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The importance of greater collaboration

Published:  15 October, 2014

Oil & Gas UK has recently released its Economic Report 2014 - the definitive guide to the current status and future prospects of the offshore oil and gas industry in the UK - with a call to secure the long-term future of the industry through greater collaboration. ODEE takes a look at the report’s findings.

The report, published annually by the UK oil and gas industry’s leading trade association, provides current analysis of a sector finding it increasingly difficult to compete for investment internationally, and calls for greater collaboration across industry with and across governments.

The report states that significant oil and gas resources still lie offshore (possibly up to 24 billion barrels), but radical fiscal and regulatory reform are urgently needed to maximise the recovery of these resources. The industry, it says, must also act immediately to address its unsustainably high, and rising, costs.

Oil & Gas UK believes that all three of these tasks are of equal importance and that it is crucial to the future of the industry that all three are successfully delivered.

Building on Oil & Gas UK’s Activity Survey 2014, which juxtaposed record investment in 2013 with a crisis in exploration and fast rising costs, this report, based on data provided by Oil & Gas UK’s members, along with information from the UK Department of Energy & Climate Change (DECC), covers a range of pertinent industry topics from oil and gas markets and regulation, to production and reserves.

Oil & Gas UK’s chief executive Malcolm Webb commented: “Today this country depends on oil and gas for some 70% of our primary energy needs and oil and gas from the UK offshore areas supply nearly 50% of that. Our industry has a crucial role to play in the future wellbeing of this country.

“This report reaffirms our sector’s position as the country’s largest industrial investor, supporter of some 450,000 jobs, successful exporter of oilfield goods and services, and a provider of secure primary energy for the United Kingdom.

“However, to support a lasting and sustainable future…we’re calling for greater collaboration – between governments, between government and industry and within industry itself to face and fight the challenges ahead.

“Full implementation of Sir Ian Wood’s recommendations for regulatory reform, and far-sighted changes to the fiscal regime, are needed in the next 12 to 18 months to stimulate new investment in exploration and production. Alongside this, the industry must improve its efficiency and reduce its costs as a matter of utmost urgency. “

Oil & Gas UK’s economics director, Michael Tholen, added: “We need a lighter tax burden, a simpler and more predictable system of field allowances and fiscal support for exploration. The outcome of the Fiscal Review, expected to be announced in December this year, must be relevant, radical and robust.”

The report highlights many of the initiatives already underway to boost exploration and production. The industry is working with government in the joint pilot programme to rejuvenate offshore infrastructure to defer decommissioning, explore possibilities to enhance oil recovery, restore production efficiency and stimulate new technologies and exploration.

Production in the first half of 2014 has been encouraging. After several years of double digit decline, DECC figures currently indicate a one per cent increase in production compared with the same period in 2013, as the basin reaps the benefits of strong investment in recent years (£14.4 billion last year and £13 billion in 2014) and the return of a number of significant fields back into production, including Elgin Franklin, Gryphon and the Penguins Cluster.

Noting the importance of the UK’s supply chain, detailed in a new section to the Economic Report, Malcolm Webb said: “A stronger production profile is also good news for the industry's extensive supply chain across the UK, providing opportunity for future growth and jobs. Data published earlier this year showed that the UK supply chain has an annual turnover of £35 billion, including over £14 billion in oilfield goods and services exports. Collaboration is key here too, if we are to strengthen the activities of our supply chain businesses across the UK at home and abroad.”

Unit operating costs however are now about 60% higher than they were as recently as 2011. Oil & Gas UK warns it will require bold and purposeful action in all parts of the industry to redress the balance on costs and so secure a sustainable future.

Looking to the production potential of the UKCS, the report notes that with regards to recoverable potential offshore oil and gas resources from the UKCS, Oil & Gas UK indicates a range of 15-24 billion boe (barrels of oil equivalent), but acknowledges that the recent lack of exploration success and slow rate of bringing discovered resources through to maturity are demonstrative of how difficult it will be to reach the upper end of these ranges.

Malcolm Webb concluded: “The magnitude of the task ahead means that over one trillion pounds of expenditure (in 2013 money) will be required if the recovery of above 20 billion boe is to be achieved. However, the UK has to compete for each and every pound of that investment. If the current trend of rising cost continues, the UKCS will cease to provide a healthy return on investment and we’ll feel the brunt through falling levels of activity.

“Maximising recovery from the UKCS is the collective responsibility of all those who fund, regulate, tax and operate the offshore oil and gas industry and achieving our full potential will require a tremendous effort on the part of everyone involved.

“Our industry makes far too important a contribution to the economic and energy security of the nation to be allowed to falter at this critical point.”

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