Oil and gas industry crisis warning

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Published: Tuesday 24th February 2015 by The News Editor

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A new report has found “striking evidence” of how rising costs, taxes and “inadequate regulation” have taken their toll on the UK oil and gas industry’s international competitiveness.

Urgent action to secure new investment and address the “collapse” in exploration is needed if the UK is to make the most of its significant untapped resources, according to industry body Oil & Gas UK.

Its 2015 activity survey of exploration and production companies operating on the UK Continental Shelf (UKCS) found that revenues declined to just over £24 billion, the lowest since 1998.

That, combined with rising costs, resulted in a negative cash flow of £5.3 billion – the worst since the 1970s.

Oil & Gas UK’s chief executive Malcolm Webb 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.”

Headline figures from the survey show that operating expenditure in the UKCS rose by almost 8% to £9.6 billion in 2014, while unit operating costs jumped to £18.50 per barrel of oil equivalent (boe), up from £17 in 2013.

Cost over-runs and other factors pushed capital investment last year beyond expectations to £14.8 billion, with half spent on just 12 fields, the report revealed.

Investment in new projects over the next three years was last year forecast at £8.5 billion but this year’s survey estimates it at around £3.5 billion.

Exploration for oil and gas in the UK last year was also said to be significantly worse than anticipated with only 14 wells drilled out of the expected 25.

However, production in 2014 had its best performance since 2000, falling just 1% since 2013 to 1.42 million barrels of oil equivalent per day (boepd).

But oil prices averaged 99 dollars per barrel in 2014, with the average price in the last quarter significantly lower at 76 dollars.

Mr Webb added: “Even at 110 dollars 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 – £94 billion 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.”

Scottish Government Energy Minister Fergus Ewing said the UK Government must deliver urgent action on taxation and regulation to help the industry protect jobs and investment.

He said: “It is encouraging that Oil & Gas UK expect the first annual production increase in 15 years to happen this year. However, to sustain North Sea activity over the longer term, exploration levels must improve and long-term investment must be sustained to ensure that sufficient new production comes on stream. This should help to protect future tax receipts and ensure a fair return to the nation.

“With lower prospectivity than many other global regions and pressure to tackle the high cost environment in the basin, the Scottish Government is clear that in order to maximise economic recovery and the Total Value Added by the sector to the economy, essential fiscal and regulatory reforms must continue to be progressed with urgency.”

A UK government spokesman said: “The Oil & Gas UK report underlines the need for a concerted and joined-up approach between the Government, the Oil and Gas Authority and industry to ensure investment and exploration in the UK North Sea continues and is able to get through this difficult period.

“The UK Government recognises how important the North Sea is, both in terms of the thousands jobs it supports and the benefit it brings to the UK economy. The package of fiscal changes and initiatives announced by Treasury in early December shows the Government understands the challenges and is on the front foot in dealing with them.”

The Scottish Conservatives’ energy spokesman Murdo Fraser said: “These are grim statistics for the industry, and it goes to show just how fortunate we are to have the broad shoulders of the UK bearing these difficult times.”

MP Tom Greatrex, Scottish Labour’s shadow energy minister, said “These findings underline the need for urgent action to ensure the fiscal framework is appropriate for North Sea oil and investment – postponing action until the budget is a needless and damaging delay,” he said.

Published: Tuesday 24th February 2015 by The News Editor

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