UNITED KINGDOM:

Capital expenditures in UKCS are expected to increase 30%

James May, director-general of the UK Offshore Operators Association (UKOOA), sees 2001 as a year of recovery for the British offshore industry, due to a more stable regulatory and tax environment.

Q. What role does UKOOA play in the UK upstream industry?

James May

A. The UK Offshore Operators Association (UKOOA) represents oil and gas companies licensed by the British government to explore for, and produce, hydrocarbons on the UK Continental Shelf (UKCS). Its 32 members include the major integrated oil companies (BP, Shell, ExxonMobil, TotalFinaElf and Texaco, for example), as well as independents such as Enterprise Oil, Kerr McGee, Ranger and Premier Oil.

The association’s role has changed significantly during its 30-year history. From an organization largely focused on internal technical issues, UKOOA has evolved into a body whose aim is to provide the leadership necessary to maintain a thriving, responsible industry. Central to this role is enhancing the industry’s reputation and developing stronger relationships with the UK and European governments, the general public and other stakeholders.

Our members are currently active in a range of association-specific and cross-industry initiatives, including the Step Change safety campaign and the Pilot government / industry collaborative program.

Q. How did your members cope with poor economics in 1998 and 1999?

A. The prolonged period of oil price lows certainly took a toll on the UKCS. Investment and activity fell sharply toward the end of the decade, and nearly 100,000 people lost their jobs as a result of company mergers and reorganizations.

Ironically, it was the government’s proposal to review the industry’s tax regime in 1998 that shed true light on the strategic nature of the UKCS’s troubles: the North Sea’s increasing maturity, its high operating costs and the need to maintain competitiveness in the face of global competition for funds. This led to the creation of a task force involving all sectors of the industry – operators, contractors and suppliers – working together with government and the trades unions to develop a vision of where the UK offshore industry could be in 2010. The targets they set were to:

• Sustain investment at £3 billion (US$4.33 billion) annually to 2010
• Maintain production at 3 MMbpdoe
• Prolong UK self-sufficiency in oil and gas; increase exports of oil and gas-related services and products by 50% by 2005
• Generate £1 billion (US$1.44 billion) annually in new business revenue
• Protect up to 100,000 jobs that would otherwise have been under threat.

Q. A new cooperative program between industry and government – Pilot – was launched last year. What are the program’s goals and projects?

A. Pilot (not an acronym) was launched in January 2000 to advance the task force’s vision and monitor the progress of a range of initiatives created by the task force to make that vision a reality. Five different governmental departments are actively involved, greatly improving the government’s understanding of factors influencing offshore activity in the UK. Recent Treasury statements confirm that the government does not intend to change the tax regime in any way that would undermine UKCS competitiveness. However, the government has also clearly indicated that it wants to see new investments in the UKCS.

Under the Pilot umbrella are several independent organizations responsible for making the changes. These include:

• LOGIC – Leading Oil and Gas Industry Competitiveness – promotes efficiency in supply chain management
• ITF – the Industry Technology Facilitator – funds the development and application of new technologies
• NTOG – National Training Organization Group – focuses on training and maximizing commitment to skills
• LIFT – License Initiative for Trading – a website promoting license trading
• DEAL – Digital Energy Atlas and Library – a web-based service that allows users to access and retrieve data related to E&P activities on the UKCS.

Q. Was 2000 a year of "recovery" for the UK offshore?

A. It is more likely that 2001 will be the year of recovery for the UK offshore industry, but 2000 certainly saw a return of confidence. This was due not only to the recovery in oil and gas prices, but also to the continued stability of the UKCS regulatory and tax environment. Credit must also be given to Pilot, which has stimulated industry confidence and strengthened recovery by building an agenda that is shared by all sectors of the industry, government and unions.

While there was little movement in actual development spending in 2000 – estimated to be similar to 1999 at about £3 billion to £3.2 billion (US$4.33 billion to $4.62 billion) – several potential new developments were announced. There was also a modest recovery in exploration, with estimated spending rising to £500 million (US$720 million) compared with £460 million (US$662 million) in 1999. There were 37 exploration wells drilled, compared to 31 in 1999, which had been the lowest in 30 years. Among the highlights in 2000 was the installation of the first phase of Elgin / Franklin and Shearwater gas / condensate fields, and the associated gas pipeline to Bacton.

Q. What is UKOOA’s outlook for 2001?

A. A survey of UKOOA members’ intentions anticipates a 30% increase in capital expenditures in 2001, to some £4 billion (US$5.78 billion). The outlook depends on several factors, including containment of the high cost of drilling, increased success in exploration in the North East Atlantic and improved economics for smaller North Sea prospects.

Q. What are some major exploration or development projects underway?

A. The largest project to be given governmental approval last year was the £485-million (US$700-million) Leadon oil field, 220 miles northeast of Aberdeen. Kerr McGee North Sea (UK) Ltd. will bring it onstream using an FPSO system to be built at the Swan Hunter yard on Tyneside. Production is due to commence in early 2002 and peak at more than 50,000 bopd.

Another key project is BP’s £320-million (US$462-million) pipeline, which takes surplus gas from the Foinaven and Schiehallion fields west of Shetland on the Atlantic frontier, and routes it via Shetland to the North Sea’s most northerly oil platform on Magnus oil field. There, the gas will be used to flush out an extra 50 million bbl of oil before being recovered and landed via another pipe network for use onshore.

BP is also advancing plans for its massive Clair field, also west of Shetland, which contains in excess of four billion bbl of oil in place. And TotalFinaElf is operating a fast-track project to install four subsea wells on the Nuggets gas field this summer, with a tie-back to Alwyn North field, 25 miles away.

UKOOA estimates that there could be up to 36 billion boe still remaining on the UKCS, although new prospects are likely to fall into the 50-million-to-100-million-boe range each.

Q. How is the health of the construction sector of the UK upstream sector?

A. With confidence and investment returning to the UKCS, the outlook for the construction sector is improving. But, with the possible exception of Clair, the days of large-scale fabrication contracts are over. The impact of increasing maturity in the North Sea is being translated into a greater call for subsea technology, largely centered on tie-backs to existing infrastructure. This is seen as a relatively cheap and quick way of bringing marginal and satellite fields onstream. It will also provide a new lease of life for the North Sea’s extensive network of installations and pipelines, and delay decommissioning.

Q. What are some of the UK offshore industry’s greatest operating challenges?

A. One of the greatest challenges facing the UK offshore industry currently is developing the new technologies capable of unlocking fields of diminishing size in the increasingly mature North Sea province.

The industry has two funding mechanisms to bring innovative technological ideas to the market. The Industry Technology Facilitator (ITF) was created in 1999 under the Pilot umbrella to accelerate development in four specific areas: wells, subsurface, process facilities and decommissioning. So far, 10 new collaborative joint industry projects have been launched with a total committed investment of £2.1 million (US$3.03 million). These include a device to allow continuous mud circulation during drill pipe changeovers and a tool that can see through crude oil to carry out inspections.

The Nova Technology Fund is a venture capital fund providing a new source of private equity finance for SMEs with a product or idea to develop. The 11 founding partners have committed £5 million (US$7.22 million) to the fund and are looking to raise a further £15 million (US$21.66 million) from the financial sector this year.