Foreword

The UK remains a very significant oil and gas producer and 2005 saw another strong year for the UK offshore oil and gas industry which produced 645 million barrels of oil and 85 billion cubic metres of gas. We continue to be an oil exporter and provided 93% of the nation's gas. UK oil and gas met three quarters of the nation's total energy demand in 2005, demonstrating the immense contribution our industry makes to the UK economy.

Activity rose again last year as UKOOA's member companies sought to explore and develop new opportunities and increase recovery from existing fields. Investment rose to £ 5 billion, again making them the largest industrial investor in the UK economy. Total expenditure including capital investment and operations reached nearly £10 billion, £1.5 billion higher than in 2004. Even before the latest tax increase, tax revenues to government in 2005/6 rose to nearly £10 billion in response to the rise in oil price.

The mix of gas supplying the UK is gradually changing as we move to import more of the nation's needs over the next few years. New pipeline and LNG import projects, expansion of the existing interconnector to Belgium and completion of a new interconnector to the Netherlands will bring new supplies to the UK. In the meantime, supply next winter is anticipated to be in a similar position to the last one where the UKCS provided a reliable, dependable supply of gas to the UK market and it should continue to do the same this winter and for many more yet to come.

Employment is expected to rise in 2006, with the industry providing jobs for 380,000 people throughout the UK. This comprises 290,000 people directly employed by the industry, with another 90,000 jobs supported by economic activity induced by the direct employees. In Scotland alone, the industry provides more than a 100,000 skilled jobs and provided an export industry which was worth £4 billion even in 2004 (the latest year for which data is available).

UK production of oil and gas reached a peak in 2000 and has begun to decline. As production declines it becomes increasingly challenging to sustain the competitiveness of a basin. If the UK is to make the most of its indigenous hydrocarbon resources it will be necessary for UKOOA member companies to invest £100s of billions in technically and commercially risky opportunities in a mature, high cost oil and gas province.

The "Tale of Two Futures" diagram below provides a perspective on the long-term potential of the UKCS and also a view on how bleak that picture could be if we fail to make the necessary investment. Discoveries now average at 20 - 30 million barrels of oil equivalent. This is fifty to hundred times smaller than the fields on which the North Sea was built. Life will be different in the second half of the North Sea. A new field will have to be brought on stream every three or four weeks if we are to deliver the better future. Achieving that outcome is by no means assured; the right investment and regulatory climate has to be in place.

Figure 1: A Tale of Two Futures

As a consequence of the latest tax increase, which was imposed on the industry in December 2005, new fields are now taxed at a rate of 50% and older fields (pre 1993) which pay PRT, are taxed at 75%. Even before this increase the UK oil and gas industry was the most highly taxed sector of the UK economy. This tax rise has made the UKCS less internationally competitive and dangerously exposed in the event of a downward correction in the price of oil. With production beginning to decline, it might be expected that the tax burden should be reduced, rather than increased, to encourage investment and extend the life of the basin.

Over the last year the government has recognised the need to take a fresh look at UK energy policy, culminating in the launch of the Energy Review in January, 2006. The Review seeks to identify the measures that are needed by 2020 and beyond to tackle climate change, and ensure secure and affordable energy supplies in the UK. DTI's own figures, contained in the Review, demonstrate that the UK economy will become more reliant on oil and gas in the period through to 2020 with demand rising from three quaters to 83% of total energy requirement, even with sustained growth in renewable energy sources. However, the UK is fortunate enough still to have substantial petroleum reserves remaining (possibly as much as 27 billion barrels) and it is of the utmost importance that UK energy policy focuses on making the most of this opportunity.

We hope that the Energy Review will recognise that energy policy needs to be better aligned and represented within government. Currently, it is being determined by a number of separate teams, including DTI, Treasury, DEFRA, Foreign Office and the Prime Minister's office. UKOOA believes that this is not sustainable and that a more efficient and coherent approach is required, preferably managed by a dedicated department and headed by a Secretary of State for Energy.

There are too many different and un-necessarily burdensome regulatory influences (UK and EU) which fail to recognise the objective of maximising economic recovery of our reserves. The unsatisfactory rules regarding decommissioning provide an example of conflicting policies which hinder the trading of assets and may well result in the premature removal of existing pipelines to the detriment of future production. The UK fiscal regime has failed to provide long term stability to encourage investment. More specifically, it discourages the pursuit of high risk exploration and development opportunities and does not recognise that new fields are predominantly small, costly to develop and of marginal value after tax.

In 2006 the industry will continue to address the challenges posed by the rapidly changing business environment. If recent years have been dominated by rising oil and gas prices, 2006 may well be dominated by rising costs and global competition for rigs and human resources. The rapidly rising costs of operating in the UKCS, the global shortage of rigs and resources and the current UK tax and regulatory regimes all have the potential to frustrate companies' plans and may lead to a failure to maximise the production of oil and gas. Government should not presume that the UK will remain a preferred location for investment even at current high oil and gas prices. UKOOA is committed to deliver the best from North Sea and create an industry which has an increasingly global reach. We hope that other stakeholders will join us in that essential task.

Malcolm Webb
Chief Executive
UK Offshore Operators Association