Outlook for the UKCS in 2005

Expenditure

Total expenditure, including exploration and appraisal, investment in new production and operations is projected to rise sharply, exceeding £9 billion in 2005.

Figure 28: UKCS Total Expenditure 2003-2010

During 2002 and 2003 capital investment in new field developments and existing producing fields declined in the UKCS. However investor sentiment improved during 2004 and investment is expected to rise from £3.3 billion to £3.8 billion in 2005 and will even exceed this figure if availability of drilling rigs, material and human resources permit.

Figure 29: UKCS Capital Expenditure 2003 – 2010

It is projected that capital investment from 2005 to the end of the decade will total £13 billion. This is some 13% higher than last year’s forecast. It is also important to note that investment plans tend to focus on a relatively short window, typically less than five years. For example, in 2001 the industry was forecast to invest £2 billion in 2006. Whereas the latest projection has risen to £3.2 billion and is expected to rise further prior to 2006.

Comparison of recent surveys shows signs of a step increase in operating costs which are around £500 million per year higher than previously forecast over the next few years. Operating expenditure is projected to be around £5 billion in 2005 and should be sustained above £4 billion until 2009. In part this rise in costs results from increased spend to extend the life of ageing assets and infrastructure. However environmental and regulatory costs continue to rise and could yet begin to constrain new development activity.

Operating cost per barrel (£/boe) rose 13% in 2004 and are significantly above any recent surveys. As figure 30 shows, continued investment is needed to bring new production on stream. Without this new investment, operating cost per barrel would rise by 50% by 2010. This trend of increasing unit operating costs must continue to be addressed or the UKCS will rapidly become uncompetitive when compared against global investment opportunities.

Figure 30: UKCS Unit Operating Cost 2003 – 2010

Confidence in the basin has gradually been restored after the changes to the tax regime in 2002 and the exploration outlook has improved significantly. Industry expenditure on exploration and appraisal rose to £400 million in 2004, a 25% increase on 2003, and is projected to rise to over £500 million in 2005.