Friday 11 February 2000

Report Predicts Long Term Future for North Sea

UK offshore oil and gas production will continue well into the 21st Century, despite the increasing maturity of North Sea fields and international competition for investment, says a report to be published today (Friday, 11 February) by the Industry representative body, the UK Offshore Operators Association (UKOOA).

UKOOAs 1999 Economic Report, the Associations first comprehensive economic survey of the offshore oil and gas industry, summarises the key events of the past 12 months which have shaped current activity levels and examines the drivers and obstacles for future development.

It highlights the Industrys key strengths a highly skilled workforce; its existing infrastructure in the form of extensive offshore networks of pipelines and installations; and the remaining potential in existing fields.

It reveals that most estimates of UK reserves indicate that, under optimal conditions, there is about as much oil and gas remaining to be recovered offshore as the 26 billion barrels of oil equivalent (boe) already produced by the UK Industry in the last 30 years.

However, the extent to which the remaining exploration potential is captured will depend on a number of factors. Production costs in the UK sector are high and new field sizes small compared with other oil producing countries. Therefore, cost reductions and the application of new technology will be key if the province is to continue to attract investment and the Governments Oil and Gas Industry Task Force (OGITF) target of three million boe per day for 2010 is to be realised.

Also crucial will be the retention of current infrastructure to support further development in existing fields and the recovery of smaller pools of hydrocarbons in satellite reservoirs nearby. The potential remaining in mature fields is large about 2 billion boe but the window of opportunity for further investment in these fields is limited, in some cases, to only three or four years. Moreover, while the Industry has identified in the order of 80 projects which could attract such additional investment, further development is discouraged by current tax rates which, for these ageing fields, can be as high as 69%.

The report also reveals the full impact of the recent oil price collapse on activity levels. Although oil prices have recovered, the average price in 1999 was still only some $18/barrel and few analysts believe the current highs will be sustainable. The market for gas, which now accounts for 40% of all activity on the UK Continental Shelf (UKCS), remains depressed. The spot price for gas averaged only 11p/therm over the last 24 months equivalent to some $10/boe. The recovery of gas prices is being hindered by the Governments stricter consents policy for gas-fired power station which is reducing future demand and activity levels.

Note to Editors

1.The UK Offshore Operators Association (UKOOA) is the representative organisation for the UK offshore oil and gas industry. Its 31 members are licensed by the British Government to explore for and produce hydrocarbons in UK waters.

2.A copy of UKOOAs 1999 Economic Report is enclosed. A summary of key findings is attached to this press release.

UKOOA 1999 Economic Report Key Findings

Contribution to the UK:

The industry has invested some £160 billion (1999 £) in the UK since exploration began in the mid-1960s.

The UK economy has benefited by £160 billion (1999 £) from North Sea taxation since the 1970s.

In 1998 oil exports reduced the UKs trade deficit by £3 billion.

Over the last five years the industry has accounted for nearly 20% of total UK industrial investment.

Some 300,000 jobs throughout the UK are supported by the industry, of which approximately 30,000 are based offshore. In Scotland, industry supported jobs represent 7.1% of total employment.

Gas supplied by the offshore industry has made a significant contribution to the UKs ability to reach its Kyoto target. Emissions form power stations have fallen by some 12 million tonnes of carbon per annum between 1990-97 as a result of switching to gas-fired power generation.

Key Events in 1998/99:

The collapse of the oil price in 1998 to $9/barrel created major economic and financial problems for the oil industry in the UKCS, because the North Sea is now a high cost area. Prices have recovered, but the average oil price in 1999 was some $18/barrel. Most industry analysts believe that the recent recovery in the oil price ($20-25/barrel) will not be sustained.

UK gas prices have remained depressed throughout 1998/99. The spot price of gas has averaged 11p/therm over the last 24 months - equivalent to some $10/boe.

In 1999 North Sea exploration declined to its lowest for over two decades in the face of uncertain prices and declining exploration success.

Oil and gas production in 1999 has reached record levels of over 4.5 million barrels of oil equivalent per day.

After a sustained period of high development spending, capital expenditure in 1999 declined to £3.2 billion, some 25% down on recent years. Reduced spending is leading to a decline in the number of jobs supported by the industry.

A number of high profile mergers in the international oil industry were announced in 1998/99.

The instigation of the Oil and Gas Industry Task Force (OGITF) has provided an invaluable opportunity to focus on the challenges and regulatory burdens currently being experienced on the United Kingdom Continental Shelf (UKCS) and its initiatives are supported by the industry.

The reintroduction of Capital Gains Tax Rollover Relief in 1999 was welcomed by the industry to assist in the necessary rationalisation of UKCS assets to stimulate increased UKCS activity.

The Challenge Ahead:

The UKCS is a mature region compared with new provinces opening up elsewhere and new UK fields are considerably smaller than those discovered in the past. The Industry Technology Facilitator has been established to enhance opportunities for operators, suppliers and contractors to find cost-effective solutions to retain the UKs ability to compete.

Currently industry average returns from North Sea exploration and development activity are marginal. Sustaining an active and successful exploration programme will require a more focused approach and reduction in field life costs.

Existing infrastructure in the UKCS provides a large potential for further brown field development about 2 billion barrels of oil equivalent - but the window of opportunity for incremental investment for maximum reserve recovery is limited, in some cases, to some 3-4 years. UKOOAs data indicate that the industry has identified some 78 projects for incremental investment, but currently incremental investment for mature fields is discouraged by tax rates as high as 69%.

The key to opening up additional UKCS exploration and production will be further cost reductions and new technology. The Leading Oil and Gas Industry Competitiveness (LOGIC) initiative has been established to find ways of achieving these goals.

The introduction of additional UK and EU regulation has increased costs and administrative burdens throughout the industry e.g. OSPAR. Care must be taken to ensure that regulation does not impact on UKCS competitiveness.

Industry dialogue and continued partnership with Government are essential if the challenges are to be fully addressed to ensure that the UKCS is able to succeed in an increasingly competitive global market.

For more information, please call 020 7802 2400.