Oil & Gas UK Says Government Reforms Needed

On publication of its 2007 Economic Report, Oil & Gas UK said it was encouraged by the opportunity provided by current consultations to deliver fiscal and regulatory reform. Whilst total spending on exploration, development and production of oil and gas reserves grew by 20% to £11.5 billion in 2006, production struggled to respond, and in 2007, continuing cost inflation and sustained low gas prices are putting the competitiveness of the UK continental shelf (UKCS) under severe pressure.

In its 2007 Economic Report, Oil & Gas UK highlights the continued significance of the oil and gas industry in the UK economy in terms of security of primary energy supply, technical innovation, jobs, tax revenues and export activity. Oil & Gas UK estimates that a huge prize, amounting to between 16 and 25 billion boe, remains. If the UK's remaining barrels of oil and gas equivalent are to be recovered, then Government and Industry must work much more closely together to realize the full potential of the basin.

Malcolm Webb, Oil & Gas UK's chief executive said: "Industry is pleased to see the Governments determination to boost investment in the UKCS as expressed in the Energy White Paper. I am personally heartened that we have recently seen the Secretary of State chairing PILOT meetings, publicly demonstrating commitment to help us deliver our full potential and I hope this will continue.

"On tax, we believe there are lessons to be learnt from the much sharper than anticipated decline in government revenues witnessed after the rate increase of 18 months ago. The Treasury then forecast tax revenues this fiscal year of £11 billion, whereas the reality will be nearer £8 billion. Higher tax rates do not always generate more tax.

"Oil & Gas UK values the constructive dialogue with Government, addressing measures to improve the business environment and restore UK competitiveness. Now is the time for action and we look forward to the outcome of the current fiscal discussions and consultation on decommissioning. Together we can sustain the jobs and tax revenues associated with indigenous production and continue to reap the rewards from our supply chain which is currently a global leader in innovation and technology."

The UK produced 2.9 million barrels of oil equivalent (boe) per day last year. The UK is still a larger oil and gas producer than Nigeria, Kuwait and Indonesia. In 2006, the oil and gas industry paid £9.1 billion in direct taxation to the Exchequer and made a positive contribution worth over £30 billion to the UKs balance of trade. The oil and gas industry also continues to support around 480,000 jobs, 380,000 of which are involved in domestic production and up to 100,000 in supply chain export activity.

Malcolm Webb commented: "Global cost inflation, a small average discovery size and technically complex reservoirs have all contributed to the average cost of developing new oil and gas reserves in the UK rising to $25 per barrel. Of UKCS production, oil accounts for 55% and gas accounts for 45%, so the collapsed gas price has a bearing on producers revenue. The combination of rising costs and an effective oil price which now sits around $40 per barrel means industry margins are shrinking. Industry competitiveness is slipping and the struggle to attract investment is intensifying, a trend evident in the shelving of several projects vulnerable to low gas prices in the southern gas basin and the mature northern North Sea, where the ageing nature of infrastructure yields particularly high operating costs."

Despite efforts to promote the use of renewable sources of energy, the recent Energy White Paper confirms that the UK's reliance on oil and gas for its primary energy demand will increase from 75% to 79% in 2020.

Malcolm Webb commented: "The UK's increasing reliance on oil and gas make it absolutely imperative that we maximize the recovery of our own reserves. A more competitive fiscal and regulatory regime will help attract the investment necessary to provide 25% of the UK's gas and 60% of the UK's oil in 2020 and to allow the strong and growing £15 billion pa supply chain to expand both in the UK and overseas markets."