Serica points up perils of North Sea exploration An oil rig in the North Sea off the Scottish coast Serica Energy hit the jackpot in 2006 when it discovered a largish natural gasfield in the UK sector of the North Sea. Eight years later, the small London-listed oil explorer is still trying to figure out how to get the gas ashore. Serica had hoped to feed gas from the field, called Columbus, into a network of pipelines owned by BG Group that run to an onshore terminal. However, it is taking years to thrash out the terms of a contract. Meanwhile, Serica's gas remains in effect stranded, buried deep beneath the seabed. UK North Sea crude oil Drilling activity and new projects The company's share price has plunged from £1 at the time of the Columbus find to 13p. "The market loses confidence in you if you make a discovery and can't bring it into production," says Tony Craven Walker, Serica's chairman. Serica's tribulations reflect a deep problem in the North Sea - the lack of co-operation between operators. This is seen as one factor behind a troubling decline that is causing jitters from Aberdeen to Westminster and raising questions about the future of one of the world's most prolific hydrocarbon basins. "It would be premature to say the North Sea is over, but the alarm bells are ringing," says Graham Hollis, partner for energy and resources at Deloitte in Aberdeen. Worried by declining production, the government last year tapped an eminent oilman, Sir Ian Wood, to come up with suggestions for how to maximise recovery from the North Sea's dwindling oil and gas reserves. One of his key recommendations was for companies operating there to work together more effectively. "The frequency of failure to agree between and within consortiums on key issues, including access to infrastructure and development of field clusters, is very damaging," he wrote. There have been more than 20 instances in the past three years, he says, where the inability of operators to agree terms for access to processing plants and pipelines has caused "significant delays" to projects, or led them down a "suboptimal" route. In some cases, this had resulted in oil and gasfields being left "stranded." Columbus is a classic example of that. The problem lies with the structure of the industry. The majors, who entered the North Sea decades ago, still control much of the infrastructure - the big platforms, pipelines and terminals. Meanwhile, the more recent discoveries are being made by new entrants - small operators such as Serica. And the fields they find are often too small to justify standalone developments, so need to be "tied back" to existing production hubs. What's needed is someone to bang heads together. There's no one doing that at the moment Andrew McCallum of Dana Petroleum "The trouble is that the existing operators have little incentive to accommodate a third party through their infrastructure," says Amjad Bseisu, chief executive of EnQuest, a North Sea-focused explorer. This is really slowing down investment. In September, it will be 50 years since the first oil licence was awarded in the North Sea. Since then, this venerable basin has yielded some 41bn barrels of oil equivalent. It has also become critical to the UK economy, employing 450,000 people and paying 15 per cent of all corporate taxes in the UK in 2012-13 alone. Ministers and industry officials insist it has a bright future, claiming that a further 12-24bn boe remain to be produced. "We're only two-thirds of the way through the North Sea story," Michael Fallon, energy minister, said last week. But there are worrying signs. Production has fallen more than a third since 2010. Maintenance schedules are getting heavier, as equipment ages, meaning more field outages. More disturbing still, the rate of exploration drilling has halved over the past decade. The biggest problems facing the sector, says Oonagh Werngren, operations director of trade body Oil & Gas UK, are a lack of cash for ever more expensive exploration and the tight rig market. "New entrants are having trouble raising finance," she says, "while the majors have to be able to justify every exploration prospect against a global portfolio." The decline is not all to do with arrogant oil companies refusing to share their pipelines. Confidence was shattered by the UK Treasury's £2bn tax raid on the sector in 2011. Ministers later softened the blow by providing tax allowances for certain fields and more certainty on tax relief for decommissioning costs, which have hung heavy over the industry for years. The tweaks led to a boom in investment, which rose to £14bn last year - the highest level in real terms since the mid-1970s. Last year saw 13 new field start-ups: compared with only nine in 2012, according to Deloitte. Wood Mackenzie, the energy consultancy, says 21 fields were actually supposed to come on stream last year. Many were delayed because of "stretched resources" in the sector, while others were put on hold completely, as spiralling costs put pressure on project economics. Striking examples include Chevron's multibillion-dollar Rosebank field west of Shetland, and Statoil's Bressay heavy oil project. Stagnation and decline in the UK is often contrasted with successes in Norway's North Sea sector, which continues to see big discoveries and high activity levels. Experts point to the tax regime: companies can claim back 78 per cent of their exploration costs if they drill a dry hole. "It means your risk profile is completely different," says Serica's Mr Walker. This gas must be produced before all the platforms and pipes rust away completely and it'll be too late Tony Craven Walker, Serica's chairman For many in the industry, prospects for the North Sea could be vastly improved if the UK created a new, beefed-up regulator. Indeed, Sir Ian Wood's report recommends just such a body, with new powers to resolve disputes, impose sanctions and provide incentives for improved recovery. Currently, all regulatory issues are handled by about 50 officials at DECC, the Department of Energy and Climate Change - down from 90 in the early 1990s. Philippe Guys, head of French major Total's UK business, says any new regulator should resemble the Norwegian Petroleum Directorate. "DECC is the only institution that has a global view of all the licences, of everything that is done in terms of exploration and production in the North Sea," he says. If all that data were properly digested and analysed, it would help us identify where we should invest . . . where the new frontier areas are. That's what is done in Norway. Others agree. "The Norwegian regulator has a much more hands-on approach to optimising resources," says Andrew McCallum, head of corporate affairs at Dana Petroleum. A tougher British watchdog, he says, will be able to intervene in commercial disputes and enforce greater collaboration. "What's needed is someone to bang heads together," he says. There's no one doing that at the moment. BG's changing priorities lie at root of Serica's problems At the root of Serica Energy's problems in the North Sea are the changing priorities of a much bigger company - BG Group. BG operates a field called Lomond, as well as a pipeline to northeast England called the Central Area Transmission System, or CATS. It long nurtured plans to expand Lomond by building another platform next to it, linked with a bridge. That would have increased Lomond's processing capacity, and allowed it to handle gas from other fields, including Serica's Columbus and Arran, which was originally discovered in 1985 by Royal Dutch Shell but is now owned by Dana Petroleum. That extra gas would then be fed into the CATS system. However, last year BG dropped the idea of a bridge-linked platform (BLP) for Lomond, leaving Serica and Dana high and dry. In a statement, BG said it applied strict criteria to every project to ensure it delivered value for its shareholders. In the Lomond BLP case these criteria were not met. Serica's difficulties are common across the industry. The number of North Sea oil and gasfields has increased from 90 in the early 1990s to more than 300 now, and the number of operators has also risen. "As the basin matures, fields get much smaller," said Nigel Hares, co-founder of North Sea explorer EnQuest. So it needs everyone to collaborate to a much greater extent than previously. That does not appear to be happening. Serica and Dana are still hoping they can reach an agreement with BG that would allow gas from Columbus and Arran to be pumped into the BG system. But progress is slow. "This gas must be produced before all the platforms and pipes rust away completely and it'll be too late," said Tony Craven Walker, Serica's chairman.