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The future of North Oil & Gas. With fifty successful years for the industry in the basin, how do we plan for sustainable success in the coming decades? We asked more than thirty senior executives for their views. A Sea Change

“Now is the time for everyone to demonstrate leadership to ensure we harness the expertise, imagination and tenacity that has built the UKCS into one of the UK’s greatest industrial success stories.” Dr Andy Samuel, Chief Executive, Oil & Gas Authority

http://www.pwc.co.uk/seachange Foreword

2 PwC – A Sea Change For all of my living years the North It’s clear that leadership is key. How Sea has been producing oil and gas this leadership vision is framed and and making a significant contribution the framework that the industry can to European economies. As the world adopt to maximise the opportunities transitions towards a lower carbon through transformation will be vital - future, what will that contribution look be it as pioneers for new technologies, like in thirty years’ time? embracing and expanding greener solutions or exporting the skills of the The basin has been at an inflexion point more than 400,000 people who work for the last couple of years as it grappled across the North Sea sector. with first rampant cost inflation and then a rapidly declining oil price. More In pulling this report together we have recently the North Sea has witnessed interviewed more than thirty senior an unprecedented level of turmoil. The stakeholders from across the oil and precipitous decline in oil prices, which gas industry in the UK, the started in the summer of 2014, triggered and . Many of the insights and a wave of restructuring and cost solutions captured in this report are the reduction that impacted all companies product of their thoughts. in the basin. Majors, independents, oil service companies – all of them felt the The driver for transformation is the pain as they sought to shed cost, with industry itself. aim is to guide some succumbing to insolvency. the sector through this journey of transformation in order to maximise the Now as oil prices begin to recover, there economic recovery from the basin, as we is a sense that we are finally seeing seek to continue to support the industry light at the end of a very dark and long for decades to come. tunnel. However, while there may be a temptation to see a price recovery as Alison Baker, UK & EMEA the panacea to all ills, the reality is the Oil & Gas Leader, PwC North Sea still has to address a number of fundamental challenges. These range from a fragmented ownership base to endemic cost inefficiencies. This report will highlight some solutions to these issues, including for example the creation of a joint venture vehicle to consolidate smaller and disparate assets under one operator.

More fundamentally however, the energy industry is transforming as we move to a lower carbon world. As one of the more mature basins in the global energy sector how will the North Sea and its constituent stakeholders take a lead in this transformation?

The future of & Gas 3 Executive summary

Set against the backdrop of the Wood Review and “lower for longer” oil prices, the North Sea oil and gas industry is undergoing a significant period of change. And as the pressures to transition to a lower carbon world mount following the COP21 initiative, this may suggest the basin’s days are numbered. Or are they?

We interviewed more than 30 senior stakeholders from the UK, the Netherlands and Norway, across the value chain in the North Sea to gauge their views. This report is the culmination of their insights and views on the state of play in the North Sea, alongside some potential solutions for sustainable success.

The general consensus is that the North Sea does have a future. However, a number of fundamental issues will need to be addressed in the next 24 months if the basin is to avoid a rapid and premature decline.

Insights

• The North Sea is an exciting • Leadership is lacking – the basin prospect play with potentially needs new ideas – it needs disruption 20-30bn boe of undiscovered and change whilst recognising resources – particularly West of the benefit of the wisdom and , the Atlantic Margin and on experience that has gone before; the UKCS/NCS border; • I t’s been said many times that it’s • The window of opportunity to essential to attack the cost base effect change is getting smaller of the North Sea and ensure cost all the time. According to some efficiency is embedded irrespective respondents the basin has some 24 of the vagaries of the oil price; months to turn around performance. Time is of the essence if a suite of • M&A activity has stalled due to solutions can be deployed to rescue a number of factors (including the the basin; decommissioning liability issue, unnecessary complexity and lack of • Significant progress to support funding). Despite these obstacles, the North Sea in the UK has been deals can be and have been done made including the Wood Review, through innovative solutions to the establishing of the Oil and Gas these challenges; Authority, favourable changes in taxation – but there is more still • In the UK, low carbon was not top to do; of mind for industry participants as they focus on cost reduction. • There is a recognition that In contrast, the responses from collaboration is important, but the Netherlands reflected a sector not at any price – there is a need to already planning an expansion of recognise mutual benefit – perhaps renewables post decommissioning. a need to simply “work together better” (even though this goes against the ingrained culture of the basin, and that must change);

4 PwC – A Sea Change “The North Sea is here to stay and is alive and kicking. The people who will turn off the lights in the Norwegian sector haven’t even been born yet.” Eirik Waerness, Chief Economist, Statoil

Solutions

• C apital is vital for the future and • C ollaboration is an over • Leadership is a vital component different kinds of capital are needed used word, particularly in relation to too – recognising the importance across the life cycle. Innovations the North Sea – the key is ensuring of our global centre of excellence such as consortium financing, where there is real mutual benefit for in , and other regional counterparty risk is collective, could all parties. A salient example centres such as , and build an area or asset approach to could be the creation of a “super their true potential, as well as the a project rather than a company JV” which consolidates smaller and economic benefit for the are focused one. Government fragmented assets under one vital. Additionally nurturing the establishing clear support around operator. Such a JV would boast talent of the future to drive those decommissioning could also scale for cost efficiency and ensure a truly transformative changes, are make a huge difference to smaller better bargaining position vis-à-vis key traits of real leadership; in the operators – a decommissioning suppliers. This would also enable industry, operators and the supply guarantee scheme to lessen the a more coordinated approach to chain will need to show leadership; burden of abandonment letters of the decommissioning of the asset credit for example; pool. Additionally, this would be a • Finally, the elephant in the room fantastic opportunity for the kind is decommissioning but turning • T here is a real need for a of consortium based approach to this to a positive could provide a “North Sea champion” – financing mentioned earlier; further extension to the future leading the way in innovation, best by maximising efficiency from in class working and cooperation. • Government and regulators late life assets and exporting skill And the mindset of the basin needs across the basin have a role sets. Moreover, aligning our to change – truly embedding the to play – from clearly articulating decommissioning planning to the notion of working together for their vision for the future to transformation journey towards mutual risk/reward. Cost efficiency signposting the way ahead a lower carbon future would is paramount and goes beyond cost on topics such as infrastructure ensure a seamless transition and reduction, especially when combined ownership, encouragement for secure our energy future. with a reduction in complexity and a exploration, decommissioning and leaner way of operating; the transition to low carbon. They all need to set a blueprint for the future;

The future of North Sea Oil & Gas 5 The North Sea – 50 years and counting

Since the UK Act Whilst major discoveries may be less came into force in 1964, we have seen frequent now than in the early days of more than 4,000 wells drilled at a cost the basin, the near term future of the in excess of £50bn and more than 45bn North Sea is assured with large projects boe produced to date. Depending on such as Clair Ridge, Kraken, Catcher, who you speak to, there is suspected to Mariner, Laggan-Tormore, the Quad be somewhere in the region of 20-30bn 204 (Schiehallion) redevelopment and boe of resources remaining and still the giant Johann Sverdrup development to be exploited. Considering the last near the Norwegian Continental Shelf number, it is no surprise that all other border with the UK Continental things being equal, the future of the Shelf (UKCS). basin can be measured in decades. And that does not even take into account It is hoped that the introduction of new what might be achievable with advances basin wide seismic may lead to more in technology and innovation, as we discoveries and surveys the potential seek to maximise the economic recovery of West of Shetland and alternate play from the basin. types, such as fractured basement reservoirs, has still to be fully exploited. From first gas at West Sole in 1967 and first oil at Argyll & Duncan in 1975, we In this report, as we have done with have certainly come a long way – there previous publications such as Northern are now some 300 platforms operated by Lights1, we will take a look at the some 75 different companies and more North Sea in more detail and ask some than 1,500 licences. fundamental questions:

And despite, several oil price crashes, • What has the industry done well? most recently in 2014, the basin has • What works and what needs generated in excess of £300bn to the UK a rethink? Exchequer and supports a workforce of more than 350,000 in the UK alone. • And how can we make those real, dynamic changes that will continue to transform the future of the basin for the better?

“The next ten years will be very different from where we are now – market dynamics are changing and the North Sea will need to evolve and adapt to those changes.” Paul de Leeuw, Robert Gordon University Innovation Centre

6 PwC – A Sea Change 1 To keep up to date with the latest developmentsand insights, follow @PwC_Scotland on Twitter or visit http://pwc.blogs.com/scotland/ Our report – what we did and why

The North Sea has reached a fork in the Figure 1 As to the question whether the North road, which direction we follow will Profile of Respondents Interviewed by Segment Sea had a future more than half of those depend on what action we take and how interviewed felt it did (as illustrated in quickly we do it. Figure 2).

There is no doubt that commitments Government / Independent And this does not perhaps tell the full Regulator 11% Operator 24% made by national governments at COP21 story – many respondents who replied in Paris signal an intention to cut down “terminal decline” were talking in the on hydrocarbons and move towards a Other Total literal sense of a declining oil basin, 19% respondents cleaner and greener future. But, and it is which is a fact. The key is how we a big but, that transition will not happen 37 manage that decline for the greater good overnight and we will need to bridge the Financial Major of all stakeholders in the basin. gap until such times as those renewable Services 5% Operator 22% alternatives can compete in scale with Trade Industry In terms of measurement of optimism, their hydrocarbon ancestors. Organisation 5% there was a significant element of sitting OFS 14% on the fence – neither overly optimistic And, to continue producing competitively nor overly pessimistic (as illustrated from the North Sea in particular, it is Our research involved 37 face to face in Figure 3). The view was that a lot clear that some transformative changes interviews, with a broad cross section of depended on making real, transformative are required. interested parties (see Figure 1). and sustainable change over the medium term, underpinned by a sense that we With this premise in mind, we sought And the general consensus was that the need to start taking those actions now. to interview senior stakeholders from North Sea still has a future, despite the Indeed some commented that the time across the industry and in the UK, high operating costs and impact of lower for change was four or five years ago. Netherlands and Norway to find out what oil prices. their concerns are, but more importantly, how they believe we can transform the North Sea to meet our needs and bridge that gap to a lower carbon future.

Key findings from interviews (all respondents from UK, Netherlands and Norway)

Figure 2 Figure 3 “This is the age of Responses about the Future of the North Sea Profile of Respondents by Degree of Optimism Regarding the Future of the North Sea hydrocarbon man and it still has a while

With a future Optimistic to go.”

58% 5 3% Jeremy Cresswell, Energy Editor, Press & Journal

4 34% Terminal 22% Decline

52% 20% 3 Other

2 11%

1 0% Pessimistic 0 10 20 30 40 50 60

The future of North Sea Oil & Gas 7 Insights

Setting the scene It is clear that the industry as a whole example of the kind of success which – the Wood Review has been successful in enacting at can be had. As for the Dutch sector, The Wood Review was published in least some of those recommendations. there is still gas potential to exploit in 2014, before the current “lower for HM Treasury has made step change the short term, with an expectation longer” oil price situation occurred. improvements to the fiscal structure the basin can offer opportunities The review recognised there were some in recent times. The taxation issue for the renewables sector once fundamental issues with the UKCS in particular, whilst not necessarily decommissioning gathers momentum. which needed to be addressed to ensure impacting too many companies in the that we were able to maximise the current climate, sets the right tone by There is also real recognition that the economic recovery from the basin. reducing the tax rate and creating a basin has much to offer in terms of a The key findings of Wood were: new investment allowance. The Oil generally attractive fiscal regime, low & Gas Authority (OGA) has also been geopolitical risk, an excellent supply • There is a need for more established as the regulator aiming chain and a world leading centre of collaboration and more proactive to shape and guide the future of the excellence in Aberdeen (in addition and involved stewardship; industry. to other regional hubs of technical expertise across the UK). • HM Treasury should continue to With these key recommendations build on the steps already taken in mind, we make the following But, as time goes on, the materiality of (e.g. the creation of brownfield and observations following our review: the opportunity will undoubtedly lessen new field allowances) to incentivise and change – what may seem major future recovery; There is still significant opportunities to the independents will potential in the North Sea become less significant for the majors. • The Department of Energy & Genuine excitement exists among This will be an inevitable evolution (DECC) should: operators that there are opportunities to for the basin and consequently the create a new arm’s length exploit, such as tight gas in the northern investment framework for the basin will regulatory body; provide it with a North Sea. There are new plays too, need to reflect this dynamic. number of additional powers and for example Hurricane Energy has capacity; task it with developing discovered more than 400m bbls in the and implementing, with industry, fractured basement reservoirs of West strategies in key areas (exploration, of Shetland. infrastructure etc); There is also the “uncharted territory” • I ndustry must make a series of of the Atlantic Margin to explore, as well commitments (co-operation as the “border” region between UKCS/ in achieving effective field NCS where Johann Sverdrup is a recent cluster developments, sharing infrastructure, greater asset stewardship etc.) and will be held to account by the new regulator.

8 PwC – A Sea Change The window of opportunity for Report card – some progress but “stick” approach of leadership would change is getting smaller we could do better not be effective, whereas others felt Whilst many believe in the future As mentioned earlier, the Wood Review there was a need to name and shame potential of the basin, this is tempered stressed the need for the government inappropriate behaviours by specific with the view that the window of and the regulator to work for the greater sector participants. What was common, opportunity to take advantage of that good of the basin, encouraging new nevertheless, was the view that the potential, is short and closing. investment and maintaining a OGA’s number one focus has to be There is a sense of urgency in the stable regime. shaping and changing the mindset industry, a feeling the sector really has and behaviours of the industry to meet only one more cycle left and one last The recent UK Government fiscal the challenges of transformation into wave of success. Moreover, the clock is measures, which more than halved the the future. ticking as to when these changes need to supplementary charge and effectively be implemented before we see the North abolished PRT ( Revenue Moreover, there was a common view Sea decline at a far greater rate of knots Tax) were roundly praised by industry. among operators and oil services than it should do. Nevertheless, given the low oil price that the Government approach is not there are few companies paying tax in integrated – different agendas exist However, that all said, if managed the short term and as such the fiscal between DECC, OGA and the Treasury correctly, the North Sea can still provide impact has been limited. Additionally, and more needs to be done to align a few more decades of production the news of further seismic surveys has those agendas, as well as ensuring and activity. been widely applauded by the sector. alignment to the needs of the industry from small oil services companies all And a key factor in that is addressing The introduction of the Oil & Gas the way through to the super majors. the issue of fragmentation (particularly Authority has been welcomed. However, And that alignment is best served by in the UK sector) – there is a consensus views varied across the board as to ensuring a wide range of skills and view that there are too many players its effectiveness thus far and the experience across the value stream. with differing viewpoints which style of leadership demonstrated. For At present for example, oilfield services can hinder progress. Furthermore, example, some operators felt that the companies feel there is too much focus fragmentation can be a barrier to the on the operators and too much “” efficient running of the basin. Another influence in terms of how they work and consequence of this is the impact on how they act – oil services need a voice. asset integrity which is in decline in some places and low oil prices could mean less attention is being paid to infrastructure. This may result in leaving assets stranded with no exit routes for the hydrocarbons.

The importance of maintaining and managing infrastructure and infrastructure hubs cannot be underestimated in relation to security of supply and health and safety.

“This is a basin that still offers significant opportunities for all types of companies and it’s this diversity that will be key to its success.”

Deirdre Michie, Chief Executive, Oil & Gas UK

The future of North Sea Oil & Gas 9 Collaboration remains important – but not at any cost “Collaboration and complementarity have been around Underpinning Wood, was the since 2011, but we haven’t seen radical changes in working encouragement for industry to relationships, cost efficiency, or indeed recognition of where work together better – the word “collaboration” is often used, but it is competition has its place, and complementarity clear that this is a word which is not has its role.” generally welcomed by the industry. Dr Marcus Richards, Senior Industry Executive The original principles of the Joint Operating Agreement should still apply and companies need to find a way to work together that engenders trust and honesty, as well as working smartly From smaller companies there was together in a mutually beneficial way a feeling that something needs to be for the greater good of the project. done to encourage new ideas and new Addressing that inherent lack of trust entrants – new ways of working together and effective working relationships in which benefit all and ensure that the, general across the industry, is vital in oftentimes adversarial relationship the transformation journey. between operators and oil services, That collaboration, or co-operation if does not revert to type once prices start you prefer, needs to apply across the to recover. value chain with each element being clear on how their contribution benefits This relationship between operators themselves and others. And it is vital and oil services, sometimes described that we do not just collaborate or as ‘pugilistic’ by those interviewed, cooperate for the sake of it – players’ first was commented on from different focus has to be on cost efficiency and the . Some of the operators felt oil understanding that they are running a service companies were too focused business to make money. on “unrealistic” margins. This meant escalating costs for operators in periods Beyond that, efforts to “collaborate” of buoyant oil prices. Conversely, in have not been widely successful and periods of lower prices, operators have been borne more out of necessity, typically discount oil services rates in for example sharing helicopter drops an aggressive manner. As for service to cut costs, than out of a real desire to providers, several felt in the current work together in a positive way. Premier environment of low oil prices they were Oil recently announced its intent demonstrating the required flexibility with other several North Sea players to price contracts appropriately taking to merge parts of their operations, into account the cashflow challenges including logistics, procurement and of operators (by offering, for example, finance departments. This may become deferred compensation options). a template for future operations in the region.

10 PwC – A Sea Change Follow the leader There is no doubt that the basin would never have got to where it now is without solid leadership but there is a feeling that there is a time for a changing of the guard.

Leadership with new ideas and thinking outside the box is needed – innovators, change drivers and disruptors are key to the longer term prosperity of the basin. That said, much like the sensei, this needs to be combined with wisdom and experience.

Large operators tend to export their best talent to more frontier basins, and those in the North Sea, whilst excellent at the management of existing assets may be less adept at innovation and bringing in the new thinking that is needed to drive the future.

This is particularly true when it comes to decommissioning. There is a real danger that a general level of inaction and focus on cost reduction could lead to a loss of talent and therefore a need to import decommissioning skills. As a result, North Sea players could miss the opportunity to become the global leaders in decommissioning, diversifying their offering away from a traditional focus on production to one of the potential growth areas of the future.

The future of North Sea Oil & Gas 11 “All the signs were there before prices dived. Everyone was taking their cut. There was a capital efficiency problem. The fundamental issue is ensuring that the cost base is attacked forever and we don’t revert to past behaviours.” Andrew Hockey, Non-Executive Director, Fairfield Energy

Cost efficiency needs to be From a supply chain perspective, there From a cost efficiency perspective there central to business operations was focus on increasing margins and are two real fundamental questions There is no doubt that, compared with no real incentive to participate in the which need to be addressed: many other basins around the world, risk equation, and as a result costs the North Sea is a high cost operating spiralled, particularly for rig day rates 1. How much of cost reduction to area (see Figure 4) but, during our and support vessels. It is worth pointing date is sustainable? interviews, it was widely recognised out that the high rig demand at the that much of this was self-inflicted. As top of the oil price resulted in a large 2. How much is actually just an industry, we knew that there was number of new rigs being produced, coincidental, or “kicking the can a cost efficiency problem in the North which has now led to a distortion in the down the road?” Sea long before prices crashed – even rig market. And as market conditions at US$110/bbl it was obvious. What continue to stagnate, and operators the drop in price has done has been to continually review their cost base, there accelerate the realisation of the problem will inevitably be further consolidation and its impact and provide additional in the supply chain, thereby reducing stimulus for changing things as soon as choice and potentially increasing costs we can. as things improve.

To some extent, operators have, in the past, abdicated their responsibility on Figure 4 cost management to the supply chain, Average Offshore Breakeven Oi Price (Selected Countries) as industry has shifted to outsourcing, and use of sub-contractors has $ Current Brent price increased complexity.

Angola Moreover, the basin suffered from unrealistic salary expectations. High oil prices masked the inefficiency of paying over the odds in a sellers’ market and Norway skills that were in demand were able to command top dollar salaries from the highest bidder.

Brazil At current oil price, production economics are US challenging in the UK

UK

Indonesia

Mexico Source: Rystad Energy; PwC Strategy & US$/bbl $0 $20 $40 $60 $80 $100 $120 Research

12 PwC – A Sea Change “It takes too long to get stuff done in the North Sea so we need to facilitate a reorganisation to align interests better between the various stakeholders or face collapse – we need to consolidate and rationalise as the place has become too fragmented.”

Tony -Walker, Executive Chairman, Serica Energy

To deal or not to deal… Again, the Serica deal with BP was an However, it is recognised that for a truly that is the question example of what can be achieved. In joined up approach to energy, we need A specific area of concern, particularly this case decommissioning costs were to ensure the basin has a clear roadmap as some of the majors seek to exit the met by BP up to a maximum fixed level that will take it from a hydrocarbon North Sea basin, is the complexity of to reflect estimated costs inflated with world into a low carbon future, thereby actually getting a deal done – this can RPI, with Serica being responsible for paving the way of a smooth transition be extremely time consuming and often any costs above that level and sharing in for the UK. mired in red tape and legalese. One any savings. example of this was the deal Serica Furthermore, the transition to a low Energy did to acquire an 18% interest Underlying all of this of course is access carbon world carries with it a great in Erskine from BP. This was a relatively to capital – you need funding, in a lot weight of public expectation, therefore small transaction, with a consideration of cases, to get a deal done and there is it is incumbent on the North Sea oil and of around US$13m, however, it still concern that a number of banks have gas industry to find a way to proactively took a year to complete. Clearly this retreated from the sector, and the North contribute to the debate and the corresponds with our previous point Sea in particular. Often this kind of forward planning. around recognising that what is material behaviour tends to be cyclical and they for one company may be noise level are likely to return when conditions The Dutch perspective is rather for another and the latter view can be improve, but this does not help matters different. There was a feeling that the detrimental in completing a deal quickly near term where the M&A market is in a industry was moving more quickly and cleanly with the right level of focus. state of inertia. towards decommissioning over the next five to fifteen years. As a result the Another factor impacting deal The transition to low carbon focus is more on maximising revenues completion is the question of the Perhaps surprisingly (or not), many of from hydrocarbons to fund renewable decommissioning liability. This has our respondents felt that the prospect energy projects in the basin, such been covered in many recent reports, of a low carbon future was not on the as wind farms and tidal initiatives. not least our own blog series on agenda in the UK. Their focus remains Moreover, there is an expectation that decommissioning2, but the fact remains primarily on cost reduction with a the decommissioning skills developed that concluding a mutually beneficial view to maximising economic recovery in this sector can be exported to other approach to this is time consuming from the basin. That said, there is a mature basins in the future. and can hamper deals – it is unfair to recognition of the importance of gas expect a small operator to take the as a bridging fuel in the low carbon burden when the larger players have transition, and hence a greater focus on extracted most of the economic value. gas may be required. Moreover, it is worth noting new entrants will not obtain a tax deduction for decommissioning, as they will not have the same tax history as long term incumbents.

2 Look at pwc.co.uk/energy_spotlight The future of North Sea Oil & Gas 13 In our interviews we asked respondents ‘Access to Capital’ was universally The Way to identify which themes were ranked the most important issue in fundamental to transforming the North the North Sea, alongside ‘Technology Forward Over Sea basin over the next 5-15 years. & Innovation’. ‘Collaboration’ and ‘Government’ were equally ranked in Of the choices we discussed with second place. the Next our interviewees, the following were identified as key to the future Perhaps more interesting were the 5-15 Years transformation of the basin: comments made around these topics and the sub themes emerging from Interestingly from the UK perspective, our interviews. ‘Decommissioning’ and ‘Fiscal Stimulation’ were considered noticeably less important than the other themes. Given the immediate challenges facing the basin, decommissioning was considered somewhat too distant an issue to address and with low oil prices, fiscal measures were considered less relevant.

Figure 5 Top Themes for North Sea Identified by UK Respondents

Technology & Innovation Rank 1

Access to Capital Rank 1

Collaboration Rank 2

Government / Regulator Rank 2

Talent & Leadership

Decommissioning

Fiscal Stimulation

Other

Low Carbon

0246810 12 14 16

Frequency of mentions

14 PwC – A Sea Change Access to Capital… Nevertheless what is evident is the …possible solutions a little context need for different kinds of capital: Access to capital was identified as Consideration of consortium financing the number one factor affecting the • Equity to encourage activity to with collective counterparty risk transformation of the North Sea. fund exploration; Clearly without capital there will be • The risk is shared among the joint no investment in any of the projects, • Bond and capital market financing venture partners and financing is initiatives and actions required to to fund ongoing activities of provided on an overall basis; sustain the future of the basin. producing companies; • The attraction of this could be that Given the diverse funding requirements • As for the traditional reserves based banks might be able to reduce their of players in the North Sea, there is a lending (RBL) market place, this has exposure to a particular area by need to reinvigorate the capital profile of been hampered by its reliance on a providing less on aggregate to the the sector, to encourage new investment discounted oil price – projects which consortium, whereas the consortium and enable the transformation journey. are borderline economic may not may be able to attract a syndicate therefore attract RBL financing and financing approach rather than During the interview process, alternatives must be sought; reliance on one institution; respondents noted that as oil prices had fallen, several institutions and • S imilarly, covenant based financing • The downside is that banks may rate traditional providers of capital is under pressure due to the low the risk based on the lowest common had retreated from the basin. As a oil price and we have seen several denominator and this would need to consequence there has been inertia examples of companies renegotiating be addressed. in terms of funding new projects and their covenant positions in order to new deals. A degree of nervousness has continue to trade. The Government should consider entered the markets following several setting up a decommissioning fund insolvencies across the sector which is Beyond this, decommissioning places a or a guarantee scheme which helps impacting availability of funding. That large burden on the capital availability smaller companies cover their said, larger companies with stronger picture, particularly for smaller letter of credit requirements for balance sheets and greater diversity in companies who must provide a letter of decommissioning their asset base, found access to capital credit to cover their share of the liability. less problematic so long as the project • In this case the Government would economics were robust. Against this backdrop of diverse funding effectively underwrite the letter of requirements, respondents highlighted credit based on contributions to the a number of capital options to explore fund. Those contributions might be going forward: based on economic value extracted from a field, for instance

Risk

“The whole basin has a history of seeing challenges and overcoming challenges. And as before operators, partners and their supply chain are going to have to work together to sustainably answer these challenges.” Ben Taylor, Country Commercial Lead – UK & , Shell

The future of North Sea Oil & Gas 15 Technology & Innovation… • Reduce complexity: specifically for A salient example is the automotive a little context oil services providers they need sector where the industry recovered During the interviews, ‘Technology & to consider an integrated service from a devastating crisis and followed Innovation’ was equally identified as the offering for all phases of project work a path of shared technology platforms number one factor in enabling the future with reduced interfaces and hence and joint venture arrangements, and transformation of the basin. ‘Technology reduced costs. More broadly all witnessed the arrival of new entrants & Innovation’ helps differentiate us from industry participants need to focus such as Tesla. other basins and enhance economic on a ‘simpler North Sea’ where there recovery. And this theme is not just is more consolidated ownership, Moreover, the industry can learn lessons about inventing and deploying new greater clarity on key hubs and from other low margin industries tools. It is about inventing new and strong industry focus on maximising and LEAN manufacturing processes, better ways of doing business – ways economic recovery; simplifying processes, reducing waste which can make the industry leaner, and red tape. Simplification is vital – more efficient and fit for the future. • Leverage ‘big data’ better: there has the industry has managed to make the been much talk about the use of simple, highly complex and tailored. …possible solutions technology to reduce costs. Digital From our conversations a number of oil fields, unmanned platforms and And as well as looking outside of the ideas were generated: more broadly the use of ‘big data’ industry, we can also look to other have been widely referenced but basins - this means learning the lessons • There is a need for a North Sea industry wide adoption of these from other mature basins around the Champion: who is the company or technologies has been mixed. There world in order to realign cost structures innovator of the future who will lead is a large prize to be had in using and how people collaborate, innovate the way in transformation, best in existing information much better and work together. This requires a class working and cooperation? to plan logistics, drive inventory fundamental change in relationships efficiency and to decide where best between oil and gas companies and the • I ntroduce a new mind set of working to drill. Managed effectively, the service sector for the basin to operate together: truly embed the notion data could be a driver for more in a different way and the recognition of working together, identifying collaborative working. that the players are changing with an the mutual benefits and shared increasing focus on small to medium risk/reward rather than simply All easier said than done perhaps. size companies. collaborating for the sake of it; And yes much of this might have been said already but it is definitely The industry is in need of disruption • E mbed an attitude that focuses on worth reiterating. – new entrants with new ideas about cost efficiency: one step further how to work. There has previously on from cost reduction, seeking to In particular, in early 2015, PwC issued been a “we’ve always done it this way” ensure that the cost base remains a report covering seven fundamental approach – and the sector needs to manageable, efficient and does steps to secure the future of the embrace these disruptors rather than not spiral out of control once UKCS (‘Seven fundamentals to drive pushing back in order to innovate and prices recover; excellence in oil and gas operations3’). re-invent itself for the future. These steps are still relevant today, and, in particular, the notion of learning lessons from other industries is a vital step in the self-medication required. The industry needs to look outside and take a step back – view other industries – in order to re-invent itself.

Collaboration

NS Cost complexity Champ

16 PwC – A Sea Change 3 Look at www.pwc.co.uk/industries/oil-gas/insights/seven-fundamentals-to-drive-excellence-oil-gas-operations Collaboration…a little context from coordinated decommissioning. Collaboration was also identified as Furthermore, such a consolidation a key theme in our interviews. That would enable restructuring of said, whether you call it collaboration, operational and management cooperation or working together, the organisations for operators. key fact remains that this needs to be Moreover, this approach will cooperation that is for the benefit of all encourage technical innovation and parties to the transaction, not just for help establish what is core to late life the sake of it. operations and decommissioning;

…possible solutions • A similar approach can also be Aside from simply working together, applied to financing – consider there could be other ways of making a consortium financing / collective real step change in cooperation, counterparty risk, as mentioned in for example: the earlier ‘Access to Capital’ section, which focus attention on area • Establish a joint venture vehicle based outcomes rather than asset that consolidates smaller assets based ones. of multiple operators under one sole operator. This would give the investment vehicle the scale to deliver cost efficiencies that prove elusive to smaller, more fragmented assets. Collectively, the owners can negotiate more effectively with the authorities and suppliers, as well as the Government. The biggest barrier for owners from joining together has been in valuing the trade- off between size of the potential decommissioning liability and risk- based value from the assets. A neutral party with an acceptable methodology that produces a schedule of relative shares is potentially the best way to make progress on this. There are a number of known synergies on platforms and wells in terms of supply costs (we estimate 10% to 15% of current cost base). Similar savings could come

The future of North Sea Oil & Gas 17 Government and Regulator… a little context …possible solutions Many respondents in our interviews The majority of our respondents recognised the positive contributions emphasised the necessity for the made by the Government and the Government and the regulator to set regulator in the UK North Sea for the vision and scope for the future of example. The Government was the North Sea. Countries such as Saudi applauded for its decision to lower tax Arabia and Norway have taken a long rates for the North Sea in the recent term view on the future of oil and budget. The OGA was lauded for how their country will evolve over the helping draft the Maximising Economic medium to long term. The UK similarly Recovery (MER UK) strategy, securing needs to set what the end game for the £40 million of Government funding to North Sea will be. shoot new seismic over frontier areas, with the data now available to industry, As part of this visioning piece there are plus the introduction of more flexible several key elements including: licence terms ahead of the upcoming 29th licensing round. OGA teams have • T he need to envisage what the also intervened to help operators solve sector will look like in 10 years to set commercial problems that might once the blueprint; have gone unresolved. Similarly, the OGA helped create the MER UK Forum • The vision needs to be holistic taking which replaced the PILOT programme into account offshore and onshore oil and Oil and Gas Industry Council. and gas in the UK and how this feeds Whilst in the Netherlands, the regulator into a low carbon future (such as is seen as being more progressive there perhaps emphasising the preferential is still scope for a wider view of the fiscal treatment of gas production energy journey, from hydrocarbons over oil); through to renewables. • A nd this vision needs to be underpinned by Government agency alignment for the greater good of the basin.

18 PwC – A Sea Change Beyond the vision and the blueprint, there are probably three key areas where the industry is keen for the Government and the regulator to take a more active role:

Infrastructure Exploration Decommissioning

Looking at these in turn;

Decommissioning / Infrastructure Exploration • Government should become an • In the UK North Sea the Government • Incentivising exploration in the equity player in decommissioning needs to address the infrastructure UK North Sea will be fundamental and show willingness to take on risk ownership recognising the to ensuring the medium term and cost for decommissioning. If the importance of infrastructure hubs sustainability of the basin. Norway Government assumes a degree of risk to . The Government is typically held up as a with the majors, independents can will need to work closely with where tax measures were introduced focus on squeezing out the last drops industry. However if there is discord to stimulate more exploration. of oil from the North Sea; the OGA will need to step in and take Perhaps for the UK a package of the lead; smaller scale measures including tax • T he Government should consider and regulation could be considered setting up a decommissioning to reduce costs; fund or a guarantee scheme which • The aim should be to encourage helps smaller companies cover operators to farm out the • Making more 3D seismic available their letter of credit requirements ownership and the maintenance to update old data will further for decommissioning; of infrastructure to a third party, enhance exploration opportunities allowing the operators to focus on whilst reducing the cost burden • A n alternative option would reservoir development; on explorers. be to establish a Decom plc – a Government owned vehicle which • Infrastructure could be run and acquires late life assets at zero cost owned by a third party and/or and manages the decommissioning, nationalised. The end goal would be paid for by the operators; to establish a ‘National Grid’ model for North Sea pipelines and hubs • F inally, over the long term the where operators would pay a tariff to Government should focus on the the owner; need to develop a transferable, exportable and scalable skill set • The infrastructure model can around decommissioning which be rolled out to include having a can secure the future of the UK national shared pool of critical services industry. equipment such as drilling units, heavy lifters, and develop a UK Offshore Equipment plc, Government backed entity, with tariffs which are competitive and encourage their use.

The future of North Sea Oil & Gas 19 Leadership…a little context …possible solutions • The sector also needs a small Underpinning all of the messages of It was difficult to quantify what our handful of companies to take this report is the theme of ‘Leadership’ respondents shared about their thoughts the lead and facilitate this - the industry needs change drivers on leadership going forward but there transformation of the basin. Premier in leadership roles – innovators, was a broad and common sentiment Oil’s leadership in floating the entrepreneurs and disruptors. And, on what those elements of leadership merging of operations is one small more importantly, it is vital that these should encompass, namely: example. This level of leadership leaders are not drowning in “big needs to replicated across the whole oil” behaviours, rather that they are • In the UK, industry and Government basin. Moreover, a new way of aligned to the materiality concept need to do a better job in explaining thinking is required – one that is discussed earlier. how the North Sea benefits the not bound by the traditions of the national economy, so attracting new past. To some extent, a new entrant There is a real concern that the current talent will be easier; with expertise from another sector round of redundancies could cause a might be better placed to militate for leakage of talent out of the industry. • It is equally important that the this change; Today’s talent are tomorrow’s leaders future role of North Sea is clearly and at this stage the industry cannot articulated in the context of a low • Oil services also have a major afford another big crew change as it carbon future as this will be critical leadership role to play with regards heads towards its most transformative in attracting a younger generation to the overall transformation of years – maximising economic recovery, of talent with a very different the basin. There is an expectation into late life decommissioning and perspective from the generation that mainly operators will drive the low carbon. currently operating in the North Sea; change agenda. However, given the talent and innovation prevalent in The industry needs to find new ways the supply chain, these firms should of incentivising and retaining talent play a bigger part. through the cycle which do not cause costs to spiral once again.

Transform

Real Leadership

Economic Nurture benefit talent

20 PwC – A Sea Change “There is a dearth of good leadership in the North Sea. Good leadership is not just about being technical it is also about being entrepreneurial to turn something into a money making business. We have become very bureaucratic and process driven.”

Francis Gugen, Chairman, Chrysaor

The future of North Sea Oil & Gas 21 The Dutch Sector of the North Sea – Summary Findings

Our Dutch respondents identified ‘Collaboration’ as the number one theme, with ‘Technology & Innovation’ and ‘Government & Regulator’ in equal second place. ‘Talent & Leadership’ was ranked third place. Interestingly, none of the respondents referenced ‘Access to Capital’ as an issue

Insights were concerns that Government is not In terms of aligning actors, cross- Respondents saw a clear future for demonstrating sufficient leadership border collaboration would play an the Dutch North Sea sector, with a in relation to the direction and speed important role next to collaboration twin focus on hydrocarbons and new of change in the North Sea energy within the national borders. Paramount renewable energy sources. There transformation. Nonetheless, the focus to this is clarity in regulation and was recognition that low gas prices was on Government as a coordinator creating a level playing field in matters are accelerating the demise of the and facilitator rather than outright related to licensing, tariffs and subsidy basin at present, but at the same time Government involvement. schemes for cross-border projects. respondents saw a clear role for gas While thinking ‘big’ in terms of master itself as a transition fuel towards a more Similar to their UK counterparts, planning, the motto should be to “start renewable focused system. our Dutch respondents believed the small” and align expectations and Netherlands was well placed to become plans in small groups of stakeholders to Unlike in the UK sector, there was an world leaders in decommissioning achieve results. The North Sea countries expectation that within the next five to engineering and to export these skills to and their efforts to align around fifteen years decommissioning would other mature basins. North Sea wind development is a good happen in parallel to the development example and there are many more. of renewable energy sources. Re-use of Solutions assets to support these developments To create a common and holistic view, would be interesting but general Government leadership would be opinion is that the actual potential is needed. The Government should limited. The consensus view was that take an active role in coordinating the renewables sector (such as offshore interests and policies and chart a wind, tidal energy) would generate the clear path from exploration of the next wave of investment opportunities last remaining hydrocarbon reserves in the North Sea. In fact to some extent to decommissioning and a switch to the sector was already maximising renewables. The message would be revenues from hydrocarbons in order to to look at hydrocarbons and renewable fund the future of renewable energy. energy as two complementary elements in the energy transition. However, in many cases what was thought to be lacking was a holistic Public-Private Partnerships were and coordinated view on the future seen as a solution to ensure that both of the North Sea, including a position risk and proceeds are fairly distributed on tackling CO2 reductions. There is a between the public and private sectors. view that a master plan (a Deltaplan if In addition, the Government can ensure you will) including coordinated policy that part of the subsidies provided to and regulation development is required renewable energy projects flows back to enable new investments. There to society.

22 PwC – A Sea Change Figure 6 Top Themes for North Sea Identified by Dutch Respondents

Other

Low Carbon

Talent & Leadership

Collaboration

Technology & Innovation

Decommissioning

Access to Capital

Fiscal Stimulation

Government / Regulator

01234567

The future of North Sea Oil & Gas 23 The Norwegian Sector of the North Sea – Summary Findings

Our Norwegian respondents identified ‘Collaboration’ as the main issue facing the Norwegian sector, followed by ‘Technology & Innovation’, and, in particular, standardisation and . The third most important theme for the NCS is ‘Government & Regulator’, including tax incentives for late phase/mature assets.

Interestingly, despite the NCS being relatively exploration and development intensive, ‘Access to Capital’ was not raised as critical for transformation.

Insights Solutions As for ‘Government and Regulator’ Like the rest of the oil and gas industry, ‘Collaboration’ and ‘Technology & respondents noted that the Norwegian the Norwegian sector faces a headwind Innovation’ are considered to be Government has played an triggered by the 2014 oil price drop. the key themes underpinning the instrumental role in the development There are more than 100 explored transformation of the NCS. The feeling of the NCS. For example, the 78% fields which require a significant is that both E&P and OFS players need tax rebate has not only increased the reduction in the break even point to to form stronger working relationships, exploration appetite for the E&P majors, become profitable. And for fields of collaborating along several important but has attracted smaller exploration less then 50m bbls the current fiscal dimensions, e.g. technology, processes companies that otherwise could not arrangements mean they make no profit. and contractual risks. More needs to fund the exploration costs. Lundin Changes are clearly needed to the fiscal be done around standardisation of Petroleum is an excellent example; regime to encourage the development documentation in particular and even the small exploration company that is of those fields. For the Norwegian oil better “industrialisation” of the sector. accredited for being the main driver and gas industry to become profitable, behind discovering Johan Sverdrup. players in the NCS have begun to take Senior executives sense a significantly That said, for fields of less than 50m bbls, measures to arrest the inefficiency stronger climate for collaboration stimulation to the fiscal regime, perhaps that surged prior to the oil price drop. today compared to 12 - 24 months by looking at capex depreciation or an There is a common understanding ago, and therefore, are focussed on uplift in tax allowance, could unlock that the industry should use this the creation of win-win solutions. many more projects. opportunity to address some of the Rather than creating over-engineered, main cost drivers, e.g. expensive staff bespoke solutions, “good enough” Besides opening up more acreage, the rotation arrangements. is an important terminology that Norwegian Government has several Senior executives in Norway has entered the Norwegian oil and gas tools to stimulate the industry. For tend to characterise the NCS as a industry’s vocabulary: E&P companies example, as some of the NCS giant mature basin. However, they are should analyse their portfolio of assets are in their late production phase, conservatively optimistic in regards products and solutions they employ and asymmetry between corporate and to the opportunities in the basin. The strive for “good enough” standardised Governmental profitability may arise. optimism stems from the unexplored products and solutions. Statoil is seen as The Government may consider easing a areas in the Barents and North Sea. a front-runner in aggressively pursuing particular asset’s tax rate to maximize Furthermore, political stability and such standardisation, seeking the overall profitability of the project. financial stimulation are favourable in “win-win” solutions. Similarly, the Government ought to Norway compared to other less mature consider introducing tax incentives basins worldwide. to encourage E&P companies to develop the relatively large number of mid-sized hydrocarbon deposits already discovered. 24 PwC – A Sea Change Leaders also noted that oil and gas Leadership Management must assume companies must avoid doing short- For the NCS to succeed, respondents accountability in simplifying the ways term cost-cuts as a knee-jerk reaction noted the importance of long-term in which their company is working. Old to the current situation, but rather focus commitment to asset and exploration and unchallenged work processes have on initiatives that generate fundamental strategy. The E&P companies’ a tendency to stick with a company and sustainable improvements. licenses and asset portfolios must even though they do not create value. harmonise with the companies’ “We’ve always done it this way”, can be Respondents are concerned about losing capabilities. An example of this is a blinkered mindset and can result in critical competence and capacity in Capricorn Norge (), which non-value creating processes. certain segments, that could create a is relatively unknown in the context If your organization holds “not fit bottleneck for future growth, or inflate of the NCS. However, Capricorn was for purpose” processes, it is time to future cost. Respondents also noted that the “winner” in the 23rd NCS license clean up. a change to offshore shift arrangement round. Capricorn’s license wins are is long overdue. The current rotation, largely ascribed to the commitment in addition to the already high wage and focus the company has had over level, make a Norwegian offshore several years to win licenses they employee 85% more costly than their assessed as attractive and a fit to their UK equivalent. exploration capabilities.

The future of North Sea Oil & Gas 25 “The long term future of the North Sea will be very different.” John Pearson, Group President, AMEC/Foster Wheeler

Conclusion

The North Sea basin has gone through enormous change since hydrocarbon production first took off in the 1960s. Not least, the last couple of years have witnessed seismic changes in the industry, as the oil price collapse triggered a radical restructuring of the sector. Through all this change and turmoil, the oil and gas industry has proved itself resilient to change, adapting quickly to a changing environment.

Looking ahead these challenges are set to grow. The North Sea faces twin existential challenges, as a mature basin seeks to eke out another cycle of production success, while simultaneously tackling the pressures associated with operating in an increasingly low carbon world.

The North Sea can still play a valuable role in generating employment, stimulating economic growth, meeting our needs for security of supply in energy, and acting as a bridge to a more low carbon world in the medium term. Hopefully, this report will create a platform for all sector participants to engage in a dialogue to identify the way forward and ensure the basin has several more decades yet of success ahead.

26 PwC – A Sea Change Acknowledgements PwC would like to thank the following for their time and input to this study ...

Name Company Name Company John Baillie Addax/ Bernhard Kreiner OMV Bas Bakker Rabobank Mel Kroon TenneT Jan Boekelman EBN Paul de Leeuw RGU Alan Brown ASCO Rita Marcella RGU Colin Butcher Lloyds Banking Paloma Mele de Juan Hannam & Partners Melfort Campbell Imes Group Ltd Deirdrie Michie OGUK Jonathan Carpenter René Oudejans Gasunie David Cook Dong John Pearson AMEC/Foster Wheeler Tony Craven-Walker Serica Energy Tom Reynolds Energy David Crawford Dr Marcus Richards Senior Industry Executive Jeremy Cresswell Press & Journal Dr Andy Samuel OGA Liz van Duin Rijkswaterstaat Bernd Schrimpf Wintershall Ante Frens NAM Alistair Stobie Hurricane Energy Francis Gugen Chrysaor Gavin KCA Deutag Andrew Hockey Fairfield Energy Ben Taylor Shell Jan Willem Hoogstraten EBN Robert Trice Hurricane Energy Otto Jager TenneT Geir Tuft Ineos Steve Jenkins Senior Industry Executive Eirik Waerness Statoil Phil Kirk Chrysaor Sir Ian Wood ONE

The future of North Sea Oil & Gas 27 Contacts Alison Baker Kevin Reynard Partner, PwC UK Partner, PwC UK UK & EMEA Head of Oil & Gas Head of Aberdeen Centre of Excellence +44 (0) 20 7804 3314 +44 (0) 122 425 3238 +44 (0) 7730 147810 +44 (0) 7725 706789 [email protected] [email protected]

Jan Willem Velthuijsen Ole Martinsen Partner, PwC Netherlands Partner, PwC Norway Netherlands Chief Economist Norway Head of Oil & Gas +31 (0)88 792 7558 +47 (0) 952 61 162 +31 (0)6 2248 3293 [email protected] [email protected]

Authors Craig Stevens Adrian Del Maestro Senior Manager, Oil & Gas, PwC UK Director of Research, PwC UK +44(0)131 260 4661 +44 (0)7900 163558 +44(0)7738 844839 [email protected] [email protected]

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