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Government Help Is Vital in Averting an Oil and Gas Investment Slump
Industry Outlook
a report by
Malcolm Webb
Chief Executive, Oil & Gas UK
With doubts over how much of the UK’s energy needs can be met supplementary corporation tax (SCT) have both doubled. Worryingly,
by low-carbon fuels, it is clear that oil and gas must continue to play Oil & Gas UK’s latest activity survey shows that only one-third of new
a role in securing the nation’s future energy supply. The UK’s oil and developments now under consideration break even at current costs,
gas industry currently provides 70% of the nation’s energy needs a US$50 oil price and the current UK fiscal regime.
and pays 30% of total UK corporation tax. However, the banking
crisis and recession are putting investment over the next two years This fundamental mismatch of the tax rate and business
at risk, and this could jeopardise the huge contribution made by environment renders UK investment opportunities less valuable and
the oil and gas industry to energy supply, jobs, tax revenues and the less competitive. On top of this, the banking crisis is strangling the
UK’s balance of trade. Government action is urgently needed to flow of capital and equity to many companies in our industry. New
avoid the worst effects of the global recession and banking crisis on
exploration and production on the UK Continental Shelf (UKCS) so
that short-term difficulties do not damage the long-term productive
Investment in UK oil and gas
capacity of this strategically important industry.
production has been falling
It is becoming increasingly apparent that the move to a low-carbon
since its £5.6 billion peak in
future will not happen as quickly as we would like it to. We hear that
2006, despite the rise in oil
the first new nuclear power stations will not be built before 2017.
prices over the same period.
Although we have built, with enormous subsidy, enough wind
turbines to generate 5% of our electricity, regrettably it seems that
no more than 1% is operational when we need it. Moreover, investment is being secured for only the most attractive projects;
electricity generation accounts for only one-third of our total energy accordingly, it is anticipated that investment will fall to somewhere
demand; commercially viable alternatives to oil and gas in transport in the range of £3.5–4.5 billion in 2009 and could decline to £2.5–4
and domestic heating (which together make up the remaining two- billion in 2010.
thirds of energy demand) are an even more distant prospect.
This is not to say that the opportunities do not exist to sustain strong
It is now clear that if we are to avoid importing a large proportion of investment for years to come, just that the capital cannot be secured
our oil and gas needs in 2020, at huge cost to the country’s economy, at the moment. Of the UK’s remaining 25 billion barrels of oil and gas
we must maximise the recovery of our indigenous reserves. So far, we equivalent (boe), companies currently have plans to recover about
have produced only 60% of our oil and gas; the remaining 40%, 10 billion boe. Recovering the remaining 15 billion boe will require
worth several trillion dollars to the UK economy, remains to be maintaining sufficient exploration activity to access all those reserves.
extracted. Sustained strong investment and further exploration Therefore, it is particularly concerning that while exploration and
would enable UK production to satisfy 65% of its oil demand and appraisal activity in 2008 (109 wells) was roughly the same as in
one-quarter of its gas demand in 2020 – enough to cover all the gas 2007, there is a real danger of a rapid reduction in 2009.
used in homes. This would be a vital contribution to our energy
security and prosperity. The UK oil and gas industry is at a crossroads. There is a broad range
of commercial opportunities that could attract investment in the
However, investment in UK oil and gas production has been falling right circumstances. In the short term, however, action needs to be
since its £5.6 billion peak in 2006, despite the rise in oil prices over taken to maintain the flow of development capital and mitigate the
the same period. In the last four years, the cost base and reduction in exploration and appraisal activity. The Government and
industry need to work hard, both together and in their separate
ways, to ensure that critical investment and productive capacity is
Malcolm Webb is Chief Executive of Oil & Gas UK, the
leading trade association for the UK offshore oil and
not irretrievably lost in the current recession so that the industry,
gas industry. Previously, he was Director General of with its supply chain, can get through it in good health.
the UK Petroleum Industry Association (UKPIA),
representing the UK oil refining and marketing sector.
Mr Webb is also a member of PILOT, a Director of
So, how can the industry play its part? Individual suppliers and
OPITO – The Oil & Gas Academy and Chairman of
purchasers alike need to take responsibility to drive out inefficiencies
Common Data Access Limited, the industry’s data
management body.
and unnecessary costs, and some suppliers will also need to revise
their expectations on margins in order to help sustain activity and
E: sfraser@oilandgas.co.uk
employment through the downturn. All companies should also
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© TOUCH BRIEFINGS 2009
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