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Business energy: new report reveals challenges for UK gas business


The UK Oil and Gas Economic Report 2015 offers an overview of the “very challenging times” facing the UK oil & gas business. Is this the end for UK business gas?

Concerns over the viability of the North Sea oil and gas business continue to mount. As the report points out, the UK Continental Shelf (UKCS) has seen four successive years of record investment, but the return on investment is being severely undermined by acute cost inflation. In 2014 offshore oil and gas operational spending outweighed production earnings. A continued fall in commodity prices has worsened the situation.

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Clearly, this situation is not sustainable. Investors have understandably been reticent to commit more money, causing exploration to fall to its lowest level since the 1970s. Capital investment is expected to drop by £2-4 billion in each of the next three years.

Sharply rising costs have been accompanied by a significant fall in production efficiency, leaving the UK sector particularly exposed to the drop in oil price, pointed out Deirdre Michie, Chief Executive, Oil & Gas UK.

But not all the news is bad: even before the oil price fall, the industry was focused on developing a coherent response to the challenges facing the basin while upholding the safety of the workforce. “It is now widely recognised that a transformation in the way business is done is required if the UK sector is to become more resilient and competitive in a world of sustained lower oil prices,” explained Michie.

This transformation is now apparently underway: “Alongside the UK Government’s restructuring of the tax regime to provide a more fiscally competitive proposition, as well as its funding of seismic surveys to open up new areas for exploration, the industry has been working hard to bring costs down and improve efficiency. The concerted action of companies is beginning to yield results and will help to restore the attractiveness of the basin.”

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The measures being taken to improve the efficiency of assets offshore have resulted in stronger delivery from existing fields, the report found, with Oil & Gas UK expecting the rate of decline in production to slow dramatically over the next two years.

These efforts, along with the start-up of the sizeable Golden Eagle field, can be seen in Government provisional data show, which show production in the first half of 2015 was 3% higher than the same period in 2014. Oil and Gas UK expects the first annual production increase for 15 years this year.

“Furthermore, we are now seeing companies’ commitment to improving cost and efficiency reflected in industry performance,” said Michie. “We anticipate that by the end of 2016, companies will have reduced the cost of operating their existing assets by 22% (£2.1 billion), though the fall will be offset to some extent by £1 billion of operating expenditure relating to fields brought on-stream in the intervening period.”

With assistance from the recovering production profile, the average operating cost per barrel of oil equivalent (boe) is also expected to fall from £17.80 in 2014 to £17 this year and by a further £2-3/boe to around £15/boe by the end of 2016, almost reversing the last three years of consistent increases.

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Of course, cost cutting and efficiency almost always have negative impacts – UK business gas is no exception. The report estimates that UK oil and gas industry UK employment has fallen by 15% since the start of 2014 with a further contraction likely.

Nevertheless, Michie was confident over the future: “Maximising the recovery of our oil and gas resource will strengthen the country’s energy security, boost tax revenues, exports and the balance of payments as well as sustain high value activity and jobs in our world-class supply chain.”

“Challenging times continue,” she concluded, “but I am confident that a corner is being turned.”

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Find out more about business gas at our dedicated page.

UK oil & gas in numbers

Energy supply

  • Oil and gas provided 68% of the UK’s total primary energy in 2014, with oil for transport and gas for heating being dominant in these markets.
  • In 2030, 70% of the UK’s total primary energy is expected to come from oil and gas, according to the Department of Energy & Climate Change (DECC).
  • The UK Continental Shelf (UKCS) continues to satisfy just over 50% of the UK’s oil and gas demand. Import levels are expected to rise to 74% by 2030.

Economic contribution

  • The supply chain in the UK generated over £39 billion of sales in 2013 with similar figures estimated for 2014. These supply chain sales included over £16 billion of export of goods and services (in 2013).
  • Offshore oil and gas extraction, last year, was the sixth largest contributor to national gross value added among the 37 production, manufacturing and construction sectors in the UK economy.
  • Production of oil and gas boosted the balance of payments by £25.2 billion in 2014.
  • The industry paid £2.2 billion in corporate taxes on production in 2014-15, the lowest in over 20 years because of falls in oil price and as a consequence of recent investments.
  • Since 1970, the industry has paid over £330 billion in such taxes.

Reserves/Resources

  • More than 43 billion barrels of oil equivalent (boe) have been recovered since first production from the UKCS in 1967. Further overall recovery is forecast to be up to 22 billion boe.
  • Considering the full range of opportunities available, the UKCS has the potential to deliver:
    • 8–12 billion boe in existing reserves
    • 5–4 billion boe in potential additional
    • resources
    • 2–6 billion boe in yet-to-find potential

New developments

  • Four new fields came on-stream in 2014, bringing approximately 190 million boe into production.
  • DECC approved eight new fields last year, which will require capital investment of £2.4 billion to develop and are expected to yield 160 million boe of production over time. In addition, DECC has approved 28 brownfield projects of various sizes.
  • The amount of fresh investment committed to new developments is expected to average £3-4 billion per year over 2016 and 2017, compared to almost £10 billion per year from 2011 to 2013.

Production

  • Provisional data from DECC for the first six months of 2015 show an increase in production by around 3% against the same period last year.
  • In 2014, UKCS production averaged 1.49 million boe per day (in total 545 million boe), just 0.2% less than 2013. This was the best year-on-year production performance since 2000, with many assets reporting improved production efficiency and new fields coming on-stream.
  • The UK remains in the top 25 global producers of both oil (23rd) and gas (23rd).

Decommissioning

  • Decommissioning expenditure is likely to rise from £1 billion in 2014 to over £2 billion in 2018, by which time over 50 fields will either be approaching or undertaking decommissioning.
  • Some 475 installations, 10,000km of pipelines, 15 onshore terminals and 5,000 wells will have to be decommissioned.

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