Offshore Europe: Keynote session on regulatory initiatives and positions since Macondo

Michael Fallon addresses the Offshore Europe conference in Aberdeen.

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

The Rt Hon Sir  Michael Fallon MP

Good afternoon.

Four weeks ago, I made my first trip to an offshore platform in the North Sea, the Elgin platform. That visit highlighted the sheer scale of operations offshore, the dedication of the workforce and the risks that working in remote locations can bring.

These risks were driven home by the recent helicopter crash off the coast of Shetland and I cannot talk about the offshore oil and gas industry today, without first expressing my sympathies for the families of those who sadly lost their lives in this tragic accident: Duncan Munro, Sarah Darnley, Gary McCrossan and George Allison.

My thoughts are also with the survivors who went through a very difficult ordeal and I would also like to thank all those involved in the rescue operation. Investigations into the incident are still at a very early stage, but we are committed to ensuring that the root causes are identified and action taken to prevent a similar incident happening in the future.

And I firmly believe that we do have a sound future to look forward to in the North Sea. This was one of the first areas worldwide to develop its offshore oil and gas potential and this proud history of offshore exploration and production has produced an amazingly innovative and productive oil and gas industry.

The oil and gas industry currently supports around 450,000 jobs – many of which are highly skilled and are located across the UK, often in parts of the country which are economically challenged.

Exploitation of the UK Continental Shelf has been a major success. Over 40 billion barrels have been produced so far - but 20 billion, or perhaps more, still remain. This offers, by any measure, a significant prize.

Extracting the remaining reserves in both the UKCS and across the world will increasingly fall to the subsea industry. The UK is in an excellent position to take advantage of this - Subsea UK’s recent business activity review showed that the UK now holds an impressive 45% of the £20 billion global market.

The government’s Oil & Gas Industrial Strategy, which was published in February, sets out a clear path to ensure that the UK fully exploits its remaining oil and gas reserves.

Yesterday, the Chancellor unveiled the final decommissioning relief deed which gives companies certainty over the level of tax relief they will receive for future decommissioning costs. These deeds, which government will sign with industry, will provide the certainty needed to unlock billions of pounds of additional investment in the North Sea.

The Secretary of State recently invited Sir Ian Wood to lead a review aimed at maximising the economic recovery from UK offshore oil and gas. The review will be looking in depth at the issues that need to be addressed to ensure the longevity of the industry and our resources. Sir Ian will produce emerging conclusions in the autumn and the final report in early 2014.

We have separately been considering the levels and security of gas supplies. Previous independent assessments have shown that we enjoy high levels of gas supply security provided by a diverse range of supply sources, including: our own production, pipeline imports from Norway and the EU, imports from global markets via LNG and storage.

These sources have provided reliable gas supply over recent challenging winters, including our highest ever daily gas demand in January 2010. However, following the protracted cold spell earlier this year, and the Elgin incident last year, concerns have been raised about the UK’s gas market and its ability to attract sufficient gas to meet current and future demand.

Since then, DECC has been working to assess whether the potential benefits of intervention in terms of more secure supply and effects on gas prices might outweigh the associated costs and risks. We commissioned independent consultants to assess the costs and benefits of a range of potential interventions.

This study, published today, has found that the case for government to subsidise investment in new storage facilities is weak. Action is already being taken by the government, Ofgem and the EU to improve the UK’s gas security of supply. The UK has capacity to deliver twice the amount of gas required over winter, and only depends on gas storage for a fraction of total supply (7% in 2012).

This decision means that it will not be necessary for bill payers to subsidise increased investment in new gas storage facilities to ensure security of supply, saving bill payers subsidy costs, which over 10 years could run to £750 million. On the contrary, ruling out new subsidies for large scale seasonal storage should clear the way for the market to invest in smaller, fast-cycle capacity.

Underpinning and supporting the UK’s oil and gas industry is a robust regulatory regime, with a clear allocation of responsibilities for safety, environmental protection and for response to any incident. The regulatory system has been developed to meet evolving challenges and the UK has learnt from experience both at home and abroad.

Following the terrible Piper Alpha disaster in 1988, safety regulation was brought under the Health and Safety Executive umbrella, to get the benefit of their expertise in regulating major hazards. Since then, it has developed into the first class regime we have today. I know the changes to the safety regime were covered comprehensively at the recent conference to mark the 25th anniversary of the Piper Alpha tragedy so today I will largely focus on the vital role my department plays in overseeing the exploration, development, production and environmental performance of the offshore industry.

The tragic events on the Macondo well in the Gulf of Mexico in which eleven people died and just under 5 million barrels of oil were released to sea along with more recent events nearer to home – the Gannet oil release and the Elgin gas release - reinforce our resolve to ensure that consideration of human safety and risk to the environment is an integral priority for all oil and gas activities.

DECC made changes immediately following Macondo - changes which built on the robust regime already in place and ensured that the highest standard of practices were maintained in UK waters.

From the outset, we were committed to ensuring that lessons from the Macondo incident were considered and taken into account in the UK.

An immediate review of the UK regime was carried out resulting in:

  • An increase in the oversight of drilling operations through the recruitment of additional environmental inspectors;

  • A review of the indemnity and insurance requirements - leading to an agreement by the industry to more than double oil spill liability insurance for the settlement of claims, from 120 to 250 million dollars; and

  • companies updating their oil pollution emergency plans to address the possibility of an uncontrolled blow-out.

Moving on to the longer term, DECC, HSE and the Maritime and Coastguard Agency all participated in the Industry led Oil Spill Response Advisory Group (OSPRAG). The Group provided a focal point for a review of the UK offshore sector and its ability to cope in the event of a major incident and was an excellent example of collaborative working.

Participants from the oil and gas industry, the regulators and the trade unions, voluntarily, gave significant amounts of time and effort to identify and implement improvements to strengthen the UK’s oil spill prevention and response practices and you will be hearing more about this later.

We also tested how the authorities would respond in the event of a major deep water spill in the UK. Exercise Sula, took place off Shetland in May 2011 to test the UK’s National Contingency Plan for marine pollution from a deep-water drilling operation, similar to Macondo. Although the exercise identified some areas for improvement, overall it demonstrated that the UK has highly professional and dedicated personnel who understand their roles and responsibilities and who can respond effectively to an oil spill incident.

Separately, a regulatory review independently chaired by Geoffrey Maitland, Professor of Energy Engineering at Imperial College London, considered the findings from official Macondo reports and their relevance to the Oil and Gas industry in the UK.

The panel’s report, published in December 2011, acknowledged the strength and rigour of the UK’s offshore oil and gas safety and environmental protection regime, but made a number of recommendations for further improvements.

Working together, the regulators and industry have implemented the majority of the panel’s recommendations in full. Just to touch on some of the work that has been taken forward:-

  • Industry has developed and published guidance to ensure that critical safety equipment remains in good repair;

  • From 1st January this year, petroleum licensees on the UKCS have had to demonstrate that they have the financial capability to respond to an incident, before consent is given to drill exploration and appraisal wells; and

  • Operators are now carrying out offshore oil and gas emergency response exercises involving the Secretary of State’s Representative every 3 years instead of every 5.

A Senior Oversight Group has been established to supervise the implementation of the remaining Maitland recommendations and to ensure that the offshore regime remains fit for purpose in the longer term.

I would now like to talk briefly about the response of the European Union since Macondo. The UK has worked closely with European counterparts and the Commission to ensure that high standards of health and safety and high levels of protection for the environment are maintained across Europe in respect of oil and gas operations.

Let me be clear, we welcomed many of the initiatives suggested by the Commission such as the sharing of information and the desire to level up standards in some Member States to ensure best practice. However, although we recognised the need for legislation to put this in place, we did not support the Commission’s initial proposals to do this by means of a Regulation.

We considered that an appropriately worded Directive could achieve the same objective in a more efficient manner - avoiding uprooting a large part of a world class safety system and causing confusion for industry. As a result we, along with other Member States, argued successfully for the replacement of the proposed Regulation with a Directive.

In the same way that we lobbied effectively that a Regulation was not necessary for the Oil and Gas Sector, we are clear that UK legislation is a sound basis for robust regulation of Nuclear and Shale, although of course in all sectors we keep all regulatory measures under review.

The EU Directive on the Safety of Offshore Oil and Gas Operations came into force on the 18th July 2013 and must be transposed by July 2015. There are a number of aspects which require careful consideration by HSE and DECC and we are already working together on the transposition plan.

Nevertheless I can confirm that we will be seeking to implement both the spirit and words of the Directive whilst minimising unnecessary changes for industry and the machinery of government. But I am keen that in moving towards that target we avoid any gold-plating – an aim I am particularly conscious of in my role as Minister for Better Regulation.

In summary, although we are moving towards a less carbon intensive future, hydrocarbons currently supply some three-quarters of our energy needs and we will be significantly dependent on oil and gas for many years to come. As a result, I believe that it is vital that we continue to do all we can to maximise economic recovery of our indigenous hydrocarbon reserves, whilst maintaining high standards of safety and minimising environmental impacts. This applies both to offshore and the onshore.

The safety of our offshore workforce and the need to protect our valuable marine environment remains an absolute priority. The work that has been undertaken to date goes a long way to further minimising those risks and, should such an event occur, ensuring that the UK has appropriate response measures in place to limit the impact on safety and the environment. However, we can never be complacent.

Today we are looking at the response to Macondo and the tremendous amount of work that has been done in response to that tragic incident. However, we must never forget the human cost and I would like to finish this afternoon as I started by remembering and paying respect to all those who have lost their lives working offshore, not just here but across the world. Only by remembering the past, can safety in the future be assured.

Published 11 September 2013