No doubt about it: investment in developing UK oil and gas reserves last year was strong, rising by at least a quarter compared to 2010.
But this increase in spending on a limited number of projects with robust economics which involve large accumulations of oil and gas masks a darker tale.
If the UK oil and gas industry is to fulfil its potential in contributing to our energy needs, providing highly skilled employment and substantial tax revenues to the Exchequer, the worrying underlying trends that emerged in 2011 must not be ignored. Urgent action to address them is now required.
So what is giving us cause for concern?
Firstly, the UK suffered a drop in production much greater than was anticipated by either industry or Government prior to the Budget. In 2011, production fell 17% compared with the prior year.
This is in sharp contrast to an average 7% decline a year over the previous five years.
While extended shutdowns for maintenance and lower gas demand will have contributed to this, sustained fiscal instability since 2002 and under-investment in 2007-9 will not have helped.
Indeed, the time lag between investment, or lack of, and first production was rather neatly illustrated by the fact that only 30 million barrels were brought onstream in 2011, not nearly enough to offset the natural decline of mature fields, which is ultimately the goal.
The direct link between production and tax revenues was highlighted in December when the Treasury downgraded its forecast for the tax it would collect on production in 2011/12 by £2.3 billion.
Secondly, the UK did not prove attractive for exploration with drilling for new oil and gas falling by half in 2011 at only 14 wells.
This is in contrast to the experience of all other North Sea countries where exploration was the same or better than last year. In a province holding up to 24 billion barrels of oil and gas potential where only half, at most, are being considered for investment, finding the undiscovered accumulations is absolutely imperative.
Exploration and resulting discoveries are vital in the fight to keep existing infrastructure economic and sustain production in a mature province.
Thirdly, the industry is proving cautious regarding future activity following the Budget. Oil & Gas UK’s business confidence index for the latest available quarter (July to September 2011), at 53 out of 100, shows an outlook that is only marginally positive and much more negative than in the fourth quarter of 2010.
This is sentiment that was reinforced by a survey of Oil & Gas UK’s members after the Budget last year which revealed that investment in over one billion barrels of oil and gas, worth around £12billion, would not be secured in the current tax regime.
Lastly, but very importantly, Oil & Gas UK’s study of 16 fields which changed ownership in the last five years and which are now benefiting from over £2billion additional investment and 300 million barrels of extra recovery highlights the importance of asset trading in a mature province.
So it is particularly worrying that while a couple of sizeable asset transfers (in terms of reserves) took place last year, many mature assets are languishing on the market and overall, asset transfers have slowed to a trickle in the last five years.
In many cases uncertainty on whether the government will honour current commitments to provide full tax relief on decommissioning costs is cited as a key stumbling block.
The UK is very fortunate to have its own oil and gas endowment. If we do not make the most of it and give the economy and energy security the helping hand it needs, we would be witnessing a huge missed opportunity.
However, sustaining investment throughout the price cycle is made extremely difficult in a fiscal environment without long-term certainty so achieving stability at this juncture is very important in the industry’s future.
The UKCS can recover from 2011 and in this, the ongoing work of Oil & Gas UK’s members and the Treasury to improve the business environment for investing companies and deliver long term certainty is hugely important.
The constructive engagement on the extension of field allowances to stimulate investment and the treatment of tax relief on decommissioning costs, most recently through the Fiscal Forum, chaired by the Economic Secretary to the Treasury, Chloe Smith MP, has been encouraging.
An awful lot hangs on the results which we hope will be presented by Budget 2012.
Mike Tholen is economics director at Oil & Gas UK
Oil & Gas UK’s 2012 Activity Survey, incorporating forecasts for exploration, investment, production and decommissioning will be published on February 28. Results will be presented in either Aberdeen on February 28 or London on March 1 at
http://www.oilandgasuk.co.uk/events/index.cfm
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