Summary Index

Summary Fiscal Environment The industry faces tax rates ranging from 40% for new fields - including a 10% Supplementary Charge on Corporation Tax (SCT) - to 70% on fields paying Petroleum Revenue Tax. Confidence is beginning to return after the introduction of SCT in April 2002 which saw the transfer of some £5 billion in value from the industry to government. Many investors still perceive the UKCS to be a more risky fiscal environment following the introduction of SCT and remain more cautious in their investment plans. Fiscal stability will be essential to maintain investor confidence. UKCS Competitiveness The UKCS faces increasing global competition for new investment capital as it continues to deal with the challenges of increasing maturity. Exploration rates reflect the maturity of the basin and are still feeling the impact of the introduction of SCT. Forty five exploration and appraisal wells were drilled in 2003, similar to 2002 activity levels, but 30% below 2000 and 2001. £400 million was spent on exploration and appraisal in 2003. Exploration expenditure is projected to be 12.5% higher in 2004, possibly a sign of increasing confidence in the UKCS. Estimates of the remaining reserves potential range from 22 - 31 billion boe (barrels of oil equivalent). Current plans potentially develop 14 billion boe by 2030, but target only half the remaining reserves in the UKCS. Over the last 10 years the: Average size of field discovered has halved (now 20-30 million boe); Total number of fields in operation has doubled (now over 250 fields); Average production by field has halved to 15,000 boepd (barrels of oil equivalent per day). There is increasing pressure on development and operating costs as: Capital investment between 2003 and 2010 has risen by 16% compared with 2002 forecast, yet will deliver no more production than forecast a year ago; Operating costs (currently £3/barrel) from existing production will rise by 60% by 2010 unless we continue to develop new fields at the current rate. The industry is committed to encourage new developments by improving access to infrastructure. It issued a complete revision of the Infrastructure Code of Practice in May 2004 which will be maintained on behalf of all operators by UKOOA. Regulatory pressure is a continuing threat to the future of the North Sea. Threats were apparent in the: Draft new EU Constitution which could have damaged the competitiveness of the industry and harm the UK's security of supply; Initial allowances allocated to the sector in the draft National Allocation Plan for the EU Emissions Trading Scheme (which the industry supports) which would have placed additional pressure on existing aging facilities, potentially resulting in premature closure of older assets; Extra demands to provide information on the flow of gas needed to ensure security of gas supply to the UK. Industry is keen to ensure that this does not become a regulatory burden that will deter new imports to the UK and ultimately damage security of supply. Maximising Britain's Oil and Gas Resource In 1999, PILOT, the body representing both the industry and the Department of Trade and Industry, built a vision for the oil and gas sector in 2010, seeing: UKCS as the safest place to work world wide in oil and gas; Producing 3 million barrels per day of oil and gas; Sustaining investment at £3 billion per annum; Prolonging self sufficiency - for oil and gas; Sustaining employment - up to 100,000 more jobs; Increasing exports and generating new business. There is good progress against many aspects of the vision: Continuous improvement in safety performance; Investment levels are being sustained at £4 billion per annum; Employment remains strong in the oil and gas sector. The UK oil and gas industry is however facing an increased challenge to deliver the production vision as: The latest projection shows that the industry will miss the vision of 3 million boepd in 2010; There is a gap between the current production projection and the vision of some 500,000 boepd which can only be filled by: Raising exploration and appraisal activity; Increasing the contribution from existing fields and opportunities nearby. In a renewed effort to fill the gap, the industry has initiated a project targeting incremental barrels in existing or "brown" fields in conjunction with the Department of Trade and Industry. The brownfield vision is that: By collaborative action, over 5 billion boe of additional UKCS reserves will be developed; This activity will contribute sufficient incremental production to reach the PILOT vision of 3 million boepd in 2010; Substantial incremental levels of investment and jobs will be delivered in parallel with the production vision.