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    North Sea investment sustained but inflation and exploration slowdown raise concerns

    News // July 28, 2006

    Total investment in UK offshore oil and gas exploration, new field development and operations continued its year on year upward trend in 2005, rising 15 per cent to 9.7 billion, the largest of any British industrial sector, according to a report by the UK Offshore Operators Association (UKOOA), the representative organisation for UK oil and gas producers. 

    The UKOOA Economic Report 2006, titled "Energy Now and for the Future", claims that sustained investment in the UK continental shelf (UKCS) could ensure that the UK oil and gas industry still meets 60 percent of the UKs hydrocarbon needs in 2020, providing a solid foundation for UK security of energy supply.

    The UK produced 3.2 million barrels of oil equivalent (boe) per day last year. Up to an estimated 27 billion barrels of oil and gas remain to be recovered. The industry, currently the 12th largest oil and gas producer in the world, supports around 380,000 jobs, nearly a quarter (100,000) of these in Scotland. It contributed nearly 10 billion in direct taxation to the UK Exchequer in 2005 and is on track to pay over 12 billion in 2006.

    Operating costs per barrel have increased, in the last two years by as much as 20 percent and last year totalled 4.7 billion.  Coupled with constraints on resources, in particular drilling rigs and skilled personnel where some costs are rising at alarming rates, this threatens to undermine the UK's competitiveness and therefore the ability of the industry to find and extract new oil and gas reserves in the increasingly mature basin, where discoveries are becoming smaller and technically more complex.

    The current surge in drilling masks a potentially worrying shift away from exploration and appraisal. The total number of wells drilled in 2005 rose by 30 percent to around 300, and is forecast to rise again in 2006 to 320 wells. Despite this, exploration and appraisal (E&A) drilling has fallen back markedly since January and could drop by 25-30 percent over the course of the year to around 60 wells in total.

    "In the current price climate and with constraints on resources, it would appear that companies are understandably taking decisions to switch rigs into development or production work, rather than exploration which carries higher risk," says UKOOA chief executive Malcolm Webb. "This could be a worrying trend, given that we now need to increase exploration activity in order to find and develop the new oil and gas reserves necessary to sustain the medium and longer term future of the basin."

    "The Government's Energy Review Report published on July 11 highlights the massive private investment in different forms of energy and energy infrastructure that will be needed to meet future demand. However, the Government must create the right business environment that promotes investment and encourages private capital to be risked. The third major tax hike in three years demonstrated fiscal instability and did nothing to encourage exploration of the UK continental shelf (UKCS).

    "We were pleased to hear the Government state its commitment to maximising the recovery of UK oil and gas in the Report but recognition that our natural resources are fundamental to UK security of energy supply is not enough. It is now clear that the UKCS needs to improve its competitive position in order to attract the rigs and other resources necessary to maximise production in the second half of the life of the North Sea.

    "We need to have a common understanding across all government departments, particularly including the Treasury, of what it takes to compete as a high-cost, high-risk mature basin for global investment funds. It is incumbent upon us all to ensure that such an understanding is achieved and UKOOA is committed to playing a constructive part in the dialogue."

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