BY JONATHAN MILNE
After months of dialogue between the industry and HM Treasury in the UK, on 19 March, the Chancellor George Osborne announced a consultation that would allow significant allowances for uHPHT fields in the UK North Sea, like Maersk Oil’s Culzean gas project.
Maersk Oil stands to benefit from the new allowance introduced by the UK Government, to support investment in ultra high pressure/high temperature fields. The proposed change to the UK’s fiscal landscape evolved over time and Maersk Oil played a leading role for the industry in securing this longer term opportunity through smart stakeholder management.
When it was discovered in 2008, the ultra high pressure/high temperature (uHPHT) Culzean gas field, in the UK North Sea, caused a lot of excitement.
“We knew pretty much straight away that this could be a very significant discovery. We also knew that it would be very technically challenging to develop. That would inevitably mean high costs,” says Martin Rune Pedersen, Managing Director of Maersk Oil UK.
In the following years further appraisal work was undertaken on the discovery, confirming that Culzean was a strong development prospect, with the potential to meet around 5% of the UK’s gas demand by 2020/21. The next steps were to deliver on that potential by overcoming the technical and economic challenges of the project.
The UK Government had already introduced an allowance for high pressure/high temperature fields, recognising that operators needed to be incentivised to explore ‘new plays’ as more conventional opportunities in the basin became rarer. The original allowance was capped at a fixed sum – but no operator had taken advantage of this, suggesting that the incentive failed to meet the needs of the industry.
Culzean presented an opportunity for a win-win for both government and industry. A large gas discovery could enhance UK energy security and develop expertise in the emerging play of uHPHT. For Maersk Oil and other operators to follow, a new uHPHT allowance could enhance project economics and enable a successful development.
Effective engagement to drive change would be critical to delivering this win-win. “We first met with HM Treasury officials in April 2013 through the Fiscal Forum, which brings together operators and government,” says Tom Tildesley, Finance Director, Maersk Oil UK. “We had a good initial meeting which established that an enhanced allowance would be good for UK plc and the wider industry. It was also clear that they wanted to create an allowance that would provide the proper incentive for development. From then on, Maersk Oil, together with Oil & Gas UK (the UK’s industry representative body) steered an industry-wide response to the type of allowance that would work. This consensual approach worked well and was appreciated by HM Treasury.”
(Left to right) Danny Alexander, the Chief Secretary to the Treasury, Martin Rune Pedersen, Managing Director, Maersk Oil UK, with Sir Ian Wood.
Meetings with industry partners and government have always been immensely important. Maersk Oil has, in recent years, revitalised the attention and resources focused on external stakeholders. One of the key architects of further embedding this is Matthew Wilks, Chief Commercial Officer. Wilks highlights that stakeholder influence is a critical business enabler and provides Maersk Oil with a major competitive advantage.
“In the industry, 73% of all project delays have been due to ‘above ground’ or non-technical risks. With the increasing complexity of our operated and operated-by-others (OBO) business, we need to understand and respond to the changing needs of our partners, regulators and host governments. Enhancing our external orientation and successfully influencing our stakeholders is essential to achieve our business objectives,” says Wilks.
Developing commercial mindsets
Stakeholder engagement is a mandatory part of successful project development and execution for Maersk Oil as an operator. An example of timely stakeholder engagement is from the UK, where Maersk Oil, as operator of the Culzean project, engaged with the government while it was working on a new HPHT allowance.
However, it is equally, if not more, important to ensure good relationships and mutual understanding with partners for projects operated-by-others as this is one of the ways to influence the project’s direction.
“Improved stakeholder understanding leads to a deeper relationship, which leads to increased influence. Increased influence amplifies the power to deliver our operational objectives, and ultimately, this is what will create value for our company,” says Wilks.
Wilks has sponsored leadership courses that provide leaders in Maersk Oil with the opportunity to develop and test their commercial mindset, as well as their understanding of how stakeholder engagement can enable business. Going forward Maersk Oil will address the minimum requirements for how we work with our external relations and aim for a best-practise approach in proactively planning interactions with stakeholders.
Chief Commercial Officer
The timing of discussion over the uHPHT allowance also chimed with a wider piece of work being undertaken by Sir Ian Wood (founder of Wood Group) on behalf of the UK Government, examining how to maximise economic recovery on the UK Continental Shelf. Some of the >> key themes in Sir Ian’s final report aligned well - better cooperation between HM Treasury, the Department of Energy and the industry; and the need to develop new and emerging plays.
“There’s no doubt that the new allowance is a strong example of UK government commitment to the UK North Sea in general, but also to Sir Ian’s report in particular," says Martin Rune Pedersen.
"It’s one proof point that they are taking action to stimulate investment and work more closely with the industry. From that point of view, the timing of the discussions about the allowance was excellent, as it gave the government a great platform to illustrate their commitment,” he adds.
Maersk Oil is currently actively engaged in the consultation process, working with industry peers and government to deliver a
fiscal outcome that can meet the needs of the UK, the industry and further the aim of maximising economic recovery in the UK North Sea.