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

Executive Summary

Key messages:

• Securing the long term future of the UKCS
• Creating an internationally competitive fiscal and regulatory framework
• Proactive Stewardship: A Road Map to TVA

Remit and Scope

• The Oil and Gas Expert Commission was appointed by the Scottish Government in advance of the September 2014 referendum.
• The Commission's remit was to consider options for the implementation of the key principles set out in the Scottish Government paper ' Maximising the Return from Oil and Gas in an Independent Scotland'. Those principles are aimed at improving the production profile, and enhancing the climate for investment in the UKCS.
• The Commission has considered its brief to be the maximisation of value, as well as creating the means for assuring the long-term future of the UKCS. It has sought to establish findings which will influence future government policy in the years to come, irrespective of the outcome of the referendum.
• Throughout this report the term UKCS is used to refer to the existing UK Continental Shelf. In the event of a Yes vote in September 2014 all references will apply consistently to the Scottish portion of the existing UKCS and the rUK portion ^[1] .

The Opportunity and the Challenge

• The Oil and Gas industry in the UKCS has reached a critical crossroads. While significant opportunities exist, the scale and imminence of the challenge has not been fully appreciated.
• With complex interdependencies influencing investment decisions in the UKCS, there is some urgency needed to ensure potential investment opportunities are not lost or stranded. Government and industry must act now if they are to overcome this challenge and secure a long-term and sustainable future for the UKCS.
• The Commission's view is that extracting the potential remaining 24 billion barrels of oil equivalent ( Bboe) will generate considerable benefits for the economy and society more widely; representing a major opportunity over the next 50 years.
• In order to realise this opportunity, Government should ensure that the policy approach is appropriate for the changing investment environment. Future discoveries in the UKCS are likely to be smaller in size and more technically challenging, and therefore the balance of risk between industry and Government must be carefully considered.
• It is important that Government takes action now to secure the required investment through creating an internationally competitive fiscal and regulatory framework which ensures stability and predictability. That framework must be sustainable, flexible and responsive to market forces.
• The main challenge is to adapt quickly to the transition of the UKCS from a province where high prospectivity attracted high levels of investment, to one where investment in late-life fields and more technically challenging resources is rewarded by a reasonable rate of return for the industry and for the nation.
• In order to address this challenge the Commission believes not only that there should be a strong focus on Maximising Economic Recovery (' MER' ^[2] ) - but that there should be an over-arching emphasis placed on maximising the overall contribution of the sector to the economy: the Total Value Added (' TVA' ^[3] ).

The Investment Climate

• Investment in UKCS field development is currently at record levels, but exploration activity and production levels are at a record low. There are many challenges to overcome in order to attract long-term and sustained investment in support of the achievement of MER and maximum TVA.
• Government and industry, with some urgency, should recognise the reduced investment intentions and adapt to the market forces currently prevailing in the UKCS and the global oil and gas sector, identifying and addressing the key barriers to investment.
• A targeted policy framework appropriate to the changing commercial environment and maturity of the province is now needed in order to maximise the return from the substantial remaining resources.
• Government should recognise the need for a fundamental change in approach, from one which sought to control access to a sought after resource, to one which seeks proactively to attract investment through creating the right fiscal and regulatory conditions.
• Investment is required in all areas of the industry; exploration, development, production, infrastructure, decommissioning and the supply chain - enabling the development of sustainable capability, skills and innovation.

Stewardship: A Road Map to TVA

• The Commission's view is that there should be a dual focus for future oil and gas policy and stewardship, essentially that policy should be:
  a. built with the explicit aim of Maximising Economic Recovery, and
  b. constructed so that Government and society benefit from the TVA generated by industry.
• The Commission believes that a clear understanding of TVA, and where and how it is generated, will enable Government to make well-informed policy assessments with a view to ensuring that maximum TVA can be achieved.
• The strategy set by Government must ensure that any changes to the fiscal, regulatory or licensing regimes are wholly cognisant not only of the impact on the oil and gas sector directly, but of the potential impact on the overall value to the wider economy.
• The Commission supports the central recommendation of the Wood Review for the creation of a new Regulator to provide more proactive stewardship, and wholly endorse the imperative for swift action made clear within that report. However, the Commission believes that the agenda for the new Regulator must be set within the context of Government's over-arching strategy for achieving maximum TVA.
• The principal recommendation of this report is for Government to produce a Road Map setting out clear policies, and the manner in which the sector will be governed.
• The Road Map must create a new and more positive sentiment, that the UKCS is 'seeking investment and is open for business', and should be produced in the context of a rolling 5 year strategy, staged in line with a comprehensive evaluation of the remaining asset value of the UKCS.
• This Road Map should include actions for the development of the skills, capability, innovation and technology required to achieve an overall increase in the strength and competitiveness of the domestic supply chain.
• As a basis for a new model of proactive stewardship the Road Map must seek to eliminate or mitigate the current impediments to investment and look at actions, structures and changes that are needed to facilitate the achievement of the over-arching objective of delivering maximum TVA.
• Government must set the parameters for the implementation of this strategy in the context of TVA, and take policy responsibility for the delivery of this ultimate aim.

The Fiscal Regime

• Stability and predictability must be central to the fiscal regime in the UKCS. Where the UKCS cannot promise the large opportunities it once could, it must be able to offer a stable and predictable regime - and one which recognises its place in the global market.
• Fiscal policy making has in the past been influenced by the short-term impact on production tax revenues, causing substantial uncertainty with negative effects on investment.
• The optimal fiscal regime should reflect the current and future context of the basin. As such, there is a need to re-assess the combination of tax rates and allowances which will fulfil these requirements.
• To maximise the benefits from the sector and its supply-chain, the future emphasis should be on encouraging long-term sustainable levels of investment, enhancing stability and predictability, and recognising the investment hurdles for investors.
• In the detailed design of the system there should be clear recognition of the significant capital cost associated with developing the remaining fields and incremental projects.
• Allowances should be transparent and predictable early in the evaluation stage of a project, and based on economic rather than physical factors.

Regulation: Governance and Licensing

• The emphasis of future regulation should be on high quality, proactive stewardship. The Commission believes that the new Regulator must utilise a combination of regulatory powers, persuasion and incentives.
• Proactive stewardship by the new Regulator must not only tackle the impediments to investment but also assist Government in ensuring the maximisation of TVA. It should provide advice in relation to the necessary investment in, and development of, skills, technology and innovation.
• There is a need for a change to the way in which oil and gas companies operate within the basin. At a corporate level there must be a shift to a new paradigm of complementarity and mutual advantage.
• The creation of a new culture of enhanced stewardship and collaboration will be a significant and critical step towards creating success, and accessing the potential remaining 24 Bboe or more.
• If voluntary and incentivised stewardship does not deliver, then further licensing obligations and statutory powers for the Regulator should be considered. Any measure should ensure that companies controlling production, and the factors affecting production, do so in a way that supports the achievement of MER and of maximum TVA.

Regulation: Health, Safety and Environment

• The UKCS has established a robust, world-leading health, safety and environmental regulatory regime.
• Government must build on the existing regime for regulation of Health, Safety and Environmental Protection with the continuing objective of making the UKCS the safest place to explore for and produce oil and gas worldwide.
• Health, safety and environmental regulation must be consistent with emergency response arrangements and the statutory requirements of the EU Offshore Safety Directive.

Decommissioning

• Government and the new Regulator should play a central role in developing a strategic approach to decommissioning with the aim of minimising decommissioning costs to the operators and the taxpayer and achieving the maximum economic extension of field life.
• A clear strategy is required to mobilise investment by the supply chain to ensure that technology, capability and capacity is in place, and that the TVA from decommissioning expenditure is optimised.
• To minimise the cost to both operators and the taxpayer, consideration should be given to encouraging a pipeline or cluster of decommissioning projects - creating economies of scale, sharing knowledge and techniques.

Technology and Innovation

• The exploitation of appropriate new technologies is one of the most 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 further improve the international reputation and competitiveness of the indigenous supply chain.

Skills

• A window of opportunity exists to establish a world class generation of new professionals and the future visionary leaders of the oil and gas industry in the UKCS.
• There is an over-emphasis from industry on short term solutions and recruitment strategies to attract already skilled, qualified and experienced personnel, rather than on developing sustainable skills to meet future needs.
• A balanced mix of short, medium and long term objectives is required for sustainable talent and skills development and investment in the UKCS.
• In pursuit of maximum TVA, an assessment of skills capacity in the UKCS must be undertaken and a sustainable skills development plan produced: enhancing the development of an internationally competitive supply chain in the long-term, and ensuring provision of required skills to maximise production in the short to medium term.

Transition

• Regardless of constitutional change, the UKCS is now on the cusp of transformative change by necessity and as a result there are various transitional issues which must be given due consideration.
• This report advocates a change in approach. This change, along with the full implementation of the recommendations within the Wood Review, the EU Offshore Directive and any changes that may occur as a result of the forthcoming Scottish referendum, must be managed and implemented in a way which encourages, and does not impede, investment in the UKCS.
• In order to deliver continuity for the industry, there should be a coherent regulatory approach to the management and implementation of policy, whether under a single or dual jurisdiction, post September 2014. This will require government collaboration with a view to evolving policy which is consistent with achieving maximum TVA, encouraging investment and safeguarding the interests of society and the environment.