Investment needed to secure UK oil and gas supply chain

24 February 2015

New investment in offshore oil and gas exploration must be secured to protect energy security and the industry’s supply chain.

A report from Oil & Gas UK, which represents the UK offshore oil and gas industry, published today said rising costs, taxes and inadequate regulation have taken their toll on the UK industry’s international competitiveness.

It said falling oil prices meant that industry revenues dropped to just over £24 billion for the year, resulting in a negative cash flow of £5.3 billion for the North Sea basin, the worst since the 1970s.

It warned without sustained investment, critical infrastructure would disappear leaving energy resources in the ground.

The Activity Survey 2015 said exploration for oil and gas in the UK last year was significantly worse than anticipated with only 14 wells drilled out of the expected 25. It said there was no improvement in sight to the downward trend of recent years, with between eight and 13 exploration wells forecast for this year as price uncertainty added to the existing difficulty explorers have accessing capital.

Malcolm Webb, Oil & Gas UK chief executive, said the survey painted a bleak picture but also identified the region’s potential and showed the importance of government and industry measures to secure its long-term future.

“This is crucial not only for the energy security that domestic oil and gas production provides but also for the hundreds of thousands of highly skilled jobs, advanced technology and billions of pounds of exports which the industry underpins,” he said.

The report says: “Fresh investment will rely on sustained improvements in the cost base and a significant improvement in fiscal terms; without such changes, the impact on the UKCS [UK Continental Shelf] and the wider supply chain will be severe.”

The study added lower oil prices have now sharply reduced production revenues and both operators and their supply chain have had to adjust quickly to the new market conditions.

"The supply chain will inevitably have to reappraise its UK business and, in many cases, seek to accommodate lower domestic demand as well as downward pressure on costs. This may encourage many in the supply chain to place a greater priority on their export markets to provide some protection against a declining local market."

Webb said changes to tax, costs and regulation were needed to achieve the at least £94 billion of investment that would recover reserves.

“The time has now come for delivery of permanent change on those fronts. We need to see full delivery of the Wood Review recommendations as well as a permanent reduction in the headline rate of tax, a simplification of the tax allowance structure and stimulus for exploration. We must, together, do what is needed to reduce costs, encourage investment, and avoid premature decline.”

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