2007 Economic Report - Summary

The UK offshore oil and gas industry makes a vital contribution to the UK economy, providing energy for the nation, investment and employment.

In 2006:

• The UK produced 2.9 million barrels of oil equivalent¹ (boe) per day;
• 588 million barrels of oil and 80 billion cubic metres of gas;
• Saw total expenditure rise to 11.5 billion, a 40% increase over the last two years, with:
• Capital investment increasing 66% over the last two years to £5.6 billion, the largest of any industrial sector;
• Costs to operate the offshore fields, pipelines and onshore terminals rising to £ 5.5 billion;
• Exploration expenditure of £0.6 billion;
• The industry contributed £9.1 billion in direct taxation to the UK Exchequer.

In 2007:

• The UK will produce around 3.0 million boe, (approx 55% oil / 45% gas), benefiting from the surge in activity seen over the last two years;
• However total expenditure is expected to drop back to around £10-10.5 billion, reflecting a drop in the rate of capital investment;
• Tax revenues are forecast to drop to around £8 billion as a result of recent increases in costs, declining production as well as the impact of much lower gas prices.

Over the last four decades the Industry has (in 2006 money):

• Invested £241 billion in exploration and capital development;
• Spent £126 billion on operating these assets;
• Provided £232 billion in tax revenues to the UK Exchequer.

UK Oil and Gas contributes to the UK’s security of supply:

• Oil and gas from the UK Continental Shelf (UKCS) provided 70% of the nation’s total energy demand in 2006, avoiding imports costing £30 billion;
• Provided 96% of the UK’s oil needs and 92% of its gas needs;
• The UK was ranked as the twelfth largest producer overall (oil and gas combined).

This Industry provides employment for a highly skilled workforce and has a growing export presence:

• The industry employs 480,000 across the UK:
• with 380,000 involved in domestic production, comprising 290,000 directly employed by oil and gas companies and the supply chain, with another 90,000 jobs supported by their economic activity;
• and a further 100,000 employed in exports of goods and services;
• Employment is spread across the UK, with over a 100,000 skilled jobs in Scotland directly employed by the industry;
• Other centres of employment include South East England (21% of oil and gas employment), North West England (6%) and East Anglia (5%);
• The oil and gas supply chain has an increasingly global reach with Scottish exports growing 10% per annum over the last five years to £4 billion.

Whilst this is a mature oil and gas province, there are substantial remaining oil and gas reserves still to be explored for and recovered from the UKCS:

• The UK has produced just over 36 billion boe but could still have another 25 billion boe to come;
• Currently only one in three or four exploration wells is successful;
• The 24th Licensing round in 2006 saw 150 exploration licences awarded to 104 companies;
• Around 500 million boe were discovered in 2006, an improvement on 2005. This rate of discovery will need to be sustained if we are to realise the full exploration potential of the UKCS.

The challenge is to continue to convert discoveries into developments and maximise the potential of existing fields:

• We need to bring a new development on stream every three weeks if we are to deliver the basin’s potential;
• New discoveries are typically small (less than 20 million boe) and rely on existing infrastructure to be developed;
• The number of development approvals increased to 29 projects, up from 22 in 2005 (13 new fields and 16 incremental developments on existing fields);
• Currently 40 projects are planned to come into production in 2007/8, of which 70% are subsea tiebacks.

UKCS competitiveness is under severe pressure:

• The North Sea is one of the most expensive oil and gas provinces in the world given the harsh marine environment and modest size of discoveries, and has seen costs rise significantly over the last two years;
• Operating costs have risen 40% in since 2005;
• Total technical costs of new developments (capital and operating) rose to $22/boe in 2006, 45% higher than in 2005 and will reach $25/boe for projects coming on stream over 2007-9;
• The erosion of North Sea margins is impacting investment.

The fiscal regime is not fit for purpose and does not reflect the maturity of the UKCS:

• Industry welcomes HM Treasury’s consultation on the future of the North Sea tax regime;
• The offshore oil and gas industry is the most highly taxed sector of the UK economy;
• Tax rates range from 50% - 75% since the increase in January 2006;
• There are increasing signs that the latest tax rises have damaged the UK’s competitiveness and will shorten the productive life of the UKCS;
• There is a pressing need to reduce the tax burden on new developments;
• Uncertainty on the future of PRT must be resolved;
• It is now time for the tax consultation to deliver results for the UK and the offshore oil and gas industry.

Uncertainty on the fiscal and regulatory treatment of decommissioning are damaging the productive future of the basin:

• Decommissioning costs are estimated at £15 billion (2006 money) for which industry is making full provisions on a pre-tax basis;
• Uncertainty on the future fiscal treatment of these costs are forcing companies to over provide and make asset trading much more costly;
• Asset trading takes longer and is more protracted through the inability to achieve a clean break when selling an asset;
• The Petroleum Act should be amended to provide a clean break when assets are sold, the use of an appropriate Decommissioning Security Agreement providing robust financial security for all parties;
• Government should provide certainty on the availability of decommissioning tax relief and permit securitisation to be provided to Government on a post tax basis.

The UKCS has a long and productive future ahead of it provided government energy policy recognises its full potential:

• The UK will rely on gas and oil to provide around 80% of its primary energy needs in 2020 (based on DTI’s own figures);
• If investment is sustained in the UKCS, in 2020 it could still provide around 25% of the UK’s gas and 60% of the UK’s oil and see the UK emerge as a global leader in oil and gas technology, goods and services;
• Oil & Gas UK is committed to this task.

¹“barrels of oil equivalent” (boe) equates gas volumes with oil, so that a single measure can be made of the two in combination.Back