Economic Sustainability

Indicators, trends and commentary

UKCS oil & gas production outlook

In 2004, the UKCS produced 725 million barrels of oil and 95 billion cubic metres of gas (on average, 3.6 million barrels of oil equivalent hydrocarbons per day), which exceeded domestic oil needs and met 98% of domestic gas demand. The UK still ranks as a globally significant oil and gas province.

Security of energy supply is an important aspect of UK energy policy with oil and gas accounting for 84% of the total primary energy produced and 74% of the primary energy consumed in 2004. The power generation sector consumes around 35% of total primary energy in the UK and there has been an impressive growth in its use of gas, rising from less than 1% in 1990 to 41% in 2004.

Figure 3: UK Oil & Gas Production 1970-2004

Total production through to the end of this decade is projected to be 2% above last year's forecast, based on higher than anticipated oil output over the latter half of this decade. The latest signs indicate that it is increasingly likely that the industry will achieve the PILOT vision of producing 3 million barrels per day of oil and gas in 2010.

Figure 4: UKCS Total Production Overview: 2003-2010

In 2004, the UK became a net gas importer again after a decade of self-sufficiency. Gas demand is projected to continue to rise, but there are still substantial development opportunities for new indigenous gas, if the current rate of investment can be sustained. If successful, the UK could still be producing around 25% of its gas needs from the UKCS in 2020.

The UK has been self-sufficient in oil for more than two decades and is expected to remain so until around 2010. Based on current investment plans, forecasts show UKCS production is beginning to decline, but there are still substantial opportunities if the UK remains internationally competitive and can sustain future investment. If successful the UK could still be producing 65% of its total oil requirements in 2020.

Figure 5: UK Combined Oil & Gas Production vs Consumption 1970-2020

Value contribution to the UK economy

The UK's offshore oil and gas industry continues to be the single most important contributor to the industrial sector of the UK economy. In 2003, the latest year available, the oil and gas industry contributed 13% of total gross value added (GVA) and 22% of the total industrial investment of the UK's production industries. At £25 billion, the GVA of the oil and gas industry accounted for 2.5% of the total GVA for the UK in 2003 and will form an increasing share in 2004 and 2005, as a result of higher oil and gas prices.

The UK balance of trade also continues to benefi t substantially from UKCS oil and gas production. If the UK had to import all its oil and gas in 2004, the total UK trade deficit would have risen from £40 billion to substantially over £60 billion.

Figure 6: UK Oil & Gas Industry Gross Value Added & Investment

Investment and expenditure

Since its beginning in the mid-1960s, the upstream oil and gas industry has invested heavily in exploration and field development (£219 billion in 2004 prices) and has spent over £110 billion on operations.

During 2002 and 2003 capital investment in new and existing fields declined in the UKCS. However, investors' sentiment improved during 2004 and investment is expected to rise from £3.3 billion to £3.8 billion in 2005 (including operational expenditure, the total is projected to exceed £9 billion). Capital investment from 2005 to the end of the decade is projected to total £13 billion, some 13% higher than last year's forecast.

Figure 7: UK North Sea Expenditure (2004 Prices), 1970-2004

Cost efficiency

Operating costs per barrel (£/boe) rose 13% in 2004 and is now significantly higher than in recent surveys. In part this rise results from increased spending to maintain and extend the life of ageing assets and infrastructure. However environmental and regulatory costs also continue to rise and could begin to constrain new development activity.

Continued development investment is needed to bring new production on stream. Without this investment, operating costs per barrel would rise by 50% by 2010. This trend of increasing unit operating costs must continue to be addressed or the UKCS will rapidly become uncompetitive, when compared with global investment opportunities.

Figure 8: UKCS Unit Operating Cost 2003-2010

Reserves stewardship and recovery

Figure 9: Estimate of UKCS Reserves and Exploration Potential (1.1.05)

27 projects were given development approval in 2004, double the number in 2003. They consisted of 18 new field developments (12 liquids and 6 gas) and 9 incremental projects on existing fields, so called "Brownfields" investment (all liquids). 14 new fi elds were brought into production in 2004, comprising 8 subsea developments, 4 new platforms and 2 extended reach drilling developments.

Good stewardship of UKCS assets is seen as an important factor in maintaining this development impetus and maximising the recovery of UK resources. Stewardship is seen as the ongoing maintenance and recovery efficiency of current assets, together with the identification and realisation of new opportunities. The DTI has now replaced the annual field reports with a new "stewardship process" which was launched in April this year. (See case studies.)

Reserves replacement by exploration & appraisal drilling

The number of exploration and appraisal (E&A) wells, including side tracks, rose by 40% to 63 in 2004. This was the highest since 1998 and the trend is projected to continue to rise by 10% or more this year. This increase in E&A activity is also reflected in the turn around in the rig market over the last twelve months. Rig utilisation averaged at 88% for jack-ups and 66% for semi- submersibles in 2004 and has continued to rise into 2005.

Figure 10: UKCS Exploration & Appraisal Drilling

The successful 22nd licensing round in 2004 saw 97 licences awarded (58 Promote licences, 7 Frontier and 32 Traditional). It attracted 15 new entrants to the UKCS and included ten blocks previously released from earlier licences under the DTI's 'fallow blocks and Figure 12: UKCS Pipeline Utilisation - Oil discoveries' initiative. Most new discoveries are smaller, typically in the range of 20 to 30 million barrels oil equivalent and much effort is being applied through PILOT to make these prospects economic to develop. (See case studies.)

Infrastructure utilisation

The majority of offshore infrastructure is now only partly full. Studies show that if we maintain current activity and utilise existing infrastructure for new developments, then decommissioning could be delayed by 10-15 years on many of these systems. Extending the life of infrastructure allows more reserves to be recovered from existing fields and encourages new exploration and development activity. Once infrastructure is removed, nearby potential becomes more expensive to develop, thus reducing ultimate recovery from the UKCS.

During 2004 the Infrastructure Code of Practice was amended to better influence business behaviours and encourage the use of existing infrastructure by new, third party field developments. The key changes were ensuring transparency of information and incorporating a dispute resolution process (see social indicators).

Figure 11: UKCS Pipeline Utilisation - Gas

Figure 12: UKCS Pipeline Utilisation - Oil