Economic Report 2011

Industry at a Glance

The following summarises the key findings of Oil & Gas UK’s Economic Report for 2011. The numbers below refer to 2010, unless otherwise stated.

Currently, oil and gas provide some 75% of the UK’s total primary energy
Production from the UK’s continental shelf (UKCS) satisfied 55% of the country’s primary energy demand: 87% of oil and 61% of gas
In 2020, 70% of primary energy in the UK is still expected to come from oil and gas, even if the 15% target for renewable energy is met
The UKCS has the potential to satisfy close to 60% of the country’s oil and gas demand in 2020, if the current rate of investment is sustained

Production of oil and gas boosted the balance of payments by £32 billion
The supply chain added another £5-6 billion in exports of oilfield goods and services
Among the industrial sectors of the economy, offshore oil and gas remained the largest investor and the largest contributor to national gross value added (GVA)

The oil price averaged $80 a barrel, peaking at $95 in December from the year’s low of $68 in May
Day-ahead gas price averaged 42.5 pence per therm, peaking at 65 p/th in the harsh, early winter during December
The “effective UKCS output” price was $63 per barrel of oil equivalent (boe), derived from annual oil and gas prices pro rata to production

Production was 810 million boe, or an average of 2.2 million boe per day, a decrease of about 6½ % from 2009
Production in 2011 is projected to be circa 2.1 million boe per day
In worldwide terms, the UK is the 15th largest gas producer (3rd in Europe) and 20th largest oil producer (2nd in Europe)

Total expenditure reached £14 billion on exploration, developments and operations
In more than 40 years to 2010, the industry has spent £468 billion (in 2010 money) by:
- investing £300 billion in exploration drilling and field developments and
- spending £168 billion on production operations

Tax rates on UKCS production were unexpectedly increased in the 2011 Budget with the supplementary charge on Corporation Tax rising from 20% to 32%. The marginal rate of tax on company profits now varies from 62% (previously 50%) to 81% (75%), depending on the field
The industry paid £8.8 billion in production taxes in the tax year 2010-11, one fifth of total corporation taxes received by the Exchequer
This is expected to rise to over £13 billion in 2011-12, providing more than one quarter of total corporation taxes
The wider supply chain is estimated to have contributed another £6 billion in corporate and payroll taxes
In more than 40 years to 2010, corporate taxes charged on oil and gas production have contributed £293 billion (in 2010 money) to the Exchequer, i.e. excluding such taxes paid by the supply chain

Capital investment was higher than expected at around £6 billion. This represented a 20% increase on 2009
Prior to the March 2011 Budget, it was forecast that:
- Investment could rise to somewhere between £8 and 9 billion in 2011
- Investment could rise further to close to £10 billion in 2012
It remains to be seen how these forecasts will be affected by the tax change, with business confidence in the stability of the fiscal regime materially affected
Current plans could lead to the investment of £60 billion in new production during the current decade, including ongoing developments
Projects initiated in 2010, which include both new field developments and incremental developments on existing fields (or “brown-fields”), will result in approximately £9 billion being spent to deliver 1.2 billion boe of reserves

Total operating expenditure increased by 5% to £6.9 billion
This is expected to increase slightly to £7.1 billion in 2011
Unit operating costs rose slightly to $12.5/boe; this trend is forecast to continue with unit costs rising to nearer $14/ boe in the current year

A total of slightly more than 40 billion boe has so far been recovered from the UKCS
Remaining recovery is forecast to be in the range 14 – 24 billion boe
Current investment plans have the potential to deliver:
- 6.0 billion boe from existing fields and ongoing investment plus
- 5.7 billion boe from incremental and new field developments
Average discovery size since 2000 has been 26 million boe, with two thirds of all discoveries less than 15 million boe

8 new fields came on-stream, bringing 118 million boe of new reserves into production
DECC approved a further 13 new projects
In 2010, seven out of the eight fields that came on-stream were subsea tie-backs

The total number of wells drilled (incl. side-tracks) in 2010 was very similar to 2009 with:
- 129 development wells (the same as 2009)
- 28 exploration wells (up 22%)
- 34 appraisal wells (down 19%)

In 2010, the industry supported about 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 oil and gas goods and services
Employment is spread across the regions, the main ones being
- Scotland – 45%
- South East England – 21%
- North West England – 6%
- West Midlands – 5%
- Eastern England – 5%
Each £ billion spent on the UKCS is estimated to provide some 15-20,000 jobs, but this can vary with the balance between capital and operating expenditure

Some 470 surface and subsea installations, 10,000 km of pipelines, 15 onshore terminals and 5,000 wells will eventually have to be decommissioned
From 2011 onwards, decommissioning expenditure is projected to be £23 billion by 2030, rising to £26 billion by 2040, for existing facilities
When new and incremental projects are included, on current forecasts, the total cost of decommissioning the UKCS is almost £31bn
In the shorter term, £11.5bn is forecast to be spent on decommissioning activities during the current decade.

Editorial note: the drafting of this Economic Report was undertaken during July and August 2011.