Energy Now and For the Future - Summary

The UK Offshore Oil and gas industry – producers and supply chain – make a vital contribution to the UK Economy, providing energy for the nation, investment and employment.

In 2005:

• The UK produced 3.2 million barrels of oil equivalent¹ (boe) per day;
• 645 million barrels of oil and 85 billion cubic metres of gas
• Investment in exploration and new developments rose 30% to £5 billion, the largest of any industrial sector;
• Saw drilling (exploration and development) increase 30%;
• Spent £4.7 billion to operate the offshore fields, pipelines and onshore terminals;
• Contributed nearly £10 billion in direct taxation to the UK Exchequer, even before the most recent tax increase.

In 2006:

• The UK will produce around 3.0 million barrels of oil equivalent per day;
• Total expenditure, covering investment and operations, will rise to around £11 billion, halving the rate of production decline;
• Will contribute over £10 billion in direct taxation to the UK Exchequer.

Over the last 36 years the Industry has (in 2005 money):

• Produced 35 billion boe;
• Invested £222 billion in exploration and capital development;
• Spent £120 billion on operating these assets;
• Provided £215 billion in tax revenues to the UK Exchequer.

UK Oil and Gas contributes to UK’s security of supply:

• Oil and gas from the UKCS provided three quarters of the nation’s total energy demand in 2005, avoiding imports costing £28 billion;
• The UK continued to be a net oil exporter, in volume terms, and supplied 93% of the nation’s gas demand from our own offshore resources;
• The UK was ranked as the ninth largest producer overall (oil and gas combined).

This industry provides employment for a highly skilled workforce and has a growing export presence:

• The industry will provide employment for 380,000 in 2006, an increase of 20,000 over the last two years;
• comprising 290,000 directly employed by oil and gas companies and the supply chain
• with another 90,000 jobs supported by their economic activity
• this is a direct result of the current high investment and expenditure
• Employment is spread across the UK, with over a 100,000 skilled jobs in Scotland directly employed by the industry;
• Other centres of employment include South East England (21% of oil and gas employment), North of England (10%) and East Anglia (5%);
• The oil & gas supply chain has an increasingly global reach with Scottish exports alone growing from £2 billion since 1998 to £4 billion in 2004.

Industry faces an increasing challenge to maximise recovery from the UKCS:

• The 23rd Licensing round in 2005 set new records with 152 exploration licences awarded to 99 companies and renewed interest in less explored regions and a new focus on heavy oil;
• Substantial opportunities remain, existing reserves and new exploration may deliver another 16 - 27 billion boe;
• Sustaining this level of activity will rely on the competitiveness of the UKCS and an appropriate fiscal and regulatory environment to attract investment and sustain a strong supply chain;
• New discoveries in the UKCS are now much smaller than in the past. Recent discoveries have averaged at 20 – 30 million boe and were less than 20 million boe in 2005;
• Currently only 1 in 3 or 4 exploration wells is successful;
• Therefore, average discovery per exploration well drilled is about 10 million boe.

Continued Fiscal instability may damage UK competitiveness:

• The offshore oil and gas industry is the most highly taxed sector of the UK economy;
• SCT, the Supplementary charge to Corporation Tax, was doubled to 20% from Jan ‘06, the second increase in the last three years;
• New developments are now taxed at 50%, older fields paying PRT at 75%
• After the last tax increase in 2002, investment was on a declining trend, the situation only improved as a result of increased oil prices;
• The tax increase may have limited impact in the short term because of the current high oil prices, but will have a long term impact;
• Oil and gas activity in the UK is now ~ 16% less attractive
• Investors now add a risk premium to UK investments because of fiscal instability
• The post-tax rate of return from the UKCS has declined over the last five years despite increases in the oil price, reflecting increasing costs and rising taxation
• The UKCS is now increasingly exposed to lower oil and gas prices. Activity would decline sharply if oil and gas prices revert to previous norms.

Rising costs and increased taxation may determine the outlook for 2006 and beyond:

• Costs continue to rise rapidly on the back of higher oil prices;
• Rates for semi-submersible rigs have risen six-fold since the start of 2004, with jack-up rig rates rising three-to-four fold over the same period;
• The UKCS must compete both regionally and globally for rigs, resources and skilled personnel;
• Government can not presume that the UK will remain a preferred location for investment;
• Production has the potential to decline at less than 5% pa over the remainder of the decade provided current rates of investment can be sustained;
• The latest survey forecasts production of around 2.7 million boe per day in 2010. However, 20% of production in 2010 is still to receive final investment decision and will be critical to sustain this rate of production.

¹“barrels of oil equivalent” (boe) equates gas volumes with oil, so that a single measure can be made of the two in combination.Back