The UKCS in 2005 - Sustaining Success, Competing for the Future

The UKCS in 2005 - Sustaining Success, Competing for the Future

Steve HarrisCommunications Director

UKOOA

2

UKCS in 2005 - Sustaining Success, Competing for the Future

Introduction – the Global perspective

3

Demand for crude oil has surged, with an obvious impact on crude oil prices

• Crude oil prices have risen to prices last seen in the 70’s – From a low of $11 in 1998 to $60+ in 2005

• This time less of a price shock– Driven by growth in demand rather than drop in supply

• Rising global oil prices have lead to – Increase in UK fuel prices– Rising gas prices – Placing additional strain on UK and Global economy

World Spare Oil Production Capacity

Source: EIA, Sept ‘05

Oil Price (£2005)

0

10

20

30

40

50

60

70

80

1965 1970 1975 1980 1985 1990 1995 2000 2005

Pric

e Pe

r Bar

rel 2

005

Pric

es

$/bbl£/bbl

$47£39

$24£16

$33£20

Average oil price over period

Source: Wood Mackenzie / UKOOA

0

10

20

30

40

50

60

70

80

1965 1970 1975 1980 1985 1990 1995 2000 2005

Pric

e Pe

r Bar

rel 2

005

Pric

es

$/bbl£/bbl

$47£39

$24£16 £

Average oil price over period

Source: Wood Mackenzie / UKOOA

4

However, UK is better placed than many to face oil price rises

• UK Economy is less sensitive to oil price – Oil intensity halved since 1975

• UK has been a net oil exporter for 25 years– Could still be a net exporter until end of decade – Currently saves imports of over £30 billion

• Tax Revenues from UKCS have surged in last 12 months– Expect to reach £10 billion in 2005/6– Revenues doubled from UKCS in a year

5

Substantial opportunities remain in the UKCS, but life is getting harder

• Produced 34 billion boe* over the last four decades *(barrels oil equivalent)

• Could still have another 28 billion boe (inc yet-to-find)

• Reserves replacement in 2004 (DTI)– Produced 95 bcm gas (billion cubic metres), replaced 25 bcm (26%)– Produced 725 million bbls oil, replaced 460 million bbls (64%)

3261121995-2004

9372421985-1994

13751751975-1984

24276861965-1974

Total Discovered(billion boe)

Average discovery size (million boe)

Number of discoveries

3261121995-2004

9372421985-1994

13751751975-1984

24276861965-1974

Total Discovered(billion boe)

Average discovery size (million boe)

Number of discoveries

6

UKCS faces strong competition - even around the North Sea

• UK finding costs relatively high ($/bbl)– Netherlands – half cost of UK (Southern Gas Basin) – Norway – fifth cost of UK (Central / Northern N Sea)

• New UK developments typically modest in size – UK discoveries now (25 million bbls oil or 3 billion m3 gas )

(historic field sizes +/-500 million bbls oil, +/-100 billion m3 gas)– Norway – modest to very large – Reflects maturity of UKCS

• UK has advantages – Extensive infrastructure coverage aides swift development– Shared sense of urgency (Window of Opportunity) – Wide diversity of investors

(circa 120 in UK vs. circa 30 in Norway)– Ready access to UK & European gas markets

7

How is the UKCS responding in 2005


8

Both investment and expenditure on increase in 2005

• Total Spend in UKCS could reach £10 billion in 2005 (Exploration, Capex & Opex) • Capital investment has turned round over last 15 months

– Was declining rapidly post 2002 – Could reach £4.5 billion in 2005 (forecast £3.8 billion in Jan)

• Est. 24 projects approved in 2005 – vs 27 in 2004 & 14 in 2003

• Operating costs expected to exceed £5 billion in 2005, – £0.3 billion increase on 2004, – Increasing expenditure to extend life of assets and infrastructure

Capex Trends 2002 - 2005

2.5

3.0

3.5

4.0

4.5

5.0

2002 2003 2004 2005

Cap

ex £

Bill

ion

Estimate Jan 2005

Estimate June 2005

Capital Investment 2002 - 2005

Capex Trends 2002 - 2005Capital Investment 2002 - 2005

9

Activity has increased in 2005, but still to feed through to production

UKCS Development Wells

0

50

100

150

200

250

300

Num

ber D

evel

opm

ent W

ells

in

c si

detra

cks

3.0

3.5

4.0

4.5

Pro

duct

ion

mill

ion

boe

per d

ay

1995 1997 19991996 1998 2000 2001 2002 2003 2004 2005est.

Production


0

50

100

150

200

250

300

Num

ber D

evel

opm

ent W

ells

in

c si

detra

cks

3.0

3.5

4.0

4.5

Pro

duct

ion

mill

ion

boe

per d

ay

1995 1997 19991996 1998 2000 2001 2002 2003 2004 2005est.

Production

Development wells UKCS Development Wells

0

50

100

150

200

250

300

Num

ber D

evel

opm

ent W

ells

in

c si

detra

cks

3.0

3.5

4.0

4.5

Pro

duct

ion

mill

ion

boe

per d

ay

1995 1997 19991996 1998 2000 2001 2002 2003 2004 2005est.

Production


0

50

100

150

200

250

300

Num

ber D

evel

opm

ent W

ells

in

c si

detra

cks

3.0

3.5

4.0

4.5

Pro

duct

ion

mill

ion

boe

per d

ay

1995 1997 19991996 1998 2000 2001 2002 2003 2004 2005est.

Production

Development wells

• Development well drilling is increasing– First time in three years – Drilled 166 in 2004, compared with 113 for Q1/2 – 2005

• Still to assess impact on production• Est 16 start-ups in 2005 (vs. 11 in 2004)

Oil / Gas production Actual / Projected

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

Mill

ion

boep

d

2.0

2.5

3.0

3.5

4.0

4.5

5.0


Mill

ion

boep

d

Oil / Gas production Actual / Projected

2.0

2.5

3.0

3.5

4.0

4.5

5.0


Mill

ion

boep

d

2.0

2.5

3.0

3.5

4.0

4.5

5.0


Mill

ion

boep

d

2.0

2.5

3.0

3.5

4.0

4.5

5.0


Mill

ion

boep

d

10

Oil price is not the only factor driving activity on UKCS

• Industry and DTI through PILOT have collaborated to promote a positive business environment – Recognising high cost and maturity of UKCS – Sought new means to encourage investment, attract new players and maximise

economic recovery

• 2001: Progressing Partnership– 3 voluntary processes designed to facilitate asset churn– Fallow acreage exploit or drop, preemption transparency, negotiation conduct

• 2003/4: Infrastructure Access Code of Practice– Facilitates satellite development through existing extensive infrastructure

• 2004/5: Brownfields Initiative– Quantifies remaining potential and window of opportunity– Initiatives to share best practice and encourage new technology– Asset Stewardship process to ‘encourage’ full exploitation– Ongoing decommissioning working group

11

Resources and skills are in high demand across oil industry

• Supply chain is working flat out– Takes six – twelve months for full impact to flow through to wider sector

• Drilling Rigs

– Drilling fleets are fully booked for 2005, very few left for 2006– Rig-rates doubled (jack-ups) or trebled (semi-sub)– Increasing collaboration in drilling programmes– 2 Jack-ups, 3 semi-subs returned to N Sea in last year– Katrina added to shortage of rigs

• Skilled personnel in tight supply across industry & supply chain– ILT Capacity and Capability initiative– Industry Technician training programme now producing 100 new technician

apprentices per year

12

Exploration & Appraisal - benefiting from recent initiatives

• Exploration & Appraisal activity surged– expect 80 wells for 2005

• Benefited from range of collaborative PILOT / DTI / Industry initiatives– Fallow / promote / Commercial CoP / Infrastructure CoP

• Heightened rate of E&A is critical to future of UKCS– 2002/3 slump in E&A is impacting the rate of new developments

UKCS Exploration & Appraisal Activity 2000 - 2005

0

10

20

30

40

50

60

70

80

90

100

2000 2001 2002 2003 2004 2005

Num

ber o

f Exp

lora

tion

& A

ppra

isal

Wel

ls

(Incl

udin

g si

detra

cks)

AppraisalExploration

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Insights from 22nd & 23rd licensing rounds

22nd Licensing round – 97 licences offered to 58 companies– 15 new entrants– 3 firm commitment wells

• Planned in a $30 world• Focus on heartlands • Balance of risk and consolidation• Proof PILOT initiatives are working

23rd Licensing round – 152 licences offered to 99 companies– 24 new entrants– 17 firm commitment wells

• Planned in a $40+ world• Interest centered on less explored,

– Mid-North Sea High, Moray Firth, East Shetland Platform, Atlantic Margin• Renewed focus on heavy oil• Higher risk domains

0

10

20

30

40

50

60

70

Central NS Northern NS Southern NS Atlantic Margin104 41 70 34

Traditional

PromoteFrontier

22nd 23rd Round

97 152

0

10

20

30

40

50

60

70

Central NS Northern NS Southern NS Atlantic Margin104 41 70 34

Traditional

PromoteFrontier

22nd 23rd Round

97 152

Number licences awarded 22nd & 23rd rounds

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What is driving the success of the UKCS in 2005

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Increasing diversity of investors is benefiting UKCS

• Over the last five years there has been an increasingly diverse range of companies investing in the UKCS

• Medium/large producers now produce 40% of UKCS production– From asset transfer and result of mergers

• Small producers are growing in number and increasing their share of production

• Majors remain a foundation of UKCS• New business models are being applied across UKCS

Percentage Total Spend

0%

20%

40%

60%

80%

100%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Source: Wood Mackenzie

Majors

Large / Medium

Small

Percentage Total Production

0%

20%

40%

60%

80%

100%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Source: Wood Mackenzie

Majors

Large / Medium

Small

Percentage Total Spend Percentage Total Production

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New Entrants have led growth of UKCS over last five years

Number of New Entrants

0123456789

1999 2000 2001 2002 2003 2004Source: Wood Mackenzie

• 35 new entrants since 1999– Inc small, medium and large operators– Now account for third of total capital investment

• All investors have a choice of where and when to invest • Critical to maintain the attractiveness of the UKCS

%

Growth of New Entrants Since 1999

0

5

10

15

20

25

30

35

1999 2000 2001 2002 2003 2004 2005

Proportion of total production

Proportion of total capital invested

33%

14%


0

5

10

15

20

25

30

35

1999 2000 2001 2002 2003 2004 2005



33%

14%


0

5

10

15

20

25

30

35

1999 2000 2001 2002 2003 2004 2005



33%

14%


0

5

10

15

20

25

30

35

1999 2000 2001 2002 2003 2004 2005



33%

14%

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Long term Opportunity

18

The UKCS has a long future ahead of it

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2004 2006 2008 2010 2012 2014 2016 2018 2020

Mill

ion

boe/

d

Existing Production Base

(Rapid Decline)

The Better Future

Oil & Gas Demand

Current

Place Plans in

Source: UKOOA

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2004 2006 2008 2010 2012 2014 2016 2018 2020

Mill

ion

boe/

d

Existing Production Base

(Rapid Decline)

The Better Future

Oil & Gas Demand

Current

Place Plans in

Source: UKOOA

This is the tale of two futures

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………… with substantial rewards

* Estimate Total Upstream Oil / Gas Taxrevenues 2005 - 2020

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2004 2006 2008 2010 2012 2014 2016 2018 2020

£bi

llion

(200

4 pr

ices

)

Rapid Decline£40 billion*

Current Plans £60 billion*

Better Future £85 billion by 2020*

Ultimately ~ £120 billion

* Estimate Total Upstream Oil / Gas Taxrevenues 2005 - 2020

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2004 2006 2008 2010 2012 2014 2016 2018 2020

£bi

llion

(200

4 pr

ices

)

Rapid Decline£40 billion*

Current Plans £60 billion*

Better Future £85 billion by 2020*

Ultimately ~ £120 billion

Projected tax revenues from UKCS (based on $40 projection)

• There are substantial rewards for Government and Industry if we can sustain the attractiveness of the UKCS

20

UK emerging as global centre for oilfield goods & services

• UK oil & gas industry supported by a substantial oilfield service sector – Grown rapidly over last decade– Now a major export industry

• Increasing number service companies support European, African & Middle East operations out of UK

• UK is global leader in key oilfield technologies– e.g. Subsea, Drilling technology – Subsea set to grow in the UK as industry seeks to extend field life.

21


How do we sustain current success in years ahead

22

Lessons from the recent past

• Need to maintain a stable business environment– Oil and gas prices are volatile– UKCS is a mature high cost basin

• Tax increases in 2002 rocked investor confidence in UKCS– In the following two years against relatively

flat oil prices• Exploration & Appraisal dropped• Development drilling declined• Capital investment declined

• DTI & Industry through PILOT have done a great deal to restore investment climate

• Investment confidence has since returned to UKCS

14 Rigs stacked - Autumn, 2003

23

Conclusions

• Without UK oil & gas, the nation would be even more exposed to the impact of current oil prices

• Fundamentals remain, the UKCS is a mature, high cost basin• Activity and Investment have increased in 2005, but the full

impact is still to feed through to production• Oil price is not the only factor driving activity on UKCS

– PILOT initiatives have created a positive business environment – Investor confidence is critical

• Increasing diversity of investors is benefiting UKCS– New Entrants have lead growth of UKCS over last five years

• All investors have a choice of where and when to invest – Critical to maintain the attractiveness of the UKCS

Documents

The UKCS in 2005 - Sustaining Success, Competing for the Future