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Bleak picture of high-potential UK oil industry

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Staff writer ▼ | February 25, 2015
Oil & Gas UK's new report on offshore exploration, investment and production provides striking evidence of how rising costs, taxes and inadequate regulation have taken their toll on the UK industry's international competitiveness.
UK oil and gas
Oil & Gas UK report   The lowest revenue since 1998
Malcolm Webb, Oil & Gas UK's chief executive, said: “This year's Activity Survey paints a bleak picture but also identifies this region's potential, emphasizing the importance of Government and industry now putting the right measures in place to secure its long-term future. This is crucial not only for the energy security that domestic oil and gas production provides but also for the hundreds of thousands of highly skilled jobs, advanced technology and billions of pounds of exports which the industry underpins.

“Without sustained investment in new and existing fields, critical infrastructure will disappear, taking with it important North Sea hubs, effectively sterilising areas of the basin and leaving oil and gas in the ground.”

The survey reports that 6.3 billion barrels of oil equivalent (boe) are sanctioned or under development. There are another 3.7 billion boe of potential investment opportunities, although companies indicated at the end of 2014 that less than two billion boe of those were likely to be developed.

Operating expenditure rose by almost eight per cent to 9.6 billion pounds in 2014 and on a unit of production basis, reached a record high of 18.50 pounds/boe. Falling oil prices meant that revenues fell to just over 24 billion pounds for the year, the lowest since 1998, and this, combined with rising costs, resulted in a negative cash-flow of 5.3 billion pounds for the basin, the worst since the 1970s.

Cost over-runs and project slippage on several large projects pushed capital investment in 2014 beyond expectations to 14.8 billion pounds, with half spent on just 12 fields. As these large projects move from the investment phase into production there is very little new investment lined up to replace them; indeed, it is expected to fall in 2015 by around one third to 9.5 – 11.3 billion pounds.

Annual investment in sanctioned projects alone is forecast to decline rapidly and could collapse to 2.5 billion pounds by 2018. Equally alarming is the three-year (2015-17) outlook for projects yet to get company sanction, in which planned investment has fallen from 8.5 billion pounds in last year's survey to just 3.5 billion pounds in current forecasts. The basin is not generating new projects and as a result, there is very little fresh investment.

Exploration for oil and gas in the UK last year was significantly worse than anticipated with only 14 wells drilled out of the expected 25. This continues the downward trend of recent years with no improvement in sight. Between eight and 13 exploration wells are forecast for this year as price uncertainty adds to the existing difficulty explorers still have in accessing capital.

Mr Webb said: “Even at $110 per barrel, the ability of the industry to realise the full potential of the UK's oil and gas resource was hamstrung by escalating costs, an unsustainably heavy tax burden and inappropriate regulation. At current oil prices, we now see the consequences only too clearly.

“The industry recognises that its cost base is unsustainable. Cost and efficiency improvements of up to 40 per cent are required to give this basin a viable future. This adjustment is now underway but cost control alone is not the answer.

“The basin needs sustained, high investment - 94 billion pounds alone to recover the 10 billion boe in known reserves. This is why a concerted effort on three fronts is needed – tax, regulation and cost – to make the basin more attractive to investors and ensure that significant sums of much-needed capital come to the UK.”

One positive finding of this year's survey is that production in 2014 had its best year-on-year performance since 2000, falling just one per cent since 2013 to 1.42 million boe per day (boepd). This was largely the result of investment in new project start-ups, enabled by targeted tax allowances, and a specific focus across the industry on improving production efficiency in existing fields which resulted in no major unplanned shutdowns.

This year up to 15 new fields could begin production with many expected in the first half of the year. If there is no major project slippage, oil and gas production could increase to around 1.43 million boepd in 2015.

Mr Webb concluded: “This offshore oil and gas industry is a major national asset. Our indigenous resources hold the promise of a successful industry for decades to come and we have the skills needed to realise that potential. The industry is taking measures to improve its cost efficiency and we are pleased that even before the steep fall in oil price, the Government took the important steps of implementing the Wood Review recommendations and conducting a comprehensive tax review.

“The time has now come for delivery of permanent change on those fronts. We need to see full delivery of the Wood Review recommendations as well as a permanent reduction in the headline rate of tax, a simplification of the tax allowance structure and stimulus for exploration. We must, together, do what is needed to reduce costs, encourage investment, and avoid premature decline.”