Wednesday 11 February 2009

BANKING CRISIS AND RECESSION PUT UK OIL AND GAS INVESTMENT AT RISK

Urgent measures are needed to prevent the effects of the global recession combined with the banking crisis from dampening new investment in the recovery of the UK's still significant oil and gas reserves, Oil & Gas UK warned today (11 February 2009) on the publication of its annual survey of activity for the industry.   

The Oil & Gas UK 2008 Activity Survey, which summarises planned expenditure on the UK continental shelf (UKCS) by 75 oil and gas companies, reveals that the combination of low oil prices and the freezing of capital markets will have a marked effect on exploration and development activity over the next 12-18 months. While the province is mature, its remaining reserves of up to 25 billion barrels of oil and gas equivalent (boe) give it the potential to produce large volumes to help meet the nation's primary energy needs for decades to come.

Oil & Gas UK's chief executive, Malcolm Webb, said: "The UKCS is clearly a mature oil and gas province but production has responded to a step-up in investment in 2005-6 and as a result, the annual rate of decline has slowed from 7.5% to 5% in 2008. This year and next, however, capital investment in exploration and development is forecast to drop, thus hitting future production. We cannot stand by and simply allow the decline rate to accelerate.

"Of the UK's remaining 25 billion boe, the survey tells us that companies have plans to invest £44 billion to recover 9.6 billion boe," Malcolm Webb continued.  "Our research shows that if investment could be sustained at around £5 billion per annum, the industry could hold production decline at 4-5% a year on average.  However, if investment falls, that decline will again accelerate."

Oil & Gas UK's latest estimate is that capital investment in new and existing fields fell from a peak of £5.6 billion in 2006 to just under £5 billion in 2008, despite the rise in oil prices over the period. Scarcity of capital now means that new investment is being secured for only the most attractive projects; accordingly, it is anticipated that investment will fall to somewhere in the range of £3.5-4.5 billion in 2009 and could decline to between £2.5 billion and £4 billion in 2010.

Meanwhile, the cost of developing and producing UK oil and gas in 2008 rose by 12% compared with 2007.  The break even oil price for new field investment is now over $40. Indeed, only a third of new developments now under consideration break even at current costs, a $50 oil price and the present UK fiscal regime which taxes production at a marginal rate 50 -75%.

Mr Webb said: "Since the oil price was last in the $40-45 per barrel range four years ago, the cost base and supplementary charge on corporation tax have both doubled. The fundamental mismatch of the tax rate and business environment is detracting from the value of investments, rendering them less competitive. This becomes particularly apparent when oil prices are lower."

Whilst Oil & Gas UK still estimates that the total future potential of the UKCS is up to 25 billion boe, the recovery of the last 15 billion boe will require maintaining sufficient exploration activity to access all those reserves. Exploration and appraisal activity in 2008 (109 wells) was roughly the same as in 2007. However, Oil & Gas UK fears a rapid reduction in 2009.  A year ago, it was anticipated that up to 113 wells would be drilled in 2009 whereas the latest survey predicts 77 wells, of which only 34 have a committed drilling rig.

Mr Webb continued: "The UK oil and gas industry is at a crossroads. There is a broad range of commercial opportunities which could attract investment in the right circumstances but, in the short term, we need to concentrate on mitigating the effects of the downturn.

"Government figures show that the UK will still rely on oil and gas for at least 70% of its primary energy demand in 2020. In order to minimise our dependence on imports, not to mention maximise the contribution of our domestic oil and gas to the nations balance of trade, tax revenues and employment, both the industry and Government must take measures now to ensure the industry can weather from the recession in reasonable health."

Mr Webb concluded: "The industry is working hard to adjust its cost structure and retain its impressive skills base but we need Government help to ease the flow of capital from banks to smaller exploration and production companies, improve the availability of credit to the supply chain and ease the tax burden on new oil and gas developments.

Stimulating exploration for and investment in our own reserves will help avoid the worst impacts of a potential energy crunch on the UK economy. We are in urgent and constructive discussion with the Government through the PILOT forum on all these matters and I hope that measures to address the various issues will be announced soon, certainly no later than this year's Budget."

ENDS

NOTES TO EDITORS

1. Oil & Gas UK is the leading representative organisation for the UK offshore oil and gas industry.  Its members are companies licensed by the Government to explore for and produce oil and gas in UK waters and those who form any part of the industry's supply chain.
2. PILOT is a joint programme involving the Government and UK oil and gas industry aiming to secure the long-term future of the industry in the UK.
3. The full report is available here

Sally Fraser

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