North Sea oil and gas outputs decline faster, investment drops, tax take falls £1 BN pa

The UK Offshore Operators’ Association 2006 activity survey has just been published and provides a snapshot of North sea Oil and Gas production that should leave the simple folks who plan UK energy security with furrowed brows.

Oil and gas production is now expected to be 10 % lower over the next few years - a faster than expected decline. Which is also very bad news for Gordon Brown and his juvenile Treasury satraps as it represents a drop in expected tax revenues of £1 Bn a year - say 20% of the los on VAT carousel fraud and duty evasion on tobacco.

At the beginning of the month Alistair Darling, the trade and industry secretary, declared that 2006 was the best year for new finds of oil and gas for five years. There is still an estimated 16bn-25bn barrels of oil equivalent in oil and gas left to be extracted.

Well, up to apoint Lord Copper.

High prices for oil and gas have increased interest and activity but costs have soared so that developing and operating a project rose by 45% on average last year, from US$15 per barrel of oil equivalent extracted to US$22 (page 12.) During the next couple of years it is expected to rise again, to US $25. IHS and Cambridge Energy Research Associates, have compiled an index based on a “basket” of costs for oil and gas capital projects. From November 2005 to May 2006, costs rose by 17 per cent; in the subsequent six months, they rose another 13 per cent.

The Operators report sates "Operating costs now average at $9-10/boe, compared with $5–6/boe three years ago," (Page 5)

Old wells are running dry and new wells are generally very small. Last year’s production of oil and gas was down 9 % at 2.9m boe a day, a steep fall from the peak in 1999 of 4.5m boe/d in 1999, and the lowest level since 1992. By 2010 production is expected to be down to just 2.6m boe/d - i.e 250,000 boe pd lower on average over the remainder of this decade - and lower by the same amount than last years survey and only sufficient to meet 90% of UK demand. (Page 6) The graph on Page 7 shows how forecasts have persistently been optimistic and always above outcomes.

“Poor reservoir performance" low yields and higher maintenance on ageing eqipment despite a massive investment last year of £5.6bn (highest since 1998) - investment set to fall as oilcos go looking for oil with lower extraction costs and bigger volumes.

News of discoveries that excites Mr Darling however conceals many finds of only 10 boe, the 2006 total figure of 500m boe had only one big find of 175mboe. However the long term shows a steady developemnt of production which will outlast a Labour Gubment ...The latest activity survey shows that the current Industry plans may recover up to 10.3 billion boe over the period 1.1.07 to 2030 from existing fields and new developments. Of this figure, circa 8 billion boe are to be produced from currently sanctioned investments and a further potential 2.3 billion (22%) boe from new fields and incremental developments.

The North Sea, hit by being Gordon Brown's milch cow has been hit by increased taxation but the Treasury has had to revise down sharply its forecasts of future North Sea tax revenues in last year’s pre-Budget report.... and no--ne knows what de-commissioning costs are going to be. This is reflected in the fact that Asset trading dropped dramatically in 2006 with only 17 deals reported by year end. This is a historic low and half that seen in 2005. The Report says that action must be taken now to address the fiscal and regulatory issues, particularly to provide certainty on the future tax treatment of decommissioning costs and avoid the regulatory framework on decommissioning becoming a barrier to the sale or purchase of assets.

The gas production forecasts are no more encouraging - In 2006 around 80 billion cubic metres of gas was produced, which represented a 7% drop compared to 2005 - beow forecast production; while some of this shortfall can be attributed to lower volumes of associated gas with the decline in oil production, a 5% drop in UK gas demand was responsible for the vast majority of the fall in production. From 1995 to 2004 the UK was self-sufficient in gas, but became a net importer in 2005. The proportion of gas demand satisfied by indigenous production could still be higher than 60% in 2010.

This is what the review concludes

This survey provides a much more challenging perspective on the future of the UK Continental Shelf (UKCS) than we have seen for some years. It is dominated by3 factors,

1. A more rapid than expected decline in production
2. Significant cost inflation in 2006
3. Forecast of a reduction in investment in 2007, after a sharp rise in 2006.

We see this as strong evidence that the UK Offshore oil and gas province is becoming less competitive and less able to attract investment with negative implications for future production levels and forecast fiscal revenues.

And a sobering reflection on the difficulties of energy security

The UKCS will continue to make a crucial contribution to UK security of supply
− The UK is expected to be self sufficient in oil in 2007/8 but is now more likely to be a net
oil importer by 2010,
− Indigenous gas could still meet more than 60% of UK demand in 2010.

Finally

The combined circumstances of falling commodity prices, a weakening dollar and increasing costs are now illustrating how vulnerable industry cashflow and investor confidence are to fiscal instability, and in particular tax increases which reduce the competitiveness of the basin.

There are revealing (and evidently authoritative) graphs which would be used but the vast technical staff don't understand how to remove them from PDF documents.

See also for more comment ;
Excellent analysis by Ed Crooks, Energy Editor of the Engineer - Action required for UK oil and gas News stories by Financial Times Fears for North Sea outputgrow Daily Torygraph North Sea oil slowdown likely to cost UK £3bn in lost taxes