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1. Foreword

Welcome to Oil & Gas UK’s

2016 Activity Survey

, the leading account of the UK oil and gas industry’s past performance

and future prospects.

TheUKContinental Shelf (UKCS) is entering a phaseof ‘supermaturity’ andwhile this provides great depths of knowledge

and expertise, along with significant opportunities still remaining, the report highlights the challenges posed here

relative to other basins.

Thirty years ago, the province was producing more than double the current rate from around a quarter of the number

of fields and, on average, discoveries were five times their current size. The report also illustrates that in this next phase,

the basin must compete fiercely in the current price environment to attract the limited remaining global investment.

Despite production having risen by ten per cent in 2015, the halving in oil price and the 20 per cent fall in the average

daily gas price over the last year have dramatically depressed revenues. If current prices prevail, nearly half of UKCS oil

fields will not cover their operating costs in 2016.

This is leaving the sector with very little to reinvest in new UKCS projects. Less than £1 billion of fresh investment is

expected to be sanctioned in 2016, a mere one eighth of the average over the last five years, and exploration has fallen

to an all-time low.

Over the last year, the number of fields expected to cease production between 2015 and 2020 has risen by one fifth

to over 100. The interconnectivity of fields on the UKCS makes a ‘domino effect’ on other production a very real risk.

Above all, the report demonstrates the vital need for a coherent approach by industry, the regulator, and the UK and

Scottish Governments to boost competitiveness and confidence. Together, we need to transform the basin into a highly

competitive, low tax, high activity province, which is attractive to a variety of operators and sustains and supports the

supply chain.

We have a huge task ahead of us but the prize is worth fighting for. The UKCS still holds up to 20 billion barrels of

oil equivalent (boe), which can continue to provide a secure supply of energy for the country, support hundreds of

thousands of jobs, generate several billion pounds in corporate and payroll taxes from the supply chain, and stimulate

countless technological innovations.

Moreover, the cost to individuals and families at a personal level due to the ongoing job losses makes it a moral as well

as a business imperative that we effectively manage our way through this serious downturn.

The industry is striving to restore its competitiveness and has made very substantial progress in reducing costs and

improving efficiency: average unit operating costs have fallen from almost $30/boe in 2014 to an expected $17/boe this

year. However, to cope with an oil price that has continued to decline in the early part of this year, the industry needs to

intensify its efforts even more and set its sights on a target of $15/boe by way of focussed company efforts as well as

cross-industry initiatives through Oil & Gas UK’s Efficiency Task Force.

Government announcements of support for innovation and infrastructure in the north east of Scotland including

investment in the Oil & Gas Technology Centre; the Oil and Gas Authority’s timely publication of its strategy to

maximise economic recovery; and enterprise agencies’ measures to help mitigate the negative impact of job losses

are encouraging reflections of the co-operative approach to assisting the sector.

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