Economic Report 2002 Index

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UKCS Future The joint industry/DTI survey for 2002 was completed in early November and gives valuable insights into the challenges and opportunities that lie ahead. The survey collects data from 28 UKCS Operators on their portfolios of fields in production and under development, incremental projects in existing fields and Probable/Possible new developments. The survey does not capture information on exploration. The key findings from the survey were: The PILOT production vision of 3 million boe per day in 2010 is becoming more difficult to achieve. The survey has identified a shortfall of 650,000 boepd, a widening of the gap since the 2001 survey. The target for 2005 of 4 million boepd will also be more difficult to achieve; here the gap has also widened to 300,000 boepd. It is already too late for future exploration success to make a significant contribution to the 2005 production outcome, so more production will be required from existing fields if this near term target is to be achieved (See Figure 34). Total oil and gas production between 2002 and 2010 is forecast to be 12.9 billion boe. This is some 370 million boe lower than predicted in 2001. Since the survey in 2000, expected production to 2010 has fallen by 1 billion boe, despite the well-publicised discovery of the Buzzard field which is expected to make a significant contribution by 2010 Nearly all of the production decline is attributable to falling gas production, largely from 'possible' new fields and incremental investments, the commerciality of which have been reassessed: this decline is predicted to be some 2.2 TCF by 2010. Over this period, forecast oil production barely changed from the 2001 survey estimate. Total capital expenditure up to 2010 is forecast to be around £1 billion higher than estimated in last year's survey. In combination with the estimates of falling production, this indicates a disturbing trend of deteriorating financial performance (see Figure 35). Capital development spending in 2002 is expected to meet 2001 forecasts of between £3.3 billion and £3.8 billion, although expenditure in 2003 is likely to be at the lower end of this range. The activity created by the large number of new developments approved in 2000/2001 is unlikely to be sustained. Indeed, fewer projects were approved in 2002 than in 2001. Therefore, capital expenditure is expected to decline into 2003. Unit operating costs are forecast to rise by 20% - from $4.1 per barrel of oil equivalent to $4.9 boe by 2010. Since the UKCS is already seen as a high cost region in which to develop and operate, this will raise questions about the continued competitiveness of the UKCS compared to other oil and gas provinces. There are 260 oil and gas fields under development or in production on the UKCS, compared to 248 in 2001 (The increase reflects the large of number of fields that were approved in 2001 and early 2002, including Clair and Penguins). There are significantly fewer new field developments planned for the future - 84 as opposed to 148 identified in 2001. This has caused a reduction of 1.3 billion boe in the reserves contribution from this category. There is no single reason why so many projects are no longer viewed as potential economic opportunities, although the damage to confidence from the Budget will have had some effect. However, the fields still exist and the hope must be that these projects may return to viability. The survey identified more projects in mature fields -144 compared to 96 in 2001. The total reserves from the smaller 144 projects stands at 1.6 billion boe, some 100 million below the corresponding total in year 2001. This is objective evidence of the diminishing scale and returns from mature field investment. The survey has shown that the UKCS is at a critical point in terms of its maturity and its ability to compete for international investment. There are increasing signals that the ageing portfolio of fields which constitute UKCS production is beginning to experience accelerated production decline in addition to high profile operability problems that have hit a number of fields in 2002. It may well be the case that delivery of existing production plans from these fields will require more investment than previously thought necessary. Reserves UKCS remaining reserves at the end of 2002 were estimated to be between 24-32 billion boe, ...compared with some 31 billion already produced. The UKCS is probably now past halfway in terms of resource depletion. Also, whilst the first phase of the UKCS development was a huge technical triumph, this was aided by the discovery of large prolific reservoirs. The remaining potential is in many respects much more of a technical challenge as shown by Figure 36. The characteristics of the remaining opportunities are familiar: high unit costs, small volumes, subsea developments accessing mature infrastructure. The economics of these opportunities face many hurdles some controllable, some not. The fiscal regime will make a significant difference to the shape of future basin investment and production. In the years ahead, the UKCS requires that fiscal policy and regulations are shaped and confidence renewed through open and constructive dialogue, to harness all the benefits of the nation's economic oil and gas resources, and that all stakeholders (operators, Government, contractors, trade unions) work together to achieve its continuing success. In this way the aspirations of Pilot could still be met.