Monday 28 November 2005

UK Benefits as North Sea Investment and Activity Soar

Increasing investment in UK oil and gas production has seen offshore exploration and development soar this year, pointing to an almost complete recovery from the two-year slump in 2002-3 and bringing the prospect of rich rewards for the nation, claims the UK Offshore Operators Association (UKOOA) in a report published today (November 28).  

"The heightened level of activity in the North Sea today is crucial to the future of the province and the economic benefit the offshore sector can generate for the UK," says Malcolm Webb, UKOOA's chief executive. "This years upswing in exploration and development promises a healthier outlook than we have seen for many years and brings with it expectations of securing a rich source of primary energy supply, jobs and revenues for many years to come."

However, the report, "Taking the long term view", also shows that the UK continental shelf (UKCS) only just remains competitive, with poor returns on new developments over the last decade indicating the fragility of its attraction to future investors. 

"Any move to increase the rate of taxation applied to the UKCS at this time would materially impact UK competitiveness and each £1 billion reduction in investment will result in an irrecoverable loss of at least 250 million barrels of production," warns Malcolm Webb.

UKOOA has revised its forecast of capital expenditure in the UK continental shelf (UKCS) to £4.5 billion for 2005, up 20 percent from its January estimate of £3.8 billion.  Total spend by the oil and gas industry in the UK (capital, operational and exploration expenditure) could reach up to £11 billion, says UKOOA.  This is almost as high as UK investment has ever been in a single year and the highest level for seven years. 

Provided activity can be sustained over time to allow maximum recovery of the UKs remaining 28 billion barrels of oil and gas, the ultimate long term gain to Treasury could be as much as £120 billion in tax revenues (assuming $40 a barrel).

Operating costs are also expected to be at record levels this year at around £5 billion, £300 million up on last year, as companies invest to extend the life of ageing assets and infrastructure.

The number of development wells being drilled is up for the first time in four years.  By the end of the third quarter more wells had already been drilled than in the whole of 2004 and the final number should be over 230.

Production is likely to start on 16 new fields this year, up from 11 in 2004, while government approval is expected for 24 new developments, compared to 14 in 2003. 

The turn around in the UKCS fortunes is also well demonstrated by the surge in exploration activity.  UKOOA now forecasts around 82 exploration and appraisal wells will be drilled by the end of the year, almost double the number drilled in 2002 following the tax changes.

A strong domestic market for oilfield goods and services has provided the springboard for an expanding export business, which UKOOA conservatively estimates already to be worth £6 billion, making it much larger than whisky in Scotland and all beverages or textiles across the UK.  Oil and gas goods and services now account for over 20% of all Scottish exports.

An increasing diversity of investors is benefiting the UKCS and new entrants have been a catalyst for growing investment. In 2005 the 35 companies that have entered the UK market since 1999 will account for about 33% of investment and 14% of total production.

However, Malcolm Webb warns that investors have a choice of where and when to invest.   "It is critical that we maintain the attractiveness of the UKCS," he says.  "The shock of a punitive change to the North Sea fiscal regime, will not only destroy the current investment climate but will irreparably damage the massive contribution that this industry can continue to make in terms of security of energy supply, jobs, tax, balance of trade and export earnings for generations to come."

NOTES TO EDITORS

• UKOOAs autumn paper, Taking the Long Term View, is available on http://www.oilandgas.org.uk/issues/economic  Copies of a presentation to accompany this press release will also be found on the website.  For printed copies, please contact the UKOOA press office at the above address.
• The UK Offshore Operators Association (UKOOA) is the representative organisation for oil and gas companies licensed by the UK government to explore for and produce hydrocarbons offshore around the British Isles.  It has 34 members.

For more information, please call 020 7802 2400.