Oil & Gas Lead The Way In UK

10th October 2011

Report Confirms the UK Oil and Gas Industry as a Leading Engineering and Manufacturing Base which is Making a Vital Contribution to the Economy

Oil & Gas UK's 2011 Economic Report, published today (11 October 2011), confirms the continuing significance of the oil and gas sector to the UK economy and highlights the increasingly important role of the country's world-class oil and gas supply chain in fostering engineering, manufacturing and technology excellence as well as enabling production of the UK's oil and gas resource.

The sector is one of UK industry's stalwarts, continuing to support hundreds of thousands of highly skilled, well-paid jobs and meeting the majority of the nation's energy needs. It provides a major boost to the public finances, helping the country combat the pressures imposed by the current global economic situation.

The report shows that over 40 billion barrels of oil and gas equivalent (boe) have already been extracted from the UK continental shelf (UKCS) as a result of £468 billion (2010 prices) of capital and operating investment over the past 40 years. The country remains a globally significant producer of oil and gas, with an average 2.2 million barrels of oil and gas equivalent (boe) per day produced in 2010. This production satisfied around 90 per cent of the country's oil demand, 60 per cent of our gas demand and represents well over half of our primary energy needs. With a value of £32 billion, it reduced our requirement for imported oil and gas to the extent that the UK's trade deficit was almost halved.

£14 billion was spent on exploration, development and operations in 2010. This included £6 billion of investment in new projects, an increase of a fifth on 2009, making the oil and gas industry again the largest investor among the UK's industrial sectors. Also essential in the production equation is the application of the high-class skills and technology developed within the supply chain, ranging from reservoir and subsea engineering to well services, facilities engineering and support services.

Malcolm Webb, Oil & Gas UK's chief executive, said: "The industry's world-class oil and gas supply chain that has grown up alongside forty years of production is perfectly placed to continue to foster excellence in engineering, manufacturing and technology in the UK, just the sort of economic activity the nation needs to succeed in re-balancing the economy. Our Economic Report shows how the UK fabrication and well services sectors in particular are flourishing.

"What's more, the development of the UK's offshore oil and gas gave the supply chain here a 'first mover' advantage in seeking out and building global markets for its oilfield goods and services. Such products and expertise are now in increasing demand and, in 2010, international sales by the supply chain were estimated at £6 billion."

The positive impacts of investment and production activity are wide-ranging. Employment of 440,000 people is currently supported by the industry with 340,000 of these related to finding, developing and producing our own reserves and another 100,000 occupied with supplying goods and services to oil and gas provinces around the world. Far from being based purely in traditional oil and gas centres, they are spread across the country. While 45 per cent of employees are in Scotland, one fifth live in south east England, over ten per cent live in north-east and north-west England and five per cent live in the east of England.

The wider population also benefits from this employment as income tax revenues and national insurance contributions flow directly to the public purse; together with corporation tax paid by supply chain companies, this is estimated at £6 billion a year. But this is more than matched by the tax paid on production itself, £8.8 billion in 2010-11, which constituted one fifth of total corporation tax received by the Exchequer. The proportion paid by the oil and gas industry on production is forecast by the Treasury to increase further in 2011-12 to over £13 billion, or just over a quarter of the expected total corporation tax.

Mr Webb continued: "For decades to come, it is clear that on practical, technical and cost grounds the UK will still require oil and gas to provide the bulk of its energy. Making full use of our own significant remaining oil and gas resource - estimated to be up to 24 billion barrels - will ensure the sector continues to contribute to the UK economy in the years ahead and strengthen the country's manufacturing and engineering base through the industry's technology driven, high value-adding, world class supply chain.

"Forecasts prepared at the start of 2011 showed that investment to develop UK oil and gas was set to increase dramatically to £8 billion in 2011 and be sustained at that rate for the next five years. If the investment planned then was realised, over 40 per cent of our primary energy demand or 60 per cent of oil and gas demand could still be satisfied from these resources in 2020."

However, the current business environment does raise concerns about the competitiveness of the UKCS and hence the sector's ability to attract the investment required to extract the full 24 billion resource. The confidence of the industry was severely shaken by the Budget of March 2011 with the surprise announcement that the tax rate would increase to a new top rate of 81 per cent, while access to tax relief on decommissioning costs would be capped at old tax rates. The value of projects was reduced by almost a quarter overnight and the positive effect of new field allowances that had specifically been put in place by the Treasury to encourage investment in technically challenging, small or remote fields was significantly eroded.

Mr Webb said: "The average size for new discoveries is small at around 20 million barrels, yet development costs are high. A heavy tax rate, especially for projects involving additional investment in mature fields, and greater uncertainty over future tax treatment, has not helped the industry's case in proving attractive to international investors. Transfer and trading of equity in older assets has also slowed to a trickle.

"Developments where investment is already committed or where the reserves are material and the economics sufficiently robust to withstand the tax increase, will go ahead. However, for those making investment decisions on economically marginal projects in the medium and longer term, the UK will now appear lower down the international rankings as a destination for their capital. What we now see is something of a 'two speed UKCS' whereas what is really needed for the economy and energy security is every effort to push along investment in all technically viable projects. As a result, Oil & Gas UK is working closely with the Government to find a way to stimulate investment in developments which are now 'fiscally stranded'. We believe that the current field allowance structure will need to be extended or modified to sustain investment in existing and new fields, especially the more difficult or marginal ones."

Mr Webb concluded: "Oil & Gas UK has been working alongside Treasury officials to find ways to stimulate investment in existing fields and to develop proposals to resolve the current uncertainty over access to decommissioning tax relief. We have been encouraged by the constructive engagement of the Treasury, Ministers and officials in both projects and we hope to identify a much-needed solution by the Budget of 2012.

"I firmly believe that this is an industry that can continue to make a major contribution to the UK economy and UK security of energy supply for decades to come. Our globally recognised expertise in oil and gas related technology, engineering, manufacturing and services provides a fantastic platform for the future - both domestically and in overseas markets. In these difficult economic times, we must nurture this jewel in the UK economic crown."

Facts
Oil & Gas UK is the leading representative organisation for the UK offshore oil and gas industry. Its members, who number over 165, are companies licensed by the Government to explore for and produce oil and gas in UK waters and those who form any part of the industry's supply chain.

The full report is available at http://www.oilandgasuk.co.uk/knowledgecentre/economic_report.cfm.

Key figures (2010 unless otherwise stated) from the 2011 Economic Report:
- Production from the UK's continental shelf (UKCS) satisfied 55% of the country's primary energy demand (87% of oil and 61% of gas).
- Production of UK oil and gas boosted the balance of payments by £32 billion and the supply chain added another £5-6 billion in exports of oilfield goods and services.
- Production was 810 million boe, or an average of 2.2 million boe per day, a decrease of about 6.5% from 2009. In worldwide terms, the UK is the 15th largest gas producer (3rd in Europe) and 20th largest oil producer (2nd in Europe).
- The "effective UKCS output" price was $63 per barrel of oil equivalent (boe), derived from annual oil and gas prices pro rata to production.
- Total expenditure reached £14 billion on exploration, developments and operations.
- The industry paid £8.8 billion on production in the tax year 2010-11, which is 20% of total corporation taxes received by the Exchequer. This is expected to rise to over £13 billion in 2011-12, providing over one quarter of total corporation taxes. The wider supply chain is estimated to have contributed another £6 billion in corporate and payroll taxes.
- Unit operating costs rose slightly to $12.5/boe; this trend is forecast to continue with unit costs rising to nearer $14/boe in 2011.
- Just over 40 billion boe have so far been recovered from the UKCS and the remaining resource is forecast to be up to 24 billion boe.
- The industry supported about 440,000 jobs across the UK.