An optimisation model for incentivising the development of marginal oil and gas fields amidst increasingly complex ownership patterns: UKCS case study

Abstract

Many recent discoveries in the UKCS have been economically marginal and comparatively small such that they are unable to be developed on a standalone basis. Nevertheless, there is a proliferation of production facilities and transport infrastructure that can, on accepting a tariff, process hydrocarbons from these smaller-sized oil and gas fields, thereby contributing to the UK Government's strategy of maximising economic recovery (MER). However, the empirical dimensions of cost-sharing arrangements between a field owner (host field or hub) and tie-in (satellite) fields are not well examined in the literature although they influence long-term economics in matured oil provinces. In this paper, we develop a mixed integer programming optimisation model to analyse how these third-party access to infrastructure issues impact MER in the UKCS. A first-best situation with only one regional operator is empirically compared with the actual situation of multiple ownership. We then assess the impact of different infrastructure unbundling provisions via pipeline tariff choices and their interaction with the fiscal regime on the net present value (NPV) and other project metrics such as timings of hub and field shutdowns. We find that differences in field ownership, tariff choice and changes to the fiscal regime impact the overall NPV of field developments. Our results also show that having a progressive fiscal regime in a mature basin such as the UKCS is important to support continued operations under low oil prices while increasing the government's take at high prices. The cost-sharing effect shows that imposing strict cost-sharing rules does not change overall project valuations, even in a low oil price scenario. An additional contribution to the extant literature is that tariff determination could be based on cost-sharing rules that enjoin each field tieback to a hub to pay a split tariff, comprised of a fixed cost of service (access charge) and variable (marginal) costs. • Presents MIP model for analysing economic dependencies of infrastructure assets. • Ownership style, choice of tariffs, and fiscal regime impact overall field value. • Reducing marginal tax rates improves profitability, reflecting neutrality and progressivity. • Tariffs are decisive as to whether satellite or user fields are developed. • Tariff determination to maximise MER should be based on two-part cost-sharing.