Monday 12 February 2001

Investment and Technology Key to Maximising Recovery of Britain’s Remaining Oil and Gas Reserves

Higher oil prices significantly enhance Industrys contribution to the UK economy

The sheer scale of the offshore oil and gas industrys contribution to the UK economy underscores the need to maximise recovery of Britains remaining oil and gas reserves. And the key to that is sustained investment and developing the new technologies capable of unlocking fields of diminishing size in the increasingly mature North Sea oil and gas province.

That is the conclusion of a new economic survey of the UK upstream oil and gas sector, published by the UK Offshore Operators Association (UKOOA), the body representing oil and gas exploration and production companies.

The UKOOA 2000 Economic Report argues that there could be up to 36 billion barrels of oil equivalent (boe) still to be recovered from around the British Isles, in addition to the 28 billion boe already produced since the 1960s.

However, the extent to which these possible reserves are captured will depend on a number of factors. Production costs in the UK are high compared with other oil producing countries. Therefore cost reductions and the application of new technology remain key if the UK is to continue to attract investment and the Government/Industry production target of three million boe per day for 2010 is to be realised.

The report highlights the various initiatives and collaborative measures being taken by the industry to maintain investment in the UK against a backdrop of global competition for funds and volatile oil and gas prices.

It also reveals the enormous scale of the offshore oil and gas industrys contribution to the UK economy which underlines the need to maximise recovery of Britains oil and gas reserves to protect jobs, tax revenues and security of supply in the longer term.

The report shows that:

* Some 270,000 jobs throughout the UK are supported by the industry. In Scotland, industry supported jobs represent 7 percent of total employment.

* The industry has accounted for some 18 percent of total UK industrial investment over the last ten years. Development expenditure declined in 1999 to some £3.2 billion, representing 13 percent of total UK industrial investment.

* In a year when the overall trade balance was in deficit by over £26 billion, the value of UK oil and gas in 1999 was £16 billion, or 1.8 percent of Britains Gross Value Added.

* Treasury receipts from offshore taxes in 1999/2000 was £2.6 billion. The industry has contributed a total of some £170 billion (2000 prices) to the Inland Revenue since the 1970s.

* The Treasury also stands to gain from the stronger crude oil prices with latest Government forecasts predicting offshore tax revenues rising to some £5.3 billion in 2000/2001, almost £2 billion above previous estimates. For every $1 per barrel increase in the price of oil, it is estimated that tax revenues will rise by about £225 million in the first year and by about £300 million in each year subsequently.

* In 1999 offshore oil and gas accounted for 84 percent of the UKs total primary energy production.

"Sustaining investment in the UK will determine how long Britain can delay the need to become a net importer of oil and gas," said James May, UKOOAs director general. "But this is a high risk and capital intensive industry. Companies need to deliver acceptable returns to retain the confidence of investors, and to do so over the full cycle of the ups and downs of the oil and gas markets.

"The industry is showing signs of recovery from the lows of 1999 when oil prices sank to $10 per barrel and investment slumped to just over £3 billion. While there was little movement in development spending in 2000, projections for 2001 show an anticipated rise of around 30 percent to £4 billion as new fields are brought onstream. This is good news for the 270,000 people who work in the industry, for Government and the UK economy as a whole."

UKOOA 2000 ECONOMIC REPORT Executive Summary

The UK Offshore Oil and Gas Industrys contribution to the UK Economy

* In 1999, oil and gas production accounted for 1.7 billion boe, representing some 84% of the UKs primary energy production.

* The UK economy has benefited from £170 billion (2000 prices) in offshore taxes since the 1970s.

* In 1999/2000 the Government collected some £2.6 billion in offshore taxes. Taking account of the increased price of crude oil the Treasury revenue estimate for 2000/2001 is £5.3 billion.

* The industry has invested some £190 billion (2000 prices) in exploration and development of the UKCS since the 1960s.

* Over the last decade the industry has accounted for some 18% of total UK industrial investment. Despite the decline in development expenditure in 1999 industry investment still represented 13%.

* Industry data show that some 270,000 jobs were supported by the industry in 1999. In Scotland, industry supported jobs represent some 7% of total employment.

Industry Activity in 2000

* The volatile recovery in oil prices, which started from a low of $10/bbl early in 1999, was maintained in 2000. The average price in 2000 was some $29/bbl, which in real terms is less than half the price in 1980. By the end of 2000 the price was near $24/bbl and most commentators suggest that in the medium term oil prices are more likely to be in the range of $15-$20/bbl.

* UK gas prices also recovered in 2000. Contract prices averaged 19p/therm equivalent to $16.50/boe.

* Whilst UKCS exploration activity declined to its the lowest for 30 years in 1999 there was a recovery in 2000, resulting in some 37 wells being started.

* Development spending in 2000 is expected to be some £3 - £3.2 billion, similar to 1999.

* The initiatives and industry dialogue stimulated by PILOT have been a significant factor in restoring industry confidence.

Meeting the Challenge

* Operators investment intentions indicate a return of industry confidence suggesting an increase in capital expenditure in 2001-2004 of some £4 billion in sanctioned, incremental, probable and possible field development, over intentions predicted a year ago.

* The industry has identified 120 probable and possible new fields which could proceed in the next 5 years, suggesting current record levels of production could be sustained until 2004.

* The industry believes that there remain more oil and gas reserves to be produced than the 28 billion boe already produced.

* Additional reserves recovery scope from existing fields (Brown Fields Potential) is estimated at some 4.4billion boe. With new technology, reduced development costs and continuous improvement in the economic climate, the industry could realise the potential of these reserves.

* 40% of Brown Field potential is gas and some 50% of this is in the Central North Sea.

* Despite the maturity of the UKCS, the success rate for exploration has remained stable from 1996 to 1999, averaging some 21%. The average discovery volume is 29 million boe.

* Assessment of UKCS reserves discovered in 1996-1999 indicates that almost half are currently non-commercial. Reducing the costs of UKCS development could change this perspective and will enhance the regions attractiveness for global investment. This is a key objective for the industry.

* The growth of UKCS gas supply has transformed the fuel mix used in electricity generation. In spite of a 16% increase in the amount of electricity generated, the use of gas in gas-fired power generation has meant that CO2 emissions have declined by 28% since 1990. This improvement is equivalent to a 41% reduction per unit of electricity generated.

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