UK increasingly reliant on oil, gas

July 25, 2005
The UK will be increasingly reliant on oil and gas to meet its primary energy needs during the next 10-15 years despite efforts to promote renewable energy sources, the UK Offshore Operators Association Ltd.

The UK will be increasingly reliant on oil and gas to meet its primary energy needs during the next 10-15 years despite efforts to promote renewable energy sources, the UK Offshore Operators Association Ltd. (UKOOA) said.

“The UK’s reliance on oil and, in particular, gas as primary sources of energy is increasing,” said UKOOA Chief Executive Malcolm Webb. “The government’s projections show that the UK’s oil and gas needs will rise from the current 74% of primary energy to 85% in 2020.”

UKOOA’s annual economic report, released July 14, said the UK has reserves of up to 28 billion boe.

“If we don’t produce oil and gas ourselves, then we will have to import it,” Webb said. “If the UK had to import all its oil and gas, in 2005 alone our import bill would be around £30 billion higher-increasing the current UK trade deficit by almost 75%-and UK tax revenues from oil and gas would be about £10 billion lower because imported oil and gas pays no UK corporation tax or petroleum revenue tax.”

Investment

Current oil and gas investment is expected to hold the rate of production decline at 6-7%/year for 5 years. But challenges remain if the industry expects to slow the long-term decline rate, UKOOA said. The UK offshore oil and gas industry spent £4.7 billion in 2004 on operations and £3.7 billion on exploration and capital expenditure. During 2005, the industry expects to invest £5 billion on operations and more than £4 billion on exploration and capital developments.

During 2004, the number of new project approvals doubled from 2003 to 27 project approvals, and exploratory drilling increased 40% from the previous year with 63 wells drilled.

The report noted that 37 wells were drilled during the first half of 2005. A recent 23rd licensing round drew the highest response in 30 years, and substantial progress was made through the Fallow Initiative. Of the 532 blocks identified as dormant since 2002, 442 have either seen activity or been relinquished.

“The current pickup in activity should help to address the potential lack of new developments coming on stream for 2007 and 2008,” said Webb. Investments and new projects slumped after changes to the North Sea tax regime, he said.

In April 2002, the UK government imposed a supplemental tax for oil and gas companies with the effect of adding 10% to the 30% corporate tax all UK companies pay on profits. For fields subject to the 12.5% royalty-those that received development approval before April 1982-the supplemental tax pushed the aggregate marginal tax rate to as high as 74%. The marginal rate is the combined effect of all taxes and offsets on the next unit of earnings (OGJ Online, Feb. 17, 2003).

During 2004, the industry paid over £5 billion in direct taxes. North Sea tax revenues for 2005-06 are forecast at £7-10 billion, depending upon oil prices. Companies operating in the North Sea have paid £203 billion (2004 prices) in the last 40 years, the report said.

Production

The UK is expected to remain self-sufficient in oil until 2009-10. UK gas production meets more than 90% of demand and is forecast to fulfill 60% of demand in 2010.

The UK produced 725 million bbl of crude oil (2 million b/d) and 95 billion cu m of natural gas (259 million cu m/day) in 2004 for total production of 3.6 million boe/d. Production in 2005 is expected to be 3.4 million boe/d.

The industry has invested a total of £220 billion (2004 prices) in exploration and capital development since offshore activity began in the 1960s. Since 1999, 34 new companies have been attracted to invest and produce in the UK continental shelf.