The future of North Sea Oil & Gas. With fifty successful years for the industry in the North Sea 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 Netherlands started in the summer of 2014, triggered and Norway. 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. Our 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 North Sea Oil & 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 Shetland, the Atlantic Margin and on experience that has gone before; the UKCS/NCS border; • It’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 • Capital is vital for the future and • Collaboration 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 Aberdeen, and other regional counterparty risk is collective, could all parties. A salient example centres such as Stavanger, 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 region are focused one. Government fragmented assets under one sole 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 • There 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 Continental Shelf 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.