Oil & Gas UK Economic Report 2015

As Figure 12 shows, when the total revenues from the UKCS as a whole are compared against the combined expenditure on investment, exploration, operations and decommissioning, the basin is seen to be cash-flow negative, on a post-tax basis. The industry last had such a cash-flow deficit four decades ago when the first large discoveries were being developed. As then, much of the expenditure in recent years has been targeted at a few large projects. It cannot be guaranteed that revenues from these same new developments will prove sufficient to see a swift recovery in net cash flow. Nor will this help many existing fields that will still have operating costs that are approaching or exceeding their production revenues.

Simply put, the basin is spending more than it earns. It had significant cost challenges when oil was at $110/bbl and the scale of the issue has escalated as the oil price collapsed. In 2014, at $50/bbl, almost 20 per cent of oil production was from fields that were cash-flow negative. For many companies, in the current business environment, the UKCS no longer offers an attractive investment proposition and, as a result, capital investment is forecast to fall by £2-4 billion per year (see Section 7.5 for more on capital investment). Exploration and appraisal (E&A) drilling has also fallen to levels last seen in the 1970s (see Section 7.3), which is a concern in terms of finding new discoveries for possible future development.

1

2

3

4

Figure 12: Cash Flow Forecast

5

70

Gross Revenue Post-Tax Costs Post-Tax Cash Flow

60

6

50

40

7

30

20

8

10

0

Cash Flow (£ Billion - 2014 Money)

9

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

-10

-20

Source: DECC, Oil & Gas UK

10

25

ECONOMIC REPORT 2015