UK O&G Activity Report Prompts Questions about North Sea Competitiveness

The UK Offshore Operators Association (UKOOA), the representative organization for UK oil and gas producers, has called for Government and Industry action to address signs suggesting that the UK offshore oil and gas province is becoming less competitive and less able to attract the investment needed to sustain future production levels.

UKOOA today (February 13, 2007) published its 2006 Activity Survey Report, which summarizes the exploration, investment and production plans of North Sea oil and gas operating companies over the next three years. While exploration and appraisal activity remains encouragingly strong, the report also discloses high cost inflation, a 250,000 barrel per day fall in expected production and signs of a drop in capital investment in 2007 after three years of growth, by £1-1.5 billion to around £4-4.5 billion. This raises concerns that the UK oil and gas basin could be finding it more difficult to compete for global investment, says UKOOA.

Malcolm Webb, UKOOA's chief executive, said: "The survey provides a more challenging perspective on the future of the UK continental shelf than we have seen for some years. Whilst the strong level of exploration activity is welcome, the more rapid than expected decline in production; the significant cost inflation in 2006 and the forecast of a reduction in investment in 2007 are worrying.

"Even after 40 years, the UK offshore continues to be an active oil and gas basin. Strong exploration and appraisal activity, firm plans to recover a further 10.3 billion barrels of oil equivalent (boe) and an overall reserves potential of up to 26 billion boe should allow the industry to continue making a crucial contribution to UK security of energy supply for many years to come.

"But sharply rising costs mean that the mature UK continental shelf is increasingly exposed to lower oil and gas prices. The current low price of gas, which accounts for about 45% of total UK production, may make gas production from certain parts of the North Sea more troublesome, if sustained. High cost inflation combined with typically small opportunities and increased tax rates (now 75 percent at the top end) must make it harder to attract investment into the North Sea. Margins are shrinking, particularly in the Southern Gas Basin and in the older Northern oil fields, and if steps are not taken to improve the industry's competitiveness, the implications for future production and secure indigenous energy supplies could be serious. Both the Industry and Government have their responsibilities in this."

UK oil and gas capital investment was £5.6 billion last year, its highest since 1998, while the year was also successful for exploration. Despite a decline in the number of exploration and appraisal wells drilled (69 down from 78 in 2005), there was a commercial success rate of 35 percent, showing the potential to deliver around 500 million boe, averaging 15 million boe per discovery. Exploration and appraisal activity is forecast to pick up in 2007, with up to 80 wells anticipated over the next 12 months.

However, despite prolonged high investment, UK oil and gas production fell by 9 percent in 2006 and is projected to be 250,000 boepd lower on average than previously forecast over the remainder of this decade. The drop in production is primarily attributed to poorer reservoir performance but also delays in new project start-ups and increased maintenance. This is not good news for the industry or for Treasury as it equates to a drop in tax revenues of around £1billion a year over these years based on recent oil prices.

Operating costs in the UK offshore now average at $9-10/boe, compared with $5-6/boe three years ago while the costs of bringing new North Sea developments into production look set to rise to around $25/boe over 2007-9. Uncertainties regarding the fiscal and regulatory treatment of decommissioning, combined with high oil prices, have impacted asset trading. There were 17 deals reported in 2006, half that of 2005.

"The combination of cost pressures, declining production and any premature drop in investment risks shortening the life of the basin," said Malcolm Webb. "It is possible that some of the production lost over the next few years may ultimately be recovered provided sufficient new projects come on stream. But this will require sustained investment to maintain pace in exploration, new development and maximizing recovery from existing fields. I believe the government needs to reconsider the risk reward balance, with a new fiscal and regulatory regime better suited for the second half of the life of the UKCS, and the industry simply must address its cost base."

Speaking at the launch of the report at a UKOOA business breakfast in Aberdeen, Thorsten Fischer, Senior Economic Adviser specializing in the Energy Sector at The Royal Bank of Scotland (RBS), which sponsors the 2007 UKOOA Breakfast Series, said: "The UKCS offers remarkable opportunities, not least because it is politically stable. It is all the more important that regulatory and tax policies remain predictable. Oil companies, like any other business, need planning security and prefer to operate in a stable environment, where the rules are well known. This is particularly true for the issue of decommissioning.

"UK companies, in particular small and medium size businesses, have acquired considerable expertise in exploiting mature fields, and stand to benefit from increased demand for their services. The know-how that these companies have developed also positions them as formidable competitors when it comes to supplying technology to offshore and deepwater projects outside the North Sea."