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Wood Review (Government Response)

Volume 584: debated on Wednesday 16 July 2014

The UK should be proud of its world-class oil and gas industry. It makes a substantial contribution to the economy, supporting around 450,000 jobs and supplying the UK with around half of the oil and gas we use, reducing our reliance on imports. It is vital therefore both for Britain’s energy security and long-term economic outlook that we take positive steps to maximise the economic recovery of our indigenous hydrocarbon reserves. As our carbon plan has shown, Britain will still need significant oil and gas supplies over the next decades, while we decarbonise our economy and transition to a low-carbon economy.

As the North sea enters the next phase of its development, Government have a critical role to play in ensuring the stewardship and regulation of such an important national asset evolves with it. The outlook is bright and investment levels have risen in recent years. However there remain challenges. As stated in my June 2013 statement to Parliament when I commissioned Sir Ian to conduct the review, the UK continental shelf (UKCS) has faced steeply falling levels of production and exploration in recent years as well as declining production efficiency.

Sir Ian reported his findings earlier this year and it is clear that the size of the prize on offer is considerable. The review estimated that full and rapid implementation could deliver 3 to 4 billion barrels of oil equivalent more than would otherwise be recovered over the next 20 years, worth over £200 billion. It is for this reason that I am committed to fully implementing his recommendations as quickly as possible.

Sir Ian made recommendations for both industry and Government and the full impact of his report will not be realised unless industry take up his challenge in equal measure. In particular it will be vital for companies to change the way they work together within fields and between fields to maximise economic recovery. Also in support of this is the need to curb the over-zealous legal and commercial activity which can often increase cost and make co-operation more difficult.

The key policy decisions we have taken are summarised in this statement.

The four main recommendations from Sir Ian’s report are as follows:

That Government and industry should develop and commit to a new strategy for maximising economic recovery from the UK continental shelf (MER UK)

That stewardship of the UK continental shelf (UKCS) should move to a new arm’s length body that is better resourced, and funded by industry

That additional powers should be secured to implement MER UK

The new regulator should work with industry to develop and implement new industry strategies, such as on exploration and decommissioning cost reduction.

A phased approach to implementation

In order to make swift progress, we are taking a phased approach to implementation and we have already achieved a great deal. It has only been a year since I commissioned the review and less than six months since Sir Ian published his recommendations. In that time we have announced that the new oversight body will be called the Oil and Gas Authority (OGA); have determined its structure and that it will be headquartered in Aberdeen; begun recruitment of a world-class CEO to lead and shape the OGA; and have tabled clauses for introduction into the Infrastructure Bill in order to enshrine the MER UK principles into law and provide for a levy-making power to fund the body.

These steps will allow the OGA to operate effectively in shadow form, which could begin as early as autumn 2014. We will continue this momentum to build the OGA so it has the right skills, resources and powers to deal with the challenges facing the UKCS.

Maximising economic recovery from the UKCS (MER UK) principles

Government have tabled amendments to the Infrastructure Bill to place the MER UK principles into statute. Our proposals will ensure that we maximise the economic recovery of petroleum, and licence holders will be required to act in a manner best calculated to give rise to maximising the economic recovery of petroleum from UK waters as a whole, not just that recoverable under their own licences. The clauses also place a requirement on the authority to produce a strategy for enabling the principle objective to be met along with a corresponding duty for the authority, licence holders, owners and operators of production infrastructure to act in accordance with the strategy. The strategy, developed in collaboration between Government, the OGA and industry must be produced within a year of these provisions coming into force and can be updated as necessary.

Initially, the principles will apply to offshore activity, however Government intend that the OGA’s remit should extend to onshore—as well as to the licensing activity for natural gas storage and unloading and carbon dioxide storage—and so, working with the respective industry stakeholders and trade groups, we will look to extend the principles accordingly.

Establishing the Oil and Gas Authority

The establishment of the additional powers the OGA will need to perform its MER UK obligations will require primary legislation which cannot be delivered in the remainder of the current Parliament. The Department of Energy and Climate Change (DECC) will, therefore, in the first instance, and in order to demonstrate pace and its strong commitment to implementing Sir Ian’s recommendations, establish the authority in shadow form as an Executive agency. Our intention is for this to be operational in autumn 2014.

However, Government do not believe that an Executive agency provides an optimum long-term solution. It is our intention therefore to establish the OGA in its final form as a Government company. This will give the authority greater operational independence from Government. As such it will provide a more suitable platform to provide the arm’s length regulatory certainty the industry requires to invest in exploration and production activity to maximise economic recovery from the UK’s oil and gas resources.

DECC will develop the plans for establishing the OGA further in the coming months, working closely with industry and other partners to get the substance and the detail right. We will work both through the interim advisory panel, chaired by Sir Ian Wood and in wider fora, including the industry’s principal trade association, Oil and Gas UK.

Funding the Oil and Gas Authority

Government agree with Sir Ian that the challenge of delivering MER UK requires the OGA to be significantly better resourced than the current equivalent team in DECC. In line with the long-established practice across regulation and service delivery, and to ensure the OGA is not restricted by any future Government funding constraints, the Government consider that, in the long-term, the body should recover its costs from the companies who will benefit from the services of the authority. However, to demonstrate their commitment to the tripartite approach recommended in the review, and help realise the benefits outlined in Sir Ian’s report, Government have committed to contribute £3 million per year for five years beginning in 2016-17 to the running costs of the OGA.

Additional powers and strategies

The Government are committed to ensuring the new authority makes effective use of its existing powers, which in many respects are not inconsiderable, and they will therefore review the full range of current powers to see whether, and if so how, they could be deployed more effectively by a better-resourced regulator. As recommended, the Government will also equip the authority with additional powers to enhance its ability to maximise economic recovery by encouraging and facilitating collaboration and dispute resolution without compromising the incentives for efficiency and innovation achieved by healthy competition.

Government will work closely with industry and other interested parties in the months ahead to undertake this work and ensure we are ready to put legislation on the additional powers before the House in the first Session of the new Parliament.

Once it is established, the OGA will work with industry and Government to develop the sector strategies detailed in the Wood review. As outlined in the 2014 Budget, the Government will task the new authority to review how best to encourage exploration and reduce decommissioning costs as a priority with a view to reporting back its initial findings and recommendations at Budget 2015.

This Government’s commitment to change is clear. We also need an equally strong commitment to change from industry and, from my own contacts with the industry during the Wood review and since, I am very confident indeed that it will pull together and play its part fully in the spirit that Sir Ian has set out.