Economic Report 2020

BUSINESSOUTLOOK 2020

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ECONOMIC REPORT 2020

Our vision is to ensure the UK Continental Shelf becomes the most attractive mature oil and gas province in the world with which to do business. Read all our industry reports at www.oilandgasuk.co.uk/publications

The UK Oil and Gas Industry Association Limited (trading as OGUK) 2020 OGUK uses reasonable efforts to ensure that the materials and information contained in the report are current and accurate. OGUK offers the materials and information in good faith and believes that the information is correct at the date of publication. The materials and information are supplied to you on the condition that you or any other person receiving them will make their own determination as to their suitability and appropriateness for any proposed purpose prior to their use. Neither OGUK nor any of its members assume liability for any use made thereof.

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Economic Report 2020

Contents

Foreword

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Report at a glance 6 The changing economic and energy environment 8 The UK and global economy – a year of rapid change 8 Global energy demand 10 UK energy dynamic 12 Achieving net zero UK – challenges and opportunities 14 Investing in our energy future 15 The evolving role of the oil and gas industry 19 Oil market dynamics 19 Gas market dynamics 22 The oil and gas industry’s role in supporting UK energy security 25 Maintaining investment in the UK’s the oil and gas industry 26 The industry’s macro-economic contribution 32

Embracing new opportunities – the new energy landscape

33

Leading energy transition: a UK supply chain perspective

35

Providing cleaner energy – addressing oil and gas industry production emissions

37

Helping to lower the emissions of the wider economy Setting the framework for success

39 42

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ECONOMIC REPORT 2020

Foreword

T he oil and gas sector, and the economy more widely, have experienced enormous disruption during 2020 due to the coronavirus pandemic. As our Economic Report 2020 shows, the sharp fall in global GDP links closely to the drop in global energy demand. It contributed to the triple whammy cited by OGUK earlier this year as companies dealt with the operational impact of COVID-19 alongside volatile and low oil and gas prices. The large reductions in global energy demand resulting from measures to restrict the spread of the virus depressed commodity prices severely, threatening the viability of some operations. During April 2020, Brent crude spot prices fell to their lowest level, in real terms, for more than two decades, and other global benchmarks were affected even more severely, including a period of negative West Texas Intermediate prices in the US market. Gas prices have also been similarly depressed throughout 2020, continuing the trends seen in recent years. As a result, activity levels in terms of exploration, well appraisal and developments have been significantly undermined. Businesses have had to make significant adjustments to the way they work, rescheduling their plans with respect

to both new investment and asset maintenance, whilst continuing to safely provide the UK with secure and affordable energy. By and large the sector has been able to make these day- to-day adjustments successfully. However, the economic impact of the pandemic on companies, particularly in the extensive supply chain, has been severe. Activity levels, revenue and margins continue to be undermined at a time of additional uncertainty as the post-Brexit transition period ends. Despite the many challenges brought by the pandemic, UKCS production is expected to remain around 2019 levels of almost 1.7 million boepd. The avoidance of large disruptions to output is a testament to the professionalism of our members and to the embedded health and safety culture that prevails throughout the industry. OGUK, on behalf of industry, responded to these unique challenges by setting out a three-phase framework plan which seeks to protect jobs and businesses, recover activity and investment, while accelerating the opportunities that the energy transition can bring, both at home and abroad. While the UK economy is expected to see a 11.3 per cent decline in GDP this year, domestic CO 2 emissions

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have only fallen by an estimated 10.2 per cent so far this year, while global emissions have reduced by around 5.5 per cent. These relatively small emission reductions, which resulted from significant economic and personal hardship, underline the challenge and opportunities faced by governments in delivering a sustainable recovery through lower carbon energy and industrial processes. Even during the pandemic, the sector continued to drive forward with Roadmap 2035 and its focus on ensuring that maximising economic recovery is inextricably linked with delivering net zero. Indeed, companies remain committed to reducing emissions associated with the production of oil and gas, and continue to be some of the biggest sectoral investors in offshore wind, hydrogen, carbon capture and storage solutions. In addition, industry is currently engaged in discussions with the UK Government about a North Sea Transition Deal. If successful, this would act as a catalyst to help stimulate jobs and provide energy security while transitioning to a net-zero future, in alignment with the Prime Minister’s recently published ten-point plan. The industry has already set ambitious targets to ensure it delivers significant emissions reductions from its own operations. At the same time, carbon capture, usage and storage (CCUS) and the hydrogen economy represent

important opportunities for the sector to help other industries decarbonise; they also play to our domestic supply chain’s strengths to deliver CCUS at scale. As new regulatory and business models develop our sector can provide solutions and expertise by leveraging our existing skills base and supply chain capabilities. 2020 has been a hugely challenging year and while the timeframe for the recovery of the UK’s changing offshore oil and gas industry remains uncertain, it is clear that with the right support, it can continue to earn its place in the UK’s energy future. As our Economic Report shows, there is now a clear pathway for our sector to help push forward a green recovery, create new jobs and support those in energy communities across the country, providing secure, affordable and lower-carbon energy and products.

Deirdre Michie OBE, Chief Executive, OGUK

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ECONOMIC REPORT 2020

Report at a glance

Impact of COVID-19:

The impact of the pandemic has resulted in a 4.4% fall in global GDP

1720

2020

1820

1920

UK GDP is expected to fall by 11.3% , the largest decline in 300 years

UK total energy

2020 global oil demand expected to total 91.3 million bpd, down 8.8 million bpd on 2019, resulting in severe oversupply and price volatility

demand was down 12% in the first 3Qs of the year

Global energy demand is expected to decline by 5% in 2020

Global gas demand expected to fall by 4% in 2020 - the largest annual decline in history

Global upstream investments expected to decrease by 40% to $300 billion this year compared to 2019

Brent crude averaged $41/bbl YTD — $23/bbl lower than 2019

UK Oil and Gas Performance:

Six exploration wells spudded in 2020, the lowest on record

However, at the start of 2020 there were over 135 E&A projects identified in company plans through to 2025 , at varying stages of drill probability

UKCS production is expected to remain around 2019 levels of almost 1.7 million boepd - despite the many challenges brought on by the pandemic

The UK met 61% of oil and gas demand from indigenous resources in 2019 61%

£

At the start of 2020 there were more than £35 billion of capital investment opportunities in company plans over the next decade, with varying probabilities of progression

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What Does Industry Add: >£150 billion of capital has been invested in the basin over the last 20 years Around 2/3 of this committed between 2010-19, driving increased production 2/3 The UK supply chain provides services worth around £28bn worldwide, 60% of which is related to UK activities The energy sector provides 2.5% of UK’s GVA – oil and gas is a key contributor In 2019 the industry supported up to 270,000 jobs, however the slowdown in investment has led to a reduction in 2020

Industry Contribution to Net Zero:

This year UK emissions have fallen by an estimated 10.2% ( 5.5% globally) – mainly due to the effects of lockdown restrictions

Industry has committed to halve production emissions by 2030 on the path to net-zero emissions by 2050

Even in the most rapid transition scenario, oil

and gas will still provide 46% of global energy needs in 2040

Achieving our CCUS goals could require around £2–2.5 billion by 2030 to develop transport and storage infrastructure

The Climate Change Committee estimates annual net-zero investments may need to grow to 2% of GDP - up to £50bn/year until 2050 – providing new diversified growth opportunities

Estimated $400bn global investment in hydrogen required between now and 2035

Hydrogen will become increasingly integrated, replacing around 50TWh of UK gas consumption by 2030

Securing a North Sea Transition Deal will help unlock these opportunities and advance net zero

Up to 175 mtCO 2 will need to be captured and stored in the UK each year by 2050 – equal to half of all domestic CO 2 emissions in 2019

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ECONOMIC REPORT 2020

The changing economic and energy environment

The UK and global economy — a year of rapid change

COVID-19 is firstly a global humanitarian health crisis, with more than 1.4 million lives lost and 60 million confirmed cases. 1 However, actions to control its spread have also led to an unprecedented economic crisis. This year has seen one of the most volatile and unpredictable economic environments in history, with the impact of restrictions due to COVID-19 leading to one of the largest year-on- year declines in GDP ever seen, the effects of which are likely to be felt for years to come. The International Monetary Fund (IMF) anticipates a global fall in gross domestic product (GDP) of 4.4 per cent this year 2 – a similar rate to that seen in 2009 following the global economic crisis. It is anticipated that China will be the only G20 economy to avoid recession this year. The

impact in the UK, as in other advanced economies, is likely to be more pronounced than the global average, with forecasts anticipating a potential decline of 11.3 per cent this year. This is the largest annual contraction in 300 years and will mark the first UK annual growth decline since 2009. The second quarter (April to June) saw the largest quarterly GDP contraction on record in the UK (a decline of 19.8 per cent quarter on quarter 3 and 21.5 per cent year on year), with the overall value of the economy falling to levels last seen in Q1 2003. This was, however, followed by the largest quarterly increase in Q3, at 15.5 per cent. 4 It is likely that further contraction will be seen in Q4 due to restrictions being re-established.

1 As at 27/11/2020 2 https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020 3 https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/quarterlynationalaccounts/apriltojune2020 4 https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/gdpfirstquarterlyestimateuk/julytoseptember2020

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GDP Trends — Global and UK

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000

600

Global GDP (USD) Global GDP (GBP)

500

400

300

200

Global Annual GDP ($/£ Billion)

100

0

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Forecast

UK Quarterly GDP (£Billion - 2018 Money)

Source: IMF

2000 Q1

2001 Q1

2002 Q1

2003 Q1

2004 Q1

2005 Q1

2006 Q1

2007 Q1

2008 Q1

2009 Q1

2010 Q1

2011 Q1

2012 Q1

2013 Q1

2014 Q1

2015 Q1

2016 Q1

2017 Q1

2018 Q1

2019 Q1 Source: ONS

2020 Q1

It is anticipated that 2021 will see a return to growth, however the extent of this will vary and it will take time for the global economy as a whole to return to its pre- COVID trajectory. The OECD 5 predicts that by the end of 2021 around $7 trillion will have been lost from global GDP compared to previous projections. The economic recovery will be defined by a number of factors, mainly government actions to control continued spread of the

virus, including development and roll out of vaccines, and measures to support consumer and investor confidence. Many governments, including the UK, have committed to a green recovery from the impact of COVID-19. This involves combiningmeasures to boost the economy whilst progressing policies aligned with net zero ambitions. There are a number of growth opportunities for the oil and gas sector in support of this.

5 https://read.oecd-ilibrary.org/view/?ref=136_136495-20g6l69n4a

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ECONOMIC REPORT 2020

Global energy demand The economic challenges being faced around the world arising from COVID-19 have already had a direct impact on levels of energy demand, with the International Energy Agency (IEA) anticipating a 5 per cent decline this year. The largest decline was seen during the second quarter when countries accounting for more than half of demand had some form of lockdown measures in place. The impact will also continue to be seen in the years to come. The IEA estimates that, based on existing policies, global energy demand will remain suppressed compared to pre- pandemic levels, with all forms of energy being impacted in some way and will not return to pre-pandemic levels until 2023.

The longer-term growth outlook will be largely defined by the recovery strategies implemented by governments following the pandemic and the progress of measures to support the aims of the Paris Agreement. 6 Based on pre-COVID trends, energy demand was projected to see a 12 per cent increase over the next decade. The vast majority of this would be fuelled by growth in renewable power generation, with limited overall growth in demand for oil and gas. However, the IEA Sustainable Scenario (a scenario compatiblewith the aims of the Paris Agreement) would see a situation in which energy demand could continue to fall by 10 per cent based on significant investment in energy efficiency measures. Such a scenario would see no full recovery in global demand for oil and gas from the supressed levels in 2020.

Global Energy Demand Projections

20,000

18,000

IEA Stated Policies Scenario

16,000

14,000

IEA Sustainable Development Scenario

12,000

10,000

8,000

6,000 Energy Demand (Mtoe)

4,000

2,000

0

2010

2015

2018

2019

2025

2030

2035

2040

Source: IEA

6 The Paris Agreement aims to ensure a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius.

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IEA Sustainable Development Scenario IEA Sustainabl Development Scenario

16,000

Other Renewables Bioenergy Hydro Nuclear Coal

Natural Gas Oil

14,000

12,000

10,000

8,000

6,000

4,000 Energy Demand (Mtoe)

2,000

0

2010

2018

2019

2025

2030

2040

Source: IEA

An energy outlook in line with the IEA Sustainable Development Scenario would mean significant changes in the composition of the energy sector. In 2019, hydrocarbons (oil, gas and coal) met 81 per cent of global demand, with oil and gas accounting for roughly 55 per cent (31 and 23 per cent, respectively). 7 By 2040, in this most rapid transition scenario, oil and gas will provide 46 per cent of energy needs (23 per cent each) with significant reductions in coal (which falls to 10 per cent). Significant growth in electricity demand, mainly provided by solar and wind power, will replace much of this hydrocarbon reduction. The continued need for oil and gas in this most ambitious

scenario puts further emphasis on current strategies by the sector to reduce emissions associated with the production of oil and gas and to deepen understanding of how its unique skills can be deployed to decarbonise other industries which cannot meet climate change targets through electricity alone. At the same time, it is likely that oil and gas, alongside nuclear, hydropower, bioenergy and other renewables will continue to serve as part of a diverse and adaptive energy mix that utilises multiple sources in a wide range of future demand scenarios. The need to retain a safe, secure and affordable energy supply applies equally to the UK as at global level (as shown overleaf).

7 https://www.iea.org/topics/world-energy-outlook

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ECONOMIC REPORT 2020

UK energy dynamic

UK Primary Energy Consumption

UK Energy Consumption by Sector, 2019

250

Oil

Gas

Coal

Electricity

Bioenergy & waste

Oil Gas Coal Electricity Bioenergy

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

200

150

100

50

UK Energy Consumption (mtoe)

Proportion of Energy Consumption by Sector

0

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Transport

Domestic

Industry

Services

Source: BEIS

Source: BEIS

UK Electricity Generation Mix

Domestic Power generation UK Energy: H1 2020 Snapshot Oil Transport Fuels Gas

Oil

Gas

Coal

Wind & Solar

Nuclear

Hydro Other renewables

Industry Total Energ

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% UK Electricity Consumption by Source

Electricity

- 2

19%

-30%

11%

-15%

-11%

-6%

UK Energy: 2050 Snapshot vs 2017

Gas

Oil

Electricity

-32% -82% +67%

Source: BEIS

Source: CCC

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UK energy consumption In 2019, the UK’s total energy consumption was around 190 million tonnes of oil equivalent (mtoe). This figure is almost 20 per cent lower than in 2000, despite the UK economy increasing by 37 per cent (in real terms) during the same period. Within this, despite a total reduction in consumption of 19 per cent, the relative importance of oil and gas in meeting the UK’s energy needs has slightly increased, from 74 per cent of consumption in 2000 (33 per cent oil and 41 per cent gas) to more than 75 per cent in 2019 (36 per cent oil and 39 per cent gas). This period has also coincided with a 39 per cent reduction in greenhouse gas emissions from the UK economy, from 707.9 million tonnes of CO 2 equivalent (mtCO 2 e) to 435.2 mtCO 2 e. Developments in electricity generation have been instrumental in supporting the reduction in emissions, with releases from power stations having fallen by almost two-thirds since 2000. Over the last two decades coal generated electricity has declined by 94 per cent, whilst the contribution from renewable sources has grown, increasing from less than 3 per cent of the electricity mix in 2000 to 36 per cent in 2019. Along with this, the contribution of gas has also remained steady, from 39 per cent in 2000 to 41 per cent last year. However, electricity power generation only accounts for 18 per cent of UK total energy consumption, as transport along with domestic and industrial heating and wider industrial use make up the majority of consumption. Transport accounts for 40 per cent of total energy consumption, with oil meeting 96 per cent of these needs. Meanwhile,domesticuse(primarilynatural gas forheating)

accounts for 29 per cent of total energy consumption. 8 The current options for replacing oil and gas from these sectors are much more limited and have widespread technical and economic challenges. Demonstrating the scale of the challenge, 85 per cent of domestic homes (23 million homes) have a gas fuelled boiler installed which will need to be replaced with alternatives. Building on the UK’s supply chain successes New technologies such as electric vehicles, hydrogen and ground source heating pumps are now emerging to displace conventional solutions, however the pace of change is constrained by their cost and technological maturity. As this report notes, the development of hydrogen and CCUS are opportunities, where the UK’s oil and gas supply chain has competitive advantage that we should make the most of as we come out of the COVID- downturn. Thousands of UK companies 9 have the technical, design and project management expertise, coupled with the infrastructure and skills to deliver these new energy opportunities at scale both to the domestic market and internationally. Although its use will continue to evolve, all projections consistent with net zero — including the Climate Change Committee and National Grid Future Energy Scenarios – expect significant quantities of oil and gas to provide secure and affordable energy throughout the shift to a lower-carbon economy. This is provided their production and use are achieved with fewer associated emissions.

8 https://www.gov.uk/government/statistics/energy-consumption-in-the-uk - ECUK: Consumption data tables. 9 https://assets.ey.com/content/dam/ey-sites/ey-com/en_uk/news/2020/02/ey-review-of-the-uk-oilfield-services-industry.pdf

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ECONOMIC REPORT 2020

Achieving net-zero UK – challenges and opportunities

The UK net-zero objective In 2019, the UK government legislated to achieve net zero greenhouse gas emissions by 2050 - the first G7 nation to do so - with Wales adopting a target to reduce net emissions by 90 per cent during the same time frame and Scotland aiming to achieve net zero by 2045. Worldwide, countries making up almost half of global GDP, including China, now have commitments in place or policies aligned with achieving net-zero emissions. The President-elect of the United States, Joe Biden, has also indicated that an initial priority for his administration will be to re-join the Paris Agreement which commits to keeping global warming well below 2 degrees Celsius. Achieving these ambitions will require wide-scale political, economic and societal change, including from how we use land, to our consumer choices and how we both produce and consume energy. In doing this, it is crucial the transition to net zero is managed in an effective, efficient and economical way to ensure it is achieved alongside continued economic growth and ongoing energy security. Although the drivers are very different, the economic turmoil of 2020 provides an illustration of the potential consequences of rapid and unmanaged societal and economicchange.UKemissionshavefallenbyanestimated 10.2 per cent so far this year, while global emissions have

fallen by 5.5 per cent. 10 However, this reduction has been the result of widespread economic shutdowns and stay- at-home orders, which have also resulted in record levels of public debt and rising unemployment. Net zero and the oil and gas sector Net zero is both a challenge and opportunity for the UK’s changing oil and gas sector. The industry is evolving, adapting and, in many cases, is already taking advantage of new diversified growth areas. Investments from traditionally oil and gas production and supply chain companies will be a key driver of solutions to tackle climate change and many have adapted their strategies to align with net zero ambitions. Along with this, many of the net- zero solutions will be provided by the skills, technologies and capabilities which already exist within the oil and gas industry. The Oil and Gas Authority (OGA) - working with the Department for Business, Energy and Industrial Strategy (BEIS), Crown Estate and other regulators - estimates that the North Sea has the potential to contribute as much as 60 per cent of the UK’s emission abatement requirements

10 https://carbonmonitor.org/ - November 2020

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Investing in our energy future Energy demand is a critical driver in supporting continued economic growth, particularly in developing economies. Meeting this demand in a secure and affordable way requires continued investment across a diverse range of energy sources. Alongside this, the energy sector accounts for the largest source of global emissions and significant investment will be required to meet climate ambitions worldwide. Global energy investments are forecast to fall by around 18 per cent this year due to the current economic environment, from over $1.6 trillion to around $1.3 trillion. 13 This has a cascading impact on the oil and gas sector, with upstream investments expected to decrease by 40 per cent to $300 billion this year compared to 2019, the consequences of which will be felt most severely by our supply chain. Despite an anticipated 1.8 per cent per year reduction in oil demand and 0.6 per cent per year for gas, the IEA estimates in its Sustainable Development Scenario that almost $68 trillion of total energy investment will be required over the next two decades. This is consistent with the European Union who also estimate that achieving

by 2050 11 – with half of this being through integration across the energy landscape, including hydrocarbon production, hydrogen production, CCUS and wind power. This integration and expansion will require massive investment but can also deliver real value to the UK over and above emissions reduction. It will require a concerted effort from both operators and supply chain alike as the whole sector pivots to deliver this exciting agenda. The OGTC estimates that around £430 billion of investment in offshore energy integration could unlock a cumulative £2.5 trillion of value and support around 200,000 jobs in the future. 12 This emergent technology relies on theproven track recordof our energy supply chain companies to bring new concepts to the market. OGUK is continuing to work closely with the UK Government on proposals for a transformational North Sea Transition Deal, which will help unlock the full contribution the industry can make to achieving net zero and the wider economic benefits.

11 https://www.ogauthority.co.uk/media/6625/ukcs_energy_integration_phase-ii_report_website-version-final.pdf 12 https://www.theogtc.com/media/3875/closing-the-gap-summary-report.pdf 13 https://www.iea.org/articles/investment-estimates-for-2020-continue-to-point-to-a-record-slump-in-spending

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ECONOMIC REPORT 2020

their climate goals will require an additional €350 billion of energy investment within Europe over the next decade compared to the previous one. 14 In the UK context, over the last decade, almost £220 billion of capital has been invested in the UK energy system. This investment spans hydrocarbon production and refining, gas distribution and electricity generation and associated networks, with around half committed to the oil and gas sector. However, annual energy investments as a proportion of GDP have fallen to less than 1 per cent in recent years. To help achieve net zero whilst maintaining a secure and affordable energy supply,

investment across a diverse range of energy sources will need to continue to expand in the decades to come. The Climate Change Committee estimates that annual net zero investments may need to grow to the equivalent of 2 per cent of GDP, or up to £50 billion per annum until 2050. The correct commercial and regulatory frameworks must be in place to enable this scale of investment at a national and global level. Companies need long- term certainty of the conditions upon which they can make robust investment decisions. Companies are also adapting their strategies in line with increasing

UK Energy Investment

Oil & Gas Extraction Electricity Gas Distribution Coal & Refined Petroleum Products Energy Investment Vs GDP

30

1.8

1.6

25

1.4

20

1.2

1.0

15

0.8

10

0.6

0.4

5

0.2

Energy Sector Capital Investment as a Percentage of GDP

0

0

Energy Sector Capital Investment (£billion - 2019 Money)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: BEIS, ONS

14 https://ec.europa.eu/commission/presscorner/detail/en/QANDA_20_1598

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investor focus on environmental, social and corporate governance (ESG) and how their investments align with net zero objectives alongside financial returns. This is an increasingly important consideration in attracting the level of investment required across the energy system in the future. Between 2010–19, around £100 billion of capital (42 per cent of UK energy investment) was associated with the development of new oil and gas reserves on the UKCS. Although oil and gas demand is projected to fall in future, it will remain a core part of the energy mix. It is therefore crucial that investment continues to ensure that the required UK supply is in place to meet demand. A slowdown in oil and gas investment will not reduce the rate of consumption, but will mean that supply will fall at a quicker rate than demand. A domestic industry provides greater opportunity to control associated emissions, while supporting energy security and the economy through the transition. Investment in electricity systems has increased in recent years and averaged around £10 billion per year since 2010. The electricity sector has attracted the largest investment levels in the UK energy sector since 2016. The Climate Change Committee estimates that total investment in the power sector will need to double (to £20 billion per year), in line with forecasts

that electricity consumption will need to almost double by 2050 for a net-zero outcome. 15 The increase in electricity investment seen in recent years has driven the significant growth in renewable power capacity across the UK, which has seen total wind power capacity increase from 5.4GW in 2010 to 24GW last year, 16 9.8GW of which is offshore. This is an area which will continue to increase in the years to come, following the UK government target to grow wind capacity to 40GW by 2030 17 and with the support put in place through the Offshore Wind Sector Deal. 18 Aurora Energy estimates that reaching the ambition of 40GW of wind power by 2030, (predominantly from floating wind) will require up to £50 billion of cumulative investment, over the next decade. 19 Many of the largest investments in the UK renewable power sector are being made by traditional oil and gas producers who are becoming increasingly integrated across the energy sector. Equinor and SSE are developing the world’s largest offshore wind farm, Dogger Bank, off the east coast of England – a project worth some £9 billion between 2020–26, the first two phases of which now have funding in place. 20 TOTAL is also investing in the Seagreen1 wind farm off the east coast of Scotland – requiring investment of around £3 billion in the coming years. 21

15 https://www.theccc.org.uk/publication/net-zero-the-uks-contribution-to-stopping-global-warming/ 16 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/875384/Wind_powered_electricity_in_the_UK.pdf 17 https://www.gov.uk/government/news/new-plans-to-make-uk-world-leader-in-green-energy 18 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/790950/BEIS_Offshore_Wind_Single_Pages_web_optimised.pdf

19 https://www.auroraer.com/insight/reaching-40gw-offshore-wind/ 20 https://www.equinor.com/en/news/2019-09-19-doggerbank.html 21 https://www.total.com/media/news/communiques/total-enters-giant-offshore-wind-farm-project-scottish-north-sea

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ECONOMIC REPORT 2020

Significant commitments continue to be seen across the sector through associations such as DeepWind’s Floating Offshore Wind Subgroup. 22 The group is supported by many OGUK operator and supply chain members and is co-chaired by Fugro, which also provides oilfield services. Scotland’s 50MW Kincardine Offshore Wind project is the largest of its kind in the world, and the first of many such wind farms expected as Scotland strives to become a global hub of floating offshore wind development through support of the subgroup. Alongside investment to help lower emissions from the power sector, significant investment to address emissions from other parts of the economy which are more difficult to decarbonise, such as transport and heat, is required. The Climate Change Committee is clear that technologies such as CCUS and hydrogen will be needed for the UK to meet its net-zero ambitions. Total CCUS capacitymay need to reach up to 175 million tonnes/year by 2050 (equal to half of CO 2 emissions in 2019) and hydrogen consumption may need to expand to 250TWh (displacing the equivalent of almost 30 per cent of total gas consumption last year). There are a number of early-stage projects in these areas being progressed across the UK (all with significant involvement from OGUK members), however the frameworks upon which companies will base final investment decisions remain immature. OGUK is continuing to work on implementation of these frameworks with governments and stakeholders as part of negotiations on the North Sea Transition Deal.

22 DeepWind is the largest offshore wind representative body in Scotland, with over 510 members drawn from industry, public sector and academia including both traditional oil and gas operators and supply chain

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The evolving role of the oil and gas industry

Oil market dynamics The oil market has seen unprecedented volatility throughout 2020, the direct result of a collapse in demand due to the restrictions put in place to manage the spread of COVID-19. This has led some commentators to suggest that the pandemic-related restrictions, combined with the wider adoption of net zero objectives, will mean that 2019 represents the peak level of oil demand at global level. Globally, the IEA estimates that oil demand (including biofuels) in 2020 will fall to 91.3 million barrels per day (bpd), down 8.4 million bpd on 2019 levels. 23 This is three times greater than the previous largest year-on-year decline rate seen in 1980. Demand in April, at the height of the global restrictions, saw a reduction of 29 million

bpd, falling to the lowest monthly level since 1995. 24 A shift in demand of this extent has never been seen before, outlining just how severe the impact of the pandemic and subsequent global economic downturns have been on the industry. This significant fall in demand in 2020 driven by COVID-19 restrictions has had a significant impact on the Brent crude price. In March, the Brent spot price fell by more than 80 per cent as the increasing impact of COVID-19 became apparent and hit investor and consumer confidence levels. A similar scale of percentage decline was seen during the previous downturn, albeit more gradually over a period of 18 months from mid-2014 to early 2016.

140

Monthly Average Brent Spot Price

120

Nominal Average Monthly Brent Price Annual Average Brent Price

100

80

60

Brent Price ($ per Barrel)

40

20

0

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19

Jul-20

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

Oct-13

Oct-14

Oct-15

Oct-16

Oct-17

Oct-18

Oct-19

Oct-20

Apr-13

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18

Apr-19

Apr-20

Source:EIA

23 https://www.iea.org/reports/oil-market-report-october-2020 24 https://www.iea.org/reports/oil-market-report-april-2020

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ECONOMIC REPORT 2020

Prices have seen some limited recovery in November, with the announcements of COVID-19 vaccines, causing the Brent spot price to increase by 3.7 per cent, reaching $49/bbl in late November. However, the year-to-date average of $41/bbl is still more than $23/bbl lower than the 2019 average. The modest recovery is expected to continue to 2021, with the Energy Information Administration (EIA) forecasting Brent spot prices to average of $47/bbl over the next year. It looks certain that this year will mark the lowest annual rate of demand since 2013 and the first annual decline since the impact of the financial crisis in 2009 (which resulted in a 2 per cent demand decline). Based on current policies, the IEA estimates that it will take until 2023 for demand to recover to 2019 levels and it will remain below the pre-pandemic trajectory throughout the decade. OPEC has a slightly more bullish outlook, with demand recovering to previous levels in 2022. Although a return to growth will likely be seen in the medium term, there is greater uncertainty in the longer- term outlook. The IEA predicts that growth could plateau around 2030, potentially marking ‘peak oil’ demand within the next 10 years. However, its more ambitious Sustainable Development Scenario corresponds to a situation where peak oil has already occurred in 2019. Other energy forecasts such as BP’s Rapid and Net-Zero scenarios similarly predict that peak oil demand may well have arrived. By way of contrast, OPEC is more bullish on demand with estimates of continued growth until the late 2030s,

before it plateaus at around 10 per cent above 2019 levels (110 million bpd). Despite differing demand growth expectations, all wider energy scenarios continue to reinforce the role of oil as a core part of the global energy mix in the decades to come. In advanced economies such as the UK, peak levels of oil demand have already been seen. As has been outlined, whilst the relative importance of oil in the UK’s primary energy mix has remained steady, consumption has fallen by almost 12 per cent since 2000. Nevertheless, the impact of the pandemic has still had a marked effect on the use of oil in the UK. Overall demand for oil products (crude, NGLs and feedstocks) in the first half of 2020 was 15 per cent lower than in 2019 and the second quarter marked the lowest demand on record with a year-on-year decline of more than 26 per cent. This has been driven mainly by reduced transport demand – aviation fuel demand fell by 86 per cent in the second quarter, with petrol falling by half and diesel by two-fifths. This trend resulted in the UK becoming a net exporter of oil products for the first time in 15 years – however this is a temporary event and initial indications are that recovery in demand in late summer has seen a return to net importer status. These dynamics will continue to evolve, with the Climate Change Committee estimating that UK oil consumption may need to fall by more than 80 per cent compared to 2017 by 2050 to achieve net zero. 25 However, significant policy change will be required to achieve this, and the latest BEIS Energy Reference scenario estimates that a 16 per cent reduction in demand is likely to be seen in the next two decades. 26

25 https://www.theccc.org.uk/publication/net-zero-the-uks-contribution-to-stopping-global-warming/ 26 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/931323/updated-energy-and-emissions-projections-2019.pdf

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During the upcoming period of transition oil will continue to have an important role in an increasingly diverse energy mix. During this period, investment in new domestic resources is vital to provide energy security throughout the transition. Without this investment, domestic production will decline at a faster rate than demand. This also helps protect the skills and capabilities within the sector which are crucial in supporting net-zero solutions.

Global Oil Demand Projections

UK Quarterly Oil Product Demand

120

25

OPECDemandOutlook

100

20

80

IEASustainableDevelopmentScenario

15

60

10

40

GlobalOilDemand (Millionbpd)

5

20

UK Demand for Primary Oils (mtoe)

0

0

2010

2015

2019

2020

2025

2030

2040

Source: IEA,OPEC

2019 Q1 Source: BEIS

2000 Q1

2001 Q1

2002 Q1

2003 Q1

2004 Q1

2005 Q1

2006 Q1

2007 Q1

2008 Q1

2009 Q1

2010 Q1

2011 Q1

2012 Q1

2013 Q1

2014 Q1

2015 Q1

2016 Q1

2017 Q1

2018 Q1

2020 Q1

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ECONOMIC REPORT 2020

Gas market dynamics The impact on global gas demand seen this year will be more limited than oil, largely due to gas being more predominantly used in domestic settings and power generation which have demonstrated greater demand resilience than areas such as transport. However, it is still anticipated that gas demand will fall by around 4 per cent in 2020 (to 3.8 trillion cubic metres [tcm]), representing the largest annual decline in history and the first since the aftermath of the 2008 financial crisis. 27 Looking forward, annual demand is expected to return to growth in 2021, however the IEA estimates that around 0.75 tcm of demand growth is likely to be lost by 2025 and by 2030 gas demand will be around 2 per cent below the pre- pandemic trajectory.

Overall, gas demand is expected to remain more robust over the long term in comparison to oil demand, buoyed by its role as a key transition fuel for emerging economies still highly dependent on coal. Based on policies currently in place, by 2040 global gas demand could increase by 30 per cent, although in more ambitious scenarios could see a decline of 12 per cent compared with 2020, but still maintaining its overall share of the energy mix (23 per cent). In advanced economies with a high level of climate ambition, such as the UK, the reduction in gas demand could be greater than seen at a global level. The Climate Change Committee also estimates that a significant reduction in gas consumption will be required (depending on different scenarios relating to the future

Global Gas Demand

Global Gas Demand Scenarios

4.5

5,000

4

OPEC Gas Demand Outlook

4,500

3.5

4,000

IEA Stated Policies Scenario

3

3,500

2.5

3,000

IEA Sustainable Development Scenario

2

2,500

2,000

1.5

1,500

1

Global Gas Demand (Mtoe)

1,000

0.5 Global Gas Demand (Trillion Cubic Metres)

500

0

0

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Forecast

2010

2015

2018

2019

2025

2030

2035

2040

Source: IEA, OPEC

Source: IEA

27 https://www.iea.org/reports/gas-2020

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use of hydrogen) by 2050 to help achieve net zero. 28 However the current BEIS Energy Reference Scenario outlines that the UK is on track to see a reduction of only around 10 per cent by 2040. 29 In line with the global trend, UK demand has declined and the second quarter of 2020 marked the lowest demand on record for that period – down 16 per cent year on year – while the first half of the year saw an 11 per cent decline in total. The main drivers of this were a 26 per cent reduction in demand for gas in power generation (to record-low levels) and warmer temperatures leading to lower heating requirements. This follows on from a generally declining trend over the last

two decades, in which demand has fallen by 22 per cent between 2000–19. Alongside changing demand dynamics, a significant shift in supply has affected the wholesale gas National Balancing Point (NBP) price in recent years, mainly driven by massive increases in the available shipments of liquefied natural gas (LNG). LNG imports increased by 157 per cent in 2019 and have increased further in 2020. In the first half of the year LNG imports were 28 per cent higher than the same period in 2019 and five times higher than the first half of 2018. Much of this is being driven by traders taking advantage of lowprices and storing the LNG (predominantly in mainland Europe) to re-sell at times of

UK Quarterly Gas Demand

H1 2020 Gas Demand Snapshot

400,000

350,000

300,000

Power Generation

Industry

Domestic

250,000

200,000

150,000

100,000

UK Quarterly Gas Demand (GWh)

50,000

-26% -8% -4%

0

Source: BEIS

28 https://www.theccc.org.uk/publication/net-zero-the-uks-contribution-to-stopping-global-warming/ 29 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/931323/updated-energy-and-emissions-projections-2019.pdf

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ECONOMIC REPORT 2020

higher price, generally during winter. When coupled with lower demand, the much wider level of LNG availability adds to concerns around an oversupplied market and is acting to suppress prices. The average day-ahead NBP price in 2020 has been less than 23 pence per therm (p/th) – one-third lower than the 2019 average (34.70p/th) and almost two-thirds lower than the 2018 average (60.32p/th). At one point in May this year, prices were trading at just 8.50p/th – the lowest real-terms price for 18 years.

Monthly Average Day-Ahead NBP Price

0 10 20 30 40 50 60 70 80

Monthly Average Day-Ahead NBP Price

Annual Average Day-Ahead NBP Price

NBP Day-Ahead Gas Price (Pence/Therm)

Jul-17

Jul-18

Jul-19

Jul-20

Jan-17

Jan-18

Jan-19

Jan-20

Sep-17

Sep-18

Sep-19

Sep-20

Nov-17

Nov-18

Nov-19

Nov-20

Mar-17

Mar-18

Mar-19

Mar-20

May-17

May-18

May-19

May-20

Source: ICIS

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The oil and gas industry’s role in supporting UK energy security

Energy security can be defined as ensuring the economy has reliable access to energy at a stable and affordable price. Supporting UK energy production as part of a diverse range of energy sources is critical for both economic contribution and security of supply. From the UK perspective, as a mature production basin and a net importer, this means maximising the use of indigenous resources and minimising reliance on net imports to meet domestic energy demand. Along with this, increasing environmental considerations mean that it is beneficial to have a strong domestic energy supply which can be controlled, regulated, and governed appropriately. In 2019, the UK’s net energy import dependency was just over 35 per cent of total energy consumption. As an economy, the UK spent £19 billion 30 on crude oil and £6.6 billion on natural gas imports alone, 17 per cent less than 2018 (£30.7 billion). The cost of imports is directly linked to both demand and commodity pricings and the year-on-year decline seen here is based on a reduction in both of these factors. Net energy imports accounted for 5 per cent of the total UK imports spend in 2019, compared with 7 per cent in 2018. However, consumption was 1.5 per cent 31 lower in 2019 than in 2018, meaning import spend was proportionally in line across both years. The largest elements of UK energy imports consist of

pipeline gas, LNG and net imports of crude oil to support the deficit between demand and production. Last year, domestic gas production supported just under half of UK gas demand, with the remainder being imported from overseas. 57 per cent of the UK’s total gas imports in 2019 were from Norway, with the majority of this being through the Langeled pipeline. 32 So far in 2020, Norwegian supply has fallen to 48 per cent of imports mainly due to maintenance outages. The remaining demand balance is made up from interconnectors with continental Europe and LNG imports. Last year total LNG imports increased by 157 per cent, with the largest source of UK LNG imports being Qatar (49 per cent of LNG supply in 2019). 33 As well as the economic cost of these imports, offsetting the benefits of UK gas production, there is also a significant impact on carbon emissions, as LNG has over twice the carbon intensity of domestically produced gas. 34 Maximising our ability to support energy security domestically enables greater accountability with regards to emissions from energy production, and industry is taking responsibility for these emissions through the ambitions in Roadmap 2035 35 and sector-leading production emission reduction targets. 36

30 https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/uktrade/march2020 31 https://oilandgasuk.cld.bz/OGUK-Business-Outlook-2020-Markets-Investments/4/ 32 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/938018/ET_4.3_NOV_20.xls 33 https://www.gov.uk/government/statistics/gas-section-4-energy-trends 34 https://www.ogauthority.co.uk/news-publications/news/2020/north-sea-gas-has-lower-carbon-footprint-than-imported-lng/ 35 https://www.roadmap2035.co.uk/ 36 https://oilandgasuk.co.uk/product/production-emissions-targets-report/

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