elliot bidgood wood review
Elliot Bidgood: new regulator needed to maximise oil and gas recovery

It has long been argued Britain has not made the most of our North Sea oil and gas reserves since the major fields were first discovered in the 1960s.

Thatcher famously used up £166bn in North Sea proceeds on tax cuts and spending in the 1980s, rather than investing in a Norwegian-style sovereign wealth fund, for example.

But now, with experts warning that North Sea production is slowing and that our response to the current crisis in Ukraine is being hampered by the EU’s arguable dependence on Russia, it is clearer than ever that we must form a coherent strategy to harness our oil and gas assets and align their use with our economic and national security interests.

The Wood Review has been enlightening in this regard. Led by Sir Ian Wood, the Aberdeen-born founder of the North Sea oil and gas firm the Wood Group, the report noted that production from the UK Continental Shelf peaked around 1999 and fell by 38% between 2010 and 2013.

Branding our current approach “light touch”, he states that there is “strong consistent evidence” of the need for a fresh strategy, recommending that a new arms-length regulator should be tasked with ensuring that UK oil and gas firms maximise production in line with our economic strategy, ‘MER’ (Maximising Economic Recovery).

This regulator would be empowered to encourage a regional approach to exploration, require that firms holding exploration licences comply with MER and ensure that they maintain their exploration assets properly (Wood describes falling efficiency as “an indicator of poor asset stewardship”). It would also encourage collaboration among firms, in order to cut costs by ensuring that they agree clear terms for the orderly use of our processing and transport infrastructure.

Shell UK chairman Ed Daniels has reiterated the value of the Review, warning us not to write off North Sea oil as something we “used to have” in the rush to capitalise on shale reserves. Instead, Daniels stressed the industry’s continuing contribution to our economy, security and our fiscal health, in terms of the £6.5 billion it paid in corporate taxes in 2012-2013 (although as Wood noted, contributions to the Treasury have reduced over time as efficiency in the industry has fallen, and Ed Daniels called for new tax cuts for the industry in his Telegraph article).

Daniels further pledged that Wood “has our firm support as far as his broad recommendations go”. Energy Secretary Ed Davey similarly promised that the coalition would move quickly to fully implement the Wood recommendations, while Labour’s own shadow minister for Energy Tom Greatrex has commented that the Wood Review “rightly calls attention to the need for cooperation and wider consultation in order to get the most from the remaining resources in the North Sea”, an encouraging sign of an emerging consensus on the issue.

Looming large in all of this, of course, is the Scottish independence referendum in September. BP CEO Bob Dudley and Shell CEO Ben van Beurden have made clear that the continuation of the union is vital for the stability of the industry, because as Tom Greatrex noted, “fragmentation of fiscal and regulatory regimes through separate arrangements in Scotland from the rest of the UK would increase risk, reduce efficiency and minimise the chances of achieving the goals [the Wood Review] sets”.

Moreover, Labour is in a unique position as a party to hold the union together and thus ensure that our long-term energy planning is not disrupted by a vote for separation. Recent polling data from Survation has confirmed that if Scottish voters began to fear that further Tory-led governments in Westminster were likely, the Better Together campaign’s current poll lead could be reduced by as much as 6 or 11 points, demonstrating that Labour’s One Nation voice in these debates is key to the stability of both the union and the North Sea oil and gas industry.

Having said that, I would note that industry representatives also appealed last year for all sides to ensure that the North Sea does not become a “political football” to a degree that might impede progress in tackling our energy challenges, instead calling on Holyrood and Westminster to cooperate with the industry to maximise production.

Sir Ian Wood’s proposals appear to represent a sound framework from which we can do just that – especially given the arms-length independence of the regulator – and thus could help secure a stable energy future for the entire UK. Labour should continue to stand behind these efforts.

Elliot is a research volunteer for LFIG

North Sea Oil and Gas Challenge: Maximising Economic Recovery
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