Economic Report 2002 Index

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Executive Summary Contribution of the Offshore Oil and Gas Industry to the United Kingdom   In 2001 the UK was the world's 4th largest gas producing country and its 10th largest oil producer.   In 2002 oil and gas production is estimated to have been some 4.2 million boepd, a decline of some 100,000 boepd relative to 2001.   Net exports of crude oil and natural gas were worth £6 billion.   In 2002 the value of UK indigenous crude oil and natural gas production was £21 billion, or some 2.4% of Gross Value Added.   The UK economy has benefited from £190 billion (2002£) in taxes since the mid-1960s.   The UK Treasury estimates North Sea taxes at £4.9 billion in 2002.   The industry has invested some £205 billion in the UK offshore sector since activity began in the mid-1960s.   A study by PACEC indicated that some 265,000 jobs were supported by the offshore oil and gas industry in 2001. Many more jobs in the UK are in international oil and gas exploration and production activities.   Total industry expenditures are expected to be about £8 billion in 2003. Competitiveness   A region's Competitiveness is determined by: - The prospectivity of the province in terms of the probability of finding oil or gas. - The likely size of any discovery. - The costs of developing and operating a successful discovery. - The fiscal regime, including the risk that the host Government may adversely change the regime after investments have been made.. - The political risk.   Policy makers and the industry must preserve UKCS infrastructure by ensuring the economic rent extracted by both government and infrastructure owners permits thorough depletion of the nation's resources.   Independent research by OXERA shows the long term oil and gas company profitability averages around 13% , comparable with other successful industries before the imposition of a 10% Supplementary Corporation Tax.   Small oil and gas companies compete with other industries in debt and equity markets for funds and new companies need to deliver high returns (above 20%) on new projects.   In terms of exploration attractiveness the UK now ranks very low on a global scale.   Cumulative Decommissioning costs have increased by £400 million to £8.8 billion since the 2001 survey. Events in 2002   On 17th April, the Chancellor announced the first fundamental change in the fiscal regime for the North Sea for almost ten years. The changes comprised: 1. The introduction of a new tax, Supplementary Corporation Tax (SCT), at a rate of 10%. 2. Introduction of a 100% First Year Allowance (FYA) on investment. 3. The Abolition of Royalty from 1st January 2003.   The impact of the Budget measures will remove an additional £8 billion in tax from the industry up to 2010.   The industry is concerned that the new SCT denies deductions for interest expense unlike mainstream Corporation Tax (CT).   Opportunities in existing fields now face tax rates ranging from 40% to 70%.   Four significant discoveries were announced from the 16 exploration wells drilled in 2002. Exploration drilling activity equalled the low of 1999, itself the lowest since North Sea exploration commenced in 1965.   The average discovery size in the UKCS over recent years has been some 25-30 million boe.   In the 20th offshore licensing round 270 blocks/part blocks were offered and 36 were awarded to 33 companies , four of which were new entrants to the UKCS.   In 2002 18 projects received development approval and were worth £1,290 million. (In 2001 spending of £2,500 million on 21 new oil and gas projects was announced.)   In 2002 new projects yielded additional reserves totaling some 450 million boe. (The projects approved in 2001 were projected to yield twice this amount.)   The UK and Norway share a common aspiration to develop optimally the North Sea's oil and gas reserves.   The 60 km corridor on each side of the median line contains nearly 13 billion barrels oil equivalent.   Improved co-operation could generate additional value for all stakeholders. A UK-Norway work group concluded that there was a potential pre-tax prize of up to $2 billion that could be unlocked and a review of the fiscal regime for infrastructure tariffs has commenced. Energy Markets & Security of Supply   The volatility of the oil price seen over the past few years was maintained in 2002 with prices fluctuating between a low of $18/bbl in January and a high of $32/bbl in December.   Although oil price expectations for 2003 are still in the mid - $20s, the forward price drops rapidly to below $22 in 2004 and below $20 by 2006. For investment decision makers it is not today's price but the perception of the future price of oil that is important.   Final production figures for 2002 are expected to show continuation of the trend which saw UK gas production peak in 2000 at 10.6 billion cubic feet per day (108 billion bcm), and fall to 10.4 bcfpd (106 bcm) in 2001.   Since the mid 1980s the real price of gas supplied by UKCS producers at UK delivery points has more than halved but the price benefit to industrial gas consumers has been offset by the impact of the 4.4p/therm Climate Change Levy.   The UKOOA / DTI survey has revealed a significant near-term decrease - over 2 tcf (57 bcm) by 2010 - in projected gas production, such that it now seems unlikely that self-sufficiency will be sustained beyond 2005.   Energy policy and regulation influence supply and demand and will help to determine when the UK becomes a net importer of gas.   UKOOA remains concerned that the current capacity regime is not working in the wider national interest.   Gas remains the fuel of choice as we move towards a lower carbon economy.   Globally gas resources are abundant. The issue for policy makers is to establish an enabling regulatory/fiscal climate that encourages investment in infrastructure and networks.   Some 70% of global proved gas reserves (5,500 tcf or 155 tcm) are estimated to lie within economic transportation distance of the EU. UKCS Future Outlook   There are 260 oil and gas fields under development or in production on the UKCS, compared to 248 in 2001.   Remaining reserves in these developments are around 11 billion boe, an increase of 1billion boe.   There are 84 new field developments planned for the future (2001:148).   The survey identified 144 projects in mature fields (2001:96).Total oil and gas production up to 2010 is forecast to be 12.9 billion boe. This is some 370 million boe lower than predicted in 2001.   Total capital expenditure up to 2010 is forecast to increase by around £1 billion, compared to the estimates from last year's survey. In combination with the falling production estimates this indicates a disturbing trend of deteriorating financial performance.   Capital development spend in 2002 is expected to meet 2001 forecasts of between £3.3 - £3.8 billion.   Unit operating costs are forecast to rise by 20% - from $4.1 boe to $4.9 boe by 2010.   The PILOT production objective of 3 million boe per day for 2010 is becoming more difficult to achieve.   UKCS reserves at the beginning of 2002 were estimated to be between 24-32 billion boe. This compares with some 31 billion boe already produced.