Economic Report 2012

Industry at a Glance

The following summarises the key findings of Oil & Gas UK’s 2012 Economic Report. Figures below refer to 2011, unless otherwise stated.

Security of Supply

  • Currently, oil and gas provides some 73 per cent of the UK’s total primary energy
  • Production from the UK’s Continental Shelf (UKCS) satisfied 49 per cent of the country’s primary energy demand: 68 per cent of oil demand and 58 per cent of gas demand
  • In 2020, 70 per cent of primary energy in the UK will still come from oil and gas, even if the 15 per cent target for renewable energy is met
  • The UKCS has the potential to satisfy close to 50 per cent of the UK’s oil and gas demand in 2020 if the current rate of investment is sustained

Economic Contribution

  • Production of oil and gas boosted the balance of payments by some £40 billion
  • The supply chain added another £6 billion in exports of goods and services
  • The UKCS remained the largest investor and the largest contributor to national gross value added (GVA) among the industrial sectors of the economy

Oil and Gas Prices

  • The price for Brent crude oil averaged $111 a barrel (bbl), peaking at $127 in May during the Arab uprisings from a low of $93 in January
  • In early June 2012, the price of Brent oil had fallen by 25 per cent compared with its peak earlier in the year and was under $100/bbl
  • Day-ahead gas prices averaged 56 pence per therm (p/th), peaking at 66 p/th in March when the Fukishima disaster in Japan caused some diversion of LNG supplies away from Europe
  • Gas traded at a discount to oil throughout 2011, at around 50 per cent in energy equivalent terms
  • The combined oil and gas price for UKCS production was $90 per barrel of oil equivalent (boe)

Production

  • Production was 656 million boe, or 1.8 million boepd, a decline of around 19 per cent from 2010
  • The UK was the third largest gas and second largest oil producer in Europe, and 19th largest in the world for both oil and gas (ref. BP’s Statistical Review of World Energy 2012)

Total Expenditure

  • Total expenditure reached almost £17 billion on exploration, developments and operations
  • In more than 40 years to 2011, the industry has spent £486 billion (in 2011 money) by:
    • investing £310 billion in exploration drilling and field developments and
    • spending £176 billion on production operations

Taxation

  • The industry paid £11.2 billion in corporate taxes on production in 2011-12, almost 25 per cent of total corporation taxes received by the Exchequer
  • This is expected to fall to £9.6 billion in 2012-13, but will still provide over 20 per cent of total corporation taxes
  • The wider supply chain is estimated to have contributed another £6 billion in corporation and payroll taxes
  • Over £300 billion in production related corporate taxes have been paid to the Exchequer in over 40 years since production began

Capital Investment

  • With a number of large developments receiving field approval in recent years, capital investment rose to £8.5 billion. This represented a 40 per cent increase on 2010
  • Investment is expected to rise in 2012, possibly reaching £11.5 billion
  • Sixteen new fields and major field redevelopments secured approval, together requiring £13 billion of capital investment and expected to deliver 1.5 billion boe of reserves over time
  • Total investment committed or already in progress was £31 billion at the end of 2011, £7 billion higher than 12 months earlier

Operating Costs

  • Total operating expenditure remained similar to 2010 at £7 billion
  • This is expected to increase slightly, roughly in line with inflation, to £7.5 billion in 2012
  • Unit operating costs rose sharply to $17/boe because of poor production. The cost per barrel is expected to rise further to around $18/boe in 2012

Reserves

  • A total of 41 billion boe has so far been recovered from the UKCS
  • Further overall recovery is estimated at 15 - 24 billion boe
  • Current investment plans have the potential to deliver around 12 billion boe in total:
    • 7.1 billion boe from existing fields and ongoing investment plus
    • 5 billion boe from incremental and new field developments
  • The aggregated portfolio for the UKCS contains around 20 per cent more reserves than a year ago

New Developments

  • Five new fields came on-stream, bringing 30 million boe of reserves into production
  • DECC approved 12 new projects, as well as four major incremental redevelopments
  • 60 per cent of all new fields are subsea tie-backs to existing infrastructure

Drilling Activity

  • The total number of wells drilled (incl. side-tracks) was lower than 2010 with:
    • 122 development wells (down 6 per cent)
    • 14 exploration wells (down 50 per cent)
    • 28 appraisal wells (down 18 per cent)
  • Part of the fall in drilling activity can be attributed to the unexpected increase in the Supplementary Charge on Corporation Tax from 20 per cent to 32 per cent in 2011’s Budget
  • Exploration drilling is expected to pick up in 2012 with 64 exploration and appraisal (E&A) wells forecast, although only 40 of those are firmly committed

Employment

  • The industry supported at least 440,000* jobs across the UK with:
    • 32,000 directly employed by oil and gas companies and major contractors
    • 207,000 in the wider supply chain
    • 100,000 in jobs induced by the economic activity of employees and
    • 100,000 in jobs exporting goods and services
  • Employment is spread across the UK comprising:
    • Scotland – 45 per cent
    • South East England – 21 per cent
    • North West England – 6 per cent
    • West Midlands – 5 per cent
  • Each £ billion expended on the UKCS provides 15-20,000 jobs

Decommissioning

  • Some 470 installations, 10,000km of pipelines, 15 onshore terminals and 5,000 wells will eventually have to be decommissioned
  • From 2012 onwards, decommissioning expenditure is projected to be £28.7 billion (2011 money) by 2040 for existing facilities
  • New investment in probable developments could add £4.3 billion to this total
  • High oil prices and sustained investment in asset integrity mean that decommissioning expenditure over the next decade is expected to be around £10.3 billion, some 10 per cent below last year’s forecast
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