Following the introduction of tax changes designed to encourage growth in the UK oil and gas sector, the industry has responded with the highest investment for more than thirty years. As a result, according to Oil & Gas UK, which (25 February) published its 2013 Activity Survey, thousands of jobs are now being created across Britain and the production of UK oil and gas and resulting tax revenues can now confidently be expected to rise over the coming years.
The Activity Survey shows a diverse mix of investment, ranging from projects of less than £50 million through to some of over a billion pounds, in total soaring to £11.4 billion in 2012. This is now expected to rise even further to at least £13 billion in 2013.
Investments totalling almost £100 billion are now in companies’ plans. The prospect of investment on such a scale highlights the potential for the UK’s offshore oil and gas sector to boost economic activity and contribute to the country’s prosperity for many years to come.
Malcolm Webb, Oil & Gas UK’s chief executive, said: "Here is some really good news for the UK. After two disappointing years brought about by tax uncertainty and consequent low investment, the UK continental shelf (UKCS) is now benefitting from record investment in new developments and in existing assets and infrastructure, the strongest for more than three decades. The recent introduction of targeted tax allowances to promote the development of a range of difficult projects, coupled with the Government’s ground-breaking commitment to provide certainty on decommissioning tax relief, has prompted global companies and independent businesses alike to take another look at the UK as an investment destination and resulted in a new wave of investment. It is crucial that we sustain this momentum in the years ahead."
Thanks to recent improvements in the tax regime, more oil and gas reserves have become commercially viable for development. The number of projects submitted to the Department of Energy and Climate Change (DECC) and given development approval almost doubled between 2011 and 2012. The 33 projects that DECC has approved since January 2012 involve investment of £13.4 billion.?However, herein lies the next challenge. As reserves moved through into production they have not been fully replaced with new discoveries. While sanctioned reserves rose at the start of 2013 to 7.4 billion boe, the highest level for six years, the total reserves on companies’ plans fell by half a billion boe.
Mr Webb continued: "Only 21 exploration wells per year on average were drilled over the last three years. As a result, in 2012 not enough barrels were discovered to replace all those produced. However, again, there is real cause for encouragement as the survey results lead us to forecast 130 exploration wells over the next three years which, alongside the use of new and improved sub surface technology, should result in many more barrels being discovered."
Production fell to 1.55 million boe per day in 2012, down by 14 per cent from 2011 and by 30 per cent from 2010. Taking into account the two to three year average time lag between investment decisions and first production, much of this fall can be attributed to the damage done to investor confidence by the numerous adverse tax changes in the mid-2000s with new developments reaching a low point in 2008/9.
While production may fall again slightly this year to 1.45 – 1.5 million boe per day, thanks to the recent surge in investment a significant upturn can now be predicted over the next three to four years, rising to approximately two million boe per day by 2017 with significant benefits for the UK economy. By way of example, the projects approved in 2011 and 2012 alone will over time produce more than two billion barrels of oil and gas, generate £100 billion value for the economy and an additional £25 billion in production taxes for the Exchequer.
Mr Webb concluded: "There has always been an over-riding case to maximise recovery of the UK’s oil and gas resources. It has never been more important or relevant that we do so than now. Seventy per cent of British energy requirements will likely still need to be met by oil and gas into the 2040s. As a nation we need to satisfy as much of that demand as possible from our own resources.
"Recent collaborative work between Government and industry is now bearing fruit in terms of investment and job creation right across Britain and recovery in production and tax revenues will certainly follow. We look forward to the continuation of this collaboration between industry and Government, against the backdrop of each of the UK and Scottish Governments’ long-term industrial strategies for this sector which will further boost the supply chain’s capacity to create employment and foster innovation. The continuing evolution of the fiscal and regulatory regime will also enable Britain to make the most of this valuable national asset, the products of which are essential to our daily lives and can underpin our prosperity for many decades yet to come."