Scotland's Independent Expert Commission on Oil and Gas: report

8. Technology and Innovation

Key Messages:

• The exploitation of appropriate new technologies is one of the important keys to the future success of the UKCS.
• While new technological advances have made a significant contribution to the UKCS, the level of investment in R&D in the UK has remained consistently and significantly lower than in its main competitor countries.
• It must be recognised and accepted that oil and gas related R&D is not solely the responsibility of the major oil/gas operators.
• Government and industry must work in partnership to improve the international reputation and competitiveness of the indigenous supply chain.

Context

1. Access to the remaining 'yet to find' resources in the UKCS will require significant progress in improving capital, cost and operating efficiencies through focused technology since remaining fields are generally smaller and their resources more difficult to extract.

2. Since the first major discovery at the West Sole gas field was made in 1965, technology development has played a significant role in the growth of the oil and gas industry. As the industry spread out from the relatively shallow waters of the SNS and into deeper waters WofS and the NNS, the engineering challenges grew substantially.

3. Whilst many of the responses to these challenges were incremental, built on existing techniques and technologies, a number of breakthrough technologies were also developed. Amongst these were the now iconic 3D Seismic and Long Reach Horizontal Drilling techniques - without which the story of the UKCS would have been very different.

4. While new technological advances have made a significant contribution to the UKCS, the level of investment in R&D in the UK has remained consistently and significantly lower than in its main competitor countries.

Government approach

5. Government recognises that new technologies play a vital role in Maximising Economic Recovery. However, the Regulator currently has no role in encouraging their development and use by operators. As a consequence the UK Supply Chain suffers from a lack of industry and state R&D support compared to many of its competitors.

6. Past approaches by Government to driving technology and innovation have achieved varying degrees of success. This is mainly a result of:

a. the short-term focus of investors;

b. the scale and financial capacity of the technology developer; and

c. the significant costs that come with the development and application of new technology to drive ultimate recovery within the UKCS.

Box 6 : Investment in R&D

• The former UK Energy Minister, the late Malcolm Wicks, stated in his Report on Energy Security 2009 ^[42] , that:
• " The UK does not compare well with other countries. This is partly a result of the UK not having a major industrial base in the energy sector."
• In 2013 both Scottish Enterprise and the UK Government published information that showed the oil and gas R&D spend across the whole of the UK only amounts to 0.3% of sales. By comparison, it is notable that the main competitor of the UKCS, Norway, has achieved a spend of 4% of sales. ^[43]
• Looking specifically at public sector funded R&D, a report issued by Research Councils UK (' RCUK') in November 2013 stated that "the UK spends relatively little on energy R&D in comparison to international competitors. The resources expended are out of alignment with ambitious energy and climate change policy goals." ^[44]
• This report assessed the R&D budgets reported to the IEA (International Energy Agency) by the UK research councils, key government departments ( DECC, BIS, DfT CLG) and other major funders such as the Energy Technologies Institute ( ETI) and the Technology Strategy Board ( TSB). It did not consider the Devolved Administrations or the former Regional Development Agencies ( RDAs). However, with the exception of Scottish Enterprise, the level of additional funding into oil and gas R&D is likely to have been minimal. Scottish Enterprise R&D spend is around £3 million per annum ^[45] .
• The RCUK report says that the budget for oil and gas R&D in 2012 in the UK was a mere £4 million which was less than half of that spent on coal, and most of the £35 million budget for fossil fuel research is focused on carbon capture and storage ( CCS).
• Overall the UK has fallen back to 19th position in the IEA rankings and 14th within Europe in terms of energy R&D spend per unit of GDP. By comparison, Norway is 6th, spending around double that of the UK ^[46] .

Industry Approach

7. It is difficult to accurately calculate the industrial spend on oil and gas R&D as companies tend to keep these details confidential. However, it is possible to examine the records of the UK's Industry Technology Facilitator ( ITF) which is an organisation owned and funded by the industry (31 major global operators and service companies) to assist in setting up collaborative technology projects.

8. ITF was set up to support the UKCS. Since its inception in 1999, ITF was responsible for launching more than 190 joint industry projects ( JIPs), with a portfolio of around 37 on-going projects and supported by around £16 million direct member investment.

9. However, due to difficulties obtaining funding for projects, it ultimately internationalised many aspects of its operations and set up a number of overseas offices. As a consequence many of these projects involved foreign companies, making it difficult to determine the benefit to the UKCS.

10. As part of their Oil and Gas strategy published in 2013 the UK Government has now committed to " reprioritis(ing) the ITF's focus toward the UKCS". At this stage it is unclear how this might be achieved. This must not mean that the ITF's knowledge of the global industries' technology needs is undervalued.

Future approach

11. First and foremost, it must be recognised that oil and gas related R&D is not solely the responsibility of the major oil/gas operators.

12. Equally, it has to be understood that with the change in the balance between major operators to the considerable crop of smaller operators, the significant private sector funding streams that once supported R&D are no longer as accessible.

13. The exploitation of appropriate new technologies is one of the important keys to the future success of the UKCS. The route to accessing those new technologies can either be through encouraging the application of emerging technologies that offer solutions which the UKCS may benefit from, or through focussed development programmes aimed at solving specific industry needs.

14. The latter will allow for the growth of TVA by commercialising the output from university and/or supply side R&D programmes. The export potential of this output could be significant.

15. There are three fundamental issues to address:

a. the size and scope of the technology challenge;

b. how to obtain industry support for R&D; and

c. how to ensure new technology is able to be properly tested and evaluated.

16. In the context of defining the challenge, delivery can be achieved in two ways:

a. Collaboration: by drawing together the knowledge bases within PILOT, ITF and the new Scottish Oil and Gas Innovation Centre in order to build a coherent view of the key technology needs, from reservoir to export line, critical to the future of the basin as a whole; and

b. Regulation: awarding the new Regulator new powers that require operators as part of their development plan to submit proposals for technologies that could potentially improve the field economic recovery rates.

17. In order to obtain industry support it may ultimately be necessary to develop a carrot and stick approach, consisting of a mix of incentives and obligations written into all future licence agreements.

Future Investment

18. A government driven programme aimed at stimulating supply chain industry investment in R&D, innovation and technology development could deliver a range of positive outcomes. There are particular areas that require the leadership of government to act as a catalyst for investment and which would benefit from the use of licensing and stewardship levers by government to enable progress.

19. Government and the new Regulator must work with the industry at all levels to ensure the UK is at the forefront of the development of technology in both the UKCS and in global markets. This is particularly needed for, and relevant to, the broadened base of investors in the UKCS with smaller new entrants unlikely to have either funds for R&D or access to the onshore drilling and production where new technologies can be tested without the risks of offshore tests.

20. The new Regulator should play a strong role in the development of an R&D strategy to be implemented through the Research Councils, the Scottish Funding Council and other appropriate bodies leading to new technologies and knowledge that can be applied in support of the aims of the industry and Government not just in respect of MER but also in maintaining a healthy indigenous supply chain and therefore reinforcing TVA.

21. In order to part finance this strategy the new Regulator and Government should evaluate the potential for including an R&D commitment element to new licences, potentially as a percentage of the level of investment in a project and other costs, but offset by an R&D tax allowance. This could be similar in operation to the Norwegian system.

Recommendation 1: Government must be the catalyst for investment by the indigenous supply chain through the establishment of R&D and innovation demonstration programmes where optimal national benefit can be obtained.

Centres of Excellence

22. Sustainable global competitiveness needs to be established through the creation of Centres of Excellence in selected areas of strength and value. These centres of excellence need to deliver outputs that achieve industry acknowledgement of UKCS leadership and contribute sustainable value to the economy.

23. The Commission supports the Scottish Oil and Gas Innovation Centre as an example of a centre of excellence that has the means of developing collaborative research projects across and between universities, industry and other research centres.

24. The Commission recommends that this initiative receives appropriate levels of long term financial support which can be used to lever in industrial funding and that it should put in place clear and practical mechanisms for commercialising research results.

Recommendation 2: In support of TVA, Government must expand investment in R&D in oil and gas both directly and through centres of excellence that can facilitate collaboration between operators, the supply chain and Government in relation to critical technology needs.

Technology Testing

25. The testing of new technologies offshore, particularly 'down hole' or 'sub-sea', presents considerable challenges as well as potential rewards. Companies are reluctant to pioneer new technology, creating a culture of a 'race to be second'. This is an issue which must be dealt with as it can greatly impede the progress to the market of some potentially important technologies.

26. According to the UK Government's Oil and Gas strategy paper the time taken to get new technologies from proof of concept to market penetration is said to be faster in Norway than in the UKCS. Scottish Enterprise research suggests that the average time from proof of concept to market penetration in the oil and gas industry worldwide is in the order of 16 years but there is evidence that the UKCS takes significantly longer than this.

27. By contrast, Norway is achieving its technology goals, set out in its OG21 framework, and has successfully accelerated development from proof of concept to market penetration in around 8-10 years.

28. Operators are extremely risk averse when it comes to testing new technologies. Whilst an increasing number of shore-based test facilities are now available live testing remains problematic.

29. Technology trials in a realistic environment are a critical part of the development process. Some trials can be conducted onshore but others will need to be conducted offshore with all the costs and risks that entails.

30. The Commission recommends that the Regulator and Government work with the industry to determine what barriers exist to offshore trials on the UKCS compared to those on the Norwegian Continental Shelf and to work to develop ways of overcoming them.

Recommendation 3: Processes targeting improved technology testing are needed to improve the "time to market" of new technologies.

The Supply Chain

31. Industry representative bodies such as Subsea UK and the Society for Underwater Technology must be encouraged to collaborate more closely with Government departments and agencies involved in promoting exports in order to: share market intelligence, gain a more comprehensive understanding of overseas opportunities and to monitor the reputation of indigenous products and services.

Recommendation 4: Government and industry must work in partnership to improve the international reputation and competitiveness of the indigenous supply chain.