Maximising Economic Recovery - Where Are We Now?

Transcription

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2 Maximising Economic Recovery - Where Are We Now? Chaired By Brenda Wylie Northern North Sea & West of Shetland Area Manager Oil and Gas Authority

3 Setting up the OGA Stefanie Murphy Deputy Director Head of Wood Review Implementation Team

4 Setting up the OGA Stefanie Murphy Deputy Director - Head of Wood Review Implementation Team 17 June 2015

5 Key Wood Review recommendations to Government and industry to develop and commit to a new strategy for Maximising Economic Recovery from the UKCS (MER UK) maximise recovery from UKCS MER UK 1 Wood Review 2 Create a new arm s length body charged with effective stewardship and regulation of UKCS hydrocarbon recovery, and maximising collaboration across the Industry Effective stewardship and regulation Sector strategies 4 3 Additional powers Develop and implement important sector strategies The new body should take additional powers as outlined in the Wood Review to facilitate implementation of MER UK

6 Key milestones delivered to date 2014 Wood Review final report published Interim Advisory panel set up CEO recruitment begins Clauses introduced into Infrastructure Bill CEO appointed F M A M J J A S O N Chair recruitment begins D 2015 Call for evidence closes J F Sir Patrick Brown appointed as Chair M A Additional specialist staff recruitment ongoing SoS launches call for evidence Call for evidence Formal Government response to review Workshops Andy Samuel takes up post

7 Key Issues and Milestones Energy Bill Introduction of the Levy Key Issues & Milestones MER UK Strategy OGA Establishment 7

8 Energy Bill Call for Evidence How to implement Wood Energy Bill Powers to attend meetings Powers to access and publish data Dispute Resolution role for OGA New sanctions for non-compliance with MER UK and licence conditions Informal/formal improvement notices Financial penalties Licence Revocation

9 Decommissioning Energy Bill Transfer of existing DECC functions to OGA Powers for SoS to direct OGA in Exceptional Circumstances for the National Interest and National Security Conflicts of interest The roles and functions will then be vested in the new Government Company (GovCo)

10 Key Issues and Milestones Energy Bill Introduction of the Levy Key Issues & Milestones MER UK Strategy OGA Establishment 10

11 Introduction of the Levy Fees and charges and a new levy Infrastructure Act 2015 How to apportion the levy: Simplicity Fairness Cost reflectiveness OGA cost conscious and VFM

12 Key Issues and Milestones Energy Bill Introduction of the Levy Key Issues & Milestones MER UK Strategy OGA Establishment 12

13 MER UK Strategy Infrastructure Act 2015 Obligations and sanctions..but also ways of working and principles Good engagement but no easy answers Changes in behaviours Deadline for laying Strategy in Parliament April 2016

14 Key Issues and Milestones Energy Bill Introduction of the Levy Key Issues & Milestones MER UK Strategy OGA Establishment 14

15 OGA Establishment Governance and DECC/OGA Relationship OGA Board Future role and shape of DECC team Who does what Tripartite working Government side Setting up GovCo

16 Timeline Setting up the OGA Ahead of Legislation Call for evidence closed Policy development Chair appointed Government response to CfE published Energy Bill introduction to Parliament Consultation published on MER UK strategy Levy in force J F M A M J J A S O OGA Stakeholder Group commenced Development of MER UK Strategy Royal Assent Infrastructure Bill MER UK Workshop OGA operational as an Executive Agency Levy consultation published NED appointed to OGA Board Response to levy consultation published Levy Regulations laid OGA fully operational and established as a Government Company Summer 2016 MER UK strategy comes into force (Jan 16)

17 The UKCS an Overseas Investor s Perspective Tim Blackford General Manager & Director JX Nippon Exploration and Production (U.K.) Limited

18 Oil & Gas UK The Oil and Gas Industry Conference 17/18 June 2015 The UKCS an Overseas Investor s Perspective Tim Blackford General Manager & Director JX Nippon Exploration and Production (U.K.) Limited

19 Who is JX Nippon? Japan s largest integrated resources/energy company Three key operating areas under a Holding Company: Refining and Marketing Metals and Mining Exploration and Production E&P Core areas globally UK Vietnam Malaysia Other key areas Australia, US, Canada, Qatar, UAE

20 JX Nippon in the UK Key facts: A proactive partner in 33 UK licences Operator of 5 licences Co-venturer in 16 producing fields Drilling Operator in a deep water exploration well West of Shetland in 2016 Engaged in some of the largest current UKCS upstream projects Mariner heavy oil project and the Culzean uhpht project Capital spending is above $3 billion over next 5 years Two UK offices London and Aberdeen

21 JX Nippon s UKCS Producing Assets JX Nippon owns assets across the maturity curve, including: Offshore platforms Subsea wellheads and tie-backs Pipelines and terminal Andrew platform and Kinnoull module Sullom Voe Terminal Blane

22 JX Nippon s Major Development Projects Mariner: JX Nippon s Equity: 28.89% Operator: Statoil Heavy oil field FSO evacuation for liquids First Oil is scheduled for 2017 Culzean: JX Nippon s Equity: 34.01% Operator: Maersk uhpht Gas condensate field Subject to final investment decision mid-2015 First production is scheduled for 2019

23 The current oil price is a challenge we continually review our portfolio but we are not driven by short term price variability JX Nippon s UK Strategy West of Shetlands (potential hub) - exploration Mariner heavy oil development, exploration Andrew/Brae production, exploration, development Culzean/ETAP production, uhpht exploration & development Build the business around core hubs: Central North Sea HPHT Andrew Area Mariner heavy oil West of Shetlands Additional smaller satellite discoveries that might be developed. Cluster Area Allowance may help Inventory of exploration prospects drill out over next three years Manage decommissioning

24 JX Nippon Profiles Capex Profile: Production Profile: JX Nippon is one of the major investors in the UKCS over the next five years

25 UKCS investors are changing Tier 1 companies are progressively withdrawing from non-core UKCS areas Sector consolidation is also removing players e.g. BG Group and Talisman Energy. It remains to be seen what acquirers do with the Source: Hannon Westwood UKCS Assets Tier 2/3 companies are increasingly important to the future of the UKCS

26 Has the current price environment changed the investment landscape permanently? We believe it has. JX Nippon as a UKCS Investor What is JX seeking from its UK investments? Returns Must be as good or better than anything else in the JX opportunity universe Predictability Below forecast returns create a risk discount for investments Managing capital, operating and abandonment costs is key (some evidence of moderation in development capex for new projects) Stability No more unexpected negative fiscal changes e.g. Supplementary Charge Assistance for exploration A long term production profile but with reasonable payback time Investment efficiency is key value versus volume Value adding business growth potential How to leverage infrastructure investment Maximise third party business

27 JX Nippon as a UKCS Investor Changes in the UKCS business proposition Wood Review MER UK. How will this be interpreted? New regulatory environment OGA. How active a regulator will it be? Fiscal review and tax reform has limited immediate impact for current non taxpayers. New HMG/OGA support for exploration activity and infrastructure. Aggressive management of the UKCS operating cost base is key: UKCS is the highest operating cost area for JX We have yet to see any meaningful reduction in our opex base for 2015 Benefits overstated and implementation cost understated If the industry doesn t deliver in the timeframe we risk the domino effect assets are abandoned, residual costs increase

28 Barriers to Future UK Investment Major operators struggle to control their cost base are they structurally able to deliver a low cost alternative? Delivering major projects on budget and on time is essential experience is very poor The current oil price environment constrains the potential benefits of tax rate reductions Source: WoodMac

29 Operating Costs Deliver immediate reductions Build-in sustained ongoing improvements Crafting our future levers we can control Exploration Delivery of basin potential requires a step change in exploration incentives, approach and performance Direct subsidy of drilling may have to be contemplated Project Delivery Reduce capex Deliver to budget and schedule Operating Efficiency Improve integrated and aligned planning across fields and infrastructure

30 The future JX remains broadly positive on the UK as an investment area A sustained period of low oil prices forces companies to focus hard on cash flow management JX is no exception Managing our cash exposure on our major projects will be a challenge if the past is any guide The investment pot is not infinite we can t rely on a rising oil price to continually bail the industry out

31 Questions 31

32 NNS Fuel Gas Challenge Operational Gas Group Initiative Jim Goldie Joint Venture Lead TAQA Bratani Limited

33 OGUK Conference 17 th June 2015 Operational Gas Group Speaker : Jim Goldie TAQA Joint Venture Lead 33

34 Area Criticality 34

35 Area Criticality 35

36 Area Criticality MER 36

37 Conditions Of Satisfaction MER Factor Timeliness Reliability of Supply Conditions of Satisfaction From end-2015, the supply of operational gas is secure and available in sufficient quantity to each consumer, and the operating framework will be durable through to end of decommissioning. The supply of operational gas to all consumer delivery points is reliable, which is expected to include diversified sources of supply and substitution arrangements, in time. MER Flexibility The take of operational gas by consumers is flexible, to match planned and unplanned operational needs (and with equitable consequences for any under-take by any individual consumer). Market Cost Transparency and Simplicity Attractive to Suppliers The unit cost of operational gas supplied is close to that which would be determined by a competitive market; reflecting the value of the product, its geographic location and other service factors. The governance of the operational entity and its activities will be: transparent; simple; equitable; efficient; and auditable. The model adopted should attract the interest of, and superior terms from, prospective suppliers through a simple and material gas demand. 37

38 Commercial Structure Overview Gas Flows Gas entry point from Gullfaks Satellites Excess gas delivered to St Fergus by Statoil 38

39 Commercial Structure - Simple Service Providers TAQA, as Buyers Representative (BR), contracts with service providers Buyers Representative A Buyers Representative Agreement (BRA) allocates contract rights and obligations to UFOs. Meets the Conditions Of Satisfaction 1. Timeliness 2. Reliability 3. Flexibility 4. Market Cost 5. Transparency & Simplicity 6. Supplier Friendly User Field Operators 39

40 Commercial Structure Complex 1 BR/UFOs Buyers Rep Agreement (BRA) Governance, Gas Prioritisation, Expenditure Allocation, Disbursement of Income, L&I s Allocation ; Insurance; Securities etc. 2 BR/Statoil purchase of Gullfaks Satellites gas Offshore Purchase of Gullfaks satellites Gas 3 BR/NLGP TA & allocation services agreement 5 6 BR/SEGAL TA & allocation Annual Fee UKDCC gas service Shell ICA tariff Esso ICA tariff Statoil/SEGAL Gas Supplier Undertaking UFO / SEGAL User Field Operator Undertaking Amendment to Statoil to SEGAL TPA (Statfjord Area) to deliver TUCs to TAQA Amendment to TAQA to SEGAL gas sale and purchase (for TENNCA area net export) TAQA/SEGAL TPA for transportation and processing of Excess Gas BR/Statoil compensation for Top Up Components (C3 & C4) Statoil/BR compensation for Excess Gas delivered in FLAGS pipeline (C1 and C5+) Monetise ExGas at St Fergus Key BR contract with Statoil BR contract with NLGP BR/UFOs contract with SEGAL External contract to BR/UFOs 40

41 Challenges & Solutions Imbalance between composition of Input gas and Offtake gas Lean gas intake and rich gas offtake generates negative C2 to C5+ components in the SEGAL system which must be balanced by component Lean Gas Purchased Volume Uplift Top Up Components Rich Gas Consumed Excess Gas Volume MER C1 - C5+ C1 - C5+ C3, C4 C1 - C5+ C1, C5+ Buyers Representative (BR) issues Agency or NewCo TAQA as BR Competition Law No profit / No loss TAQA Exposure OGA 41

42 Deliverable / value to NNS 1 st October 2015 First Gas Protected Oil production 140 mmboe Reduced NNS area opex $210m or $1.50 bbl Epilogue OGG is the first example of cross area, collaborative MER driven project. Regrettably we were unable to execute in time to help Dunlin. MER 42

43 Critical success factors Terms Of Reference Collaboration Collaboration Dedicated Project Leadership OGA Engagement Leadership Matching Commitment Strong Links Steering Group Balance Intervention 43

44 Contact Details for Further Information 44

45 Reducing Complexity and Delays in Legal and Commercial Process Nigel Wooley VP Negotiations - Global Commercial Operations BP

46 Reducing Complexity and Delays in Legal and Commercial Process OGUK Conference - 17 th June 2015

47 47 Complexity and Delays What are the causes? Is the UKCS more difficult than other regions? Disputes and dispute resolution What can we do better? The impact of MER UK

48 48 Causes of Complexity and Delays (1) Hard Realities Different technical and commercial perspectives Involvement of multiple JVs with multiple owners Fiscal and contractual legacy Marginal opportunities with limited solution space Complexity is rarely a barrier, but it does bring additional cost

49 49 Causes of Complexity and Delays (2) Softer Issues Levels of trust and transparency The pursuit of preference over necessity Limited expectation of success Collaboration is intermittent and selective Seeking agreement or positioning for escalation and intervention? Focusing on problems rather than concluding the deal

50 50 The Commercial and Legal Environment Market Space UK and EU Law, Property Rights Regulated Space DECC/OGA, CCOP and ICOP Contracted Space Existing Agreements

51 51 Why Is It Hard To Reach Agreement? Area Market Space Sources of Difference Unequal bargaining power. Expectation of intervention Different perception or understanding of risks. Regulated Space Different interpretations, benchmarks or standards. A perception that advocacy pays. Contracted Space Dispute over the intent of the contract. Dispute over construction of the agreement. All Different technical or commercial perceptions Protecting or securing commercial advantage

52 52 Is UKCS More Complex - Multiple JVs Central Graben Elgin Franklin Shearwater Puffin Culzean Erskine Kessog Courageou s J-Block Jackdaw Faraday Block 31 - Angola

53 53 Is UKCS More Complex? - Contractual Legacy West of Shetland Mid Norway Field WoSPS GASLED EoSPS NLGP Sullom Voe Terminal Magnus Karsto Processing Plant Entry/Exit System Draupner SEGAL Brent Sleipner St Fergus Easington

54 54 Is UKCS A Difficult Region? Complexity is real, but we are good at resolving it Solution space is increasingly difficult to find Collaboration is intermittent and selective Nobody benefits from missed opportunities Differences in perspective and benchmarks drive misalignment

55 55 Independent Challenge and Dispute Resolution Quality and Finality of Outcome Advisory Arbitration Independent challenge can open space for negotiated outcomes Mediation Binding Arbitration Courts, Appeal $100k $500k $5m $10m 3 months 6 months 18 months 24 months + Use a method that is fit for purpose This may not be the one required by the contract

56 56 What Does Simple Arbitration Look Like Agree on a statement of dispute and remit of arbitrator Appoint arbitrator (binding or advisory) and agree timeline Each side makes a written submission Proposes an explicit outcome or remedy for dispute. Option for brief rebuttal response Arbitrator delivers pendulum verdict. Realistic for $100k and within 3 months. Contracted Regulated Market

57 57 The Impact of MER UK Market Space UK and EU Law, Property Rights Regulated Space DECC/OGA, CCOP and ICOP Contracted Space Existing Agreements

58 58 What Is The Impact of MER? Will not reduce complexity, nor make uneconomic projects viable Will create a regulatory continuum across all commercial areas Could provide clear, consistent and principled guidance. Could become a magnet for dispute and frustration Companies do not need to wait for OGA to intervene Encourage appropriate transparency and trust in negotiation Use of independent challenge Use of fast track dispute resolution

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60 Maximising Economic Recovery - Where Are We Now? Panel Session Chaired By Brenda Wylie Northern North Sea & West of Shetland Area Manager Oil and Gas Authority