The task is URGENT. Staffing the Regulator in 2015 means that reviews © 2014 Gaffney, Cline & Associates. All Rights Reserved.
will not happen till 2016, and material action is unlikely till 2018. Compare with the retirement trend.
▪ Lower oil price makes this all the more urgent.
26
Suggestions ▪ Additional tax burden is no longer appropriate. Review PRT and the Supplementary Charge – this is an industry about to die on it’s feet and the contribution to the overall UK budget is negligible. ▪ All the brown-field, small field, heavy oil and other allowances then fall away. Unnecessarily complex, and just breeds uncertainty in the fiscal regime. ▪ Introduce an Abandonment Fund, tax deductible, as % of net cash flow at ringfence level. Based on annual assessments of abandonment liabilities, current fund value. Will allow non-oil companies to invest in infrastructure. ▪ Grandfather the Decommissioning Deeds. Allow them to become part of the Abandonment Fund. © 2014 Gaffney, Cline & Associates. All Rights Reserved.
▪ This will allow operation of hubs and export routes as regulated utilities, with service level agreements. Separates O&M (tariff) cash flow from oil revenues. ▪ This trades short term loss of tax against longer term CT, Income Tax and VAT receipts.
27
