Wednesday 14 January 2004

North Sea Investment Holds Strong Despite Fresh Challenges to Competitiveness

Despite rising investment, mounting unit costs and declining production volumes mean that UK offshore oil and gas producers have a two to three year window of opportunity to contain the rate of decline in the North Sea. Urgent action by all stakeholders, including Government, is required to increase investment in marginally economic fields, maximise the recovery of reserves in producing (brown) fields and stimulate the exploration and appraisal activity that is essential for future production. The increasing regulatory burden must also be addressed.

That is the conclusion of the UK Offshore Operators Association (UKOOA) from an analysis of the latest annual survey of the investment and development plans of 29 oil and gas production companies active in the UK continental shelf (UKCS), carried out jointly with the Department of Trade and Industry (DTI).

The trade bodys report on the UKOOA/DTI 2003 Activity Survey, published today, shows that while capital investment in offshore oil and gas developments remains strong, rising unit costs and declining production volumes point to deteriorating economics in the North Sea and the challenge ahead for companies to remain competitive and attractive to future investment.

Key findings are:

* Capital expenditure (capex): the industry continues to meet investment projections with capex in new offshore developments expected to remain above the joint Government Industry PILOT vision of £3 billion per annum through to 2006. Capex in 2003 was estimated at £3.4 billion, with a small increase forecast for 2004 at over £3.5 billion. The outlook for overall capital expenditure to the end of the decade is also forecast to remain strong, up by 15 per cent on last years forecast at a total of £18.5 billion over the period 2003-2010, albeit with no increase in reserves.

* Operational expenditure (opex): opex will remain above £4 billion until 2006 (opex in 2003 was estimated at £4.3 billion). Unit operating costs will rise by 60 per cent by 2010, based on currently sanctioned development plans. Unit costs can only be held down if currently identified marginal developments can be made economic.

* Production: despite ten new field development approvals in 2003, forecasts for near term oil and gas production continue to slip. 2004 volume predictions are just over 3.7 million barrels of oil equivalent per day (boepd), down by 280,000 boepd compared with last years outlook. Production in 2003 was estimated at just over 4 million boepd. Industry production plans will develop up to a total of ten billion boe of reserves by 2010, and may develop up to a total of 14 billion boe by 2030. The challenge will be to identify ways to find and develop the additional 9-16 billion boe in the UKCS not covered by current plans.

* Reserves portfolio: the number of possible future projects is down by around 500 million boe to 4.2 billion boe, and is reduced by a further 400 million boe with the Governments approval for the Buzzard development in November 2003.

The PILOT intermediary production goal for 2005 of 4 million boepd is now unlikely to be met, while the 2010 vision of 3 million boepd looks increasingly elusive, unless significant new reserves are added over the next two to three years through increased exploration and appraisal activity, improved marginal field economics and incremental investment in brown fields.

Commenting on the report, Steve Harris, UKOOAs acting director general, said:

The estimated shortfall on the PILOT 2010 target is 570,000 boepd, based on current production trends. To close the gap by the end of the decade, the industry will need to move urgently to explore and bring new discoveries into production within an ever shortening time-frame. The second vital element will be the contribution of additional reserves recovered from existing fields. Both present considerable economic and geo-physical challenges, which can only be overcome through the combined efforts of industry, its supply chain and Government.

We seem to have failed to convince Government that time is of the essence if we are to utilise existing infrastructure to maximise the recovery of oil and gas from the North Sea. We need to remedy that.

Alan Booth, UKOOA president and senior vice president and managing director of Encana (UK) Ltd, said: The strength of investment in the UKCS reflects the ongoing commitment of existing players to maximise the economic recovery of UK oil and gas reserves. It also confirms the sectors continuing attraction for new companies who see opportunity in the North Sea. But ultimately, the sectors long term success will depend on the ability of the Industry to arrest the current trend that is seeing it spending more to produce less. This will take the combined efforts of industry, the supply chain and government to find new ways to enhance the regions commercial attractiveness through cost reductions, technology breakthroughs, fiscal incentives and containing the increasing regulatory burden.

Notes to Editors

1. The UK Offshore Operators Association (UKOOA) is the representative organisation for the UK offshore oil and gas industry. Its 29 members are licensed by the British Government to explore for and produce hydrocarbons in UK waters.

2. PILOT is the successor body to the Oil and Gas Industry Task Force (OGITF) and was established in January 2000 to secure the long-term future of the oil and gas industry in the UK. PILOT comprises 23 key Government representatives and recognised leaders from the industry. It meets on a quarterly basis. http://www.pilottaskforce.co.uk

3. PILOT aims to achieve the following outcomes for 2010:

- Production maintained at 3 million barrels of oil equivalent

- Capital investment maintained at £3 billion per annum

- Prolonged self-sufficiency in oil and gas

- 100,000 more jobs in addition to earlier forecasts

- 50 per cent increase in exports by 2005

- £1 billion additional revenue from new business

- Establish the UK as the safest place to work in the oil and gas industry worldwide.

For more information, please call 020 7802 2400.