Oil & Gas UK Economic Report 2014

1. Foreword

Oil & Gas UK’s Economic Report 2014 is the definitive guide to the current health and future prospects of the offshore oil and gas industry in the UK. Oil & Gas UK is the country’s leading trade body for the offshore oil and gas industry, and data provided by its members, along with information from the Department of Energy & Climate Change, form the basis of this new report. The debate around Scottish independence has focused attention on this country’s offshore oil and gas resource like never before. It rightly highlighted the industry’s critical role as a major contributor to economies both north and south of the border. This industry is a multi-billion pound investor, a provider of hundreds of thousands of skilled, well paid jobs and an exporter of high value oilfield goods and services around the globe. It generates significant revenues and, crucially, gives this country a secure supply of primary energy. Today, we depend on oil and gas for some 70 per cent of our primary energy needs and oil and gas from the UK supply 50 per cent of that. The people of Scotland have decided that Scotland should remain part of the United Kingdom. Oil & Gas UK’s responsibility is to continue to work closely with both the UK and Scottish Governments towards our shared ambition of maximising the economic recovery of our offshore oil and gas resource. There is much work to do. In 2013, we saw capital investment on the UK Continental Shelf (UKCS) reach £14.4 billion, its highest in three decades. Such massive expenditure will, for a while at least, halt the decline in production we have seen in the North Sea for the last consecutive 14 years. There is clearly life still on the Continental Shelf. Companies are investing and those investments are paying off. Yet here is the paradox. Behind this encouraging news lies an urgent need for substantially more exploration to discover the untapped sources that will feed the future development of newoil and gas fields. Only 15 exploration wells were drilled in 2013. That number needs to increase substantially. Equally concerning are the industry’s rising costs. Every pound invested in the UKCS yields only about one fifth of the return achieved ten years ago, and as the industry in the UK must compete for investment in a global marketplace, our current situation is simply not sustainable. How can we reverse this pattern? Oil & Gas UK sees the need for three remedies all of which need to be urgently applied.

First, we need to see radical change to our industry’s fiscal regime. We need a lighter tax burden, a simpler and more predictable system of field allowances, and fiscal support for exploration. Time is not on our side. The outcome of the Fiscal Review, due to be announced in December, needs to be relevant, radical and robust. Second, we need to see prompt and full implementation of the Wood Report recommendations, all of which have been accepted in full by the industry and both governments. Third, our industry needs to tackle the cost, efficiency and productivity challenges which are now bearing down on us. This report underscores some of these challenges. Production efficiency has experienced a significant decline, falling on average from 80 per cent in 2004 to close to 60 per cent in 2012. Unit operating costs are now 62 per cent higher than they were as recently as 2011. It will take bold and purposeful action to redress the balance on costs and secure a sustainable future. Nothing should be considered to be off limits. Collaboration will be the key to our success. Maximising recovery from the UKCS is the collective responsibility of all those who fund, regulate, tax and operate the offshore oil and gas industry. It also involves getting assets into the right hands, which demands a swift resolution to the current market overhang on disposals. Achieving our full potential will require a tremendous effort on the part of industry, the regulators and both governments. A stronger production profile will reap benefits too for the industry’s extensive supply chain across the UK. Data published earlier this year show that the UK supply chain provides jobs for almost half a million people and exports almost £15 billion a year in oilfield goods and services. Collaboration is key here too if we are to strengthen our supply chain businesses in all parts of the United Kingdom. Our industry makes far too important a contribution to the economic and energy security of the nation to be allowed to falter. Luckily we have strong foundations but we cannot stand still. We must embrace change and continue to invest for the future.

1

2

3

4

5

6

7

8

MalcolmWebb Chief Executive, Oil & Gas UK

7

ECONOMIC REPORT 2014