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Ofgem’s Winter 2007- 8 Consultation SeminarBirmingham, 27th June 2007
David Odling, Oil & Gas UK
The UK Continental Shelf in 2007and
The Future of UK Gas:a ‘Phase Diagram’
(i) the UKCS in 2007
3
UK has been producing oil and gas for more than 30 years
New Reserves
Production
Ultimate Recovery~ 60 + billion?
0
15
30
45
60
1970 1975 1980 1985 1990 1995 2000 2005
billi
on b
oe
(bar
rels
oil
equi
vale
nt)
Discovered Produced
4
UK oil and gas production and international comparison
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1970 1975 1980 1985 1990 1995 2000 2005
Milli
on b
oepd
GasOil
Source: DTI
0.0 5.0 10.0 15.0 20.0
Indonesia
Kuwait
Nigeria
United Kingdom
Algeria
Venezuela
United Arab Emirates
Norway
Mexico
China
Iran
Canada
Saudi Arabia
USA
Russian Federation
Million boed
GasOil
Source: BP Statistical Review
Annual oil and gas production in UK
In 2006, UK was 12th
largest producer in the world
5
0
2
4
6
8
10
12
2003 2004 2005 2006 2007 2008 2009 2010
£bi
llion
200
6 re
al te
rms
E&ACapexOpex2005 survey
0
2
4
6
8
10
12
2003 2004 2005 2006 2007 2008 2009 2010
£bi
llion
200
6 re
al te
rms
E&ACapexOpex2005 survey
UKCS expenditure up £2 billion in 2006 v 2005
In 2006:• Spent ~ £11.5 billion • Capex & Opex ~ £5.5 bn each; Exploration & Appraisal ~ £0.6 bnOutlook• Expect to spend £40 billion 2007- 2010• 25% up on previous year’s survey forecast
UKCS Total Expenditure
6
BUT, costs of new developments rising rapidly
• Technical Costs drive the economics of new developments• Unit costs ($/boe) have risen 45% since 2005
– Signals difficulty if oil & gas prices decline• Operating costs now average $9-10 /boe
– Compared with $5-6 three years ago• Northern & Southern North Sea the most expensive areas
– Consider impact of declining gas prices on SNS
Unit Technical Costs
0
5
10
15
20
25
30
2005 2006 2007-09 average
$ pe
r boe
pro
duce
d 20
06 re
al te
rms
opex / boecapex / boe
$15 / boe
$25 / boe$22 / boe
7
Comparing current plans with the long term prize
0
5
10
15
20
25
1
Exploration(Yet to Find)
Undeveloped Discoveries
Brownfields
Sanctioned Investments /In production
Produced 1.1 bln boe in 2006 Source UKOOA 1.1.07
4.0 – 8.2
8.1
2.5 – 4.0
1.5– 4.5
UKCS - Projected Reserves / Resourcesest. 16 - 25 billion boe
billi
on b
oe
Current Activity / Plans
8.1 billion boe
0.8 billion boe
1.4 billion boe
~ 0.5 billion boe
Exploration in ‘06
8
Time will not wait - there is a window of opportunity
• Around 45% of infrastructure could be decommissioned by 2020, unless current activity is sustained
• If investor confidence is maintained, decommissioning could be delayed by 10-15 years in many of the existing systems
Example of major hub life extension
0
20
40
60
80
100
120
2006 2010 2015 2020 2025 2030
Brownfield
Pro
duct
ion
Existing Production
E&A +New Devt’s Economic
cut -off point
0
20
40
60
80
100
120
2006 2010 2015 2020 2025 2030
’
9
What should we look like in 2020 ?
• There is an “Appetite for Action”
0
1
2
3
4
5
2006 2008 2010 2012 2014 2016 2018 2020
Mill
ion
boep
d Oil and Gas Demand
The Better Future
Existing Production Base
Source: UKOOANote: Outlook Nov ‘06 data
UKCS – Tale of Two Futures
10
In Summary
• Plenty to play for on the UKCS
But ……….
• Increasingly difficult
• Increasingly costly
• Above all, it needs a much more sensitive fiscal and regulatory regime, tuned to the maturity of the UKCS, if the maximum economic recovery of our oil and gas reserves is to be achieved.
(ii) the Future of UK Gas:
a ‘Phase Diagram’
Report by Poyry Energy Consultingfor Oil & Gas UK
12
Historical and future evolution of UK gas market
0
20
40
60
80
100
120Ja
n-95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
Jan-
14
Jan-
15
Jan-
16
Jan-
17
Jan-
18
Jan-
19
Jan-
20
nom
inal
p/th
erm
Phase I:'Oversupplied
liberalised island'
Phase II:'Interconnection and increasing oil prices'
Phase III:'Supply margin
squeeze'
Phase IV:'Capacity excess'
Phase V:'Investment and demand'
ILLUSTRATIVE
13
Possible worlds in Phase IV and into Phase V
0
30
60
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
p/th
erm
Historical UKgas price
LNG wars
Oil index
Delink
Collapse
Oil-indexed gas contract price at $80/bbl for oil
Oil-indexed gas contract price at $50/bbl for oil
Oil-indexed gas contract price at $20/bbl for oil
14
0
20
40
60
80
100
120
140
160
180
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Sup
ply-
dem
and
(bcm
/yea
r)
DemandInterconnectionNorwegianLNGUKCSHistorical
Phase III:'supply margin squeeze'
Phase IV:'capacity excess' Phase V:
'investment and demand critical'
Transition to Phase V
15
0
10
20
30
40
50
60
70
80
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
Gas
use
(bcm
/y)
Fast CCGT growth, high price world Base Low CCGT growth, low price world Historical
Gas demand from power generation in high and low worlds(“high” and “low” refer to electricity prices)
16
70
75
80
85
90
95
100
105
110
2000 2001 2002 2003 2004 2005
bcm
Forecasted 2005/06 UKCS supply Demand
Shifting change in UKCS supply and UK demand forecasts for 2005-6
17
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
180.00
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Vol
atili
ties
(%)
UK House Prices Coffee Coal UK Gas (Heren Monthly Index) US Gas (Citygate prices)
UK gas
US gas
Coffee
Coal
House prices
Volatility of monthly traded products
18
0
50
100
150
200
250
300
350
400
450
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Vol
atili
ty (%
)
UK Gas HH Carbon FTSEGold Silver Platinum PalladiumBrent Crude UK Electricity Pool UK electricity (NETA)
UK electricity
UK gas
Carbon
Daily volatilities
19
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
0 6 12 18 24 30 36 42 48 54 60Months
Pro
porti
on o
f tra
des
NBP Gas (OTC) Brent Crude Henry Hub UK NBP gas (electronically traded) UK Electricity
Proportion of trades at each month on forward curve in 2006
20
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Pric
e (p
/ther
m)
Investment based on current price
Investment based on internal forecasts
UKCS investment only, based on current price
2012: First Norwegian pipeline is completed in Internal Forecast scenario
2015: First Norwegian pipeline is completed in Current Price scenario
2017: Rapid growth causes prices to recover from crash.
2020: In Internal Forecast scenario, second Norwegian pipeline is completed.
2022: Demand stabilizes, causing a temporary drop in prices
2017-2025: Extra invested capacitycauses prices to be generally lowerin scenarios with investment than without.
Effect of new import pipeline on UKCS price
21
0
5
10
15
20
25
30
35
40
45
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Pric
e (p
/ther
m)
Investment based on current price
Investment based on internal forecasts
UKCS investment only, based on current price
2011: In "current price" scenario Terminal 3 project is completed; in "internal forecast" scenario Terminals 1 and 2 are also completed.
With 16bcm/y of extra capacity "internal forecast" scenario has lower prices; however as this capacity is not "must-run" price differential is not significant.
2019: In "current price" scenario, Terminal 1 project is completed
Effect of new LNG import terminals on UK gas price
For further information, please refer towww.oilandgas.org.uk
(see Industry Issues – Economics, Energy Policy & Gas)Poyry’s report – published in June 2007
Activity Survey 2006 – published in February 2007Economic Report for 2007 – to be published in July
Thank you!
The UK Continental Shelf in 2007and
The Future of UK Gas:a ‘Phase Diagram’