Economic Sustainability: Case Studies

Summary of UKCS Resource Stewardship Initiatives

Simon Toole is currently Director Exploration, Licensing and Development in the Energy Group at the Department of Trade and Industry.

Background

The Department of Trade and Industry, DTI's overall aim is to maximise the economic benefit to the UK of its oil and gas resources, taking into account the environmental impact of hydrocarbon development and the need to ensure secure, diverse and sustainable supplies of energy for UK businesses and consumers at competitive prices.

At this stage of maturity of the UK's offshore industry, there are two main sources of oil and gas: those coming from existing developments and those coming from new discoveries. Combined, this determines the limit of reserves that can be recovered.

Figure 15: Three Levers to Maximise the Economic Recovery of Hydrocarbons

The three factors in which action can be taken to maximise the size of this recovery, as illustrated above, are:

1. Increase the size of the resource base being accessed - the key challenges are to use technology to make exploring for new fi elds less risky, to improve development economics and to identify best-practice recovery mechanisms.
2. Ensure that, once found, oil and gas are extracted as efficiently as possible – the key challenges are to develop new fields quickly, to ensure established fields are being driven to their full potential, where necessary adopting new business models.
3. Extend the life of the infrastructure - a key insight is that time is becoming an increasingly critical factor. Small new projects will not be able to justify their own, new infrastructure and will need to utilise what already exists, which must be kept both economically and physically viable.

Exploration – improving access

The focus of the Department in exploration is to ensure that the best companies are licensed to explore and appraise the range of opportunities on the UK Continental Shelf (UKCS), and to bring them forward for development. Licences are usually given to a number of companies in a Joint Venture (JV), under the leadership of a designated Operator. The current approach is to attract a diversity of skilled companies to make sure that possible discoveries are not overlooked and that, once discovered, fields are brought into production quickly.

Exploration focus within PILOT has been to encourage new entrants and further activity, through the following initiatives:

Access to data – industry sponsorship and support of the DEAL website (www.ukdeal.co.uk), which facilitates public access to well and seismic data on all current UK offshore licences. This was supplemented in 2003 with the development of the National Hydrocarbon Data Archive, a repository for the data from relinquished licences

Access to licences – to enhance the licensing process through new Promote and Frontier licensing options alongside Traditional licences, and regular Rounds (within the context of the Strategic Environmental Assessments) that include newly relinquished acreage from the fallow discoveries and blocks processes described below.

Access to infrastructure – a new infrastructure code of practice was launched in 2004, to make access to existing infrastructure easier and help the development of new, smaller discoveries.

The fallow process was launched by PILOT in 2002 with the aim of stimulating drilling and development activity on blocks and discoveries which have seen no activity for four years or more. This has received strong support from industry which has worked with the DTI to enhance the process over the three years of its operation, so now it covers all licences and effectively brings old licences into line with modern terms.

During 2004, a further 67 fallow blocks and 23 fallow discoveries were identified, which require signifi cant activity by the current licensees if they are not to be relinquished. Since 2002, the fallow block process has resulted in new activity, including 45 exploration wells, 12 of which were successful in discovering hydrocarbons. There have also been 16 blocks relinquished and then subsequently re-licensed in the 21st and 22nd Licence Rounds (in 2003 & 2004 respectively). Since 2002 the fallow discoveries process has resulted in 12 extra appraisal wells and 7 fi eld development approvals. Further details can be found on the DTI website http://www.og.dti.gov.uk/upstream/index.htm.

Developments - improving stewardship

The focus of the Department, once a development has been agreed, is to ensure that the Field Development Programme is being followed or modifi ed appropriately as the understanding of the field develops, so as to maximise economic recovery of hydrocarbons. In 2004, the PILOT Brownfields Work Group highlighted the quality of "stewardship" as a key factor in realising the full economic potential of the UKCS. Good stewardship comes down to two key factors:

• That asset owners consistently do the right things to identify and then exploit opportunities
• Assets are in the hands of those with the collective will, relationships and resources to achieve this

In April 2005 the DTI formally introduced a new stewardship review process, to be carried out annually and consisting of a number of stages summarised below.

In the first stage of the work, the DTI will collect and review key metrics on current field management over recent years, including: production, production efficiency, reserves, expenditure, activity and safety performance. The process will be used to focus on around 10% of fields which, for whatever reason, risk failing to achieve their full potential. Individual results will be fed back to all participants.

The second stage of the process will lead to detailed discussions between the DTI, the operator and all the JV partners for those fields selected. These discussions are designed to encourage a fresh look at investment opportunities, which may include a technical audit, to reach agreement on the way forward. In an extreme case they could ultimately lead to the DTI serving a work programme or the operator being replaced. However, good stewardship should equate to attractive economic investment, so in the great majority of cases it is expected that improvement will come from the JV through normal commercial means; perhaps with interest realignment, the introduction of third party investment or, possibly, divestment.

The process will be reviewed after its first trial this year and amended to incorporate feedback. Further details are available on the DTI website, see http://www.og.dti.gov.uk/regulation/guidance/reg_offshore/part6.htm

Figure 16: DTI Annual Stewardship Process