Economic Report 2016 - Oil & Gas UK

ECONOMIC REPORT 2016

Looking ahead to 2017, the downward trend in expenditure is expected to continue, with a steep decline in capital investment being the main contributing factor. Operating costs are also expected to fall, albeit at a much slower rate, while E&A expenditure is forecast to remain weak at around £0.7 billion. There is likely to be a slight upturn in decommissioning expenditure next year, from £1.5 billion to £2 billion, as many fields, particularly in the southern North Sea (SNS), cease production and enter the decommissioning phase.

Figure 21: Total Expenditure by Category

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Decommissioning Costs

Exploration and Appraisal Costs

25

Development Costs

20

Operating Costs

15

10

5

Total Expenditure (£ Billion - 2015 Money)

0

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Source: Oil & Gas UK, OGA

Capital Investment Globally, almost $1 trillion of capital investment earmarked for new oil and gas projects over the next five years has been postponed or cancelled 21 . With long-term oil and gas price expectations now significantly lower than the first half of the decade, potential developments across the world are fundamentally less attractive using almost any investment criteria. Many investors are simply unwilling to sink capital into new opportunities at this time so it is very hard to raise new equity. Debt financing (see section 4 on corporate financial structures) is also becoming more constrained as the collateral against which banks lend, most commonly reserves, is now worth less, tightening borrowing capacity. Ultimately, in a fiercely competitive and mobile industry, only the most attractive prospects around the world are able to secure development finance. In the UK, capital investment is falling rapidly after years of record expenditure that peaked at £14.8 billion in 2014. Last year, around £11.6 billion was invested and this is likely to decline to around £9 billion this year and £7 billion in 2017.

21 See www.woodmac.com/analysis/global-upstream-investment-slashed-by-US1-trillion

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