Economic Report 2001 Index

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President's Foreword This is UKOOA's third annual Economic Report and I am glad to be able to say that the industry has continued to build on the recovery started in late 1999. This is testament to the skills and sustained efforts of individuals in all sectors of the industry who are working to ensure its continued success and upon which the employment of almost 265 thousand people, directly or indirectly, depend. Career opportunities, across key industry areas continue to attract new people into the industry. A key initiative in 2001 was UKOOA's Sustainable Development Strategy which was published as Striking a Balance in April. Developing this strategy, which covers economic, social, environmental and stewardship objectives was an important milestone for our industry. We recognise that sustainability is not about quick fixes and that interaction with all our stakeholders will determine how the strategy will develop. This Economic Report seeks to focus on the main economic drivers for oil and gas activity on the United Kingdom Continental Shelf (UKCS) in 2001. The importance of our responsibilities for stewardship, the environment and health and safety, each of which have their own influences on industry behaviour and economics, will be reflected in greater detail through the annual review of the strategy which will be published at a later date. In reviewing industry activity on the UKCS in 2001, a clear signal of the industry's continued commitment to maximise recovery of UKCS reserves can be seen in the approval of some 21 new field development projects, of which several are extending the frontiers of technology. For example, Clair and Penguins are both very different in almost every dimension except their shared symbolic significance of an industry in renaissance. Clair has for many years been one of the largest undeveloped fields on the UKCS. Its development illustrates the reward for determination to overcome the complex technical hurdles that have prevented earlier sanction. Penguins - like Clair a discovery from the 1970s - breaks new frontiers and will become the longest sub-sea tie-back on the UKCS at some 65 kms. Penguins, and other remote satellite developments, such as Otter and Nuggets which progressed in 2001, give encouragement that the many undeveloped discoveries on the UKCS whose progress has been frustrated by seemingly impossible technical barriers and large distances from infrastructure may yet be candidates for development. As industry stakeholders work together to manage costs and risks and as new technology is developed, extra potential production from mature fields will begin to be realised as well. This year we also witnessed what is potentially the largest discovery on the UKCS for a number of years. The Buzzard discovery shows that despite the well documented fall in average discovery sizes across the UKCS, there is still the geological potential for operators to identify and discover large accumulations. In 2001 UKCS production was sustained at similar levels to 2000 and a number of fields commenced production during the year. Elgin and Franklin are (together) the largest recent development and are notable for their high pressure, high temperature (HPHT) technology. They have already become one of the leading producers on the UKCS, delivering in excess of 220 thousand barrels of oil equivalent per day (Mboepd). On a smaller scale, the industry working with Government, has enabled two new projects to go ahead through the granting of Royalty remission. These are the installation of a new pipeline from the Beatrice field and the further development of the Columba E terraces. Whilst gas production from the UKCS continues at record levels, changes to the downstream regulatory regime are needed to encourage necessary investment in onshore infrastructure and a more competitive transportation system. If this can be achieved, offshore gas fields will receive more positive signals for incremental investment and new development. As we enter 2002, these promising signals have to be tempered with some degree of caution. Anticipation of global recession compounded by the tragic events of September 11th has engendered a rapid slide in the oil price. Predicting the oil price remains as difficult as ever. The industry has seen a peak of $30 per barrel (/bbl) of dated Brent in January declining to under $17/bbl in November. It is too early for UKOOA to gauge how the price decline will affect prospects for UKCS activity in 2002 and beyond. However we feel confident that the recovery in UKCS activity is broadly based and, provided that the industry and Government continue to work together, the challenging targets set by PILOT can be achieved. Much of PILOT's work, in which operators have been significant contributors along with Government, suppliers, contractors and the unions, has been focused on mitigating barriers to activity, whether they are related to commercial activities, technology or resources. The industry's Step Change in Safety initiative now comes within PILOT's remit and we are committed to achieving a reduction in the number of accidents offshore of at least 50%. The industry has also agreed to a range of new occupational health and safety targets that go beyond the national targets set by Government and the provisional HSE safety statistics for the 12 months to September 2001 show an encouraging downward trend in the injury rates of the offshore industry. Also during the year, PILOT agreed new intermediate targets for 2005 which aim to deliver production of 4 million boepd and sustain capital investment at a three year rolling average of £3 billion per annum. These provide a useful milestone for assessing whether the industry remains on track to deliver the Vision for 2010. The UK Energy Review published by the Cabinet Office in February 2002 was welcomed by UKOOA. The importance of maximising the potential of current and future energy supplies cannot be overstated. UKOOA has pointed out to the review team that, in an open and competitive market, oil and gas will continue to supply the vast majority of the UK's energy requirements for several decades to come. Our members have a vital role in ensuring that, to the extent economic constraints permit, the significant remaining quantities of oil and gas on the UKCS will prolong UK self sufficiency. Michel Contie UKOOA President