Economic Report 1999 Index

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President's Foreword The last 18 months have been a period of momentous change in the international oil industry; the events have been as dramatic as they have been unexpected. The unique circumstances of the UK offshore oil and gas industry have forced it to adapt rapidly to these changes. UKOOA's first Economic Report quantifies industry activity on the UK Continental Shelf in a factual way and conveys the industry's perceptions of the challenges which lie ahead. During 1998/1999 the oil price has swung from $20/barrel to $9/barrel and back again in little over a year which has had a dramatic impact on industry confidence. But despite current oil price strength, the fundamentals remain bearish. Gas prices, particularly those in the UK and Europe, remain weak and have not responded to movements in the oil price. The worldwide oil and gas industry responded to a period of inadequate shareholder returns and the need for greater cost efficiency in a very determined way. A number of major mergers have created some of the largest private companies in the world. Innovative new ways of doing business, for example alliancing, outsourcing and partnering, in addition to radical consolidations, have also enabled the upstream industry to reduce its cost base and enhance its financial performance, in order to be properly prepared for long term price expectations. In exploration the industry has delivered remarkable success in the Gulf of Mexico and Angola. In the latter, some 8 billion barrels of reserves have been discovered in under 5 years. These provinces will create a magnet for industry investment over the next 5-10 years against which more mature provinces, such as the UKCS, will need to compete. The challenges of the last 35 years in the North Sea have been immense and the industry's success is measured by today's record levels of production. The future challenges may be even greater with diminishing returns to exploration, small field sizes and high development and production costs. An innovative and cost effective response will be essentual to ensure that the UKCS remains competitive in the global marketplace. Two of the key strengths of the UKCS are the infrastructure legacy and the remaining potential in existing fields. Through the continual application of technology, these mature field assets can yield a valuable prize probably comparable with the remaining exploration potential of the basin. The success of the latter is dependent on the former; the life of the infrastructure will determine the extent to which the exploration potential is captured. The industry recognises that licence holders are the stewards of this potential and that it has a responsibility to manage the assets to maximise the value to the country. Success is also crucially dependent on Government action to create the right climate of regulation and the appropriate fiscal regime. The establishment of the Oil and Gas Industry Task Force (OGITF) in late 1998 has proved to be a very positive step which has greatly improved the understanding amongst Government, industry participants and contractors of the key factors affecting the industry's performance. The creation of a shared agenda and appreciation of the challenges ahead has already instigated many initiatives which are necessary to deliver a vision of production in excess of 3 million boe per day through to 2010. I believe that working in partnership with the Government, our contractors, suppliers and customers will enable the industry to ensure that the UKCS remains a competitive force well into the 21st century, offering attractive rewards both for the industry and UK plc. Bob Connon UKOOA President 1999