Bleak picture as revenues at 17-year low

Oil fields face being ‘lost’ without urgent action to help industry

Malcolm WebbThousands of jobs will be lost and billions of barrels of oil left underground unless Chancellor George Osborne takes urgent action is taken to secure investment in the industry, according to a report published today.

The 2015 Activity Survey paints a bleak picture of slowing activity and competitiveness with revenue slumping to its lowest for 17 years as a result of rising costs and taxes, and the burden of regulation.

It warns that 6.3 billion barrels will be produced but just under half the oil identified for development will be left under the sea.

This latest statement comes as Mr Osborne drops further hints that he will take action in next month’s Budget to ensure the tax regime helps support the industry. However, until they get firm guarantees, lobbyists will maintain pressure for action.

Malcolm Webb, Oil & Gas UK’s chief executive, said: “This year’s Activity Survey paints a bleak picture but also identifies this region’s potential, emphasising the importance of Government and industry now putting the right measures in place to secure its long-term future.

“This is crucial, not only for the energy security that domestic oil and gas production provides, but also for the hundreds of thousands of highly skilled jobs, advanced technology and billions of pounds of exports which the industry underpins.

“Without sustained investment in new and existing fields, critical infrastructure will disappear, taking with it important North Sea hubs, effectively sterilising areas of the basin and leaving oil and gas in the ground.”

Operating expenditure rose last year by almost 8% to £9.6bn. Falling oil prices meant that revenues fell to just over £24bn for the year, the lowest since 1998, and this, combined with rising costs, resulted in a negative cash-flow of £5.3bn for the basin, the worst since the 1970s.

Cost over-runs and project slippage on several large projects pushed capital investment in 2014 beyond expectations to £14.8bn, with half spent on just 12 fields.

Oil & Gas UK say that as these large projects move from the investment phase into production there is little new investment lined up to replace them. “Indeed, it is expected to fall in 2015 by around one third to £9.5 – £11.3bn,” it says.

“Annual investment in sanctioned projects alone is forecast to decline rapidly and could collapse to £2.5bn by 2018.  Equally alarming is the three-year (2015-17) outlook for projects yet to get company sanction, in which planned investment has fallen from £8.5bn in last year’s survey to just £3.5bn in current forecasts. The basin is not generating new projects and as a result, there is very little fresh investment.”

The report states that exploration for oil and gas in the UK last year was “significantly worse than anticipated” with only 14 wells drilled out of the expected 25.

“This continues the downward trend of recent years with no improvement in sight. Between eight and 13 exploration wells are forecast for this year as price uncertainty adds to the existing difficulty explorers still have in accessing capital.”

Mr Webb added:  “Even at $110 per barrel, the ability of the industry to realise the full potential of the UK’s oil and gas resource was hamstrung by escalating costs, an unsustainably heavy tax burden and inappropriate regulation.   At current oil prices, we now see the consequences only too clearly.

“The industry recognises that its cost base is unsustainable.  Cost and efficiency improvements of up to 40% are required to give this basin a viable future. This adjustment is now under way but cost control alone is not the answer.

“The basin needs sustained, high investment – £94bn alone to recover the 10 billion boe in known reserves.  This is why a concerted effort on three fronts is needed – tax, regulation and cost – to make the basin more attractive to investors and ensure that significant sums of much-needed capital come to the UK.”

One positive finding of this year’s survey is that production in 2014 had its best year-on-year performance since 2000, falling just one per cent since 2013 to 1.42 million boe per day (boepd).

This was largely the result of investment in new project start-ups, enabled by targeted tax allowances, and a specific focus across the industry on improving production efficiency in existing fields which resulted in no major unplanned shutdowns. This year up to 15 new fields could begin production with many expected in the first half of the year. If there is no major project slippage, oil and gas production could increase to around 1.43 million boepd in 2015.

Mr Webb concluded:  “This offshore oil and gas industry is a major national asset. Our indigenous resources hold the promise of a successful industry for decades to come and we have the skills needed to realise that potential. The industry is taking measures to improve its cost efficiency and we are pleased that even before the steep fall in oil price, the Government took the important steps of implementing the Wood Review recommendations and conducting a comprehensive tax review.

“The time has now come for delivery of permanent change on those fronts. We need to see full delivery of the Wood Review recommendations as well as a permanent reduction in the headline rate of tax, a simplification of the tax allowance structure and stimulus for exploration. We must, together, do what is needed to reduce costs, encourage investment, and avoid premature decline.”

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