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President's Foreword In reviewing industry activity on the UKCS in 2002 it is difficult to avoid the shadow cast by the tax increases on the UK's oil and gas industry announced in the Chancellor's April Budget. They dominated much of the agenda for the remainder of the year. The changes to the fiscal regime have damaged confidence in the UKCS as a place to do business both for companies that have already invested here and those seeking to do so. The confirmation of Royalty abolition from January 2003 is a relief and is welcomed by the industry. I sense that it has allowed both industry and government to move on. "There needs to be real determination from all stakeholders in the UK industry to ensure that its competitive position vis-a-vis the rest of the world's oil and gas producing regions is enhanced. The fiscal regime is a key factor in determining competitiveness as it could be used to attract investment in ways that it currently does not. However, competitiveness isn't solely a function of the fiscal regime. Whilst the oil and gas price is largely comparable on a global basis, it is cost, risk and prospectivity that vary. The industry will be looking at the other parts of the competitiveness jigsaw and doing all it can to improve capital efficiency in our drive to attract investment capital from international boardrooms and new investors alike. The industry met its investment forecasts in 2002, just as in 2001. However, production forecasts were missed for the second year running and were undermined by a number of operational difficulties. The UKCS now appears to have reached the mid-life phase of its evolution. Production is established on a downward trend, now some 10% below the 1999 peak. Development approvals were lower this year, following the large number sanctioned in 2001, and only 16 exploration wells were started in 2002, although I expect this number to rise in 2003. Clearly, there is no simple explanation for the recent exploration decline but a combination of factors such as basin maturity, high unit costs, smaller prospects, alternative global opportunities and perceived risk can act as a deterrent to investment. The long and the short of it is that the industry is spending more to produce less and as this is not a sustainable business model, considerable effort will be required across the industry to challenge and change this model for the better. "However, the maturity of the UKCS is creating new and distinct activity niches offering opportunities for a new generation of operating companies" ...such as my own. These new entrants will play a significant role in further developing the UKCS, as evidenced recently with fresh approaches to developments at Heather, Thistle and Beatrice extending the lives of these fields, and the redevelopment of Argyll (as Ardmore). However, new entrants cannot replace the majors. Whilst the majors will continue to make their crucial contribution, it will take some time for new entrants to establish themselves and fill any gap in terms of investment volume, jobs and production. It is encouraging that the UK and Norway Governments are now engaged in a dialogue with industry on a range of issues to enhance commercial co-operation on all aspects of the oil and gas industry. The UK-Norway North Sea Co-operation Work Group are focussing on transportation & infrastructure, operational synergies, mutual open market access and industry liaison. Maximising the value from the UK's infrastructure legacy is of fundamental importance to the health and sustainability of the UKCS, and removing the current fiscal distortions from infrastructure taxation can contribute to this objective. In due course it will also be necessary to assess whether the fiscal disincentives, manifested through a 70% tax rate that applies to much Brown Field investment, can be alleviated. As indicated by the UKOOA/DTI activity survey the drop in UKCS production forecast to 2010 is largely attributable to falling gas output. As a result the UKCS is likely to become a net importer of gas earlier than had been anticipated. Ensuring the provision of a level regulatory and fiscal playing field to optimise use of existing and new-build infrastructure will be vital to secure the supply of future UK energy requirements. It is to be hoped that these issues will be addressed positively in the forthcoming treaty negotiations with Norway and in the Energy White Paper. Looking ahead, the current global political and economic uncertainty will undoubtedly influence the oil price in 2003, and any expectations that the current relatively high oil price will be sustained are likely to be disappointed. Remaining UKCS oil and gas reserves are estimated to range between 24 billion and 32 billion boe and if oil prices fall to more realistic long -term levels there will inevitably be an impact on the investment outlook for the region. At this stage, however, the industry is confident that investment in 2003, whilst below 2002, will remain above £3 billion. The UK offshore industry can continue to produce significant volumes of both oil and gas for the next thirty to forty years. To do so it is vital that all stakeholders in the North Sea, through strong leadership, work together and communicate more effectively. By doing this we will rebuild confidence and relationships and tackle more effectively the many challenges and opportunities that lie ahead. Bruce Dingwall UKOOA President