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Legal and Finance: Time for the bubble to burst?

Legal and Finance: Time for the bubble to burst?


It has long been considered that the oil and gas industry in the UK operates in somewhat of a bubble. The industry is treated differently for taxation from other manufacturing and production related sectors and to those outwith the industry, oil and gas contracting and commercial structures are alien and unclear.

Equally, within the global oil and gas market the UK exists in an operating bubble. Historic economic analysis has highlighted that operating in the UKCS provides one of the best $/BOE returns on investment, especially during lower oil price environments. This may be due, in part, to the range of differing operating environments available under one licensing regime, from established onshore projects and the harsh locations West of Shetland, to the shallower waters of the North Sea. There is also an easily accessible local and overseas market given the established infrastructure which helps to reduce initial capital costs. The UK fiscal regime which sets oil and gas apart internally within the UK is considered one of the most competitive regimes in the global oil and gas arena and actively supports development, decommissioning and encouraging new entrants.

However, in the current climate, with significantly lower oil and gas prices, constrained movement of personnel and supply restrictions as a result of COVID-19 and the rise of new oil and gas jurisdictions offering onshore development opportunities with lower cost profiles, has the UKCS bubble burst?

Definitely not. Through industry initiatives including the OGA strategy, Vision 2035 and the development of the Oil and Gas Technology Centre the UK oil and gas industry is moving into a new phase of operations.

Focussing on developing centres of excellence for the advancement of clean, transformational technology, the growth of underwater innovation and to highlight more collaborative decommissioning practices, the UK is seeking to lead the way in innovation in the industry.

Moreover, increased diversification and focus on energy transition as well as a heightened awareness of climate change and the need for Net Zero to be incorporated into daily operations has positioned the UK as a leader in addressing key issues facing the industry. In fact, one facet of such diversification (offshore wind generation) has placed the UK 6th globally against such giants as China, the US and India – not bad for a country that is, on average, thirty-two times smaller in size.

Against that backdrop it's no surprise that the UK is attracting increasing investment and interest from more global players.

This interest and diversification brings with it a range of legal matters to be considered. Opening up the industry to a more global market means that elements such as intellectual property and confidential information need to be protected on a wider scale. Contracting terms become more focused on traditional 'boiler-plate' provisions such as dispute resolution and governing law as well as the usual commercial terms. There are also the personnel implications to consider as diversification of business may need a change to contract terms if staff are also required to diversify.

It is expected that over the next 10 years the UKCS oil and gas industry will become more collaborative and diversified utilising its existing skills and resources to generate a much wider 'energy' industry.

Assessing and understanding the legal implications of those changes now will ensure a smooth transition into the next stage of the UK energy industry.

It's fair to say that the bubble has definitely not burst, it's just expanded, and with the right care and consideration the UK can retain its place in the global market.

Read the latest issue of the OGV Energy magazine HERE.

Published: 17-01-2021

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