House of Commons - UK offshore oil and gas

UK offshore oil and gas - Energy and Climate Change Contents

1 UK oil and gas production

Production to date

5. More than 38 billion barrels of oil equivalent (boe) of oil and gas have been produced in the UK over the last 40 years and, although levels of peak production were reached in 1999 and are now declining at a rate of approximately 5% annually, significant volumes are still being produced: 1 billion boe of oil and gas were recovered in 2007. The UK is 8^th in the world ranking of gas producers, 18^th in the ranking of oil producers and 13^th for oil and gas combined.[2]

6. The charts below, provided by DECC, show the annual and cumulative levels of UK oil and gas reserves and production since 1980.[3]

Chart 1

Chart 2

Contribution to UK energy security

7. In 2007 the UK was self sufficient in oil (producing 583 million boe and consuming 575 boe) and produced three quarters of its gas requirements (70 billion cubic metres (bcm) were produced and 91bcm consumed).[4] Oil & Gas UK told us that "the industry is the single most significant contributor to this country's security of energy supply, today providing 70% of our primary energy needs". It states that 70% of the UK's primary energy will need to be provided by oil and gas in 2020 and "with up to 25 billion barrels of oil and gas still to recover, in 2020 the UK could still be producing oil and gas in sufficient volumes to supply 65% of our oil needs and a quarter of UK gas demand - enough gas to cover all that we need for our homes, for example - provided capital investment can be sustained at £5 billion per annum and the production decline rate held at 5% per annum". The organisation concludes that "maximising the recovery of the country's own reserves is therefore essential for future UK security of energy supply".[5]

8. The Government accepts that oil and gas is a "key component" in terms of energy security and that energy security "will become an increasingly important factor".[6] In a recent speech to the Powering Scotland conference, the Minister set out the energy security context:

A quarter of our current electricity generating capacity may close over the next decade, as nuclear plants reach the end of their scheduled lifetimes and as coal-fired and oil-fired plants close by 2016 under the European Large Combustion Plants Directive. At the same time, oil and gas from the North Sea is declining. It remains an important energy resource which we must continue to maximise, but clearly our imports of gas and oil will increase. The UK will compete for fossil fuels in a global market where global demand for energy is increasing and competition for resources is intense.

Energy supply is an increasingly important part of any nation's security.

Last month's dispute between Russia and the Ukraine underlined the importance of diverse energy sources and diverse routes of supply.

9. The prospect of the UK having to rely on imported energy sources is not new. In 2003 the Institution of Civil Engineers produced a report predicting that by 2020 there could be a potential 80% shortfall in meeting the country's energy demands from current supplies and which pointed to the "possibly cataclysmic effects of becoming reliant upon unsecured, imported fuel supplies". The report predicted that, because of the closure of coal-generating plants and the absence of new nuclear facilities, the UK's requirements would have to be met by "gas-fired power stations, importing 90 per cent of their fuel". Their conclusion was that "Britain's future energy plans lack[ed] both diversity and security of supply".[8]

10. The Government is right to focus on security of energy supply as a key challenge for the UK. Much of the UK's current electricity generating capacity is set to close over the next decade, and there is a continuing risk of disruption to energy supplies internationally as a result of political and economic turbulence. In this context the importance of domestically produced oil and gas is obvious and the case for Government doing all it can to help maximise economic production is compelling.

Contribution to the economy and employment

11. The benefits of a thriving oil and gas industry go beyond security of energy supply. Oil & Gas UK told us that "in the current fiscal year, oil companies will pay £13 billion to the Exchequer, which is the equivalent of around 30% of UK corporation tax receipts. Activity in the supply chain contributes a further £5-6 billion from payroll taxes, national insurance contributions and corporation tax".[9] The organisation's 2008 Economic Report estimated that oil and gas production had resulted in £248 billion (in 2007 prices) being paid in tax revenues since 1968.[10] It also states that "indigenous oil and gas production has an important role in reducing dependency on imported fuel. The UK's balance of trade in goods and services… was again in deficit last year by some £49 billion. The deficit would have been increased significantly, to around £78 billion, had it not been for the production of indigenous oil and gas".[11]

12. A review of employment commissioned by Oil & Gas UK found that in 2007 an estimated 350,000 jobs were provided by expenditure in the UKCS, consisting of 34,000 employed directly by oil and gas companies, 230,000 within the wider supply chain and 89,000 supported by economic activity induced by employees' spending throughout the economy. It estimated that an additional 100,000 people were employed in export activities by supply chain companies. Oil & Gas UK notes that there are clusters of high levels of employment, "most notably in Scotland. Just four parliamentary constituencies in Aberdeenshire account for 39% of total employment supported by the industry. Other regions with sizable employment are Eastern England (5%), North-West England (6%) and London and the South-East".[12] The Department's evidence notes that there has been an increase in employment in the industry of about 30% since 2004.[13]

13. Employment in the industry is contingent on ongoing investment. Oil & Gas UK estimates that each £1 billion of investment in the UKCS provides around 20,000 jobs. We examine the issue of investment below, but in terms of its effect on employment we were concerned to note Oil & Gas UK's statement that "with capital expenditure forecast to fall by up to £2.5 billion over the next two years, this could mean a loss of up to 50,000 jobs.[14]

14. The Government's priority when determining policy on UK oil and gas should be security of supply, within the context of moving towards a low-carbon economy. However, proper account also needs to be taken of the immense tax revenues paid by the industry and of the 350,000 people whose employment is reliant upon it. We are concerned to note that the industry predicts that falling capital expenditure could lead to the loss of 50,000 of those jobs over the next two years. This strengthens the case for the Government to investigate further ways by which it can support UK oil and gas production in the current difficult economic climate.

Future production levels

15. DECC's written evidence states that its "overall objective for the management of [the UK's oil and gas] resources is to maximise their economic recovery over time, and to maximise the consequent benefits to the UK economy and to UK employment".[15] Estimating future levels of oil and gas production accurately is not straightforward. There are two key factors: the extent of remaining oil and gas resources; and the likelihood of those resources actually being produced. DECC told us that it publishes annual estimates of the UK's oil and gas reserves, compiled from the companies' estimates of their fields' reserves. The reserves are categorised as "proven" (corresponding to a 90% probability of production); "proven plus probable" (50% probability of production); and "possible" (10% probability of being produced in full). "Proven plus probable" is assumed to be the central estimate of reserves, and DECC estimates that such reserves remaining at the end of 2007 were 780 million tonnes of oil and 647 billion cubic metres (bcm) of gas.[16]

16. Additionally, DECC publishes estimates of "Potential Additional Resources" (PARs: discovered volumes not currently considered producible for technical or commercial reasons) and "Undiscovered Resources" (potentially recoverable resources not yet tested by drilling). Both categories are reviewed annually and elements in them reclassified if appropriate: for example, PARS may be reclassified as reserves in the light of changed technical or economic circumstances.[17]

17. DECC has made lower, central and upper estimates of the UK discovered oil and gas resources as set out in Table 1.[18]Table 1Summary Table Giving Ranges of UK Discovered Hydrocarbon Resources(Reserves plus Potential Additional Resources, as at end 2007: billion barrels of oil equivalent)

Oil and Gas Lower Central Upper

Fields in production or under development 5.5 8.2 11.4

Other significant discoveries not fully appraised 0 1.6 3.2

Reserves 5.5 9.8 14.6

Potential Additional Resources 0.9 2.3 4.7

Total Discovered Reserves and Resources 6.4 12.1 19.2

Cumulative production to date 37.5

18. In addition to the discovered reserves and PARs set out in Table 1, DECC's mid-range estimates of undiscovered resources are 5.2 billion boe ("corresponding to a reasonable estimate of what might be found based on current knowledge") and 8.7 billion boe ("corresponding to a reasonable estimate of what might be found with better understanding of the basins or better technology"). Taking these various estimates together, DECC's evidence states that "our current best estimate of remaining recoverable hydrocarbon resources from the UKCS is of a figure of around 20 billion boe. But it is of course entirely possible that the development of better understanding and technological change will in the event enable higher figures to be reached".[19]

19. If this estimate of 20 billion boe of remaining recoverable resources is correct it means that a considerable amount of oil and gas - about 50% of that produced over the last 40 years - remains to be exploited. But two caveats need to be noted: the range of estimates of remaining resources is wide and actual production could turn out to be at the low end of it; and just because the oil and gas is there to be recovered does not mean it necessarily will be recovered.

20. In terms of remaining resources, as Professor Kemp notes, "there is… a wide range of possibilities and the current DECC estimates for the remaining potential involve a low of 11bn boe and high of over 37bn boe".[20] Explaining why DECC considered 20bn boe to be the best estimate within this range, the Minister told us "I am going for the middle measurement… All these things are, in a sense, estimates… If you talk to someone in the oil and gas industry, they will say 25 billion barrels. We say round about 20 billion, but it is between about 11 and 37, and until, in a sense, we have exploited it, we are not going to definitely know because you may… have reserves there but if they are not commercially accessible, then they are not going to do a lot of good".[21] We asked the Minister what the impact would be on security of supply if the lowest estimates turned out to be accurate. He said "we would have to import more, so we would be much more dependent on the world market for oil and gas. We have good import facilities, so that in a sense is not going to cause a massive problem. It would be regrettable, because we want to see if we can maximise the extent to which the UK can benefit from its Continental Shelf, but we have created gas and oil import facilities".[22]

21. We were told that "a feature of the maturing UKCS is the (inevitable) increasing reliance on production from fields of more recent vintages… But the newer fields are not only on average smaller than older ones but their decline rates are much faster". This would lead to a "brisk" production decline rate "unless substantial numbers of new fields and incremental projects can be brought on stream year by year to counter this inherent trend. Given the likely sizes of the new fields as many as 20 new fields coming on stream per year plus a substantial number of incremental projects would be insufficient to halt the production decline. Given the financial and physical constraints on the industry it is most likely the average number of new field developments will be less than 20 per year over the longer term, and considerably less at current oil prices".[23]

22. Evidence from UK Oil & Gas also suggests that future production will fall. In terms of exploration and appraisal (E&A), it found that 109 E&A wells were drilled in 2008 and that 67 E&A wells were planned for 2009, of which 34 were firm (i.e. with rig commitment). However, a year earlier it was expected that 113 wells would be drilled in 2009; and only 10 E&A wells were expected to be drilled in 2010 - down from a prediction of 30.[24] This big picture is confirmed by the experience of individual operators: Alan Booth, CEO of a small listed company, Encore Oil, told us "we are not in the market at the moment… For the last 15 months my company…drilled seven wells. Next year we will likely not be drilling any wells."[25]

23. Given the importance of production rates, the variation in the possible future outputs and the impact those different scenarios will have on UK energy policy we believe there is a strong case for Government and industry developing a strategy to maximise production levels. The Government told us that "aspirational" targets were set in 1999 by the Oil & Gas Industry Task Force (OGITF), the predecessor body to PILOT (the joint programme operated by the Government and industry aiming to secure the long-term future of the industry). The targets set in 1999, to be met by 2010, were:

investment sustained at £3 billion per annum from UKCS activity
production at three million barrels of oil equivalent per day (mboepd)
prolonged self-sufficiency in oil and gas
a 50% increase in exports in oil and gas supplies products [by 2005]
£1 billion additional value from new businesses
supporting up to 100,000 jobs more than there otherwise would have been
The following additional target was added in 2002:
In 2010, the UK is the safest place to work in the worldwide oil and gas industry.[26]

24. Performance against these targets has been mixed. DECC told us that since 2000 UKCS capital expenditure has comfortably exceeded £3 billion per annum and that the target for a 50% increase in oil and gas supplies products was "exceeded by a considerable margin". The Department also noted that "the renewables, and particularly offshore wind, market will predominantly be serviced by the oil and gas supply chain and generate a substantial diversification opportunity", thus helping to meet the target for additional value from new business, and that employment in and supported by the industry has risen in recent years. However, production in 2010 is now expected to be at 2.4 mboepd only, against the target of 3mboepd; DECC has said that "the UK is expected to become increasingly reliant on imported oil and gas"; and that the UKCS is still behind Australia and Asia in terms of safety.[27]

25. While some of these targets have been missed we think that setting them has been beneficial in terms of strategic planning of energy security issues and as a benchmark for performance. We accept the point made by DECC that, while the target of 3mboepd has not been realised, "these aspirational targets were useful in providing a focus for many of the initiatives which have borne fruit in the last decade. The aspirational nature of the vision target for production in 2010 is emphasised by the fact that the supporting analysis against which it was set indicated production declining to a maximum of 2.2mboepd", compared to the 2.4mboepd now expected.[28]

26. Estimates of future levels of UK oil and gas production cover a wide range: from 11 billion barrels of oil equivalent (boe) to 37 billion boe according to DECC. The Government cannot influence the amount of oil and gas remaining in the UK continental shelf. But the policies it pursues in relation to tax, regulation and licensing all have an impact on the attractiveness of producing oil and gas from the UKCS and therefore on production levels. The Minister told us it would be regrettable if oil and gas production was at the low end of the estimates, with a consequential need to import more oil and gas. We think this is an understatement, given the contribution of the UK oil and gas industry to security of energy supply, tax revenues and employment. We support the Government's objective of maximising the economic recovery of UK oil and gas resources but believe that it now needs to articulate a strategy setting out how it intends to achieve that objective with realistic but stretching targets for future production levels.

Investment levels

27. Actual levels of future production will be contingent on investment. As Oil & Gas UK put it to us: "the success of the North Sea or the UKCS offshore generally comes down to attracting and spending capital".[29] The SCDI told us that "current business plans will see the UKCS only providing about 12% of the nation's oil and gas demand in 2020. However, with sustained investment, this could increase to 40%".[30] Oil & Gas UK have estimated that approximately £1 billion of investment is required to develop and bring on-stream each 100 million barrels of production.[31] So the decisions taken by companies now about investment will directly impact upon the contribution of the industry to meeting the UK's energy demands in the future. And while the industry has an excellent track record of investment, the current outlook is worrying.

28. Levels of capital investment are falling. In 2006, estimated capital investment in the industry was at a peak of £5.6 billion; in 2008 it was down to £4.8-5 billion.[32] Oil & Gas UK contend that "in an unconstrained world, capital investment in 2009-12 could be sustained at or around £5 billion per annum based on the existing portfolio of opportunities, albeit higher oil and gas prices would be required to support many of these investments. However, current market condition combined with the lack of access to capital or equity markets will significantly suppress investment". This leads the organisation to conclude that "it is difficult to see investment forthcoming in large quantities for anything but the most attractive of projects at this time". Rather than the £5 billion annual investment which might be made "in an unconstrained world", Oil & Gas UK estimate that "capital investment in 2009 will fall to a range of £3.5 - 4.5 billion and could decline to £2.5 - 4 billion in 2010. This projection is consistent with the investment response seen in the period 1998-2000, during the last sharp downturn in oil price, where it took two years for the full impact to be felt".[33]

29. Falling levels of investment have an adverse impact upon production levels and numbers employed in the industry. Precise predictions are difficult, and require a range of assumptions, but if Oil & Gas UK's worst-case scenario of £2.5 billion investment is realised in 2010 - against the £5 billion they say might be invested in "unconstrained conditions" - then, using the industry's figures for the effect of investment on production levels and employment, this would equate to 250 million barrels of production foregone and 50,000 fewer jobs. Declining investment can also hasten the decommissioning of infrastructure which might otherwise have been used to enhance production. As Professor Kemp told the Committee, "the way to maximise economic recovery from the North Sea is to get a very steady stream of investment going. My worry at the moment is if it falls down for two or more years then we could be on a slippery slope and there will not be enough incentive to maintain the infrastructure and then it will be too late".[34]

30. We are very concerned at the bleak prospects for investment in the oil and gas industry. If the industry's worst case scenario is realised in 2010, 50,000 jobs could be lost and production could fall by millions of barrels. The Government must do what it can to facilitate investment, and the success of the steps announced in the recent budget must be judged by whether they help stop the downward slide in capital investment.

31. Levels of investments are determined by a range of factors, including: the availability of credit and equity; costs of production; the market price of oil and gas; and the attractiveness of the fiscal regime in which the market operates. The oil and gas industry is facing a particularly challenging set of market circumstances regarding the first three factors; and it has also claimed that the UK's fiscal regime makes it an unattractive environment in which to invest. We look at each of these factors below.

2 Oil & Gas UK 2008 Economic Report, p 7. Back

3 Ev 80, Annex 1. Back

4 Oil & Gas UK 2008 Economic Report, p 7 Back

5 Ev 108, para 2.1. Back

6 Q 173 Back

7 Speech by Mike O'Brien MP, 10 February 2009, http://www.decc.gov.uk/en/content/cms/news/powerscotland_speech/powerscotland_speech.aspx Back

8 https://www.ice.org.uk/knowledge/newsdetail_ice.asp?PressID=238&NewsType=Press&FacultyID=3 Back

9 Ev 109, para 2.1.4. Back

10 Oil & Gas UK 2008 Economic Report, p.8 Back

11 Ibid, p.9 Back

12 Ibid, pp 14-15. Back

13 Ev 75, para 70. Back