Oil & Gas UK is the leading representative body for the UK offshore oil and gas industry. The non-profit organization was established in April 2007 but has a pedigree stretching back over 30 years. The group’s aim is to strengthen the long-term health of the UK offshore oil and gas industry by working closely with companies across the sector, governments and all other stakeholders to address the issues that affect the industry. Malcolm Webb, the organization’s chief executive, addresses several issues including declining UK oil and gas production, encouraging the industry to increase UK Continental Shelf production, and attracting investment to the UKCS.
World Oil: How do you see the UK’s oil and natural gas production trending the next several years?
Malcolm Webb: In 2009, our industry produced on average 2.48 million bbl of oil and gas per day, 6% less than in 2008. The production decline rate is likely to remain at 6% in 2010, reflecting the slowdown in capital investment since 2006; indeed, it will continue to accelerate if investment is not sustained.
If investment can be sustained above £5 billion [$7.5 billion] per year, the UKCS could still be delivering 1.5 million bbl of oil and gas per day in 2020, enough to satisfy half of total UK demand. This is of strategic importance to the economy, as the government forecasts that the UK will still rely on oil and gas for 70% of its energy needs at that time.
WO: Independent producers appear to be more optimistic about the industry than integrated majors, not only in the UK but in other major regions as well. Do you see this outlook continuing, and will this result in independents significantly displacing majors in UK investment and E&P activity?
Webb: As recently illustrated by one major in particular, large oil and gas producers do not intend to leave the UKCS
anytime soon; they have made significant investments over the last four decades in infrastructure and fields and will continue to contribute a large proportion of total capital injected. Having said that, the range of companies operating on the UKCS, including those smaller ones that can grasp opportunities no longer attractive to majors, are important if we are to maximize recovery. Therefore, while the government has taken some steps to improve the attractiveness of UK oil and gas projects, it is crucial that more is done to bring in international investors.
WO: What are some of the important projects that are being developed in the UK?
Webb: Of the 25 billion bbl of oil and gas estimated to remain on the UKCS, the proven, probable and possible reserves reported to us in our members’ plans have increased and now stand at 11.1 billion bbl. Additions are in all areas of the UKCS but with the greatest increase in areas west of Shetland and in the central North Sea.
However, the concern is that the proven volume of these reserves, or in other words, those that have already secured investment, fell in 2009 to 5.25 billion bbl from 6.1 billion in 2008. It is the probable and possible element of the reserves, which can only be secured by new investment, that have increased by 2.3 billion boe to 5.9 billion boe.
WO: What should the UK government do to help encourage increased production from the shelf?
Webb: Over the last year, the government has taken several steps to help address the difficulties faced in attracting investment. The introduction of the new field allowance in the 2009 budget and its subsequent extensions in the Pre-Budget Report and at the beginning of 2010 were a welcome acknowledgment that a marginal reduction in tax rate can create a win-win outcome, driving up investment and production and increasing overall tax returns to the Exchequer, although the precise effect of these measures will take time to work through the system. For example, the remote, expensive Laggan-Tormore gas field to the west of Shetlands will have become more viable to develop with the new field allowance but, at this time, has yet to receive development approval.
Securing all the opportunities on offer, which is so crucial to the UK’s security of energy supply, will demand further action from both industry and government on two key fronts. First, an effective cost reduction program looking at lightening the burden of development and operating costs, production taxes and UK and EU regulatory compliance must be implemented.
Second, the question of availability of tax relief on decommissioning costs must be addressed. A heavy investor such as our industry requires, above all else, certainty in fiscal and regulatory rules if it is to have the confidence to inject billions of pounds into the UK economy each year. There is increasing uncertainty regarding government assurances that the tax relief on decommissioning costs associated with the petroleum revenue tax will be available when called upon. It is this uncertainty that damages investor confidence and ultimately reduces investment and oil and gas recovery, so action must be taken to provide certainty on the rules without delay.
On both these fronts, Oil & Gas UK is keen to continue its work with the government to find the best path to maximizing recovery of the UK’s oil and gas reserves.
WO: How is Oil & Gas UK attracting investment to the shelf?
Webb: Oil & Gas UK speaks for companies that are both the principal employers and investors in our sector, putting forward the case for regulatory and legislative change which can improve the UK business environment. We have extensive contacts across all levels of government in Westminster, Holyrood [Scotland] and the EU and engage with government agencies, all the industry’s main trade associations, trade unions, NGOs as well as with the public through the media, in all its forms. Acting through all these channels has helped Oil & Gas UK make significant progress in improving the chances of maximizing recovery of the nation’s oil and gas, with the aim of improving security of energy supply and the economic contribution made by the sector to the UK economy.
WO: Do you see any signs of recovery in the industry?
Webb: In 2009, the effect of the global recession was manifested in our own industry by plunging oil and gas prices and made worse by the turmoil in the finance markets. Undoubtedly, the whole industry—exploration and production companies, their contractors and the wider supply chain—was affected by this, but as the year went on, the oil price began to recover and financial markets calmed down, helping to offer a more positive outlook. This is reflected in the Q4 2009 Oil & Gas UK Index, which provides a quarterly measure of market confidence.
Our latest survey of companies’ plans underlines the significant challenges we face to secure current production and yet also offers a tantalizing glimpse of the future opportunity. As I said before, the total reserves on companies’ plans have increased, but it is concerning that more of these fall into the probable and possible category, rather than proven.
On a positive note, we project that investment could rise above £5 billion [$7.5 billion] in 2010 as activity picks up, but if all the opportunities identified by companies are to be developed, a staggering £60 billion [$90 billion] capital injection will be required over future decades, £25 billion [$37.5 billion] of that in the next five years. This investment will only bring onstream 11 billion bbl; there will still be 14 billion bbl left which require sustained exploration and appraisal activity to replenish production. Unfortunately, this is not consistent with the 40% fall in exploration drilling activity seen in 2009.
This industry will rely ever more on the capabilities of its supply chain if it is to deliver the full potential of the UKCS. Industry needs to work collaboratively both across the sector and with government at national, regional and local levels to develop new technologies, improve working practices and efficiencies and drive down costs. This will help to enhance the UK supply chain’s comparative advantage in the global marketplace and ensure that the industry’s critical suppliers retain a presence here.
Get it right, and the UK will still be a significant oil and gas province in 2020, matched by a thriving supply chain with a global reach. Get it wrong, and the UK’s oil and gas production will diminish rapidly by 2020, with a significant loss of high-tech jobs, declining tax revenues, and increasing energy imports with attendant serious risks to the security of energy supply.
The ingredients are in place for a successful outcome, the challenge is to ensure that an appropriate investment climate is developed and sustained to support this outcome. 
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THE AUTHORS
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Malcolm Webb is the Chief Executive of Oil & Gas UK. A graduate of Liverpool University and a lawyer by profession, he has extensive senior management experience in the upstream and downstream oil industry, gained in the UK and abroad. Mr. Webb began his oil industry career with Burmah Oil in 1974, and went on to work in a series of senior roles for the British National Oil Corporation, Charterhouse Petroleum Plc and PetroFina SA. Prior to joining Oil & Gas UK (then called the UK Offshore Operators Association) in 2004, he spent three years as Director General of the UK Petroleum Industry Association, representing the UK oil refining and marketing sector. Since joining Oil & Gas UK, he has led the organization through two major change programs to enable it to become the leading trade association for the UK offshore oil and gas industry. Mr. Webb is a member of PILOT, the government/industry forum that aims to secure the long-term future of the UK upstream industry, and sits on the Scottish Energy Advisory Board. He is also a director of OPITO–The Oil & Gas Academy and chairman of Common Data Access Limited, the UK industry body that facilitates access to UK geo-technical data.
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