The oil and gas industry dominates today’s headlines and for good reason. With oil prices at more than $140 (£70) a barrel (contrast this with 1998 when oil prices hovered around $12 (£6) a barrel), the UK is moving from being a net oil and gas exporter to a net importer. With the emphasis on global warming, the industry is at its highest profile since the 1970s. And Aberdeen, commonly known as the oil capital of Europe, is living in exciting times.
So what does this mean for energy lawyers? The key issues and challenges arise out of a number of linked factors: a shortage of oil and gas supply, a contractor service market that has not kept pace with changing oil company requirements, ageing North Sea infrastructure and demographics, an emerging renewables market and an explosion of technology. This mix creates the need for lawyers to deliver practical solutions.
To the surprise of many outside the energy industry, Aberdeen, with its concentrated focus of industry expertise, is a hub for major international oil and gas projects — not just the North Sea. The city is collaborating with contractors and operators on projects all over the world, in places as diverse as Russia, Azerbaijan, Angola, Namibia, Trinidad and Brazil and is working with an increasingly international group of new companies entering the North Sea market.
It is essential to stay abreast of an ever-changing, innovative industry. The high price of oil means that previously uneconomic developments are now viable, with operators anxious to bring them on stream as soon as possible, to take advantage of these higher prices. The resultant surge in demand for equipment such as rigs and heavy lift vessels has squeezed availability of contractor resources — with an associated increase in costs. Few oil companies these days have their own rigs or ships so, in order to get at the oil, to put in the infrastructure to bring it to market and to keep that infrastructure in good working order, operators are reliant on contractors (who make up a large sector of the oil and gas industry). With rigs and vessels in limited supply, contractors feel able to take a more robust approach to negotiating oil services contracts.
And so, despite the jump in oil prices, the cost of oil and gas production is changing the way the industry does business. The UK oil industry’s representative body, Oil & Gas UK, has calculated that the cost of developing a barrel of oil on the UK continental shelf has risen fivefold in the past seven years and warned recently that the combination of increased costs and challenging fields could mean that production from the North Sea does not reach its full potential.
All this brings about changes in contracting strategies. We are seeing more asset-sharing arrangements, such as rig-sharing agreements, where an intermediary takes on a long term rig contract and then operators effectively book a slot in that rig contract. Supply chain management, with the industry supply chain code of practice and streamlined procedures on transportation arrangements set out in the infrastructure code of practice, are all aimed at improving efficiencies in the contracting process and so increasing value and reducing costs. The range of services contractors provide has moved well away from a traditional supply role — many major offshore projects are completed under engineering, procurement, installation and commissioning (EPIC) contracts, where the contractor takes on the whole project scope, from design to completion, and total facilities contracts (where a contractor runs an offshore installation on behalf of its owners) are increasingly common. This is the case not only in the North Sea, but worldwide, such as offshore Angola, where contractors and oil companies are working together on huge oil and gas construction projects.
Another effect of the increase in costs is that it leaves less money for oil and gas companies to spend elsewhere, such as on decommissioning. Indeed, increased contracting costs result in increased decommissioning cost estimates. These decommissioning costs and the need to provide security for them, in some cases to both the government and to fellow licensees, affects the trading of oil and gas fields, as smaller companies are disincentivised to invest when much of the capital they might otherwise spend on exploration and production is tied up in providing financial security. So oil and gas companies are developing innovative structures for asset sales with a view to isolating this decommissioning liability, encouraging asset sales and investment, and so ultimately extending field life and maximising recovery of oil and gas.
It is not just the law of supply and demand which is increasing the costs of producing a barrel of oil. Global politics plays a vital role. Also, particularly in mature areas such as the North Sea or in other challenging environments, such as Sakhalin in Russia’s far east, hydrocarbons are difficult to extract. Investment in new exploration and drilling technologies is high and critical and continues to make previously uneconomic reserves available for development. Again, a lot of this expertise is based in Aberdeen and companies are increasingly concerned to protect their valuable intellectual property rights.
The swiftly changing nature of the industry means that its lawyers must think creatively and focus on business solutions. Gas storage is set to be one of the most exciting areas of energy law in the UK in the coming years. The Aberdeen energy team is working with Eni SpA (the Italian oil and gas explorer), in relation to the acquisition of a majority stake in the Hewett Field in the North Sea to develop into a gas storage facility.
For the energy lawyer, interesting times lie ahead. Aberdeen attracts many of the biggest names in the energy industry, most of whom want to do business in the North Sea and worldwide. New offices, new entrants and new suppliers all point to a vibrant and confident industry, and to Aberdeen as an energy centre still growing in stature.
Lorna Dawson is a partner at CMS Cameron McKenna in Aberdeen.
ScotlandJuly2008