Wednesday 17 November 2004

Steady Hand Required to Keep North Sea Renewal on Even Keel

North Sea oil and gas activity has seen a notable turn-around over the past twelve months but remains vulnerable nonetheless and will only be sustained by continued and substantial investment from the oil companies, a stable and predictable fiscal regime and a continuous and constructive engagement with Government, warns industry trade body, the UK Offshore Operators Association (UKOOA).

* In a report entitled Succeeding in a Challenging Environment published today (17 November 2004) in response to calls for the imposition of further taxes on the industry, UKOOA points to the evidence of investor confidence returning to the North Sea following the introduction of the 40% corporation tax rate for UK oil and gas producers in 2002:

* Exploration and appraisal drilling is forecast to be up 30 percent on last year, with around 58 wells expected to be drilled by the end of the year compared with 45 in 2003;

* Rig utilisation is up, reflected in rising day rates, with semi-submersibles seeing their highest rate for over two years.  Five drilling rigs have been re-activated, and rigs which had left the UK are now returning;

* The number of development approvals is expected to double this year, up from 14 in 2003;

* There are more potential new developments on company books than this time last year (35 compared to 28 in 2003);

* 2004 saw the most successful offshore licensing round for many years with 97 licences being offered and a renewed interest in exploration West of Shetland;

* Joint efforts by government and industry to ensure that companies new to the North Sea have access to business opportunities and that assets are either invested in appropriately or moved on are bearing fruit:

• A record number of companies are active on the UK Continental Shelf (UKCS) 123 in total;
• The last two licensing rounds have seen 42 new entrants being awarded licenses;
• The share of UKCS production from medium/large producers has increased by 10 percent over the last five years as a result of asset transfers and mergers, while small producers are growing in number and increasing their share of production at the same time.  In 2004, new entrant companies will contribute about 10 percent of production and 22 percent of investment.
• Sales of interests in oil and gas fields involving on average 700 million barrels of oil equivalent (boe) of oil and gas reserves have been completed in each of the last 10 years (major mergers excluded).  600 million boe changed ownership in 2003.  This amounts to an average 7% of total UKCS proved reserves being traded in each of the last 10 years (again, excluding major mergers).  This figure rises to 11% if mergers are included (with a peak of 28% in 2000).
• Disposals in 2003, as a proportion of total UKCS reserves, amounted to 7%.  Despite the increase in oil price, which many thought would slow sales in 2004, the volume of reserves changing hands will be up on 2003.

Speaking at the North Sea Strategy and Finance Conference in Aberdeen today, UKOOAs economics and commercial director Mike Tholen said: "It has taken two years, and higher oil prices, for the industry to recover to where it was in 2001.  We can look forward to 2005 with cautious optimism.  Higher oil prices are already facilitating "quick-win" incremental investments that would have been deemed too risky at a lower price, and there are signs that companies are also assuming higher prices when evaluating longer-term projects.  It is probable that 2005 budgets will reflect this and allow, in some cases, for increased investment.

"But it needs to be remembered that investment is not driven by short term oil price as new developments take 2-5 years to bring on stream and will be in production for further 10 to 25 years.  Any type of volatility or uncertainty hinders investment planning and needs to be avoided wherever possible.  Industry and Government must keep a steady hand to ensure stability and confidence.  Short-termism is to be avoided at all costs, the effects of which could accelerate the decline in production of UK oil and gas reserves, hitting jobs, inward investment, security of supply and tax revenues."

Notes to Editors

1. UKOOAs report Succeeding in a Challenging Environment can be downloaded from www.oilandgas.org.uk/issues/economic/succeeding.pdf

2. 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 currently has 30 members and five associate members.

For more information, please call 020 7802 2400.