Economic Report 2013

the Gulf of Mexico in April 2010. Around £1 billion was spent on asset integrity work in 2012 and the same is expected in 2013. Although this expenditure does not immediately yield additional barrels of oil or gas, companies can expect these assets to be more reliable and, therefore, experience less downtime over the remainder of their productive lives, which may well have been extended as a result. e. The extraction of more technically challenging reserves leading to increased capital intensity – as the UKCS has matured, the reserves which were easiest to recover have already been extracted. More recently, advances in technology, higher prices and an evolving fiscal regime have enabled companies to develop oil and gas in more technically challenging fields. A wide variety of HPHT, heavy oil and very deep reservoirs, as well as difficult shallow water gas fields, have begun to be developed. The consequences of this activity for unit costs are shown in figure 16. Over time, projects approved by DECC are becoming significantly more expensive to develop per barrel recovered. Each pound of capital invested on the UKCS now yields only one fifth of the oil and/or gas it did in 2002. Therefore, investment would have to be five times higher than in 2002 to achieve the same outcome, as a result of inflation of capital costs and the complexity of the reservoirs. This concept of capital intensity is becoming a crucial measure for the future health of the province.

that the year-by-year expenditure on these developments peaks in 2013. As well as these large developments, there has been investment in a stream of smaller, new projects in recent years and many more incremental developments have been approved in 2012 and 2013 as a result of the newly introduced Brown Field Allowance. b. Renewed confidence on the UKCS among the major companies – the amount of capital that the majors 3 have invested on the UKCS has more than trebled from 2009 to 2013 (see figure 15 opposite). This represents a significant change of attitude. The companies had previously been rationalising and reducing their commitments, but, having streamlined their portfolios, they are now investing heavily again in large, new and brownfield developments on the UKCS, especially to the west of Shetland. c. The impact of field allowances – to the benefit of the wider industry and the Exchequer, field allowances are now making many marginal investments possible following their introduction in 2009 and subsequent expansion (for details, please refer to figure 48 in the Appendix). During 2012 and 2013, Oil & Gas UK expects more than £6 billion of capital to be spent on fields that are in receipt of field allowances. For many of these fields, an allowance has enabled investment that would not otherwise have happened under prevailing market conditions. d. Asset integrity and rejuvenation – Oil & Gas UK has noted that companies are adopting a more risk averse attitude to operations since the Macondo incident in

3 For this purpose, Oil & Gas UK has defined majors as BP, Chevron, ConocoPhillips, ExxonMobil, Shell and Total.

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ECONOMIC REPORT 2013