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Maximising Britain's Oil and Gas Resource UKCS Attractiveness In recent years the industry worldwide has invested in previously inaccessible regions and unexplored provinces with notable successes, making large discoveries in deep water provinces such as Angola and the Gulf of Mexico, and new areas such as the former Soviet Union. The UK must compete for oil industry investment funds against these and many other provinces. The competitiveness or economic attractiveness of any province is a function of many factors including: 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. In many ways the UKCS still remains an attractive location to do business, albeit the prospectivity and size of discovery reflect the nature of the maturity of the basin. Basin Maturity Discovery size over recent years has typically been in the range of 20-30 million boe. While these are still material volumes, their size is such that they must be located close to infrastructure to be economic to develop. The size of find has declined as the basin matures and has halved over the last ten years. This emphasises the maturity of the UKCS. Figure 16: UKCS Discovery Size 1965 — 2003 Exploration, appraisal and development drilling activity over the last ten years in the UKCS is shown in Figure 17. The well count includes both the wells and side tracks (additional wells drilled from the same well-head location), following the approach adopted by the Department of Trade and Industry. The combined reporting of wells plus sidetracks is considered a more effective measure of total exploration and appraisal (E&A) activity rather than only well starts. Figure 17: UKCS Drilling Activity 1965 — 2003 The rise in infill drilling, with the rapid increase of development wells and the steady decline in the number of exploration and appraisal (E&A) wells over the last ten years, reflects the maturity of the UKCS. Typically, at least one or two appraisal wells are required before a find can be proven commercially viable to develop in the North Sea. Thus the combined number of exploration and appraisal wells drilled per year is the most appropriate measure of basin prospectivity. Figure 18 shows the number of E&A wells drilled over the last four years. A total of 45 E&A wells, including side tracks were drilled in 2003, similar to 2002 levels. However this compares poorly to the period of 20002/2001 where E&A activity was 30% higher, averaging at 60 wells per year, including side tracks. In part the decline in exploration rate has arisen because of the imposition of the Supplementary Charge on Corporation Tax (SCT) in 2002 which reduced the material value of prospects from the perspective of the industry. As reported elsewhere, exploration confidence appears to be increasing in 2004, although only time will show whether this trend is sustainable. Figure 18: Exploration and Appraisal Activity in UKCS Figure 19 shows the trend of reserves discovered against the number of exploration wells drilled over the last twenty years. The average discovery rate has been around 10 million boe per well, though in recent years it has been lower. The exception was 2001 which saw the discovery of the large Buzzard field. Typically, only one well in every three or four wells drilled finds commercial volumes of oil or gas. Figure 19: UKCS Exploration Discovery Rates The sustained growth in ultimate recovery in existing fields has been one of the successes of the industry and illustrates the part enhanced technology will continue to play. In the 10 year period 1992 to 2002 average oil field recovery factors increased from 38% to 48%. Figure 20: UKCS Growth in Ultimate Recovery Over the last ten years the total number of fields in operation has doubled to over 250, including satellites, and average production by field has halved to 15,000 boepd. Figure 21: UKCS Field Size vs. Production Materiality of Investments The maturity of the basin means that the industry is facing opportunities of diminishing size combined with increasing technical risks and greater global competition for limited capital and resources. When the industry examines the full range of technical and commercial risks around any potential development, the opportunity may not be sufficiently material to secure funds; i.e. the net value delivered per pre tax pound invested is insufficient to meet commercial investment criteria when ranked against other global opportunities. Materiality is impacted by tax rate and this issue will continue to affect investment decisions in the UKCS. The Potential Reserves The need to continue to replace the reserves produced is key to the success of the UKCS in the years ahead. Figure 22 compares the volumes discovered against the volumes produced. Figure 22: UKCS Production vs. Reserves Over the last 35 years, 33 billion barrels of oil and gas equivalent have been produced from the UKCS. Estimates of the remaining reserves potential range from 22 -31 billion boe. We may have produced just over half the total potential from the UKCS. However, at best we only have plans in place to develop half the remaining reserves potential. Current plans develop 7 billion boe or above by 2010. On top of this, there are estimated to be about 3- 5 billion boe of "brownfield" reserves to be matured in the UKCS, and Exploration (5-11 billion boe) and Appraisal (up to 8 billion boe) may contribute up to a further 13 to 19 billion boe. Figure 23: UKCS Reserves Overview Big uncertainties arise over the remaining exploration potential. This was reviewed by the Department of Trade and Industry and the industry during 2003 as part of the exploration consultation process. The review adopted a number of different methods to establish a range and central estimate for the "technically risked reserves" yet to be found in the UKCS. Figure 24 indicates the central estimate for reserves based on Department of Trade and Industry modelling. These central estimates compare well with the broad range of 5-11 billion boe of exploration potential currently being held by UKOOA. Figure 24: UKCS yet to find estimates More work is being carried out to improve the full picture of reserves remaining in the UKCS as part of the "brownfields project".