A new report by Oil & Gas UK on offshore exploration, investment and production published today has revealed striking evidence of how rising costs, taxes and inadequate regulation have taken their toll on the UK industry’s international competitiveness.
According to the sector organisation, its Activity Survey 2015 highlights “the urgency with which measures are needed to secure new investment and address the collapse in exploration, if the UK is to maximise economic recovery of its still significant untapped resources.”
One positive finding of this year’s survey is that production in 2014 had its best year-on-year performance since 2000, falling just 1% since 2013 to 1.42m 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.
Oil & Gas UK’s chief executive, Malcolm Webb commented: “This year’s survey paints a bleak picture but also identifies this region’s potential, emphasising 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.”
Webb added: “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 6.3bn barrels of oil equivalent (boe) are sanctioned or under development. There are another 3.7bn boe of potential investment opportunities, although companies indicated at the end of 2014 that less than 2bn boe of those were likely to be developed.
- Operating expenditure rose by almost 8% to £9.6bn in 2014 and on a unit of production basis, reached a record high of £18.50/boe
- Falling oil prices meant that revenues fell to just over £24bn for the year, the lowest since 1998, and this, combined with rising costs, resulted in a negative cash-flow of £5.3bn 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 £14.8bn, with half spent on just 12 fields.
- Capital investment is expected to fall in 2015 by around one third to £9.5 – 11.3bn.
- Annual investment in sanctioned projects alone is forecast to decline rapidly and could collapse to £2.5bn by 2018.
- The three-year (2015-17) outlook for projects yet to get company sanction, planned investment has fallen from £8.5bn in last year’s survey to just £3.5bn in current forecasts.
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.
Webb noted: “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% 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 – £94bn alone to recover the 10bn 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.”