Economic Report 2017 - Oil & Gas UK

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A specific Sector Deal for the oil and gas industry will also be needed and we are ..... made through mergers and acquis
ECONOMIC REPORT 2017

E C ONOM IC R E P OR T 2 0 1 7

Contents 1. 2. 3.

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Foreword Industry at a Glance Economic Contribution 3.1 T h e UK E ne r gy M ix 3.2 T h e R ole for Oil and Gas in t h e L ow e r - C ar b on E conom y 3.3 T ot al E m p loy m e nt 3.4 R e gional C e nt r e s of E x ce lle nce The Business Environment 4.1 Oil and Gas M ar ke t s 4.2 Im p act of Br e x it Creating a Long-Term Future 5 .1 V ision 2035 5 .2 D e liv e r ing t h e V ision UK Continental Shelf Performance and Opportunity 6 .1 Ke y P e r for m ance Indicat or s 6 .2 Glob al C om p e t it iv e ne ss 6 .3 T h e E fficie ncy T ask F or ce 6 .4 F iscal P olicy 6 .5 M e r ge r s and A cq uisit ions 6 .6 Inv e st or C ase St udie s

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E C O N O M I C R E P O R T 2017

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Foreword e l c o m e t o O i l & G a s U K ’ s 2017 Economic Report. Our annual report once more reflects a challenging business environment against which industry has been in action to improve its competitiveness, maximise economic recovery and position itself effectively to ensure longer-term sustainability.

The sector has done much to address its cost base and pursue the efficiency needed to compete in the current environment. While it has been, and continues to be, relentlessly demanding for many people – both professionally and personally – it is really good to see companies increasingly committed to embracing real c h a n g e t o s e c u r e t h e ir s h o r t a n d lo n g e r - t e r m f u t u r e . As this report shows, industry initiatives are helping to establish a culture focused on improving operational effectiveness, streamlining business processes and contributing to tangible increases in capital efficiency without compromising on safety. The Oil & Gas UK-led Efficiency Task Force has been instrumental in helping to catalyse p a n - in d u s t r y s u s t a in a b le c h a n g e . Companies have delivered unit operating cost improvements greater than in any other basin in the world since 2014. Although the maturity and complexity of the UK Continental Shelf (UKCS) means it remains a more expensive basin in which to operate, this is still a basin worth investing in, with exciting hydrocarbon opportunities, established infrastructure, access to a world-class supply chain, a highly skilled workforce, as well as a globally competitive fiscal regime. There are tentative signs that investor confidence is starting to return to the sector, and to the UK. Over the first half of 2017, almost $6 billion was invested in UKCS asset and corporate acquisitions. That trend is set to continue throughout this year and into 2018 with Total’s proposed acquisition of Maersk Oil announced just before publication. The sector continues to support over 300,000 jobs across the economy, but as this is around one-third lower than the peak in 2014, it could threaten core capabilities within the supply chain if activity does not pick up. The latest analysis shows the decline between 2015-16 was sharper than previously anticipated, however, there is evidence that the rate of job loss is now slowing to a reduction of around 13,000 in 2017 compared to almost 60,000 in 2016. M o r e n e e d s t o b e d o n e t o d r i v e a n y u p t u r n a n d s e c u r e l o n g - t e r m e m p l o y m e n t . U p t o £ 40 b i l l i o n w o r t h o f potential investment opportunities currently sit in company business plans. Industry will have to stay the course in terms of safely and relentlessly improving its efficiency and reducing its cost to ensure these opportunities become business realities in the near term, and that our hard-won progress is not lost in any upturn. The UK Government’s continued commitment to its Driving Investment Plan i s a p r e r e q u i s i t e f o r i n v e s t o r s . D e a l flow and asset trading can also be assisted by enabling the transfer of tax history between sellers and buyers of North Sea oil and gas assets. The industry has presented compelling evidence for change, which should be i n c l u d e d i n t h e A u t u m n B u d g e t 2017. Potential investors also require clarity as to how the UK will respond to the macro-economic impact of Brexit. T h e U K G o v e r n m e n t m u s t m a in t a in a s t r o n g v o ic e f o r o u r in d u s t r y in E u r o p e w h e r e in d ig e n o u s o il a n d g a s w ill continue to provide a vital part of the energy mix. Our industry needs frictionless access to markets and people for our supply chain and protection of energy trading and the internal energy market, which have helped provide secure, affordable energy to the UK for decades.

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The current low level of exploration and appraisal activity remains a serious concern as it is vital to replenish production with new development opportunities. The recently launched 30th Offshore Licensing Round offers companies the opportunity to bid for fresh acreage and an interesting inventory of yet-to-be-developed discoveries. However, it remains a challenge for companies to be able to commit limited funds for exploration activity in the ongoing downturn.

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Given all of the above, we should still take confidence in our achievements to date as we look to the future. The potential of our industry is captured in Vision 2035, which shows that the UK can continue to deliver hundreds of billions of pounds in revenue through the oil and gas sector over the next generation and beyond. While setting us the challenge of maximising the value of our indigenous resources, Vision 2035 also seeks to ensure our s u p p ly c h a in m a in t a in s a s t r o n g U K b a s e w h ile p u r s u in g a g r e a t e r s h a r e o f t h e g lo b a l e n e r g y m a r k e t . With this longer-term view, the UKCS needs to continue to compete with other oil and gas producing regions as well as promote the contribution that oil and gas can continue to make to the energy mix over decades to come. The UK will need to ensure its energy supply is secure, affordable and as low-carbon as economically possible, and our indigenous offshore oil and gas resources have a key contribution to make. Global oil and gas demand is forecast to rise by 25 per cent between now and 2035, and so will continue to have a crucial role to play in satisfying the world’s need for energy.

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The UK Department for Business, Energy & Industrial Strategy confirms that oil and gas will remain vital sources of energy – fuelling transport, power generation, heating and industrial usage – forecasting that it will supply around two-thirds of domestic energy demand in 2035. 7

There is a compelling need for a clear energy policy from government, which can provide the long-term clarity a n d c e r t a in t y n e e d e d t o h e lp s e c u r e in v e s t m e n t in o il a n d g a s in t h e U K . Industry continues to make a convincing case that the sector should be at the heart of the UK Government’s Industrial Strategy. The strategy should recognise the sector’s significant contribution to the economy through indigenous production that lowers import requirements, through generating exchequer revenues, by providing employment for hundreds of thousands of skilled people across our supply chain, and delivering a secure supply of energy. A specific Sector Deal for the oil and gas industry will also be needed and we are working closely with many other organisations to develop a coherent business case.

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I t is c r u c ia l t h a t in d u s t r y a n d g o v e r n m e n t w o r k t o g e t h e r t o e n s u r e t h a t a s m u c h o f t h e U K ’s e n e r g y n e e d s a s possible are met through domestic resources. Last year, £17 billion worth of oil and gas was produced from the U K C S . T h e f o c u s o n d e v e lo p in g a s m u c h o f o u r n a t u r a l r e s o u r c e a s p o s s ib le is a n o p p o r t u n it y t h a t n e it h e r t h e industry or the government can afford to forgo.

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Deirdre Michie, Chief Executive, Oil & Gas UK 5

E C O N O M I C R E P O R T 2017

2.

Industry at a Glance

Economic Contribution Companies involved in oil and gas activity

• Last year, oil and gas provided 76 per cent of the UK’s primary energy, 60 per cent of which was satisfied from indigenous p r o d u c t i o n m a k i n g a n e s t i m a t e d c o n t r i b u t i o n o f £ 17 b i l l i o n t o t h e U K ’s b a la n c e o f t r a d e . • O il a n d g a s w ill s t ill p r o v id e t w o - t h ir d s o f t o t a l p r im a r y e n e r g y by 2035, according to the Department for Business, Energy & Industrial Strategy, and therefore needs to be a vital component of an energy policy that considers affordability, s e c u r it y o f s u p p ly a n d e n v ir o n m e n t a l s u s t a in a b ilit y . • L a t e s t e s t im a t e s s h o w t h a t t h e o il a n d g a s s e c t o r c o n t in u e s t o support over 300,000 jobs in the UK. • T h e U K o il a n d g a s s u p p ly c h a in s p a n s t h e le n g t h a n d b r e a d t h of the country, servicing both domestic activities and exporting a l m o s t £ 12 b i l l i o n o f g o o d s a n d s e r v i c e s t o o t h e r b a s i n s a r o u n d t h e w o r ld .

Security of Supply

£

orda ility

The Energy Trilemma

Environmental Sustainability

T h e B u s in e s s E n v ir o n m e n t

• Oil markets remain volatile, although dated Brent averaged $51.6 per barrel (bbl) over the first six months of the year, 30 p e r c e n t h i g h e r t h a n o v e r t h e s a m e p e r i o d i n 2016. • A sh o rta g e o f sto ra g e a n d g a s c a rg o e s c a u se d th e N B 60 pence/therm (p/th) f u n d a m e n t a ls o f s t r u c t u r a l t o 25 p / t h b y J u n e .

u n P d in g lo

c e r t a in t y o v e r liq u e f ie d a y - a h e a d g a s p r ic e t o r is e February, before the b a l o v e r s u p p ly le d t o a s h

n a tu ra l a b o v e market a r p f a ll

• W e a k e r s t e r lin g im p r o v e d m a r g in s f o r m o s t o il a n d g a s p r o d u c e r s a n d m a d e e x p o r t s m o r e c o m p e t i t i v e f o r b u s i n e s s e s ac r o s s t h e s u p p ly c h a in .

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• The long-term impact of Brexit is s h o w in g t h a t t h e c o s t o f t r a d e f o r t i n c r e a s e b y a s m u c h a s £ 500 m i l l i o n p e to World Trade Organization rules, a r o u n d £ 100 m i l l i o n u n d e r o p t i m a l t r a

uncertain, with analysis h e w h o le in d u s t r y c o u ld r a n n u m if t h e U K r e v e r t s or could be reduced by d e a g re e m e n ts.

Creating a Long-Term Future

• V i s i o n 2035 s e t s a n a s p i r a t i o n f o r i n d u s t r y a n d s h o w s t h a t it c o u ld d e liv e r h u n d r e d s o f b illio n s o f p o u n d s in a d d it io n a l r e v e n u e t o t h e d o m e s t i c e c o n o m y o v e r t h e n e x t 20 y e a r s .

1

• G a s t

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lo b a l c o d v a n c e m e c to r; a n h e c a t a ly

m p e n d m sts

e t t; o th

it iv d e re a t

e n e s v e lo p ac t i v w ill d

s ; a c le a r e n e m e n t o f n e w e p r o m o t io n r iv e in d u s t r y

r g y p o lic s k i l l s ac o f tra d e to w a rd s

y ; ro a n th

te c h ss th d e x e v is

n o lo g ic a l e e n e rg y p o rts a re io n .

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• T h e v is io n m u s t u n it e t h e in d u s t r y ’s d r iv e t o m a x im is e e c o n o m ic r e c o v e r y w it h t h e U K G o v e r n m e n t ’s In d u s t r ia l S tra te g y . • It is v it a l t h a t t h e U K In d u s t r ia l S t r a t e g y r e c o g n is e s t h e k e y r o le o f t h e d o m e s t ic o il a n d g a s in d u s t r y t o t h e e c o n o m ic success of the country, and central to this will be developing a c o m p r e h e n s iv e e n e r g y p o lic y .

UK Continental Shelf P e rfo rm a n c e a n d O p p o r t u n it y

Efficiency Improvement

• S p e n d r e d u c t io n

• A c t iv it y im p r o v e m e n t

• T a c t ic a l p ro c e ss im p r o v e m e n t s

• C o n s o lid a t io n

• C o s t a v o id a n c e

• O r g a n is a t io n d e s ig n • T e c h n o lo g y

Transformational Change • A s s e t / s e r v ic e / g e o g r a p h ic re s tru c tu re • M & A + n e tw o rk in t e g r a t io n • O p e r a t in g m o d e l r e v ie w s

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• S ig n if ic a n t im p r o v e m e n t s h a v e b e e n m a d e in t h e b a s in o v e r recent years, although challenges remain: Production has increased by 16 per cent since 2014, d r iv e n b y p r o d u c t io n e f f ic ie n c y im p r o v e m e n t s a n d n e w f ie ld s t a r t - u p s . ○ Unit operating costs (UOCs) almost halved over the last t w o y e a r s a n d a r e e x p e c t e d t o f a ll f u r t h e r t o a r o u n d $14 per barrel of oil equivalent this year. ○ The basin needs fresh capital investment, with only three n e w f i e l d a p p r o v a l s s a n c t i o n e d s i n c e t h e s t a r t o f 2016. ○ D r i l l i n g ac t i v i t y r e m a i n e d a t r e c o r d l o w le v e ls la s t y e a r w i t h o n l y 14 e x p l o r a t i o n w e l l s a n d 8 a p p r a i s a l w e l l s d r i l l e d . ○D e c o m m is s io n in g is c u r r e n t ly t h e o n ly a r e a o f in c r e a s in g expenditure, but remained just 7 per cent of total industry s p e n d l a s t y e a r a t £ 1. 2 b i l l i o n . ○

• T s c E Cost Reduction

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h e E f f ic h a re s b a se stu f f ic ie n c

ie n e st d ie y H

c y T a s k F o r c e d r iv e s c o n t in u o u s im p r o v e m e n t a n d p r ac t i c e ca r o s s t h e b a s i n ; a r o u n d 100 c o m p a n y s a r e n o w ca c e s s i b l e t h r o u g h a n e w o n l i n e u b .

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• T h e U K C o n t in e n t a l S h e lf h a s b e c o m e m o r e in t e r n a t io n a lly competitive, with UOC improvements greater than in any o t h e r b a s i n s i n c e 2014 a n d t h e U K n o w r a n k i n g i n t h e t o p q u a r t i l e i n t e r m s o f f i s c a l a t t r ac t i v e n e s s . • Almost $6 billion worth of UK traded value was announced over the first half of this year, a s i g n o f c o n f i d e n c e r e t u r n i n g t o t h e b a s in . 7

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Economic R eport 2017

E C O N O M I C R E P O R T 2017

O

3.

- F acts and F ig ures

Economic Contribution

In S u m m a r y il and gas is the dominant fuel powering our economy, our transport network and our heating systems, providing over t h r e e q u a r t e r s o f t h e t o t a l e n e r g y m ix in t h e U K . A r o u n d 60 p e r c e n t o f t h i s c o m e s f r o m i n d i g e n o u s r e s o u r c e s . O v e r t h e n e x t 20 years, renewables capacity will grow primarily for electricity generation, but not quickly enough to displace fossil fuels. Oil and gas - F acts and F ig ures is still expected to comprise two-thirds of the energy mix in 2035. It w ill r e m a in p a r t o f a d iv e r s e m ix o f f u e ls t h a t is r e q u ir e d t o e n s u r e a n affordable and secure future energy supply while achieving emissions reduction targets.

Economic R eport 2017

The benefits of meeting domestic oil and gas demand from indigenous sources of production are widespread. The UK Shelf’s TheContinental UK Government (UKCS) resources are critical to security of energy supply to minimise forecasts that import dependencies. Without domestic production, the UK would h a v e h a d t o i m p o r t £ 17 b i l l i o n w o r t h o f o i l a n d g a s l a s t y e a r t o m e e t demand, which would have increased the UK's balance of trade deficit b y a l m o s t 50 p e r c e n t . /

nomic R eport 2017

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industry also currently supports over 300,000 jobs in the UK. and F ig The ures Although this is around 35 per cent below the peak in 2014, the level

of the UK’s energy mix o f e m p l o y m e n t i s e x p e c t e d t o s t a b i l i s e o v e r will t h e still r e s t come o f t h e from d e c a oil d e if activity begins to pick up. Despite most of the and UK’sgas reserves lying off by 2035 the coast of Scotland, the value generated from the industry is spread across the entire country. The diverse and highly skilled supply chain anchored here also acts as an export hub, generating almost £ 12 b i l l i The o n w UK o r t Government h o f r e v e n u e l a s t y e a r f r o m The s e r v oil i c i and n g o gas v e r s industry e a s b a s in s . supports over forecasts that The average Furthermore, the sector can help the UK achieve its climate change Brent oil price was targets. Natural gas is an affordable, reliable, relatively lower-carbon fuel that can fill renewable energy intermittency gaps. It has already helped the UK/achieve significant emissions reductions in power generation by displacing highly carbon-intensive fuels such as coal. A reduction in emissions released during the production of oil and gas i s a s i g of n o the f t h UK’s e i n d energy u s t r y ’ s mix c o m m it m e n t t o it s o w n s u s t a in a b ilit y a n d maximising domestic production will reduce reliance on fuel imports will still come from oil higher over in thethe UKfirst half t h a t c a n b and e m gas o r e by c a r 2035 b o n in t e n s iv e . of this year than the same period last year

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30%

8

300,000 jobs

The average

The average NBP

The UK Government forecasts that

2/ 3 of the UK’s energy mix will still come from oil and gas by 2035

The oil and gas industry supports over The average

Brent oil price was

30%

300,000 jobs

higher over the first half the than UK the of thisinyear same period last year Every £1 million of industry expenditure The average NBP sustained around day-ahead gas price was 17 jobs across the UK economy last year

40 hig

he

%

r

over the first half of 2017 than the same sets out aspirations period last year for the industry

The cost of industry

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T h e U K E n e r g y M ix

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L a s t y e a r o i l a n d g a s p r o v i d e d 76 p e r c e n t o f t h e U K ’ s t o t a l p r i m a r y e n e r g y . T h i s e q u a t e s t o 76 m i l l i o n t o n n e s o f oil equivalent (mtoe) and 77 mtoe of natural gas (85 billion cubic metres). Sixty per cent of this net demand was m e t b y r e s o u r c e s f r o m t h e U K C S 1, with the rest satisfied through imports. Without domestic production, the UK w o u l d h a v e h a d t o i m p o r t a f u r t h e r £ 17 b i l l i o n w o r t h o f o i l a n d g a s l a s t y e a r t o m e e t d e m a n d . A l t h o u g h w o r l d w i d e d e m a n d f o r e n e r g y i s f o r e c a s t t o i n c r e a s e b y a t h i r d b y 20352, the UK’s total primary energy d e m a n d i s l i k e l y t o r e m a i n a t a r o u n d 200 m t o e o v e r t h a t t i m e . A n i n c r e a s i n g p o p u l a t i o n a n d e c o n o m i c g r o w t h a r e expected to be offset by energy efficiency gains. According to UK Government forecasts, overall domestic primary energy supply is expected to fall faster than demand, and so the UK will become more reliant on fuel imports that c a n b e m o r e c a r b o n in t e n s iv e in t h e ir p r o d u c t io n a n d t r a n s p o r t a t io n . F o r e c a s t s s h o w t h a t g l o b a l o i l a n d g a s d e m a n d i s s e t t o i n c r e a s e b y m o r e t h a n 25 p e r c e n t b e t w e e n n o w a n d 2035. The UK, with lower consumption of coal and nuclear, is still expected to meet two-thirds of its energy demand w i t h o i l a n d g a s i n 20352. Despite progressive decarbonisation in electricity generation over the last few years, hydrocarbons are less easy to replace in the other major usages such as transport, heating and industrial use. With up to an estimated 20 billion barrels of oil and gas equivalent left to recover on the UKCS, domestic offshore o il a n d g a s r e s o u r c e s w ill c o n t in u e t o p la y a c r u c ia l r o le in s a t is f y in g t h e U K ’s f u t u r e e n e r g y d e m a n d a n d w ill remain a key component of energy supply for decades to come. The industry's MER UK (maximising economic recovery from the UKCS) strategy will maintain this indigenous oil and gas production, in turn, minimising import d e p e n d e n c ie s a n d e n s u r in g s e c u r it y o f e n e r g y s u p p ly .

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Department for Business, Energy & Industrial Strategy (BEIS), Digest of the UK Energy Statistics 2017 BP Energy Outlook 2017 9

Open to understand the journey of oil and gas and its role in the energy mix

E C O N O M I C R E P O R T 2017

Figure 1: UK Primary Energy Demand by Fuel Type in 2016 W ind, Solar and H y dro 2% Nuclear 8 %

O th er 1%

B ioenerg y and W aste 7% O il 38 % C oal 6%

O il and g as accounts for

76%

of th e U K ' s energ y mix

Natural G as 38 %

Source: B EIS

Figure 2: Indigenous Production and Demand for Primary Fuels in 2016

M illion Tonnes of O il Eq uiv alent

9 0 8 0

P rimary Demand

70

Indig enous P roduction

60 50 40 30 20 10 0 O il

Natural G as

C oal

B ioenerg y and W aste

Nuclear

W ind, Solar and H y dro Source: B EIS

10

Open to understand the journey of oil and gas and its role in the energy mix

Figure 3: UK Primary Energy Demand by Fuel Type in 2035

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O th er 2%

2

Nuclear 17%

O il 36%

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by 2035, it is forecast th at oil and g as w ill comprise

R enew ables and W aste 13%

66%

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of th e U K ' s energ y mix

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C oal 2%

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Natural G as 30%

Source: B EIS

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Figure 4: Indigenous Oil and Gas Production and Demand Projection 18 0

O il P roduction

Natural G as P roduction

O il and G as Demand

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M illion Tonnes of O il Eq uiv alent

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Source: O G A

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E C O N O M I C R E P O R T 2017

3. 2 T h e R o l e f o r O i l a n d G a s i n t h e L o w e r - C a r b o n E c o n o m y It is w id e ly r e c o g n is e d t h a t c lim a t e c h a n g e is a g lo b a l c h a lle n g e t h a t r e q u ir e s a c o lle c t iv e r e s p o n s e . T o d e liv e r a lower-carbon future, further substantial improvements in energy efficiency combined with major changes in t h e f u e l m ix w ill b e r e q u ir e d . O il & G a s U K r e c o g n is e s t h e im p o r t a n c e o f a d d r e s s in g c lim a t e c h a n g e a n d m e e t in g c a r b o n t a r g e t s a s k e y e le m e n t s o f U K e n e r g y p o lic y . It is c o m m it t e d t o p la y in g it s p a r t in b u ild in g a s u s t a in a b le in d u s t r y t h a t is p r o g r e s s iv e ly lo w e r in g it s e m is s io n in t e n s it y in t h e p r o d u c t io n o f o il a n d g a s . T h e r e n e e d s t o b e a n appropriate balance between meeting greenhouse gas (GHG) emission reduction targets with the need for secure a n d a f f o r d a b le e n e r g y s u p p ly t h a t c a n s u s t a in g r o w t h in t h e e c o n o m y . I t is im p o r t a n t t h a t t h e U K G o v e r n m e n t ’s In d u s t r ia l S t r a t e g y r e c o g n is e s t h a t o il a n d g a s w ill r e m a in p a r t o f a d iv e r s e m ix o f f u e ls t h a t is r e q u ir e d t o e n s u r e t h e s e c u r i t y o f t h e U K ’ s f u t u r e e n e r g y s u p p l y w h i l e ac h i e v i n g e m i s s i o n s r e d u c t i o n t a r g e t s . C e n t r a l t o t h i s i s a n e n e r g y p o lic y t h a t r e a lis e s t h e f u ll b e n e f it s o f in d ig e n o u s r e s o u r c e s . Under the Climate Change Act (2008), the UK has set ambitious targets to reduce emissions by 80 per cent of 1990 levels by 2050. These targets are outlined in Carbon Budgets, mandated by legislation, to help combat the r i s k s o f c l i m a t e c h a n g e . T h e U K G o v e r n m e n t ’ s r a t i f i c a t i o n o f t h e P a r i s A g r e e m e n t i n 2016 f u r t h e r e m p h a s i s e s t h e c o m m i t m e n t t o ac h i e v e t h e s e t a r g e t s . Figure 5: Total UK Greenhouse Gas Emissions 9 00 Total G reenh ouse G as Emissions F orecast G reenh ouse G as Emissions

700 600 500

5th C arbon B udg et

100

4th C arbon B udg et

200

3rd C arbon B udg et

300

2nd C arbon B udg et

400 1st C arbon B udg et

M illion Tonnes C O

2

Eq uiv alent

8 00

2034

2032

2030

2028

2026

2024

2022

2020

2018

2016

2014

2012

2010

2008

2006

2004

2002

2000

19 9 8

19 9 6

19 9 4

19 9 2

19 9 0

0

Source: B EIS

12

It is e s s e n t ia l t o c o n t in u e t h e f le x ib le p a r t n e r s h ip b e t w e e n r e n e w a b le a n d o t h e r lo w e r - c a r b o n e n e r g y s o u r c e s w it h in t h e e n e r g y m ix . R e n e w a b le s o u r c e s o f e n e r g y w ill g r o w o v e r t h e c o m in g d e c a d e s b u t f u e ls s u c h a s n a t u r a l g a s t h a t c a n f i l l r e n e w a b l e e n e r g y i n t e r m i t t e n c y g a p s w i l l b e c r u c i a l i n e n s u r i n g s u p p l y r e m a i n s r e ac t i v e t o c h a n g e s in demand. Given that energy demand routinely exceeds the total available supply of renewable energy, gas has a c r i t i c a l r o l e i n p r o v i d i n g e n e r g y s t o r a g e c a p ac i t y . Natural gas is an affordable, reliable, relatively low-carbon fuel that has helped the UK achieve significant GHG emission reductions in the power generation sector (by 48 per cent on 1990 levels3), displacing highly carbon-intensive coal. Furthermore, upgrading to more efficient and modern gas condensing boilers for domestic heating, which release similar amounts of CO2 as electric heat pumps, can help consumers reduce emissions4. N a t u r a l g a s s h o u ld t h e r e f o r e b e r e c o g n is e d a s a n id e a l p a r t n e r f o r r e n e w a b le s in t h e U K e n e r g y s y s t e m a n d c a n be a destination fuel in the power sector; in heavy industry (particularly over the longer term when coupled with carbon capture and storage (CCS)); and in heating and transport. Collaboration between government and industry is key to establishing an energy policy that balances affordability, security of supply and environmental s u s t a in a b ilit y . C C S is d e p lo y m C h a n g e lo w - c a r

re e re b o

c o g n is n t a t g c o m m n e c o n

e d a s o n a s - f ir e d p e n d s th a t o m y ta rg e

e

m e a n s t o d e c a r b o n is e p o w e r g e n e r a t io n a n d e n e r g y - in t e n s iv e in d u s t r ie s v ia o w e r s t a t io n s o r r e f in in g a n d o t h e r in d u s t r ia l p la n t s . T h e U K C o m m it t e e o n C lim a t e t h e d e v e l o p m e n t a n d d e p l o y m e n t o f C C S t e c h n o l o g y i s c r i t i c a l t o m e e t i n g t h e 2050 ts.

The widespread deployment of CCS will play to the strength of the UK oil and gas supply chain, which has all the s k ills n e e d e d t o e x c e l in it s d e p lo y m e n t u n d e r t h e r ig h t c o m m e r c ia l m o d e l. H u n d r e d s o f t h o u s a n d s o f w o r k e r s w it h transferable skills and knowledge – for example in geoscience, subsea engineering and fabrication – can build on e x is t in g e x p e r t is e a n d in f r a s t r u c t u r e t o e n a b le s a f e a n d e f f e c t iv e t r a n s p o r t a t io n a n d s t o r a g e o f C O 2in d e p le t e d o il and gas reservoirs offshore. Electrification, carbon offset and carbon abatement research and technologies also p r e s e n t a n im p o r t a n t o p p o r t u n it y t o d e p lo y t h e s k ills o f t h e w id e r o il a n d g a s s u p p ly c h a in .

1

2

3

4

5

6

7

8

9

10

11

3 4

BEIS, Updated Energy & Emissions Projections, March 2017 See http://cired.net/publications/cired2015/papers/CIRED2015_1327_final.pdf 13

E C O N O M I C R E P O R T 2017

During offshore operations, emissions arise from power generation required to process well fluids, treat oil and gas to export specification, and safely accommodate staff on offshore installations. The reduction of these emissions is a s ig n o f t h e in d u s t r y ’s c o m m it m e n t a s t h e U K c o n t in u e s t o m a k e p r o g r e s s in d e liv e r in g it s c a r b o n t a r g e t s . In 2015, these emissions made up less than 3 per cent of the UK’s overall emissions. In 1996, UK upstream GHG emissions peaked at 28.3 million tonnes CO2 e q u i v a l e n t a n d h a v e d e c l i n e d s t e a d i l y s i n c e 2000. T h i s i s d u e t o t h e f a l l i n o i l a n d g a s p r o d u c t i o n ; i m p r o v e d m a n a g e m e n t o f o p e r a t i o n s ; l o w e r e m i s s i o n s from new fields with more efficient technology; tighter regulations; and the decommissioning of older, more e m is s io n - in t e n s iv e p la t f o r m s . P a r t ic ip a t io n in t h e E U E m is s io n s T r a d in g S c h e m e h a s a ls o h e lp e d p r o v id e a framework for emissions reduction. Oil and Gas Authority (OGA) data show that industry initiatives have helped production efficiency increase from 60 per cent in 2012 to an average of 73 per cent in 2016, while data from t h e U K E n v ir o n m e n t a l E m is s io n s M o n it o r in g S y s t e m illu s t r a t e s t h a t t h e c a r b o n in t e n s it y o f o f f s h o r e in s t a lla t io n s has fallen since 2013. In 2015, despite an increase in production, this downward trend continued with a carbon emission intensity of 22,000 tonnes per million barrels of oil equivalent (boe)5. The industry has implemented several initiatives aligned with reducing emissions, including: • I n n o v a t i v e d e s i g n c h o i c e s f o r n e w i n s t a l l a t i o n s a n d f ac i l i t i e s t h a t m i n i m i s e G H G e m i s s i o n s • M o n it o r in g a n d r e p o r t in g o f e n e r g y u s a g e a n d G H G e m is s io n s • Reducing system leakages (e.g. from flare stack) • U p g r a d in g a n d a lt e r in g e q u ip m e n t t o m a x im is e o p e r a t io n a l a n d e n e r g y e f f ic ie n c y • Proposed funding for the Oil & Gas Technology Centre (OGTC) to research, develop and deploy new lo w - c a r b o n t e c h n o lo g ie s

5

14

O i l & G a s U K ’ s Environment Report provides more information on atmospheric emissions from the industry. The publication is available to download at www.oilandgasuk.co.uk/environmentreport

3. 3 T o t a l E m p l o y m e n t

1

P e o p le a r e v it a l t o t h e in d u s t r y ’s s u c c e s s a n d w ill s h a p e it s f u t u r e . M a in t a in in g a d iv e r s e r a n g e o f h ig h ly s k ille d e m p lo y e e s is c r it ic a l. It is im p o r t a n t f o r t h e e c o n o m y a n d t h e in d u s t r y it s e lf t h a t k e y o il a n d g a s s u p p ly c h a in e x p e r t is e a n c h o r e d a c r o s s t h e U K is n o t lo s t a s e m p lo y m e n t c o n t r a c t s d u r in g t h e c u r r e n t d o w n t u r n .

2

Latest estimates show that the oil and gas sector continues to support over 300,000 jobs in the UK through direct e m p l o y m e n t 6, indirect employment7 and jobs that are induced8 b y t h e s e c t o r ’ s w i d e r e c o n o m i c c o n t r i b u t i o n . While hundreds of thousands of jobs across the UK are still supported by the sector, the latest estimate represents over 13,000 fewer jobs than were supported in 20169 and 160,000 fewer than the peak of over 460,000 jobs in 2014. However, over the last 12 months, the pace of contraction has slowed significantly to just 4.2 per cent, compared with annual contractions of 19.4 per cent and 15.6 per cent in 2015 and 2016, respectively.

4

Figure 6: Employment Supported by the UK Offshore Oil and Gas Industry

D ir e c t In d ir e c t In d u c e d T o ta l

2013 36,600 198,100 206,200 440,900

2014 41,300 206,100 216,500 463,900

2015 37,300 163,100 173,400 373,800

2016 29,500 150,600 135,300 315,400

3

2017 28,300 141,900 132,000 302,200

5

6

500,000 450,000

Direct

Indirect

Induced

Total

7

Number of Jobs Supported

400,000 350,000 300,000

8

250,000 200,000

9

150,000 100,000 50,000

10

0 2013

2014

2015

2016

2017

11

Source: Experian

6 7

8 9

Those employed by companies operating in the extraction of oil and gas and associated services. Employment as a result of supply chain effects caused by oil and gas sector activity. For these companies, extraction of o i l a n d g a s an d as s o c i at e d s e r v i c e s w i l l b e o n e p a r t o f a w i d e r b u s i n e s s . Employment supported by the redistribution of income from the oil and gas sector. The 2016 employment estimate has been revised down from 330,400 in the Economic Report 2016 to 315,400 as new expenditure estimates and revised government statistics have become available. 15

E C O N O M I C R E P O R T 2017

Although some companies are still reducing headcount, particularly as supply chain companies continue to cope with low activity levels and a lack of future projects, the slowdown in employment contraction suggests that the la r g e s t r e d u c t io n s t o t h e w o r k f o r c e m a y n o w b e b e h in d u s . T h e r e a s o n s f o r t h e c h a n g in g s iz e o f t h e w o r k f o r c e have also evolved. During 2015 and 2016, the industry was focused on lowering headcount as a way of quickly reducing costs. However, in 2017, changes appear to be more transformational aimed at creating a sustainable workforce for the long-term. For example, there are more instances of workforce contraction due to synergies made through mergers and acquisitions (M&A) or due to efficiencies unlocked within businesses (see section 6). Looking ahead, the level of activity on the UKCS and the ability of UK-based businesses to win contracts overseas will largely determine the number of jobs supported by the sector. Direct jobs, most closely linked to operating expenditure, are likely to be more stable in the near-term. This is in part thanks to recent efficiency improvements helping existing facilities extend their economic limit and continue operations for longer. Indirect jobs, more closely linked to capital investment, have a less certain outlook as they are reliant on new project sanctions. Induced jobs a r e a b y - p r o d u c t o f s p e n d i n g ac r o s s a l l a r e a s o f t h e b u s i n e s s a n d t h e a s s o c i a t e d w e a l t h b e i n g r e d i s t r i b u t e d ac r o s s t h e d o m e s t ic e c o n o m y . As the industry continues to face challenges in a tough economic climate, the importance of positive and proactive workforce engagement to help deliver a sustainable long-term future becomes ever greater, on and offshore. A compelling and clearly articulated vision of the future has been formed (see section 5) that can help to illustrate t h e o p p o r t u n it ie s t h a t in d u s t r y is w o r k in g t o w a r d s .

16

3. 4

R e g io n a l C e n t r e s o f E x c e lle n c e

1

T h e U K s u p p l y c h a i n e n c o m p a s s e s a w i d e r a n g e o f e x p e r t i s e ac r o s s t h e w h o l e c o u n t r y t h a t s e r v i c e s o i l a n d g a s ac t i v i t i e s f r o m e x p l o r a t i o n t h r o u g h t o d e c o m m i s s i o n i n g . T h e d i v e r s e s e t o f s k i l l s a n d e x p e r i e n c e n o t o n l y e n a b l e s the UK’s domestic activities, but also form global centres of excellence that export goods and services to other b a s in s a r o u n d t h e w o r ld a s w e ll a s o t h e r in d u s t r ie s . F r o m t h e d e s i g n a n d m a n u f ac t u r e o f s p e c i a l i s t s u b s e a e q u i p m e n t f o r n e w d e v e l o p m e n t s t o t h e e n g i n e e r i n g expertise required to prepare a platform for removal, regional areas of excellence have evolved and developed r i g h t ac r o s s t h e U K o v e r t h e 50 y e a r s s i n c e g a s w a s f i r s t d i s c o v e r e d o f f t h e c o a s t o f E a s t A n g l i a . T w o c a s e s t u d i e s that follow (see overleaf) demonstrate the regional spread of the domestic supply chain. These are diverse multi-billion-pound projects – one a brownfield development and another a decommissioning programme – that have relied heavily on the UK supply chain for the highest quality goods and services, ensuring safe delivery. Oil & Gas UK estimates that, in 2016, every £1 million of expenditure by the oil and gas industry sustained around nine indirect jobs and a further eight induced jobs across the UK economy. Figure 7: UK Map of Companies Involved in Oil and Gas-Related Activity

2

3

4

5

  6

7

8

9

10

11

Source: Companies House

17

E C O N O M I C R E P O R T 2017

Supply Chain for the Quad 204 Project After 15 years of operating in harsh conditions and producing nearly 400 million boe, the FPSO (floating, production, storage and offloading vessel) servicing the Schiehallion and Loyal fields, 175 kilometres west of Shetland, had to b e r e p l ac e d t o m a i n t a i n p r o d u c t i o n f r o m t h e f i e l d s . T h e r e d e v e l o p m e n t w a s o n e o f t h e m o s t c o m p l e x e n g i n e e r i n g c h a lle n g e s u n d e r t a k e n b y B P a n d it s p a r t n e r s a n d h a s in v o lv e d c o n s t r u c t in g a n d in s t a llin g a p u r p o s e - b u ilt F P S O – the Glen Lyon; a complete upgrade of the subsea infrastructure; and the start of a major drilling campaign. The project is expected to unlock a further estimated 450 million boe, extending the life of the fields beyond 2035. O v e r £ 2 b i l l i o n o f c o n t r ac t s w e r e a w a r d e d t o c o m p a n i e s ac r o s s t h e U K . T h e s u p p l y c h a i n c a p a b i l i t i e s r e q u i r e d t o design and manufacture the specialist equipment associated with the Quad 204 project, as well as the engineering expertise required for the subsea control system and hook-up and commissioning, are well-established and highly c o m p e t i t i v e i n t h e U K . F i g u r e 8 d e p i c t s t h e l o c a t i o n s o f Q u a d 204 U K c o n t r ac t s w i t h a v a l u e o f o v e r £ 1 m i l l i o n e ac h . Some 13 of these contracts were over £10 million in value, more than half of which were awarded to companies w i t h i n t h e U K b u t b a s e d o u t s i d e o f A b e r d e e n . R o s y t h - b a s e d B a b c o c k f a b r i c a t e d 73 s u b s e a s t r u c t u r e s f o r t h e project – one of the largest subsea fabrication orders placed in the UK in 50 years. Other key contracts were a w a r d e d t o A b e r d e e n - b a s e d T e c h n ip f o r t h e s u p p ly a n d in s t a lla t io n o f f le x ib le r is e r s ; t h e O n e S u b s e a f a c ilit y in L e e d s f o r s u b s e a t r e e s ; a n d B r o m b o r o u g h a n d K n a p h ill b a s e d A F G lo b a l f o r t h e d iv e r le s s p ip e lin e c o n n e c t io n s y s t e m a n d t o o lin g . In addition to these larger contracts, the UK supply chain also provided expertise in procurement, logistics, training and assurance, as well as a variety of specialist engineering support offshore. While many of these contracts were awarded in the Aberdeen region, injecting capital into the city and its surrounding areas, the supply chain was i n v o l v e d r i g h t ac r o s s t h e c o u n t r y . C o n t r ac t o r s f r o m I n v e r n e s s t o L o n d o n w e r e e n g a g e d a n d t h e e x p e r i e n c e g a i n e d from complex projects such as this allows lessons to be exported globally.

18

Figure 8: Map of the Larger UK Contracts Awarded for the Quad 204 Project

1

2

3

4

5

6

7

8

9

10

N 0

45

90

180 Miles

Legend Contract value (£m) < 2 2. 1 - 5 5. 1 - 10

10. 1 - 20 Sector 20. 1 - 50 > 50

11

P rocurement and A ssurance Serv ices C atering / F acility M anag ement

R O V Support

Eng ineering Support Serv ices

R ecy cling and Disposal Serv ices

Eq uipment Desig n, Eng ineering & M anufacture

Subsea/ Topsides C ontrol Sy stem

L og istics

Training

Source: BP, CDA

19

E C O N O M I C R E P O R T 2017

Brent Decommissioning Project – the Role of the Supply Chain After 40 years of operations, the Brent Field, north-east of the Shetland Islands, is reaching the final stage of its life cycle. Since it was discovered in 1971, the Brent Field operations have produced over three billion boe, contributed more than £20 billion in government tax revenue (in today’s money), and created and sustained thousands of jobs. At its peak in 1982, the Brent Field was producing more than 500,000 boe per day (boepd), e q u iv a le n t t o t h e a n n u a l e n e r g y n e e d s o f a r o u n d h a lf o f a ll U K h o m e s a t t h e t im e . The Brent Field has four large production platforms – three concrete gravity structures (Bravo, Charlie and Delta) and one steel jacket (Alpha). Brent Delta ceased production in 2011, and Brent Alpha and Brent Bravo in 2014. B r e n t C h a r lie is e x p e c t e d t o c e a s e p r o d u c t io n w it h in t h e n e x t f e w y e a r s . Planning for decommissioning the field started in 2006 and Brent decommissioning is an iconic, multi-billionpound project. It is one of the largest decommissioning projects to take place on the UKCS due to the size and complexity of the facilities and inter-related infrastructure, its age, remote location, and the harsh environment of the North Sea. Shell submitted its draft Decommissioning Programme to the Department for Business, Energy & Industrial Strategy (BEIS) in February 2017. A 60-day public consultation commenced on 8 February 2017 and e n d e d o n 10 A p r i l 2017. The Brent Field is a 50-50 joint venture between Shell and Esso, with Shell as operator, and they have invested billions of pounds in Brent infrastructure, including a £1.2 billion redevelopment project in the 1990s that significantly extended the lifespan of the field. Throughout the Brent Field’s history, tens of thousands of jobs have been created for Brent operations, many of them highly skilled, and there have been huge benefits to local c o m p a n ie s t h r o u g h t h e s ig n if ic a n t s u p p ly c h a in s e r v ic in g B r e n t . Currently, around 1,000 people onshore and offshore are employed on the Brent operations and the decommissioning project. The Brent decommissioning project is working with over 100 north east of Scotland companies in a wide range of capacities and disciplines. Additionally, work is being conducted by Able UK Limited in Teesside, north east England, with some study work carried out in the Netherlands by the Allseas Group. The U K d o e s n o t h a v e a h e a v y - lif t v e s s e l c a p a b ilit y c o m p a r a b le t o t h a t o f A lls e a s ’ P io n e e r in g S p ir it . In t e r m s o f o v e r a ll project spend to 2025, it is currently anticipated to be around 85 per cent on UK local content. Shell has been preparing for, and conducting, an extensive range of engineering decommissioning activities including: plugging and making safe the 154 wells across the Brent Field; strengthening the underdecks; installing lif t p o in t s a n d c u t t in g t h e le g s a n d s e c u r in g w it h c la m p s a h e a d o f r e m o v a l t o s h o r e a n d r e c y c lin g o f t h e f o u r platform topsides; recovering oil and gas debris across the Brent Field and removing the oil – known as ‘attic oil’ – t r a p p e d a t t h e t o p o f s o m e o f t h e s u b s e a s t o r a g e c e lls ; a n d c le a n in g a n d f lu s h in g o f p ip e lin e s in p r e p a r a t io n o f s t a b ilis a t io n o r r e m o v a l. Well plugging and abandonment (P&A) is one of the key activities in decommissioning, representing close to half of the total spend on a typical project. Since 2016, 32 different contracts have been involved in well P&A activity on the Brent Field. Seventy per cent of these contracts are with Aberdeen-based firms, w i t h t h e r e m a i n d e r s p r e a d ac r o s s t h e r e s t o f t h e U K . W e l l P & A h a s a l r e a d y b e e n c o m p l e t e d o n D e l t a a n d B ra v o . Other services provided by the UK supply chain have included: environmental impact assessments and preparatory studies in support of the decommissioning programme; stakeholder engagement, verification and a s s u r a n c e s e r v ic e s ; in n o v a t iv e t e c h n ic a l s o lu t io n s t o s a m p le t h e s t o r a g e c e lls o n t h e t h r e e c o n c r e t e g r a v it y b a s e structures; and site remediation. The Brent project demonstrates that the skill set exists for these activities across th e U K . 20

The topside on the Brent Delta platform, weighing 24,200 tonnes, was successfully removed in a single lift by A l l s e a s ’ s i n g l e l i f t v e s s e l P i o n e e r i n g S p i r i t a n d t a k e n t o A b l e ’ s y a r d o n 2 M a y 2017. D i s m a n t l i n g a n d r e c y c l i n g D e l t a ’ s topside will sustain around 50 local jobs, and Able has also created three new apprenticeships. It is estimated that o v e r 97 p e r c e n t o f t h e t o p s i d e s w i l l b e r e c y c l e d . Shell is committed to supporting the development of the emerging decommissioning sector. As demand increases, there will be further opportunities for the UK supply chain to capitalise by developing key skills, capability and capacity to service the local markets, and to export this expertise internationally.

1

2

3

Of the project spend since 2016, Figure 9 shows the spread of work contracted to companies based in the UK. Figure 9: Map of UK Contracts Awarded for the Brent Decommissioning Project

4

5

6

7

8

9

10 N 0

45

90

180 Miles

11

S ec t o r O p er a t o r P r o j ec t Ma n a g em en t

R ec y c lin g a n d D isp o sa l S er v ic es

P la t f o r m

S it e R em ed ia t io n W o r k

R em o v a l A c t iv it ies

P o st C o P F a c ilit y R u n n in g a n d P r ep a r a t io n f o r R em o v a l

W ells P & A

Source: Shell, CDA

21

Economic R eport 2017

E C O N O M I C R E P O R T 2017

- F acts and F ig ures

4.

The UK Government forecasts that

T R eport 2017 nomic

and F

of the UK’s energy mix will still come from oil and gas by 2035

The Business Environment

In S u m m a r y

2

3

of this year, although there are some signs of oil price recovery from t h e r e c e n t l o w s o f 2016. T h e a v e r a g e d a t e d B r e n t p r i c e w a s 30 per cent higher over the first half of this year than in the same p e r i o d l The a s t y UK e a r Government . T h e l o n g e r - t e r m o u t l o o k f o The r o i oil l p r and i c e s gas r e m industry a in s supports over of forecasts unpredictable, with that the major uncertainty beingThe the average resilience Brent oil price was supply following the global reduction in investment.

T h e a v e r a g e N B P d a y - a h e a d g a s p r i c e w a s 40 p e r c e n t h i g h e r o v e r t h e / than it was last year, but the price has dropped back first half of 2017 since. Although demand for gas is forecast to continue to rise over the next decade, the pace of growth will not match that of supply in of the UK’sproduction energy mixcosts have fallen rapidly over recent years. a market where will still come from oil higher over the first half and gas by 2035 than B r e x i t b r i n g s a n o t h e r m a c r o - e c o n o m i c u n c e of r t a this i n t in y year i the n t o UK p l a y t the h a t sameopportunities period last year will be considered when investors are assessing on the UKCS. In the short-term, the weakening of Sterling in response to Brexit was positive for many oil and gas companies, particularly p r o d u c e r s w it h a lo c a l c o s t b a s e a n d s u p p ly c h a in c o m p a n ie s w it h a propensity The to export. However, in the long term, areNBP still a wide Thethere average average range ofBrent potential approaches to how the day-ahead UK will leave EU,was each gasthe price oil price was with different implications for the oil and gas industry. Oil & Gas UK, on behalf of its members, has emphasised to government the need to maintain a strong voice in Europe, enable continued frictionless access to markets and labour, and to protect energy trading hand igh the internal er e n e rg y m a rk e t.

3

30%

300,000 jobs

30%

higher over the first half of this year than the same period last year

22

The oil and gas industry supports over The average

Brent oil price was

he last year has seen significant changes to the business e n v ir o n m e n t w it h in w h ic h t h e o il a n d g a s in d u s t r y o p e r a t e s . / issues, most Commodity prices and political and regulatory notably Brexit, have dominated the agenda. Against this backdrop, aimed at driving ig industry ures has pursued efficiency improvements of the UK’s energy mix transformational change. will still come from oil 2035 Volatility in oil and gas markets has continued and overgas theby first six months

2

2/ 3

40

%

over the first half of 2017 than the same sets out aspirations period last year for the industry

The industry could

30%

300,000 jobs

higher over the first half the UK of thisinyear than the same period last year

Every £1 million of industry expenditure The average NBP sustained around day-ahead gas price was 17 jobs across the UK economy last year

40 hig

he

%

r

over the first half of 2017 than the same sets out aspirations period last year for the industry

The cost of industry trade could increase The industry could by as much as deliver hundreds By the end of 2018 of billions of pounds over in additional revenue to the UK by 2035 million

£500 1/ 3

per annum if the UK reverts to World Trade Organization rules of total production will come from start-ups post-2016

4. 1

O il a n d G a s M a r k e t s

1

Oil Prices and Market Trends O i l m a r k e t s c o n t i n u e t o b e c h a r ac t e r i s e d b y u n c e r t a i n t y i n g l o b a l s u p p l y a n d p r i c e v o l a t i l i t y . D a t e d B r e n t a v e r a g e d $51.6 per barrel (bbl) over the first six months of this year, compared with $39.8/bbl over the same period last year. The price fell back below $45/bbl in June, representing a seven-month low against the backdrop of rising global supply, but it has recovered slightly since. T h e s e p r ic e f lu c t u a t io n s a r e a ll t h e m o r e m a r k e d w h e n c o n s id e r e d a g a in s t a p e r io d o f h ig h p r ic e a n d lo w v o la t ilit y a t t h e s t a r t o f t h is d e c a d e . T h e a v e r a g e d a t e d B r e n t p r ic e c o n s is t e n t ly t r a d e d w it h in t h e r e la t iv e ly t ig h t r a n g e o f $95-125/bbl over a three-year period between quarter one 2011 and quarter three 2014, before prices fell to $63/bbl by the end of 2014. There was a slight increase in price over the first half of 2015 before another decrease saw the average price drop to a trough of $30.75/bbl in January 2016, the lowest since 2003. The progressive r e c o v e r y t h e r e a f t e r h a s b e e n w e lc o m e b u t q u e s t io n m a r k s r e m a in o v e r lo n g - t e r m p r ic e e x p e c t a t io n s a n d in v e s t o r s a r e in c r e a s in g ly o f t h e v ie w t h a t o il p r ic e s w ill b e s t r u c t u r a lly lo w e r o v e r t h e lo n g t e r m w it h m u c h g r e a t e r v o la t ilit y t h a n s e e n in t h e r e c e n t p a s t .

2

3

4

5

Figure 10: Dated Brent Price  

140

6

Dated B rent Nominal P rice ( $ / bbl)

120 100

7

8 0

8

60 40

9

20 0 2010

10 2011

2012

2013

2014

2015

2016

2017 Source: A rg us M edia

11

23

E C O N O M I C R E P O R T 2017

Global oil demand is forecast to be 97.8 million boepd this year, an annual increase of 1.3 million boepd on 2016. Although demand is growing, this is forecast to be the second consecutive year when the rate of growth has s l o w e d 10. This is partly due to the slowing expansion of the Chinese economy, with an annual primary energy d e m a n d g r o w t h r a t e o f 1. 3 p e r c e n t l a s t y e a r c o m p a r e d w i t h a n a v e r a g e o f 5. 3 p e r c e n t p e r a n n u m b e t w e e n 2005- 1511. M o r e e f f i c i e n t e n e r g y u s e i s a l s o a f ac t o r . Figure 11: Global Oil Demand and Supply 9 8

W orld Demand

9 6

W orld Supply

M illion boepd

9 4

9 2 9 0 8 8 8 6 8 4 0 2010

2011

2012

2013

2014

2015

2016 Source: IEA

On the supply side, output cuts declared by OPEC in November last year have taken effect in the first half of this year. Over the first few months of the agreement, compliance rates were very high, with outturn supply from OPEC a n d t h e 11 n o n - O P E C c o u n t r i e s l o w e r t h a n w h a t w a s a g r e e d . O n 25 M a y 2017 a t t h e 172n d meeting of OPEC, it was formally announced that the 1.8 million boepd cut in output w o u l d b e e x t e n d e d f o r a f u r t h e r n i n e m o n t h s f r o m 1 J u l y 2017 t h r o u g h t o t h e e n d o f M a r c h 2018. T h e n i n e - m o n t h e x t e n s io n w a s a g r e e d s o t h a t t h e e n d o f t h e c u t s w o u ld n o t c o in c id e w it h t h e s e a s o n a l d e c lin e in d e m a n d a t t h e start of 2018. However, the announcement did little to provide an uplift to the market, instead shifting prices f u r t h e r d o w n w a r d s a s m a n y in v e s t o r s c o n c lu d e d t h a t t h e p r o p o s e d c u t s w o u ld n o t b e s u f f ic ie n t a n d c o m p lia n c e r a t e s w o u ld n o t b e h ig h e n o u g h t o d im in is h g lo b a l s t o c k p ile s . T h is s u g g e s t s t h a t it m a y b e m o r e d if f ic u lt t o o v e r c o m e t h e g lo b a l o v e r s u p p ly t h a n p r e v io u s ly a n t ic ip a t e d .

10 11

24

See International Energy Agency (IEA) Oil Market Report at w w w . i e a . o r g / o i l m a r k e t r e p o r t / o m r p u b l i c S e e B P Statistical Review of World Energy at http://on.bp.com/2xaD2v8

Over the short term, supply will continue to dominate price expectations. According to Petro-Logistics, output from those committed to the OPEC agreement increased by more than 600,000 boepd in July compared with the first half of 2017, which marks the third consecutive month of reduced compliance as certain members' commitment to the agreement falters. Furthermore, growing volumes from countries such as Nigeria and Libya that are exempt f r o m t h e a g r e e m e n t a r e p u t t in g f u r t h e r p r e s s u r e o n t h e d e a l ’s e f f e c t iv e n e s s . A n y lo n g - t e r m g r o w t h in o il p r ic e w ill not only require a reduction in output from OPEC, but also a gradual reduction of oil inventories, many of which a r e h e ld in N o r t h A m e r ic a . Onshore shale production from the US Lower 48 States more than doubled between 2011 and 2014, driving an increase in total US output to around 12.3 million boepd, which has remained flat over the last two years. Despite the pressures on global oil price, output has increased by over 300,000 boepd during the first half of this year12. T h e r e n e w e d r e s i l i e n c e o f U S p r o d u c t i o n h a s b e e n d r i v e n b y a n i n c r e a s e i n d r i l l i n g ac t i v i t y w i t h t h e r i g c o u n t a t i t s highest in over two years. Alongside further productivity improvements from existing wells, producers have been a b le t o s u c c e s s f u lly in c r e a s e o u t p u t a t lit t le m a r g in a l c o s t . O i l d e m a n d i s e x p e c t e d t o c o n t i n u e t o i n c r e a s e o v e r t h e s e c o n d h a l f o f t h i s y e a r a n d w i l l b e a n i m p o r t a n t f ac t o r in d e t e r m in in g w h e t h e r t h e c o m b in e d e f f o r t s o f O P E C t o r e d u c e t h e w o r ld s u p p ly g lu t a r e e f f e c t iv e . B y t h e e n d o f this year, we could see average annual global demand exceed supply for the first time in more than three years. If signs of a change in demand are not apparent by the third quarter of this year, then there could be calls for further c u t s i n o u t p u t b y O P E C . T h i s v o l a t i l i t y a n d u n c e r t a i n t y i n t h e m a r k e t w i l l l i k e l y p e r s i s t i n t o 2018- 19. Gas Prices and Markets The NBP day-ahead gas price has averaged 43.3 pence/therm (p/th) over the first half of this year, 40 per cent h i g h e r t h a n t h e 30. 89 p / t h i n t h e f i r s t h a l f o f 2016. T h i s i s l a r g e l y d u e t o a s h a r p p r i c e i n c r e a s e o v e r t h e s e c o n d h a lf o f la s t y e a r a n d in t o t h e e a r ly p a r t o f t h is y e a r. A lt h o u g h t h e r o le o f g a s a s a h e a t in g f u e l m e a n s it is c o m m o n for prices to be higher over winter months when demand is higher, the impact was heightened over the winter of 2016- 17 d u e t o a s h o r t a g e o f g a s s t o r a g e a n d u n c e r t a i n t y o v e r l i q u e f i e d n a t u r a l g a s s u p p l y t o t h e U K . T h e p r i c e has fallen quite rapidly since, reaching a daily low of 25 p/th in June this year, almost 60 per cent below the daily high of 60.8 p/th at the start of February, and shows little sign of structural recovery in a market defined by a large g lo b a l o v e r s u p p ly .

1

2

3

4

5

6

7

8

9

10

11

12

Source: US Energy Information Administration 25

E C O N O M I C R E P O R T 2017

Figure 12: Day-Ahead NBP Nominal Gas Price

Day - A h ead NB P Nominal G as P rice ( p/ th )

120

100

8 0

60

40

20

0 2010

2011

2012

2013

2014

2015

2016

2017 Source: IC IS H eren

Rough storage facility, the largest seasonal storage facility in the UK, has experienced ongoing operational problems over the last two years. In June last year, operations were temporarily ceased leading to Centrica Storage announcing this summer that the facility will not be returning to injection and storage operations this year. T h i s i s d u e t o w e l l i n t e g r i t y i s s u e s a n d f ac i l i t i e s r e ac h i n g o r a p p r o ac h i n g t h e e n d o f t h e i r d e s i g n - l i f e . S h o r t - t e r m r e f u r b is h m e n t o r r e b u ild o p t io n s r e q u ir e d t o b r in g d o w n lo n g e r - t e r m r u n n in g c o s t s a r e n o t s e e n a s e c o n o m ic a lly viable and, as a consequence, the remaining 5.2 billion cubic metres (bcm) of cushion gas will be produced and the f i e l d w i l l c e a s e t o b e u s e d a s a s t o r a g e f ac i l i t y 13. Shippers will look to alternative options for storage, with much being delivered via the interconnector from Bacton G a s T e r m i n a l t o Z e e b r u g g e w h e r e i t w i l l b e t r a n s p o r t e d a n d s t o r e d i n o t h e r f ac i l i t i e s i n m a i n l a n d E u r o p e . T h e future without Rough, which accounted for over 70 per cent of total British storage capacity, will put an increased r e l i a n c e o n o t h e r s o u r c e s o f g a s s t o r a g e . N e w i n v e s t m e n t s i n s e a s o n a l g a s s t o r a g e c a p ac i t y a r e n o l o n g e r a s e c o n o m i c a l l y a t t r ac t i v e a s t h e s w i n g b e t w e e n s u m m e r a n d w i n t e r g a s d e m a n d h a s d i m i n i s h e d o v e r r e c e n t y e a r s . T h e a n n o u n c e m e n t t h a t R o u g h w ill p e r m a n e n t ly c e a s e s t o r a g e o p e r a t io n s c o n t r ib u t e d t o t h e g a s p r ic e r e b o u n d in g b ac k i n t o t h e m i d - t h i r t i e s r a n g e a f t e r d r o p p i n g t o a n a n n u a l l o w o f 25p / t h a t t h e s t a r t o f J u n e . T h e a v a i l a b i l i t y o f U K g a s s t o r a g e c a p ac i t y w i l l b e a k e y f ac t o r i n d e t e r m i n i n g h o w t h e m a r k e t d e v e l o p s o v e r t h e s e c o n d h a l f o f t h e year, alongside more traditional factors such as regional and global supply and winter temperatures.

13

26

See www.centrica.com/news/cessation-storage-operations-rough

4. 2 I m p a c t o f B r e x i t

1

Following the UK’s decision to leave the European Union (EU) last year, the UK Government stated its intention to materially change the country’s relationship with the EU, as outlined by Prime Minister Theresa May’s Lancaster H o u s e s p e e c h i n J a n u a r y 2017 a n d t h e g o v e r n m e n t ’ s s u b s e q u e n t White Paper14. T h e g o v e r n m e n t h a s s t a t e d i t s intention to end the free movement of people, the UK’s membership of the Single Market and Customs Union, and oversight of the European Court of Justice, returning sovereignty to the UK Parliament. In place of current EU membership, the government would seek a comprehensive Free Trade Agreement between the UK and the EU. Although much of the detail regarding the UK’s withdrawal remains unknown, an assessment is offered here on t h e p o t e n t ia l im p a c t o f B r e x it o n t h e U K ’s o il a n d g a s in d u s t r y . Short-Term Impact The initial result of the EU referendum saw significant volatility in financial markets. Forecasters, economists a n d b o o k m a k e r s a lik e a ll p r e d ic t e d t h a t t h e r e s u lt w o u ld b e t o r e m a in in t h e E U . T h e s u r p r is e r e s u lt c r e a t e d u n c e r t a i n t y a r o u n d h o w B r e x i t w o u l d b e i m p l e m e n t e d a n d w h a t t h e i m p ac t w o u l d b e f o r U K b u s i n e s s e s . I n v e s t o r s a r e g e n e r a lly a v e r s e t o u n c e r t a in t y a n d t h e r e f o r e U K b u s in e s s h a s lo o k e d t o t h e g o v e r n m e n t t o r e a s s u r e f in a n c ia l backers, particularly those from overseas, that their investments will not be negatively impacted. Despite this uncertainty, there were some short-term positives for some sectors of UK business. On the morning immediately after the EU referendum result, Sterling fell to its lowest level against the dollar since July 1985, closing at 1.33 $/£15. Without any change to prices, UK exports became more competitive overnight and more a t t r a c t iv e t o fo r e ig n b u y e r s .

2

3

4

5

6

7

8

9

10

11

14 15

T h e U K G o v e r n m e n t White Paper is available to download at http://bit.ly/2wanZEm See Bank of England http://bit.ly/2uKMUuF 27

E C O N O M I C R E P O R T 2017

Figure 13: US Dollar/Sterling Exchange Rate 1.6

23 June 2016 UK votes to leave the EU

17 January 2017 Theresa May's Lancaster House Speech details the plan for Britain, which set out government's priorities when negotiating Brexit

Exchange Rate (US $ to £)

1.5

1.4

8 June 2017 UK's General Election

1.3

1.2 29 March 2017 Article 50 invoked, beginning the withdrawal process from the EU

1.1

1 Jan-16

Mar-16

May-16

Jul-16

Sep-16

Nov-16

Jan-17

Mar-17

May-17 Source: Bank of England

For UK oil and gas producers, there was an additional positive benefit to margins arising from the currency d e p r e c ia t io n . U n h e d g e d o il p r o d u c e r s w it h a lo c a l c o s t b a s e s e llin g p r o d u c t in t o a d o lla r - d e n o m in a t e d g lo b a l market benefitted most from the weaker pound, in some instances increasing revenues by more than 10 per cent w it h S t e r lin g - d e n o m in a t e d c o s t s r e m a in in g u n c h a n g e d . In the 12 months following the Brexit result, UK stock indices performed very well. This is in part because UK-listed companies have income in foreign currency, but also indicates that investors believed the short-term benefit of more competitive exports sufficiently outweighed the longer-term uncertainty to create a bull market. However, both the FTSE and AIM all-share indices have fallen back since the General Election result on 8 June, reinforcing t h e n e e d f o r t h e g o v e r n m e n t t o f in a lis e p o lic y p o s it io n s a n d o f f e r g r e a t e r c la r it y o n p o t e n t ia l o u t c o m e s .

28

Figure 14: UK Stock Indices Performance 140

F TSE A IM

U K 50

17 January 2017 Th eresa M ay ' s L ancaster H ouse Speech details th e plan for B ritain, w h ich set out g ov ernment' s priorities w h en neg oti ting B rexit

F TSE 250

U K Stock Indices

130

1

F TSE 100 23 June 2016 U K v otes to leav e th e EU

2

120

3 110 8 June 2017 U K ' s G eneral Election

100

29 March 2017 A rticle 50 inv ok ed, beg inning th e w ith draw al process from th e EU

9 0

0 Jan- 16

4

M ar- 16

M ay - 16

Jul- 16

Sep- 16

Nov - 16

Jan- 17

M ar- 17

5

M ay - 17

6

Source: G oog le F inance

Long-Term Impact T h e l o n g - t e r m i m p ac t o f B r e x i t r e m a i n s d i f f i c u l t t o a s s e s s w h i l e t h e r e a r e s t i l l a w i d e r a n g e o f a p p r o ac h e s t o h o w the UK will leave the EU, each with different implications for the oil and gas industry. However, Oil & Gas UK has lo o k e d a t t h e v a lu e o f g o o d s a n d s e r v ic e s t r a d e d w it h t h e r e s t o f t h e w o r ld a n d h o w t h e c o s t o f t h a t t r a d e m a y change under certain scenarios. This analysis encompasses the whole oil and gas sector in the UK, both upstream a n d d o w n stre a m .

7

8

The primary objective of a tariff, where one is applied, is to protect a domestic industry. However, trade in natural resources such as oil and gas, where a domestic market cannot be created if resource is not abundant, is typically subject to zero or very low tariffs. Tariffs are often applied to refined products given that the refining process can be undertaken locally. Other products, many of which are used throughout the oil and gas supply chain, carry v a r y i n g t a r i f f s a s s h o w n i n F i g u r e 15 b e l o w .

9

Figure 15: EU Most Favoured National Applied Trade Tariffs for Goods Used in the Oil and Gas Supply Chain 10

P ro d u c t G ro u p C r u d e O il N a tu ra l G a s P e t r o le u m P r o d u c t s In o r g a n ic C h e m ic a ls O r g a n ic C h e m ic a ls P la s t ic s a n d A r t ic le s t h e r e o f A r t ic le s o f Ir o n a n d S t e e l E l e c t r i c a l M ac h i n e r y a n d E q u i p m e n t

A v e r a g e A d V a lo r e m 0. 00% 0. 00% 3. 00% 4. 50% 4. 30% 6. 00% 1. 70% 2. 80%

D u ty

11

Source: World Trade Organization

29

E C O N O M I C R E P O R T 2017

In 2016, as a member of the EU, approximately £73 billion worth of oil and gas related goods and services were traded between the UK and the rest of the world (£61 billion of goods and £12 billion of services). This equates to a p p r o x i m a t e l y 5 p e r c e n t o f t h e U K ’ s t o t a l t r a d e f o o t p r i n t o f £ 1. 5 t r i l l i o n 16. The £73 billion of traded goods and services can be broken down further, as shown in Figure 16: • £ 52 b i l l i o n o f f u e l t r a d e - £31 billion of imports, £7 billion of which came from the EU - £21 billion of exports, £15 billion of which were exported to the EU • £9 billion of non-fuel trade (supply chain goods) - £3 billion of imports, just under half of which came from the EU - £6 billion of exports, just under half of which were exported to the EU • £ 12 b i l l i o n o f s e r v i c e s - £3 billion of imports, just under half of which came from the EU - £9 billion of exports, around half of which go to the EU This trade, both imports and exports, came at a cost of around £600 million in direct tariff payments, around 40 p e r c e n t o f w h i c h w a s i n c u r r e d b y t h e U K a s a n i m p o r t e r . Figure 16: UK Oil and Gas Industry’s Trade Breakdown 35 Non- EU EU

Trade ( £ B illion - 2016 M oney )

30 25 20 15 10 5 0 Imports

Exports F uel

Imports

Exports

Non- F uel G oods

Imports

Exports

Serv ices Source: EY

16

Office for National Statistics 2015 data are available to download at http://visual.ons.gov.uk/uk-trade-partners

3 0

To assess the impact of leaving the EU, two different Brexit scenarios have been modelled:

1

• Fresh opportunity scenario – whereby the UK negotiates minimal tariffs with the EU and improved tariffs and favourable trade agreements with other non-EU nations. In this scenario, the direct cost of trade falls to around £ 500 m i l l i o n p e r a n n u m .

2

• World Trade Organization (WTO) scenario – whereby the UK is not able to negotiate new trade deals and reverts to WTO rules. In this scenario, the direct cost of trade increases to around £1.1 billion per annum. F i g u r e 17 s h o w s h o w t h e c o s t s o f t r a d e m a y c h a n g e u n d e r t h e t w o d i f f e r e n t B r e x i t s c e n a r i o s c o m p a r e d t o b u s i n e s s as usual, should trading patterns remain unchanged. Figure 17: Annual Direct Tariff Costs Under Different Scenarios for the Whole Oil and Gas Sector

3

4

700 EU

Non- EU

5

Trade C ost ( £ M illion - 2016 M oney )

600 500

6

400 300

7

200 100

8 0 Imports

Exports

B usiness as U sual

Imports W TO

Exports

Imports

Exports

F resh O pportunity

9 Source: EY , O il & G as U K

At around 2 per cent of the total value of trade, even under the WTO Brexit scenario, the direct tariff costs a s s o c ia t e d w it h B r e x it f o r t h e o il a n d g a s in d u s t r y a r e a n u n h e lp f u l a d d it io n a l c o s t o n a n in d u s t r y t h a t c o n t in u e s to be under significant pressure from a sustained global downturn. Non-tariff barriers that may arise post-Brexit, which are far harder to quantify, may be of greater concern to industry and increase the cost of trade further.

10

11

3 1

E C O N O M I C R E P O R T 2017

Potential non-tariff barriers to trade include: • Mobility of labour – Of the 300,000 jobs supported by the industry, more than half are employed either directly by oil and gas companies, or indirectly through the supply chain (see section 3.3 for more detail on industry employment). Around 10 per cent of that workforce comes from outside of the UK, with around half of these n o n - U K w o r k e r s c o m in g f r o m t h e E U a n d m a y b e a f f e c t e d b y a n y c h a n g e s t o im m ig r a t io n p o lic y p o s t - B r e x it . A r o u n d 70 p e r c e n t o f t h e s e w o r k e r s f r o m w i t h i n t h e E U a r e h i g h l y s k i l l e d a n d h o l d m a n a g e r i a l o r t e c h n i c a l r o l e s in t h e in d u s t r y . A n y b a r r ie r s t h a t p r e v e n t t h e ir f r e e m o v e m e n t c o u ld n o t o n ly in c r e a s e a s s o c ia t e d e m p lo y m e n t costs and compliance administration, but also potentially undermine key projects and operations. • Customs processes – W i t h t h e U K n o l o n g e r a n E U m e m b e r s t a t e a n d u n l i k e l y t o r e m a i n p a r t o f t h e C u s t o m s Union, UK goods could face customs checks at EU borders. Any delays or added bureaucracy in sourcing goods o r s e r v ic e s w o u ld b e u n w e lc o m e a n d c o u ld e v e n r e s u lt in u n p la n n e d o p e r a t io n a l s h u t d o w n s in e x t r e m e c a s e s . It c o u ld in c r e a s e t h e p h y s ic a l c o s t s o f t r a d e a n d m a y u lt im a t e ly in f lu e n c e c o m p a n ie s t o s o u r c e g o o d s a n d s e r v ic e s f r o m o t h e r n a t io n s . • Regulation and technical standards – The Great Repeal Bill will look to transpose all existing EU law applying to the UK into UK law directly (where practical). However, the future relationship between the UK and the EU will g o v e r n t h e e x t e n t t o w h ic h t h e U K c a n a m e n d o r r e p e a l a n y la w s o r r e g u la t io n a n d m a y r e s u lt in t h e U K d e v ia t in g f r o m t h e E U . T h is c o u ld in c r e a s e t h e c o m p lia n c e b u r d e n f o r U K b u s in e s s e s if o v e r s e a s t r a d in g p a r t n e r s in s is t o n additional procedures such as certification, testing and inspection. Oil & Gas UK has emphasised the need for predictability for the industry, particularly at a time when commodity p r ic e s a r e v o la t ile . W e h a v e r e c o m m e n d e d t h a t t h e U K G o v e r n m e n t p r io r it is e s t h e f o llo w in g d u r in g B r e x it negotiations: • M a i n t a i n f r i c t i o n l e s s ac c e s s t o m a r k e t s a n d l a b o u r • M a in t a in a s t r o n g v o ic e in E u r o p e f o r t h is in d u s t r y • P r o t e c t e n e r g y t r a d in g a n d t h e in t e r n a l e n e r g y m a r k e t T h e g o v e r n m e n t c a n h e lp t o d r iv e g r o w t h in t h e in d u s t r y a n d B r e x it p r o v id e s a n o p p o r t u n it y t o p r o m o t e t h e s e c t o r in t e r n a t io n a lly . O il & G a s U K u r g e s p o lic y m a k e r s t o m a n a g e B r e x it in a w a y t h a t s u p p o r t s t h e in d u s t r y a n d it s lo n g - t e r m g o a ls t o m a x im is e e c o n o m ic r e c o v e r y o f in d ig e n o u s o il a n d g a s r e s o u r c e s .

3 2

nomic R eport 2017 and F ig ures 5.

of the UK’s energy mix will still come from oil and gas by 2035

Creating a Long-Term Future The UK Government forecasts that

I

2/ 3

Brent oil price was

In S u m m a r y

2

The oil and gas industry supports over The average

n a rapidly changing energy landscape, the UK oil and gas industry / n e e d s t o a d a p t t o m a x im is e it s v a lu e w it h in t h e e n e r g y m ix o v e r t h e l o n g - t e r m . V i s i o n 2035 i s d e s i g n e d t o h e l p t h e s e c t o r f o c u s o n l o n g - t e of r m the g o a UK’s l s t o energy s t a y r e mix le v a n t a n d s u c c e s s f u l. will still come from oil higher over the first half T h e r e m a i and n i n g gas v a l u by e o2035 f t h i s i n d u s t r y w i l l d e p of e n this d l a in r year g ethe l y than o UK n t w the o factors. Firstly, the successful implementation of the industry's same period last year MER UK strategy is critical to maximise potential recovery from the U K ’s o w n n a t u r a l r e s o u r c e s u n d e r p in n e d b y a s t r o n g s u p p ly c h a in . Secondly, the UK oil and gas supply chain must focus on diversifying and deepening its interests in the UKCS while collectively growing its The average NBP The average export potential to capture as much of the global energy market day-ahead gas price was Brent oil price was a s p o s s ib le .

3

30%

300,000 jobs

40

W o r k is n o w o n g o in g t o t r y a n d s e c u r e a S e c t o r D e a l w h e r e b y in d u s t r y and government work together to maximise existing and realise new hig opportunities in the UK offshore oil and gas sector. he r

30%

higher over the first half of this year than the same period last year

%

over the first half of 2017 than the same sets out aspirations period last year for the industry

30%

300,000 jobs

higher over the first half in the UK of this year than the same period last year

1

Every £1 million of industry expenditure The average NBP sustained day-ahead gas around price was 17 jobs across the UK economy last year

2

40 hig

he

%

3

r

over the first half of 2017 than the same period last year sets out aspirations for the industry

4

5

The cost of industry trade could increase The industry could by as much as deliver hundreds Bybillions the endofofpounds 2018 of over revenue in additional

6

£500

to the UK by 2035 million

7

1/ 3

per annum if the UK reverts to World Trade Organization rules

8

of total production will come from start-ups post-2016 9

The industry could deliver hundreds By the end of 2018 of billions of pounds over in additional revenue to the UK by 2035

sets out aspirations for the industry

By the end of 2018

1/ 3 of total production will come from start-ups post-2016

Unit operating cost

Unit operating cost improvements have been greater in the UK than any other basin since 2014 Vision 2035 will require an integrated policy approach between industry and government

oilandg10 a

High profile

11

3 3

E C O N O M I C R E P O R T 2017

5. 1

V i s i o n 2035

It is c r u c ia l t h a t a s m u c h d o m e s t ic e n e r g y d e m a n d a s e c o n o m ic a lly p o s s ib le is m e t t h r o u g h in d ig e n o u s s o u r c e s o f production, provided they are competitive on both cost and against other forms of energy. As well as equipping itself to meet the UK’s forecast demand, the oil and gas industry must also recognise it has a role to play in facilitating a smooth transition to a lower-carbon economy (see section 3.2 for more information). To help achieve this, the UK’s oil and gas industry has developed a vision for the sector out to 2035. Vision 2035 b r i n g s t o g e t h e r t w o s c e n a r i o s t h a t d e p e n d o n e ac h o t h e r a n d c o u l d t o g e t h e r g e n e r a t e h u n d r e d s o f b i l l i o n s o f pounds in additional revenue for the UK economy over the next 20 years: 1) UKCS production scenario (see the blue lines in Figure 18 below) – focuses on delivering an additional three billion boe above the baseline scenario, which projects that around 7.3 billion boe of oil and gas will be p r o d u c e d f r o m 2016- 35. 2) Supply chain scenario (see the red lines in Figure 18 below) – focuses on increasing the total revenue generated by the industry’s supply chain between 2016-35. To unlock this value, the supply chain must anchor and grow c u r r e n t c a p a b ilit y a n d e x p e r t is e in t h e U K t o in c r e a s e it s d o m e s t ic r e v e n u e s w h ile s im u lt a n e o u s ly g r o w in g a n e x p o r t b u s in e s s t o b e c o m e a g lo b a l le a d e r in m a t u r e b a s in m a n a g e m e n t . A c h ie v in g t h e d e s ir e d s c a le o f s u p p ly c h a in g r o w t h w ill s e e t h e U K d o u b le it s s h a r e o f t h e g lo b a l o il a n d g a s m a r k e t f o r g o o d s a n d s e r v ic e s f r o m 3. 7 p e r c e n t i n 2016 t o 7. 4 p e r c e n t b y 2035.

Figure 18: Vision 2035 40

R ev enue/ Turnov er ( £ B illion - 2016 M oney )

35 30 25 20 15 B aseline Supply C h ain Turnov er from Exports

10

V ision Supply C h ain Turnov er from Exports

5

B aseline G ross P roduction R ev enue V ision G ross P roduction R ev enue

2035

2034

2033

2032

2031

2030

2029

2028

2027

2026

2025

2024

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

0

Source: O G A

3 4

T h e p u r p o s e o f t h e v i s i o n i s n o t t o f o r e c a s t p e r f o r m a n c e o f t h e i n d u s t r y o u t t o 2035 b u t t o s e t a s p i r a t i o n s t h a t the industry should seek to pursue if it is to maximise its economic value. As such, the baseline scenarios should not be interpreted as ‘no further investment’ scenarios, but more as challenging ‘status quo’ scenarios whereby the industry continues to invest but does not make any fundamental changes in the way it operates. Likewise, the vision scenarios illustrated in Figure 18 are not simply a depiction of a high investment case – they will require f u n d a m e n t a l t r a n s f o r m a t i o n i n d e l i v e r y m o d e l s i f t h e y a r e t o b e ac h i e v e d . T h e s u c c e s s f u l d e liv e r y o f t h e s e s c e n a r io s r e q u ir e s p r o g r e s s iv e a n d c o n t in u o u s im p r o v e m e n t in t h e competitiveness of the UKCS which must be sustained over time (see section 6). There are two areas in which t h e U K is c o m p e t in g . T h e U K C S a n d it s s u p p ly c h a in a r e c o m p e t in g a g a in s t o t h e r o il a n d g a s p r o d u c in g r e g io n s where the differentiating factors include productivity, cost, gross and net margin, and materiality of fields under d e v e lo p m e n t . O il a n d g a s m u s t a ls o r e m a in c o m p e t it iv e a g a in s t c o m p e t in g f u e l s o u r c e s w h e r e k e y d if f e r e n t ia t in g factors include affordability, security of supply, environmental sustainability, and storage and transportability to g lo b a l e n e r g y m a r k e t s .

5. 2

D e liv e r in g t h e V is io n

1

2

3

4

5

As well as improving global competitiveness, a clear energy policy; technological advancement; the development o f n e w s k i l l s ac r o s s t h e e n e r g y s e c t o r ; a n d m o r e ac t i v e p r o m o t i o n o f t r a d e a n d e x p o r t s h a v e b e e n i d e n t i f i e d a s catalysts that can drive industry towards the vision (see Figure 19 overleaf).

6

The vision serves to: • Raise awareness – communicate a consistent story that brings the opportunity to life • Generate interest – create broad interest in Vision 2035 by making it relevant to all audiences • Align on outcome – build strong willingness from all stakeholders to get behind Vision 2035 with a lig n e d le a d e r s h ip • Facilitate action – secure commitment to action by demonstrating positive examples

7

8

9

10

11

3 5

E C O N O M I C R E P O R T 2017

Figure 19: The Key Components to Achieve Vision 2035

Global

Competitiveness • Ensure the industry is positioned to capture a large share of an ever-growing g lo b a l e n e r g y m a r k e t • Build competitive fiscal and regulatory regimes to incentivise investment • Continually improve the efficiency of the basin, driving down unit operating costs f u r t h e r w h i l e ensuring industry hubs are better connected through physical and d ig it a l in f r a s t r u c t u r e

Energy Policy • P r o m o t e t h e v it a l r o le t h a t o il a n d g a s m u s t p la y in t h e U K e n e r g y m ix o v e r t h e lo n g t e r m • Ensure that indigenous production meets as much of domestic demand as possible by making the UKCS the most efficient basin in the world • Continue with research and development projects to make oil and gas less emission intensive, satisfying the need for lower-carbon fuels as part of the energy mix

Trade and Exports

• Maintain frictionless access to markets to enable global trading of oil and gas related products, even as the UK leaves the EU • Develop the export capabilities of the UK’s world-class supply chain so it continues beyond final economic recovery from the UKCS • Plan a government programme that promotes the capabilities of the oil and gas supply chain, including support for small and medium sized enterprises

Skills • Increase the number of trained engineers and encourage greater take-up of science, technology, engineering and mathematics (STEM) subjects, particularly among girls • U n d e r t a k e a m a p p in g o f f u t u r e s k ills d e m a n d s t h a t a c c o u n t s f o r t e c h n ic a l a d v a n c e s • R e c o g n is e t h e im p o r t a n c e o f w o r k f o r c e e n g a g e m e n t t o t h e d e v e lo p m e n t a n d retention of skills

Technology • Anchor capability and expertise in the UK by delivering sustained investment in t e c h n o lo g y • C o m m it t o f u r t h e r f u n d in g f o r t h e O il a n d G a s T e c h n o lo g y C e n t r e t o s u p p o r t commercialisation of new technology • E n s u r e t h e U K c a n a c t a s a t e s t - b e d f o r t h e d e v e lo p m e n t a n d e a r ly d e p lo y m e n t o f n e w t e c h n o lo g y

3 6

Delivering in these areas to achieve Vision 2035 will require an integrated policy approach. It must unite MER UK, industry’s drive to maximise recovery from the UKCS, with the UK Government’s Industrial Strategy, which seeks t o m a k e t h e m o s t o f t h e o p p o r t u n it ie s p r e s e n t e d t o t h e U K ’s w o r ld - c la s s s u p p ly c h a in .

1

Figure 20: Driving the Vision

2

MER UK

“A significant producer in 2035”

R ea l i s e t h e f u l l h y dr o c a r b o n p o t ent i a l o f t h e U K C S

Industrial Strategy

“A global energy industry, anchored in the UK, powering the nation and exporting to the world”

E x p a nd t h e r a nge a nd m a r k et c o v er a ge, do u b l e ex p o r t s

=

3

4

5

“Sustaining a relevant and successful industry at the heart of the UK’s economy”

6

I nc r ea s i ng th ep r iz e b y h a lf o v er t h e nex t 2 0 y ea r s

7

8

I t i s v i t a l f o r t h e f u t u r e o f t h e o i l a n d g a s i n d u s t r y t h a t t h e g o v e r n m e n t p l a y s a n ac t i v e r o l e i n s u p p o r t i n g t h e ac t i o n being taken by industry to safeguard its future. In January 2017, the UK Government released an Industrial Strategy Green Paper17 w i t h a n e x p l i c i t a i m “ t o i m p r o v e l i v i n g s t a n d a r d s a n d e c o n o m i c g r o w t h b y i n c r e a s i n g p r o d u c t i v i t y and driving growth across the whole country”. Government invited responses from industry and, after extensive consultation with members, associations and other trade bodies, Oil & Gas UK submitted a response to the public c o n s u l t a t i o n i n A p r i l 2017. T h e r e s p o n s e o u t lin e s t h e v it a l e c o n o m ic c o n t r ib u t io n t h a t t h e o il a n d g a s in d u s t r y c o n t in u e s t o m a k e t o t h e UK economy and its security of energy supply, as well as setting out Vision 2035 and the significant opportunity t h a t c o u ld b e r e a lis e d if t h is s e c t o r is in c lu d e d a s a k e y e le m e n t o f t h e In d u s t r ia l S t r a t e g y . P a r t o f O il & G a s U K ’s submission proposes that the Industrial Strategy should incorporate specific recommendations, in alignment with MER UK. Oil & Gas UK has also submitted a response to the Scottish Government's Energy Strategy consultation. It is im p o r t a n t t h a t b o t h g o v e r n m e n t s w o r k t o g e t h e r t o e n s u r e t h e ir p o lic ie s a r e c o m p le m e n t a r y .

17

The paper is available to download at http://bit.ly/2g198Gt 3 7

9

10

11

E C O N O M I C R E P O R T 2017

W i t h i n t h e Industrial Strategy Green Paper, the government set an open-door challenge to industry to come f o r w a r d w it h p r o p o s a ls t o t r a n s f o r m a n d u p g r a d e t h e ir s e c t o r t h r o u g h t a r g e t e d S e c t o r D e a ls . A n y p o t e n t ia l S e c t o r D e a l w ill h a v e a q u id - p r o - q u o e le m e n t . T h e r e is a n e x p e c t a t io n t h a t t h e s e c t o r p r o p o s e s a n a r e a o f b u s in e s s within which they could take action to transform their strategic prospects and need the government to intervene, where practical, to maximise the chance of success. O il & G a s U K f o r m s p a r t o f a S e c t o r D e a l T a s k F in is h G r o u p t h a t w ill p r e s e n t t h e c a s e o n b e h a lf o f in d u s t r y v ia a submission to government. The other members of the group are: BEIS, Decom North Sea, International Association of Drilling Contractors, East of England Energy Group, NOF Energy, OGTC, Subsea UK, Energy Industries Council a n d O G A .



3 8

of the UK’s energy mix will still come from oil and gas by 2035

6.

30%

he

300,000 jobs

1

The cost of industry trade could increase The byindustry as muchcould as deliver hundreds Bybillions the endofofpounds 2018 of over revenue in additional to the UK by 2035 million

The average NBP day-ahead gas price was

In S u m m a r y

40

%

30%

e r f o r m a n c e i m p r o v e m e n t s h a v e b e e n a c h i e v e d ha ic gr ho s s a r a n g e er of industry key performance indicators (KPIs) over the last 12 months. Production is still rising, driven by continued progress the first half ofso higher over the firstefficiency half in improving production and betterover project execution 2017 than the same of this year than the coming on-stream on time and that start-ups are increasingly within period last year sets out same last costs year (UOCs) are expected budget. Unitperiod operating to aspirations be around for the industry $14/boe this year, making brownfield investments more appealing and helping to extend economic field life. Challenges remain, however, and the industry is in urgent need of fresh capital investment, much of which may fromcould new Thecome industry entrants to the basin. This is true across all areas of the business, from deliver hundreds By the end 2018 exploration and appraisal through to development of new projects of billions ofofpounds over revenue a n d l a t e - l i f e m a n a g e m e n t o f o l d e r a s s e t s . in additional to the UK by 2035 A raft of M&A activity seen over the first half of 2017, worth almost $6 billion in UKCS asset and corporate purchases, is a strong vote of / through confidence in a basin that has shown impressive resilience t h e m a r sets k e t d out o w aspirations n tu rn .

1

r

over the first half of 2017 than the same period last year sets out aspirations for the industry

higher over the first half in the UK of this year than the same period last year

UK Continental Shelf Performance and Opportunity The average Brent oil price was

P

0%

hig

3

for the industry of total production It helps that the UKCS is a more attractive place to invest for the will come from start-ups long term than it had been previously, with UOC improvements post-2016 g r e a t e r t h a n a n y o t h e r b a s in in t h e w o r ld . F is c a l c h a n g e h a s a ls o been positive with the highest tax rate falling from 81 per cent to 40 per cent over the last three Budgets. The UK now has a fiscal regime that ranks among the top quartile in terms of pre-tax value r e t u r n i n By g t o the i n v end e s t o of r s . 2018 T h i s b a c k d r o p p r e s e n t Unit s t h e operating U K w i t h a cost n improvements have over immense opportunity to flourish over the next few years, been greater in the UK maximising its contribution to the UK economy. than any other basin since 2014

2

£500

3

1/ 3

per annum if the UK reverts to World Trade Organization rules

4

of total production will come from start-ups post-2016

Unit operating cost improvements have been greater in the UK than any other basin since 2014 Vision 2035 will require an integrated policy approach between industry and government

5

oilandg6 a 7

8

9

High profile

oilandg asuk /economicrepor

M

1/ 3

of total production will come from start-ups post-2016

&

A

10

11

deals total nearly $6 billion combined over the first half of the year

oilandg asuk /economicreport

3 9

E C O N O M I C R E P O R T 2017

6. 1

K e y P e r f o r m a n c e In d ic a t o r s

T h e U K C S h a s m a d e s i g n i f i c a n t p r o g r e s s i n r e c e n t y e a r s ac r o s s a r a n g e o f k e y m e t r i c s . T h i s i s u n d e r p i n n e d b y n e w b u s in e s s m o d e ls t o m a x im is e v a lu e f r o m b o t h la t e - lif e o p e r a t io n s a n d n e w f ie ld s t a r t - u p s . E x a m p l e s i n c l u d e m o v i n g t o w a r d s i n c e n t i v e - b a s e d c o n t r ac t s r a t h e r t h a n c o s t - p l u s a n d a d o p t i n g asset-focused business structures rather than traditional function-led models. Challenges remain, however, and the industry is in urgent need of fresh capital investment across all areas, from exploration and appraisal through to development of new projects and late-life management of older assets. Figure 21: Industry Key Performance Indicators18 Exploration Wells Spudded

8 00

16

700

14

600

12

500

Production in c r e a s e d t o 630 m i l l i o n b o e in 2016, the h ig h e s t s in c e 2011

400 300 200

Exploration W ell C ount

Total P roduction ( M illion boe)

Production

8

O n l y 14 w e l l s w e re s p u d d e d in 2016, half the n u m b e r re c o rd e d i n 2010

6 4 2

100 0 2013

10

2014

2015

2016

2017

0 2013

2018

2014

2015

2016

2017

Appraisal Wells Spudded

Development Wells Spudded

35

20 15 10

2014

2015

2016

2017

2018 Source: O G A , O il & G as U K

All financials shown in 2016 money.

4 0

100 8 0 60 40 20

5

18

120

Dev elopment W ell C ount

A ppraisal W ell C ount

25

0 2013

E ig h t y - s e v e n d e v e lo p m e n t w e lls w e r e s p u d d e d in 2016, a reduction o f o n e - t h ir d o n 2015

140

O n ly e ig h t a p p r a is a l w e lls w e r e s p u d d e d in 2016, the lowest s i n c e 1971

30

2018 Source: O G A , O il & G as U K

Source: O G A , O il & G as U K

0 2013

2014

2015

2016

2017

2018 Source: O G A , O il & G as U K

Capital Investment 35

16

C apital Expenditure ( £ billion)

12 10 8

6 4

Capital efficiency im p r o v e m e n t s a n d execution of smaller projects have driven th e a v e ra g e c o st o f n e w d e v e lo p m e n t s t o around $13/boe i n 2016

30 U nit Dev elopment C osts ( $ / boe)

C a p it a l e x p e n d it u r e w a s £8.3 billion in 2016, d o w n f r o m a h ig h o f £ 15 b i l l i o n i n 2014

14

25 20

2

15

3

10 5

2

0 2013

1

Unit Development Costs

2014

2015

2016

2017

0 2013

2018

2014

2015

2016

2017

2018 Source: O il & G as U K

Source: O il & G as U K

4

Operating Expenditure Operational e x p e n d it u r e f e ll t o a r o u n d £ 7b illio n in 2016, a 30 per cent reduction s i n c e 2014

12

8

6

4

2

0 2013

Unit operating c o s ts h a v e h a lv e d s in c e 2014, down to $15/boe i n 2016

35 30

U nit O perating C osts ( $ / boe)

O perational Expenditure ( £ billion)

10

5

Unit Operating Costs

25

6

20 15

7

10 5

2014

2015

2016

2017

2018 Source: O il & G as U K

0 2013

2014

2015

2016

2017

2018 Source: O il & G as U K

8

9

10

11

4 1

E C O N O M I C R E P O R T 2017

New Field Start-Ups

New Field Approvals 12

16

New F ield Start U ps

12

Nine new fields, or significant redevelopments, s t a r t e d i n 2016

O n ly t w o n e w fields were approved in 2016, t h e lo w e s t o n re c o rd

10

8

New F ield A pprov als

14

10 8 6

6

4

4

2

2 0 2013

2014

2015

2016

2017

0 2013

2018

2014

2015

2016

2017

Source: O il & G as U K , O G A

Decommissioning Expenditure

Supply Chain Revenue

40

1. 6

35

1. 4 1. 2

D e c o m m is s io n in g is t h e o n ly g r o w in g area of expenditure, w i t h £ 1. 2 b i l l i o n s p e n t i n 2016

0. 8 0. 6 0. 4

30 25 20 15 10 5

0. 2

2014

2015

2016

2017

2018 Source: O il & G as U K

4 2

Supply C h ain R ev enue ( £ billion)

Decommissioning Expenditure ( £ billion)

2 1. 8

0 2013

S u p p ly c h a in r e v e n u e f e ll f r o m £ 41. 3 b i l l i o n i n 2014 t o a r o u n d £ 28 b i l l i o n i n 2016

45

1

2018 Source: O il & G as U K , O G A

0 2013

2014

2015

2016

2017

2018 Source: EY , O il & G as U K

Production Between 2014 and 2016, production on the UKCS increased by 16 per cent – a significant achievement given that t h e b a s i n h a d p r e v i o u s l y s e e n a c o n s i s t e n t d e c l i n e i n p r o d u c t i o n s i n c e 2000. T h e g o o d p e r f o r m a n c e l o o k s s e t t o c o n t in u e w it h p r o d u c t io n a lm o s t 1p e r c e n t h ig h e r o v e r t h e f ir s t h a lf o f t h is y e a r c o m p a r e d w it h t h e s a m e p e r io d la s t y e a r. The improved performance of existing assets has been at the heart of recent impressive output, with UKCS p r o d u c t i o n e f f i c i e n c y 19 r i s i n g t o 73 p e r c e n t i n 2016 f r o m a l o w o f 60 p e r c e n t i n 2012. E v e n t h e t w o - p e r c e n t a g e point increase in production efficiency over the last year is significant, adding around 12 million boe to the basin – the equivalent to one year of production from the eighth largest field in the UK. As well as getting more from the existing asset base, significant new capacity has been added in recent years f o l l o w i n g a w a v e o f f r e s h c a p i t a l b e i n g i n v e s t e d b e t w e e n 2010 a n d 2014. N i n e n e w f i e l d s c o m m e n c e d p r o d u c t i o n in 2016 (Laggan, Tormore, Conwy, Solan, Aviat, Cygnus, Alder, Crathes and Scolty), with a further seven in the first half of this year (Schiehallion Quad 204, Callater, Stella, Shaw, Flyndre, Kraken and Cayley). These 16 developments will contribute over 300,000 boepd in the second half of 2017. A further 12 fields are due on-stream by the end of next year, increasing the contribution from recent developments to around 600,000 boepd. By the end of 2018, o v e r o n e - t h i r d o f t o t a l p r o d u c t i o n w i l l c o m e f r o m a s s e t s t h a t h a v e s t a r t e d p r o d u c t i o n s i n c e 2016. O i l & G a s U K e x p e c t s t h a t p r o d u c t i o n w i l l c o n t i n u e t o i n c r e a s e t h r o u g h t o 2019 p r o v i d start-ups come on-stream as anticipated and existing assets maintain recent uptime p r o d u c t io n v o lu m e s in t h e n e x t d e c a d e r e m a in v u ln e r a b le t o a s h a r p f a ll if f r e s h in v e s t m m a t e r i a l i s e s o o n . T h e r e w i l l s i m p l y n o t b e e n o u g h n e w c a p ac i t y t o r e p l ac e a s s e t s t h a t h r e c o v e r y f r o m t h e ir r e s e r v o ir a n d m o v e d in t o t h e d e c o m m is s io n in g p h a s e .

e d t h a t f u r t h e r n e w f ie ld improvements. However, e n t in t h e U K C S d o e s n o t a v e m a x im is e d e c o n o m ic

The large opportunities that remain undeveloped on the UKCS are mostly unconventional, such as the west of S h e t l a n d f r ac t u r e d b a s e m e n t p l a y b e i n g a p p r a i s e d b y H u r r i c a n e E n e r g y 20. O p e r a t o r s i n t h e s o u t h e r n N o r t h S e a are also examining the potential of unconventional resources in tight gas plays, with early estimated recoverable p o t e n t i a l o f a g a m e - c h a n g i n g 3. 8 t r i l l i o n c u b i c f e e t o f g a s 21. T h i s d e m o n s t r a t e s t h a t c o m p a n i e s a r e s t i l l t a r g e t i n g significant volumes, even within the most mature areas of the basin. Operating Costs If the remaining potential of the UKCS (believed to be up to 20 billion boe) is to be realised, lower operating costs a r e e s s e n t ia l f o r c o m p a n ie s t o e x t e n d t h e e c o n o m ic lim it o f e x is t in g f ie ld s a n d c o n v in c e in v e s t o r s t h a t t h e y c a n operate potential new assets competitively compared with other basins (see section 6.2 for a global comparison). S i g n i f i c a n t p r o g r e s s h a s b e e n m a d e i n t h i s r e g a r d w i t h U O C s h a l v i n g b e t w e e n 2014 a n d 2016 f r o m a l m o s t $30/boe to around $15/boe. This reduction was driven by the removal of £3 billion of operational expenditure a l o n g s i d e a 16 p e r c e n t i n c r e a s e i n p r o d u c t i o n . I t i s b e l i e v e d t h a t a r o u n d t w o - t h i r d s o f t h e c o s t e f f i c i e n c y improvements can be sustained in the long term, even if market conditions improve and the industry moves out of its current downturn (see section 6.3 for more on the Efficiency Task Force). It is forecast that operational expenditure will remain stable from now through to 2019, with further room for UOCs to drop if production increases in line with expectations. Oil & Gas UK forecasts that UOCs could fall to $14/boe by the end of this year.

Production efficiency is the total annual production divided by maximum production potential of an asset. Find out more about Hurricane Energy’s work on fractured basement plays at https://cld.bz/oS0j96p/20 21 See http://bit.ly/2inP2XJ 19 20

4 3

1

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3

4

5

6

7

8

9

10

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E C O N O M I C R E P O R T 2017

Capital Investment O n g o in g u n c e r t a in t y a n d v o la t ilit y in c o m m o d it y p r ic e s c o n t in u e s t o c o n s t r a in f r e s h c a p it a l c o m m it m e n t s in t h e sector, both globally and within the UK. In 2016, only two new developments gained approval, releasing less than £500 million, compared to 2011 and 2012 when 14 and 22 projects, respectively, were sanctioned. Only one new field was approved in the first six months of 2017, bringing less than £80 million of associated capital. Although there is optimism that around five other new developments could be approved in the second half of 2017, the la c k o f n e w d e v e lo p m e n t s g a in in g a p p r o v a l in r e c e n t y e a r s h a s c r e a t e d a d e g r e e o f u n c e r t a in t y s u r r o u n d in g U K C S p r o d u c t i o n p o s t - 2020. There is no shortage of investment opportunities in the basin, with almost £40 billion of potential capital development projects within company business plans. Around two-thirds (£25.4 billion) of this is related to modifications and redevelopments of currently producing fields, with around one third (£14.1 billion) associated with new developments currently under consideration. However, less than two-thirds of this £40 billion is viewed as having a greater than 70 per cent chance of progressing in current market conditions, which highlights the need f o r f u r t h e r im p r o v e m e n t s in o p e r a t io n a l a n d c a p it a l e f f ic ie n c y . T h e r e is s o m e o p t im is m t h a t g iv e n a s u r g e o f n e w entrants to the basin over the last two years (see section 6.5), with different investment drivers, some of these p o t e n t ia l d e v e lo p m e n t s w ill b e r e c o n s id e r e d b y t h e ir n e w o w n e r s a n d p r o g r e s s e d . Drilling Activity R e v i t a l i s i n g d r i l l i n g ac t i v i t y i s k e y t o e n s u r i n g m a x i m u m r e c o v e r y t h r o u g h t h e d e v e l o p m e n t o f k n o w n v o l u m e s and through the discovery and subsequent evaluation of yet-to-find resources. However, drilling activity remains a t r e c o r d l o w l e v e l s . O n l y 14 e x p l o r a t i o n w e l l s a n d 8 a p p r a i s a l w e l l s w e r e d r i l l e d i n 2016. T h e d o w n w a r d t r e n d continued during the first half of 2017 with only five exploration wells and one appraisal well drilled. However, some wildcat wells are scheduled for later in the year targeting large reserves which, if successful, could rejuvenate e x p lo r a t io n d r illin g o n t h e U K C S . Eighty-seven development wells were spudded in 2016, a 30 per cent decline on 2015 and the first time since 1986 that fewer than 120 development wells were drilled in a single year. With just 47 development wells spudded during the first six months of this year, there is no sign of an uptick in activity. Although more recent development concepts often require less producing wells than has typically been the case, the decline in development drilling m u s t b e c lo s e ly m o n it o r e d t o p r e v e n t ir r e v e r s ib le d a m a g e t o t h e g o a l o f m a x im is in g e c o n o m ic r e c o v e r y . If k e y infrastructure begins to be removed, there may not be an opportunity to drill postponed development wells at a la t e r d a t e .

4 4

Oilfield Services Market T h e r e l a t i v e l ac k o f n e w ac t i v i t y o n t h e U K C S h a s h a d a s i g n i f i c a n t i m p ac t o n t h e d o m e s t i c s u p p l y c h a i n . S u p p l y chain revenues fell by 30 per cent on average between 2014 and 2016, and are expected to fall by a further 3 per cent in 2017. The fall in income has contributed to a significant reduction in the number of jobs supported by industry to an estimated 302,000 in 2017 (see section 3.3 for more on industry employment). However, an o p p o r t u n it y e x is t s f o r t h e U K s u p p ly c h a in t h r o u g h c a p t u r in g a la r g e r s h a r e o f t h e g lo b a l e x p o r t s m a r k e t . Further opportunity lies in the nascent decommissioning market, with this being the only increasing area o f e x p e n d i t u r e i n t h e U K C S i n 201622. Through to 2025, it is estimated that over £17 billion will be spent on d e c o m m i s s i o n i n g a c t i v i t y . I n d u s t r y i s w o r k i n g c l o s e l y w i t h O G A a n d H M T r e a s u r y t o e n s u r e t h a t t h i s ac t i v i t y i s carried out as efficiently as possible, providing scope for the supply chain to develop skills and expertise that can be exported to other basins. Nonetheless, despite the potential business in this area, it is widely accepted that g r e a t e r v a lu e e x is t s t h r o u g h p r o lo n g in g p r o d u c t io n o p e r a t io n s .

1

2

3

4

6.2 Global Competitiveness U K C S i n v e s t m e n t o p p o r t u n i t i e s m u s t l o o k a t t r ac t i v e a g a i n s t g l o b a l a l t e r n a t i v e s i f t h e y a r e t o p r o c e e d . E v e r y o i l and gas company – from super-majors through to small private equity-backed producers – has a choice when deciding where to invest their capital. With easier access to information and a highly mobile workforce, country b o r d e r s d o n o t r e p r e s e n t t h e s a m e b a r r ie r t h e y o n c e d id . T h is p a r t o f t h e r e p o r t a s s e s s e s t h e c o m p e t it iv e n e s s o f t h e U K C S a g a i n s t o t h e r c o m p a r a b l e b a s i n s ac r o s s t h e w o r l d u s i n g d a t a p r o v i d e d b y W o o d M ac k e n z i e . There is no one metric that uniquely measures the competitiveness of an oil and gas province. Prospectivity, m a t e r i a l i t y a n d a b i l i t y t o ac c e s s h y d r o c a r b o n r e s o u r c e s a r e f u n d a m e n t a l l y i m p o r t a n t f ac t o r s . M e t r i c s s u c h a s finding, development, operating and decommissioning costs characterise the financial competitiveness and, when combined with the fiscal and regulatory regime, help determine the overall economic attractiveness of the opportunity to the investor. The maturity and capability of the supply chain are also an important consideration, a s is t h e s t r a t e g ic f it w it h in a n in v e s t o r ’s p o r t f o lio .

5

6

7

8

9

10

11

22

O i l & G a s U K ’ s Decommissioning Insight i s a v a i l a b l e t o d o w n l o a d at w w w .o ila n d g a s u k .c o .u k / d e c o m m is s io n in g in s ig h t 4 5

E C O N O M I C R E P O R T 2017

Economic criteria ultimately drive investment decisions, particularly when capital is in short supply. Commonly used criteria include: i) ii) iii) iv)

Net Present Value – post-tax (NPV) and Expected Monetary Value (EMV) Internal Rate of Return (IRR) Capital Intensity (P/I) – (calculated as NPV post-tax/investment pre-tax) Payback – the time taken to recover the initial investment.

In a m a t u r e o il a n d g a s b u s in e s s t h e c o s t s o f o p e r a t io n s a r e o n e o f t h e m o r e im p o r t a n t m e a s u r e s w h e n lo o k in g a t the financial health of a portfolio. With UOCs almost halved since 2014, the UKCS has improved its competitiveness more than any other comparable basin. The cost reductions have been greatest across drilling, wells and logistics, where they have greatly outpaced the global average. Nevertheless, the basin remains the most expensive to operate in, on average, as shown by Figure 22. Figure 22: Unit Operating Costs in Offshore Oil and Gas Producing Regions

U nit O perating C ost ( $ / boe - 2016 M oney )

35 30 25

  U nited K ing dom

Denmark

Norw ay

Neth erlands

A ng ola

B raz il

Eg y pt

Indonesia

Nig eria

U S ( G oM

Deepw ater)

20 15 10 5 0 2008

2009

2010

2011

2012

2013

2014

2015

2016

Source: W ood M ack enz ie

4 6

Although the average UOC appears relatively high in the UK at $15.30/boe, this includes the cost of operating an e x t e n s iv e n e t w o r k o f m id s t r e a m in f r a s t r u c t u r e a n d o n s h o r e t e r m in a ls t h a t g e n e r a t e a m u c h h ig h e r c o m p o n e n t of operating expenditure than in other less complex basins. When looking solely at producing fields, the weighted-average UOC of the UKCS was $13.20/boe in 2016. The median average field UOC is even lower, at just over $10/boe, indicating that a small number of assets with a very high UOC skew the mean. Indeed, over two-thirds of UKCS assets, accountable for almost three-quarters of production, were operating at under $15/boe in 2016. Figure 23: UKCS Field Level Unit Operating Costs, Mean versus Median, 2016

1

2

3

100% 9 0%

4

P roportion of U K C S P roduction

8 0% 70%

U K C S M ean W eig h ted- A v erag e U O C ( producing assets only )

60%

U K C S M edian A v erag e U O C ( producing assets only )

5

C umulativ e P roportion of Total U K C S P roduction

50% 40%

6

30% 20%

7

10% 0% 0

5

10 15 20 25 30 35 40 45 50 55 60 65 70 75 8 0 8 5 9 0 9 5 100 U nit O perating C ost ( $ / boe)

8

Source: O il & G as U K

9

10

11

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E C O N O M I C R E P O R T 2017

Cost reductions have not only been commonplace for operational assets, but also for those under development. Again, the progress made in the UK has been greater than in other basins, with Figure 24 showing the expected trajectory of the UKCS versus the Norwegian Continental Shelf. Not only have UK costs dropped further, they also a p p e a r l e s s p r o n e t o n e a r - t e r m i n f l a t i o n . R e s p o n d e n t s t o a n i n t e r n a t i o n a l s u r v e y c a r r i e d o u t b y W o o d M ac k e n z i e felt that around two-thirds of UKCS cost reductions seen across subsea capital projects would be sustained out to 2020 e v e n i f t h e m a r k e t p i c k s u p . Figure 24: Supply Chain Cost Trajectory for Subsea Developments 2015

2016

2017

2018

2019

2020

A v erag e Subsea Dev elopment C ost R eduction

0%

- 5%

U K

Norw ay

- 10%

- 15%

- 20%

- 25%

- 30%

Source: W ood M ack enz ie

Although the UK represents a more attractive destination for investors than it did two years ago, there is now le s s c a p it a l a v a ila b le t o c o m p e t e f o r. R e v e n u e u n c e r t a in t y c r e a t e d b y t h e p r ic e d o w n t u r n h a s c a u s e d in v e s t o r s to distance themselves from oil and gas opportunities. Wood Mackenzie estimates that over $1 trillion has been cut from global upstream investment budgets between 2015-20. So, while the UK has improved its relative competitiveness, this has been offset by the fact that the appetite for oil and gas investment has shrunk globally.

4 8

E x p lo r a t io n h a s a r g u a b ly b e e n h it t h e m o s t b y t h e d o w n t u r n w it h a v e r a g e g lo b a l s p e n d d o w n b y a lm o s t 40 p e r c e n t i n 2014- 16 c o m p a r e d w i t h 2011- 13 ac r o s s t h e t e n b a s i n s 23 e x a m i n e d a s p a r t o f t h e s t u d y . A l t h o u g h exploration spend on the UKCS fell in line with the average over this period, it is one of only three basins where technical reserves discovered have increased, along with Egypt and the US Gulf of Mexico.

2

Figure 25: Average Exploration Cost and Volumes Discovered, 2014-16

W eig h ted A v erag e Discov ery C osts ( $ / boe)

30

-1

1

3 Scale B ubble siz e = A v erag e tech nical v olumes discov ered per y ear

25

1 billion boe

20 15

U K Denmark Eg y pt Norw ay Neth erlands A ng ola B raz il Indonesia Nig eria U S ( G oM Deepw ater)

4

5

10 5 00 -5

6

0

1

2

3

4

5

6 7

A v erag e Exploration Spend per Y ear ( $ B illion) Source: W ood M ack enz ie

T h e r e la t iv e m a t u r it y a n d c o m p le x it y o f t h e U K p r e s e n t s s t r u c t u r a l b a r r ie r s t o r e d u c in g c o s t s f u r t h e r c o m p a r e d with other offshore provinces where larger producing fields offer greater economies of scale. However, the potential of the UK remains exciting, with opportunities such as the fractured basement plays west of Shetland; u lt r a - h ig h - p r e s s u r e h ig h - t e m p e r a t u r e p r o s p e c t s in t h e c e n t r a l N o r t h S e a ; a n d t h e c a r b o n if e r o u s r e s o u r c e s in t h e Southern Gas Basin. Although, these opportunities are not of the same scale as recent multi-billion barrel discoveries such as Johann Sverdrup (Norway, 2010) or Zohr (Egypt, 2015), and tend to come at a higher discovery cost, they can be easily brought to market and monetised.

8

T h e U K C S n e e d s t o e x c e l in t h e a r e a s it c a n c o n t r o l a n d m a in t a in a c o m p e t it iv e a d v a n t a g e . C o m p a n ie s m u s t c o n t in u e t o m a x im is e v a lu e f r o m n e a r - f ie ld e x p lo r a t io n w h e r e it h a s t h e a d v a n t a g e o f b e in g a b le t o t ie - in t o existing infrastructure, as well as taking advantage of the exceptional geological understanding in the UK.

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23

UK, Denmark, Norway, Netherlands, Angola, Brazil, Egypt, Indonesia, Nigeria and US Gulf of Mexico. 4 9

E C O N O M I C R E P O R T 2017

T h e f i s c a l a n d r e g u l a t o r y t e r m s m u s t a l s o r e m a i n a t t r ac t i v e i f t h e U K C S i s t o w i n c a p i t a l o v e r o t h e r b a s i n s . W h i l e m a n y g o v e r n m e n t s ac r o s s t h e w o r l d h a v e l o o k e d t o c o u n t e r t h e i m p ac t o f f a l l i n g t a x r e c e i p t s b y i n c r e a s i n g m a r g i n a l rates of tax, in the UK, the opposite approach has been taken. Rates have fallen from as high as 81 per cent just five years ago, down to a maximum of 40 per cent in an attempt to attract fresh investment by maintaining post-tax materiality (see section 6.4 for more on fiscal policy). Without this intervention, many investors would n o t e v e n c o n s id e r t h e U K a s a d e s t in a t io n f o r in v e s t m e n t . F i g u r e 26 s h o w s t h e a v e r a g e m a r g i n a l t a x r a t e f o r o i l o p p o r t u n i t i e s ac r o s s a m i x t u r e o f c o n c e s s i o n a n d p r o d u c t i o n sharing regimes. When comparing the fiscal attractiveness of oil and gas producing nations, the UK has moved from being below average in 2012 to being within the top quartile – a very positive sign for investors. Figure 26: Fiscal Attractiveness of the UKCS Compared with other Oil and Gas Producing Nations

100% 9 0%

G ov ernment Sh are of NP V ( undiscounted) A v erag e G ov ernment Sh are of NP V ( undiscounted)

A v erag e G ov ernment Tax of NP V

8 0% 70% 60%

U K

50% 40% 30% 20% 10% 0% Source: W ood M ack enz ie

5 0

6.3 The Efficiency Task Force

1

T h e c o n c e p t o f m a x im is in g e f f ic ie n c ie s a n d d r iv in g c o n t in u o u s im p r o v e m e n t h a s b e e n a p a r t o f t h e o il a n d g a s industry for decades. However, following the sharp oil price decline in 2014, the industry established its own Efficiency Task Force (ETF), led by Oil & Gas UK, to act as a pan-industry catalyst for sustainable change and be a vehicle to communicate progress and develop good practice. Since then, supported by strong leadership from the ETF, companies themselves and the industry overall have transformed their efficiency, significantly reducing costs, improving production efficiency and realising real increases in capital efficiency (see section 6.1 outlining industry KPIs). This fundamental change has put the industry’s future on a more secure footing. T h e E T F h a s a n u m b e r o f g r o u p s w o r k i n g ac r o s s i n d u s t r y t o i d e n t i f y p o t e n t i a l e f f i c i e n c y i m p r o v e m e n t o p p o r t u n i t i e s and realise savings aligned with three key themes: Co-operation, Culture and Behaviours; Standardisation and S im p lif ic a t io n ; a n d B u s in e s s P r o c e s s e s .

2

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Figure 27: The Efficiency Task Force Structure 5

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I n d u s t r y m u s t n o w e n s u r e t h e g a i n s m a d e t o d a t e a r e b u i l t u p o n a n d s u s t a i n e d . A n i n i t i a l i m p ac t a n a l y s i s s h o w s that up to two-thirds of the cost reductions have the potential to be sustained, even if the oil market recovers and price improves. However, achieving this will take continued commitment from the entire sector. T h i s c h a p t e r f o c u s e s o n h o w t h e E T F h a s p r o g r e s s e d o v e r t h e l a s t y e a r w i t h d e l i v e r y f r o m e ca h o f t h e t h r e e w o r k - s t r e a m s . R e g u l a r u p d a t e s o n t h e E T F a r e a v a i l a b l e i n t h e n e w E f f i c i e n c y H u b o n O i l & G a s U K ’ s w e b s i t e 24. Business Processes Business process improvement has a long-standing, proven track record of driving outstanding business performance in many other industries, for example, in manufacturing and aerospace. Through the ETF, the Production Efficiency Task Force and the Maintenance Optimisation Group of Oil & Gas UK, industry experts and specialists h a v e c o l l a b o r a t e d t o p r o d u c e a n u m b e r o f g o o d p r ac t i c e g u i d e l i n e s t o d r i v e b u s i n e s s improvement, which are available to download from the Efficiency Hub. These are:

• Maintenance Optimisation Reviews – Shared Practice and Learnings • Guidance for the Efficient Execution of Planned Maintenance Shutdowns • Tender Efficiency Framework • Guidelines to Maximise Compression System Efficiency A p p l i c a t i o n o f t h e s e g u i d e l i n e s c a n h e l p c o m p a n i e s d r i v e m o r e e f f i c i e n t w o r k i n g p r ac t i c e s a n d i m p r o v e c o lla b o r a t io n t h r o u g h o u t t h e s u p p ly c h a in .   Standardisation and Simplification Two-thirds of fields approved over the last decade and the majority of future projects under c o n s i d e r a t i o n a r e e x p e c t e d t o b e d e v e l o p e d v i a a s u b s e a t i e - b ac k . T h e p o t e n t i a l o f t h e s e d e v e lo p m e n t s a n d o t h e r s m a ll p o o l r e s e r v e s c o u ld b e m a x im is e d b y e m p lo y in g m o r e c o s t - e f f e c t iv e w a y s t o c r e a t e s u b s e a d e v e lo p m e n t s . M o r e t h a n t h r e e b illio n b o e a r e c u r r e n t l y s t r a n d e d i n a r o u n d 350 u n s a n c t i o n e d d i s c o v e r i e s t h a t a r e e c o n o m i c a l l y c h a l l e n g i n g t o p r o d u c e . I n d u s t r y ’ s c u r r e n t p r e f e r e n t i a l b e s p o k e a p p r o ac h c o n t r i b u t e s t o higher costs and longer project schedules. Subsea Standardisation – Guidelines on Adopting a Simplified and Fit for Purpose Approach25 i s t h e c u l m i n a t i o n of extensive work by the ETF’s multi-disciplinary Subsea Standardisation Group, which involved over 70 industry e x p e r t s a n d 30 c o m p a n i e s . T h e g r o u p h a s d e m o n s t r a t e d t h r o u g h r e a l l i f e c a s e s t u d i e s h o w s u b s e a d e v e l o p m e n t s c o u l d b e s i m p l i f i e d a n d s t a n d a r d i s e d t o d e l i v e r s a v i n g s o f b e t w e e n 15 a n d 30 p e r c e n t a n d b r i n g r e s e r v e s i n t o p r o d u c t io n m o r e c o s t - e f f e c t iv e ly . F o u r k e y t h e m e s h a v e e m e r g e d t h r o u g h w h ic h s u b s e a d e v e lo p m e n t s c o u ld b e made more competitive, as illustrated in Figure 28.

24 25

5 2

See the Efficiency Hub at www.oilandgasuk.co.uk/efficiency The Subsea Standardisation Guidelines are available to download at http://bit.ly/SubApp17

Figure 28: Subsea Standardisation Themes

pplying a fit for purpose approach These could include: • Functional versus prescriptive approach • Applying industry standards

odes tandards and pecifications

lternative ethods and echnologies

rocess

Hardware tandardisation

1

pplying alternative methods and technology to provide optimised solutions to • Design and field architecture • Manufacture • Fabrication • Installation • Scheduling and sequence of work scopes

2

3

4

tandardisation of hardware • Standard designs • Develop modular approach and components catalogue • Common interfaces with plug and play capabilities and interchangeability • Reuse capability similar to drilling equipment

pplying a simplified and streamlined approach to • Documentation • Review cycles • Reporting • Interface management • Inspection and testing

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To apply the findings to a UKCS prospect, Centrica’s West Pegasus field – a three well tie-back in the southern North Sea – was chosen as a case study. Using a set of adopted assumptions during the concept select stage, the group i d e n t i f i e d s a v i n g s o f u p t o 25 p e r c e n t t h r o u g h t h e a n t i c i p a t e d a p p l i c a t i o n o f t h e s u b s e a s t a n d a r d i s a t i o n g u i d e l i n e s . This significantly improved the economics of the project and the prospect of progression to development, and offers the potential for cost optimisation for other similar projects.

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Figure 29: Range of Potential Savings from Centrica's West Pegasus Project 9

Range of Potential Savings* Project Management and Engineering Procurement, Manufacture and Fabrication Transportation and Installation O v e r a ll S a v in g s *Dependant on selected field option

20. 4% 14. 8% 16. 3% 20. 4%

24. 7% 28. 3% 33. 6% 24. 7%

10

Source: Centrica, Oil & Gas UK

Chevron is also applying the standardisation principles to a future satellite subsea tie-back to its Captain field, as a r e o t h e r o p e r a t o r s h o p in g t o id e n t if y f u r t h e r c o s t - r e d u c t io n o p p o r t u n it ie s w it h in t h e ir p o r t f o lio s . C o m p a n ie s h a v e a ls o in v e s t ig a t e d h o w t h e s u b s e a s t a n d a r d is a t io n w o r k c o u ld b e a p p lie d t o o t h e r a r e a s o f t h e industry. Amec Foster Wheeler, for example, is applying the principles across its asset life cycle business and e m b e d d i n g t h e m w i t h i n i t s b u s i n e s s m a n a g e m e n t s y s t e m . W h i l e a n o t h e r E T F w o r k g r o u p i s a p p l y i n g t h e p r ac t i c e s to engineered products, with a focus on valves. A new tool – Guidelines for the Simplification of Engineered Products – is due for publication later in the year. 5 3

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Co-operation, Culture and Behaviours Driving cultural change across industry, to one with a relentless focus on efficient operations, is k e y t o e n s u r in g t h e p r o g r e s s m a d e is s u s t a in e d . G iv e n t h a t c u lt u r a l a n d b e h a v io u r a l change is a key success factor right across the spectrum of ETF projects, the Task Force has developed a range of tools and initiatives to this end: • Industry Behaviours Charter – a set of five high level principles to ensure that companies e n g a g e i n a n e f f i c i e n t a n d c o l l a b o r a t i v e m a n n e r . M o r e t h a n 50 c o m p a n i e s h a v e s i g n e d u p t o t h e c h a r t e r 26. • Continuous Improvement Network – connecting efficiency champions from across industry. • Collaboration Index – in partnership with Deloitte, the index benchmarks successful collaboration across industry and shows it is increasing across the basin. However, there is still scope for improvement. • Efficiency Roadshows – held within Oil & Gas UK member companies so that employees can hear about the ETF’s work, find out how they can get involved and share their own achievements in driving continuous improvements. M o r e t h a n 500 p e o p l e h a v e a t t e n d e d t h e s e e v e n t s s o f a r i n 2017. • Efficiency Hub – a new online and interactive Efficiency Hub on the Oil & Gas UK website will keep industry up to date with the latest advances in improving efficiency. It is a one-stop gateway to initiatives, tools and best practice and includes company case studies, as well as the latest information about the ETF and its progress. Around 100 company case studies are included on the Hub, outlining innovative ways of working smarter and c o l l a b o r a t i n g t o i m p r o v e e f f i c i e n c y a n d s u s t a i n a b i l i t y . C o m p a n i e s f r o m ac r o s s i n d u s t r y a r e e n c o u r a g e d t o p r o v id e a n d d o w n lo a d c a s e s t u d ie s t o e n s u r e t h a t k n o w le d g e a n d e x p e r ie n c e is s h a r e d a s w id e ly a s p o s s ib le . The ETF will continue to move the efficiency agenda forward throughout the rest of 2017 and into next year, with i n c r e a s e d f o c u s o n c o m m u n i c a t i n g p r o g r e s s ac r o s s i n d u s t r y a n d e n s u r i n g t h a t t h e T a s k F o r c e ’ s o u t p u t s a r e u s e d t o m a x i m u m e f f e c t a n d e m b e d d e d w i t h i n d a y - t o - d a y w o r k i n g p r ac t i c e s .  

26

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F i n d o u t m o r e ab

o u t t h e I n d u s t r y B e h a v i o u r s C h a r t e r at

w w w .o ila n d g a s u k .c o .u k / c u lt u r a l- c h a n g e - t o o ls

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F is c a l P o lic y

1

T h e c h a n g e s t o t h e U K u p s t r e a m o i l a n d g a s t a x r e g i m e i n t r o d u c e d b y B u d g e t s 2015 a n d 2016 h a v e h e l p e d c r e a t e one of the most competitive fiscal regimes for upstream investment globally (see section 6.2). The recommitment t o t h e Driving Investment Plan b y t h e C h a n c e l l o r i n Autumn Statement 2016 h a s s e n t a s t r o n g m e s s a g e t o i n v e s t o r s a n d c o m p a n ie s a lik e . T h e r e a r e e a r ly s ig n s o f in v e s t o r c o n f id e n c e r e t u r n in g w it h s o m e h ig h p r o f ile c o r p o r a t e d e a ls announced this year already, as outlined later in this section. The Current Fiscal Regime T h e c u r r e n t t a x r e g i m e a p p l i c a b l e t o U K u p s t r e a m o i l a n d g a s ac t i v i t i e s i s b e s p o k e a n d h a s e v o l v e d o v e r m o r e than 40 years. It is now made up of two main elements – Ring-Fence Corporation Tax and Supplementary Charge. A third tax, Petroleum Revenue Tax, has been permanently zero-rated with effect from 1 January 2016. Companies that do not produce oil and gas but perform associated activities, for example downstream refining or supply chain services, are not subject to this bespoke upstream tax regime and pay mainstream Corporation Tax. All companies, irrespective of whether they are in or outside of the production ring-fence, also pay the usual direct and indirect taxes, for example, capital gains, employment taxes, VAT, levies and duties. None of these tax payments are disclosed separately for oil and gas companies by Her Majesty’s Revenue and Customs, but these p a y m e n t s a r e e s t im a t e d t o b e in e x c e s s o f £ 1b illio n a n d c o n t r ib u t e t o t h e w id e r b e n e f it o f t h e in d u s t r y t o t h e U K e c o n o m y . Ring-Fence Corporation Tax (RFCT) – a tax on company profits similar to regular Corporation Tax, but at a higher rate of 30 per cent (previously up to 52 per cent). The rate of RFCT is set separately from the rate of mainstream Corporation Tax in the UK, which was at 20 per cent for 2016-17, and RFCT will not benefit from the currently a n t i c i p a t e d d e c r e a s e i n C o r p o r a t i o n T a x t o 17 p e r c e n t b y 2020. Supplementary Charge (SC) – an additional tax computed from company profits similar to RFCT, but finance costs are not deductible. This tax was introduced in 2002. The rate is currently 10 per cent, but was previously as high as 32 per cent. In 2015, the Investment Allowance was introduced to alleviate this additional layer of tax that the U K C S p a y s r e la t iv e t o a n y o t h e r in d u s t r y . T h e A llo w a n c e m e a n s c o m p a n ie s w h o in v e s t in t h e b a s in c a n r e c u p e r a t e capital and operating expenditure against their SC liabilities, so that only RFCT is levied on profits at a rate of 30 p e r c e n t.

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Petroleum Revenue Tax (PRT) – a tax levied on fields that received development consent prior to 16 March 1993. With effect from 1 January 2016, PRT was permanently zero-rated. The recent changes to lower the tax burden have created a backdrop against which new projects are being c o n s id e r e d . Specific features of the tax regime, including 100 per cent first-year Capital Allowances and the extended ability to carry back losses for decommissioning costs, provide investors with confidence and security as they navigate t h e ir r e g u la r u p s t r e a m c a s h - f lo w p r o f ile . L a r g e c a p it a l in v e s t m e n t is r e q u ir e d b o t h a t t h e b e g in n in g o f a f ie ld ’s lif e w h e n it is b e in g d e v e lo p e d a n d a t t h e e n d a f t e r p r o d u c t io n h a s c e a s e d a n d t h e f ie ld is b e in g d e c o m m is s io n e d .

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 Figure 30: Historic Upstream Tax Rates P R T- P ay ing P R T w ith SC R elief Non P R T- P ay ing Non- P R T w ith SC R elief U K C orporation Tax ( for non ring - fenced businesses)

100% 9 0%

M arg inal Tax R ate on P ro s

8 0% 70% 60% 50% 40% 30% 20% 10% 0% 19 8 0

19 8 5

19 9 0

19 9 5

2000

2005

2010

2015 Source: H M R C

UKCS Production Tax Payments The UKCS has entered a different, more mature phase, characterised by challenges around materiality of many projects, maintenance of key hubs and infrastructure, and emerging decommissioning activity. Low receipts from direct production taxes illustrate the tough time the industry has experienced over the last 24 months, as s u p p r e s s e d o il a n d g a s p r ic e s h a v e le d t o a s h a r p d e c lin e in p r o f it a b ilit y . T h e p e r m a n e n t z e r o - r a t in g o f P R T a n d t h e r e d u c t io n in c o m b in e d R F C T a n d S C w e r e p o s it iv e s t e p s t o p r o m o t e in v e s t m e n t in t h e b a s in a n d w ill le a d t o lo n g - t e r m g a in s . While many, including HM Treasury in previous forecasts, expected production tax receipts to be negative in 2015-16, the efficiency drive led by industry was a major factor in making the outturn receipts for the year positive a t £ 151 m i l l i o n . R e c e i p t s a r e e x p e c t e d t o i n c r e a s e t o a r o u n d £ 1 b i l l i o n p e r a n n u m o v e r t h e r e s t o f t h e d e c a d e .

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Figure 31: Government Revenues from Oil and Gas Production Taxes 35

1

R ing F ence C orporation Tax Supplementary C h arg e

2

R oy alty

25

Supplementary P etroleum Duty

20

3

15 10

4

5 0 ( 5)

5 19 68 - 69 19 70- 71 19 72- 73 19 74- 75 19 76- 77 19 78 - 79 19 8 0- 8 1 19 8 2- 8 3 19 8 4- 8 5 19 8 6- 8 7 19 8 8 - 8 9 19 9 0- 9 1 19 9 2- 9 3 19 9 4- 9 5 19 9 6- 9 7 19 9 8 - 9 9 2000- 01 2002- 03 2004- 05 2006- 07 2008 - 09 2010- 11 2012- 13 2014- 15 2016- 17 2018 - 19 2020- 21

G ov ernment R ev enues from O il and G as P roduction ( £ B illion - 2016/ 17 M oney )

P etroleum R ev enue Tax

30

Source: H M

Treasury , O

ce for B udg et R esponsibility

6

Facilitating Access to Decommissioning Tax Relief Further adjustments to the fiscal regime are still required to encourage capital investment over the longer term, as is clear from the measures announced in the 2017 Spring Budget. Specifically, the industry needs a mechanism to transfer tax history as part of the sale of oil and gas assets on the UKCS, so that a buyer can still obtain full relief f o r d e c o m m i s s i o n i n g l i a b i l i t y a t t h e e n d o f t h e f i e l d ’ s l i f e . T h e c u r r e n t i n a b i l i t y t o t r a n s f e r t a x c a p ac i t y a s s o c i a t e d w it h a n a s s e t f r o m a s e lle r t o t h e b u y e r h a s b e e n a b a r r ie r t o in v e s t m e n t in t h e U K C S . T h is is b e c a u s e o f t h e tax-based ‘value gap’ that arises from misalignment in asset valuation between a seller with a long tax history and ac c e s s t o f u l l t a x r e l i e f o n d e c o m m i s s i o n i n g a n d a b u y e r w i t h n o s u c h t a x h i s t o r y . T h e r e s u l t o f t h i s d e a l b a r r i e r i s t h a t la t e - lif e a s s e t s a r e le s s lik e ly t o b e s o ld t o n e w o p e r a t o r s w h o b r in g f r e s h in v e s t m e n t a n d b u s in e s s m o d e ls t o t u r n n o n - c o r e in t o c o r e a s s e t s . In d u s t r y h a s b e e n w o r k in g c o lla b o r a t iv e ly w it h t o t r a n s f e r t a x c a p ac i t y . T h i s p o s i t i v e e n g a g e m g a s a s s e t s a n d t h e a s s o c ia t e d w o r k o f t h e s p e c to provide certainty of a solution in Autumn n e w in n o v a t iv e b u s in e s s m o d e ls in t h e U K C S a E x c h e q u e r w o u ld b e n e f it f r o m c a s h - f lo w a d v a s s o c ia t e d w it h f r e s h in v e s t m e n t a n d a c t iv it y .

H M T r e a s u r y f o r m a n y y e a r s t o id e n t if y a n a p p r o p r ia t e m e c h a n is m e n t i s b e i n g c a r r i e d i n t o t h e 2017 c o n s u l t a t i o n o n l a t e - l i f e o i l a n d ia lly f o r m e d a d v is o r y p a n e l o f t a x e x p e r t s . If t h e g o v e r n m e n t w e r e Budget 2017, it would encourage further deal flow and promote t a t im e w h e n u r g e n t n e w in v e s t m e n t is n e e d e d in t h e b a s in . T h e a n t a g e s d u e t o d e f e r r e d d e c o m m is s io n in g a n d t h e b r o a d e r g a in

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6.5 Mergers and Acquisitions H i s t o r y w o u l d s u g g e s t t h a t a n i n d u s t r y d o w n t u r n i s t r a d i t i o n a l l y f o l l o w e d b y a p e r i o d o f a g g r e s s i v e ac q u i s i t i o n activity, with buyers looking to acquire cash-strapped sellers. However, there were limited examples of this over the last three years, with only $8 billion worth of UK traded value in M&A deals (this excludes multi-national corporate deals such as the merger of Shell and BG Group which completed in early 2016). Figure 32: Total UKCS Upstream M&A Activity

Total Nominal M erg er and A cq uisition V alue ( $ B illion)

7 6 5 4 3

2 1 0 2014

2015

2016

2017 ( To Date) Source: W ood M ack enz ie, O il & G as U K

However, the asset and corporate trading market has become more liquid in 2017. There have been many high p r o f i l e u p s t r e a m ac q u i s i t i o n s a n n o u n c e d o v e r t h e f i r s t h a l f o f t h i s y e a r w i t h a n e s t i m a t e d U K t r a d e d v a l u e o f n e a r l y $6 billion combined. The rationale behind the activity has varied, but few deals would fall under the category of financial distress. More commonly, the transactions are driven by diverse types of investors, most notably private equity-backed companies, looking to enter the market at what they consider to be an optimal time. On the seller’s side, there has been a mixture of smaller companies looking to leave the basin and focus on overseas opportunities and majors whose incentive to sell is driven by portfolio rationalisation and consolidation. It is important to note that the majors do remain committed to the UK with a focus on their larger-scale assets, typically found west of S h e t la n d . A n in c r e a s in g p e r c e n t a g e o f p r o d u c t io n in t e r e s t is lik e ly t o c o n t in u e b e in g s o ld t o s m a lle r c o m p a n ie s w it h a d iv e r s e m ix o f f u n d in g .

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 Figure 33: Total Working Interest Production by Company

1

Top 10 U K C S P roducing C ompanies A ll O th er U K C S P roducing C ompanies

2

3

4 Source: W ood M ack enz ie, O il & G as U K

ti th e basin, th e big g est 10 producers ti

ti th e basin, th e big g est 10 producers ti

5

There are a number of reasons behind the upturn in M&A activity seen so far this year. Primarily, the valuation gap between potential buyers and sellers has closed, enabling deals to happen. Although uncertainty over the oil price still exists, the market appears clearer than it has been over the last couple of years. Furthermore, companies have been willing to put more flexible deal structures in place, mitigating downside risk for buyers and creating upside potential for sellers. A typical example of this would be a contingency payment written into the deal, only payable by the buyer if a certain oil price or project milestone is reached. Decommissioning liabilities have also been tackled using complex structures, and this will play an increasing role within future M&A deals as the UKCS c o n t in u e s t o m a t u r e . A n e x p e r t t a x p a n e l w ill a d v is e g o v e r n m e n t o n h o w t h is c o u ld b e s t b e d e a lt w it h t h r o u g h the tax system rather than through complex and time-consuming commercial agreements (see section 6.4 on fiscal policy). Further upstream M&A activity is expected over the remainder of this year and into 2018. Major operators are l i k e l y t o t a k e s t r a t e g i c ac q u i s i t i o n s t o r e s h a p e t h e i r p o r t f o l i o s a n d t o d i v e s t n o n - c o r e a s s e t s . T h i s w i l l o f f e r f r e s h p r o s p e c t s f o r g r o w t h t o s m a lle r c o m p a n ie s lo o k in g t o c a p it a lis e o n m a r k e t o p p o r t u n it ie s . T h e ac q u i s i t i o n o f i n f r a s t r u c t u r e i n t e r e s t s b y i n f r a s t r u c t u r e f u n d s a n d o t h e r n e w b u y e r s h a s a l s o c o n t i n u e d o v e r the last year. For example, Ancala’s 30.28 per cent acquisition of the Scottish Area Gas Evacuation System and 60.56 per cent interest in the Beryl pipeline from Apache is just one example of the transition from historically o p e r a t o r - o w n e d in f r a s t r u c t u r e t o m id - s t r e a m c o n c e n t r a t e d c o m p a n ie s . Large-scale mergers and acquisitions have not been limited to the upstream business, with a number of oilfield service companies announcing deals over the last 18 months. Again, the type of deal has varied. Some companies have been acquired after struggling to adjust to the current price environment. Other deals have been driven by the desire to vertically integrate to offer a wider ‘one-stop-shop’ solution. Some mergers have been incentivised b y t h e s y n e r g ie s o f f e r e d b y c o n s o lid a t in g t w o b u s in e s s e s in t o o n e . O n e c o m m o n t h e m e f o r m o s t d e a ls is t h a t t h e n e w e n t it y is a b le t o o f f e r m o r e in n o v a t iv e s o lu t io n s a t a lo w e r c o s t w it h im p r o v e d e x e c u t io n ; t h is is c r it ic a l t o t h e fu tu re o f th e U K C S .

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6. 6

In v e s t o r C a s e S t u d ie s

Chrysaor The company C h r y s a o r i s a p r i v a t e l y - f u n d e d i n d e p e n d e n t U K o i l a n d g a s c o m p a n y . I t w a s e s t a b l i s h e d i n 2007 a n d f o c u s e s o n d e v e lo p in g a n d c o m m e r c ia lis in g o il a n d g a s in c r e m e n t a l r e s o u r c e s p r im a r ily o n t h e U K C S . T h r o u g h its transaction with Shell, the company is set to become one of the leading independent exploration c o m p a n ie s o p e r a t in g o n t h e U K C S . Details of the investment C h r y s a o r i s b u y i n g a d i v e r s e p ac k a g e o f o p e r a t e d a n d n o n - o p e r a t e d a s s e t s i n t h e c e n t r a l a n d n o r t h e r n North Sea and west of Shetland from Shell for $3 billion. In 2016, production from the assets exceeded 115,000 boepd, while the five-year average UOCs from the assets are less than $15/bbl. Furthermore, the d e a l i s e x p e c t e d t o a d d p r o v e n a n d p r o b a b l e r e s e r v e s o f a r o u n d 350 m i l l i o n b o e t o C h r y s a o r ’ s e x i s t i n g r e s e r v e s b a s e a n d b r in g s w it h it s o m e h ig h ly c o m p e t e n t a n d s k ille d s t a f f f r o m S h e ll. T h e d e a l is e x p e c t e d to complete during the second half of 2017, after the formal regulatory approvals are in place. How is the company financed? The deal is being funded by an investment of up to $1 billion from Harbour Energy, an investment vehicle of EIG, as well as from funds managed by EIG, junior debt financing from Shell, and a Reserves Based Loan of up to $1.5 billion from a syndicate of leading international banks with considerable North Sea experience. EIG is one of the oldest private equity firms exclusively focused on the energy sector, specialising in private in v e s t m e n t s in e n e r g y a n d e n e r g y - r e la t e d in f r a s t r u c t u r e a r o u n d t h e g lo b e . Why is the UK an attractive place to invest? C h r y s a o r b e lie v e s t h e r e is s ig n if ic a n t o v e r lo o k e d r e m a in in g p o t e n t ia l o n t h e U K C S . C o m b in e d w it h a politically robust environment, the UKCS is an attractive place to build a large-scale exploration and p r o d u c t io n b u s in e s s . C h r y s a o r b e lie v e s in t h e U K N o r t h S e a a n d t h e f u t u r e o f t h e b a s in a n d h a s b e e n v e r y f o c u s e d o v e r t h e l a s t f e w y e a r s o n ac q u i s i t i o n o p p o r t u n i t i e s . T h e d i v e r s e s e t o f m a t e r i a l a s s e t s i n c l u d e d i n t h e p ac k a g e f r o m S h e l l r e p r e s e n t s a n i d e a l s e t o f a s s e t s u p o n w h i c h t o g r o w t h e b u s i n e s s . What are the next steps? C h r y s a o r a im s t o b e a le a d in g in d e p e n d e n t e x p lo r a t io n a n d p r o d u c t io n c o m p a n y in t h e U K a n d is c o m m it t e d to a growth strategy in the North Sea, a testament not only to the potential that remains on the UKCS but a l s o t o t h e s k i l l s a n d e x p e r i e n c e b u i l t u p i n t h e U K ’ s e n e r g y i n d u s t r y o v e r t h e p a s t 40 y e a r s . T h e c o m p a n y ’s im m e d ia t e p r io r it y is t h e s u c c e s s f u l c o m p le t io n o f t h e d e a l w it h S h e ll a n d s a f e t r a n s it io n to operatorship. Following this, Chrysaor aims to extend the production life of the assets in many ways, including enhanced recovery techniques, exploring near-field opportunities that lie around the portfolio, a n d a d d i t i o n a l b o l t - o n ac q u i s i t i o n s . C h r y s a o r a i m s t o s u s t a i n b o t h i t s p r o d u c t i o n l e v e l s a n d r e s e r v e s b a s e at current levels, focusing on exploration, appraisal and development drilling to exploit the opportunities o f f e r e d b y t h e U K C S a n d s u r r o u n d in g g e o g r a p h ie s .

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1

Zennor Petroleum The company Zennor Petroleum Limited is an independent UK oil and gas company committed to the exploration, appraisal, development, and production of offshore hydrocarbons in the North Sea. Originally founded in 2006 as MPX E&P, the company focuses on appraisal and development of existing discoveries. Zennor currently has interests in the central and northern North Sea with oil and gas production of 2,500 boepd.

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How is the company financed? In August 2015, the company was acquired by Kerogen Capital, a Hong Kong-based private equity fund m a n a g e r f o c u s e d o n t h e in t e r n a t io n a l u p s t r e a m o il a n d g a s s e c t o r. K e r o g e n m a d e a n in it ia l c o m m it m e n t of $100 million to develop Zennor Petroleum’s existing asset base (including the licence containing the Finlaggan Discovery). The funds also allowed the company to expand the portfolio through further acquisitions, farm-in opportunities and licensing rounds. Kerogen has since increased its total commitment to $300 million.

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Details of the investment Zennor Petroleum has made rapid progress since its acquisition by Kerogen. In March 2016, the company p u r c h a s e d a p ac k a g e o f a s s e t s f r o m F i r s t O i l E x p r o L i m i t e d t h a t i n c l u d e d n o n - o p e r a t e d i n t e r e s t s i n f o u r producing fields: Mungo, Monan, Bacchus and Cormorant East. In April last year, Zennor also successfully drilled the Finlaggan appraisal well and was awarded block 2/5b in the 29th Licensing Round in March 2017, w h i c h i n c l u d e s t h e S o u t h W e s t H e a t h e r ac c u m u l a t i o n .

6

Why is the UK an attractive place to invest? Z e n n o r P e t r o le u m s e e s n u m e r o u s o p p o r t u n it ie s t o e x p lo it a p p r a is a l a n d d e v e lo p m e n t p o t e n t ia l f r o m e x i s t i n g o i l a n d g a s d i s c o v e r i e s o n t h e U K C S . I t a l s o c o n s i d e r s ac c e s s i b i l i t y t o s u b s u r f ca e d a t a a n d a n a t t r ac t i v e r e g u l a t o r y e n v i r o n m e n t a s i m p o r t a n t f o r c o m p a n i e s t o m o v e f o r w a r d a n d d e v e l o p projects quickly.

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T h e e f f o r t s o f t h e U K G o v e r n m e n t in m a k in g o ld d a t a b a s e s a v a ila b le t o t h e in d u s t r y t h r o u g h Common Data Access Limited (CDA) have also paid off. Finlaggan, which was discovered by ConocoPhillips in 2005, is an example of where Zennor Petroleum has been successful at taking old seismic data and a p p ly in g n e w t e c h n o lo g y t h r o u g h r e p r o c e s s in g t o id e n t if y it s f u ll p o t e n t ia l.

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What are the next steps? Following the successful appraisal of Finlaggan in April 2016, the company expanded its internal development project team. They have confirmed that Finlaggan is a robustly economic subsea development t h a t c a n b e t i e d b ac k t o n e i g h b o u r i n g i n f r a s t r u c t u r e w i t h a p p r o p r i a t e p r o c e s s i n g c a p a b i l i t y a n d c a p a c i t y a l r e a d y i n p l ac e . T h e c o m p a n y h a s a l r e a d y e n t e r e d i n t o a p e r i o d o f e x c l u s i v i t y w i t h i t s p r e f e r r e d infrastructure host and aims to have the route finalised this year, along with internal project sanction and O G A F i e l d D e v e l o p m e n t P l a n a p p r o v a l . T h e t a r g e t f o r f i r s t g a s i s 2020.

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How could the UKCS become a more attractive investment destination? Z e n n o r b e lie v e s t h e in d u s t r y n e e d s t o c o n t in u e t o r e le a s e s e is m ic d a t a . T h e g o v e r n m e n t c o u ld c o m p e l c o m p a n ie s t o r e le a s e s e is m ic f ie ld t a p e s w h e n t h e y e x it t h e b a s in a n d t h e in d u s t r y c o u ld m a k e g r e a t e r u s e o f t h e d a t a a v a i l a b l e f r o m C D A ’ s o n l i n e p o r t a l . I t s d a t a b a s e s h o u l d ac t a s a c e n t r a l r e p o s i t o r y f o r t h e U K C S .

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E C O N O M I C R E P O R T 2017

Siccar Point Energy The company Siccar Point Energy was established in 2014 with the aim of building a leading UK independent, full cycle, exploration, development and production company. Its strategy is to build a portfolio of assets where it c a n u s e it s e x t e n s iv e N o r t h S e a e x p e r ie n c e t o c r e a t e v a lu e t h r o u g h f o llo w - o n in v e s t m e n t a n d g r o w reserves through infill drilling, life extension, new developments or exploration. The business now includes interests in three of the largest UK assets by remaining reserves (Schiehallion, Mariner and Rosebank), as well as a portfolio of additional material development and exploration opportunities, many of them operated. With around 400 million boe of discovered resources, it is the seventh largest resource holder on the UKCS, has one of the largest resource holdings in the west of Shetlands, and a production profile through to the 2050s. Details of the investment Siccar Point Energy completed two significant acquisitions during the last 12 months. Firstly, an interest in the Mariner field, and then in January this year, it acquired Austrian national oil company OMV’s entire U K b u s in e s s . How is the company financed? The company is financed through a combination of funds from shareholders, Blue Water Energy and Blackstone Energy Partners, as well as a Reserves Based Loan from a syndicate of leading international b a n k s. Founded in 2011, Blue Water Energy is a global, middle market energy private equity firm based in London. The firm primarily targets private equity investments in the global energy supply chain, while partnering w it h m a n a g e m e n t t e a m s a n d u s in g a n e t w o r k o f in v e s t m e n t a n d o p e r a t in g p r o f e s s io n a ls . B l ac k s t o n e E n e teams. It has e n e r g y in d u s t r

r g y P a r t n e r s h a s a r e c o r d b u ilt o n it s in d u s t r y e x p e r t is e a n d p a r t n e r s h ip s w it h m a n a g e m e n t invested over $8 billion of equity globally across a broad range of sectors within the y .

Why is the UK an attractive place to invest? T h e r e is s t ill s u b s t a n t ia l p o t e n t ia l in t h e U K C S a n d S ic c a r P o in t ’s p o r t f o lio is g e o g r a p h ic a lly f o c u s e d o n w h e r e it s e e s t h e g r e a t e s t g r o w t h p o t e n t ia l a n d lo n g e v it y . T h is c o m b in e d w it h a r e la t iv e ly s t a b le a n d lo w r i s k p o l i t i c a l c l i m a t e h a s c l e a r l y d e m o n s t r a t e d t h a t g l o b a l c a p i t a l c a n b e a t t r ac t e d t o t h e r e g i o n . What are the next steps? Following the OMV deal completion in January, the company has fully integrated both businesses and lo c a t e d t h e w h o le t e a m in A b e r d e e n . T h e c o m p a n y is g o in g t h r o u g h a r a p id g r o w t h p h a s e w it h S c h ie h a llio n r e c e n t l y r e t u r n i n g t o p r o d u c t i o n a n d M a r i n e r d u e t o c o m m e n c e p r o d u c t i o n i n 2018. T h e c o m p a n y w i l l be investing around $500 million over the next two years in these opportunities, as well as progressing a d d i t i o n a l g r o w t h o p p o r t u n i t i e s i n t h e p o r t f o l i o . T h e s e i n c l u d e d r i l l i n g a n a p p r a i s a l w e l l i n C a m b o i n 2018 prior to development sanction; progressing Rosebank to project sanction; and unlocking the potential of it s e x p lo r a t io n p o r t f o lio .

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7.

Glossary

1

bbl

Barrel (of oil) (one barrel = 0.16 m3 and 7.55 barrels = one tonne)

bcm

Billion cubic metres (one metre3 = 35.3 cubic feet)

BEIS

Department for Business, Energy & Industrial Strategy

boe

Barrel of oil equivalent – this includes oil, gas and other hydrocarbons and equates these with oil, in energy equivalent terms, so that a c o m m o n m e a su re c a n b e m a d e o f a n y o f th e m

boepd

B a r r e l o f o il e q u iv a le n t p e r d a y

Brownfield

A n o il o r g a s f ie ld a lr e a d y in p r o d u c t io n

Brent

As applied to trading, the standard quality of oil in Europe and elsewhere comprising a blend of four North Sea crudes from the Brent, Ekofisk, Forties and Oseberg fields

Brexit

Brexit is the popular term for the UK's intended withdrawal from the E u r o p e a n U n io n

Bull market

A market in which share prices are rising, encouraging buying

Capital Allowances

A t e r m u s e d t o d e s c r ib e t h e a v a ila b ilit y o f a n im m e d ia t e d e d u c t io n a g a in s t R F C T a n d S C p a y m e n t s f o r a lm o s t a ll in v e s t m e n t e x p e n d it u r e in c u r r e d o n t h e U K C S

Carbon price

T h e a m o u n t t h a t m u s t b e p a id f o r t h e r ig h t t o e m it o n e t o n n e o f C O in t o t h e a t m o s p h e r e

CCS

Carbon, capture and storage

CDA

Common Data Access Limited (a subsidiary of Oil & Gas UK)

Cost-plus contracts

A c o n t r ac t w h e r e a c o n t r ca t o r i s p a i d f o r a l l i t s a l l o w e d e x p e n s e s t o a s e t lim it p lu s a d d it io n a l p a y m e n t t o a llo w f o r p r o f it

CO2

Carbon dioxide (one of the six greenhouse gases under the Kyoto protocol)

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8

CO2e

C a r b o n d io x id e e q u iv a le n t

CoP

C e s s a t io n o f p r o d u c t io n

CT

Corporation Tax (see also RFCT)

Cushion gas

T h e m in im u m v o lu m e o f g a s r e q u ir e d in a s t o r a g e r e s e r v o ir t o p r o v id e t h e n e c e s s a r y p r e s s u r e t o d e liv e r g a s t o c u s t o m e r s w h e n r e q u ir e d

Direct employment

T h o s e e m p l o y e d b y c o m p a n i e s o p e r a t i n g i n t h e e x t r ac t i o n o f o i l a n d g a s a n d a s s o c ia t e d s e r v ic e s

EMV

E x p e c t e d M o n e t a r y V a lu e

Enhanced loss flexibilities

Enhanced ability to carry back or carry forward losses, especially with regard to decommissioning losses, to generate a repayment of tax

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E C O N O M I C R E P O R T 2017

ETF

E f f ic ie n c y T a s k F o r c e

EU

E u r o p e a n U n io n

FDP

F ie ld D e v e lo p m e n t P la n

FID

F in a l In v e s t m e n t D e c is io n

FPSO

Floating, production, storage and offloading vessel

GDP (Gross Domestic Product)

A m e a su re o f a n e c o n o m y

GHG

G re e n h o u se g a s

IEA

In t e r n a t io n a l E n e r g y A g e n c y

Indirect employment

E m p lo y m e n t a s a r e s u lt o f s u p p ly c h a in e f f e c t s c a u s e d b y o il a n d g a s sector activity. For these companies, extraction of oil and gas and a s s o c ia t e d s e r v ic e s w ill b e o n e p a r t o f a w id e r b u s in e s s

Induced employment

E m p lo y m e n t s u p p o r t e d b y t h e r e d is t r ib u t io n o f in c o m e f r o m a n d g a s se c to r

Investment Allowance

A b a s in - w id e c a p it a l in v e s t m e n t - b a s e d a llo w a n c e a g a in s t a c o m p a n y ’s S C lia b ilit y

IRR

In t e r n a l R a t e o f R e t u r n

Jack-up rig

S e lf- c o n t a in e d c o m b in a t io n d r illin g r ig a n d b a r g e w it h le g s t h a t c a n b e r a is e d a n d lo w e r e d in d e p e n d e n t ly o n t o t h e s e a f lo o r

M&A

M e r g e r s a n d ac q u i s i t i o n s

million boepd

M illio n b a r r e ls o f o il e q u iv a le n t p e r d a y

MER UK

Maximising economic recovery from the UKCS (ref. the Wood Review)

mtoe

M illio n t o n n e s o f o il e q u iv a le n t

NBP

National Balancing Point (fictional location in Britain where the NTS is notionally in balance and at which the trading of gas takes place)

National Transmission System

H ig h p r e s s u r e g a s t r a n s m is s io n s y s t e m in B r it a in o p e r a t e d b y N a t io n a l Grid – the ‘motorway’ network for gas

OGA

O il a n d G a s A u t h o r it y

OGTC

O il & G a s T e c h n o lo g y C e n t r e

OPEC

O r g a n is a t io n o f P e t r o le u m

P&A

Plugging and abandonment (of wells)

Production efficiency

T h e t o t a l a n n u a l p r o d u c t io n d iv id e d p o t e n t ia l o f a ll f ie ld s o n t h e U K C S

PRT

P e t r o le u m

p/th

Pence per therm (for gas)

Reserves

H y d r o c a r b o n s t h a t a r e a n t ic ip a t e d t o b e a c c u m u la t io n s f r o m a g iv e n d a t e f o r w a r d

6 4

t h e o il

E x p o r t in g C o u n t r ie s

b y t h e m a x im u m

p r o d u c t io n

R e v e n u e T a x re c o v e re d

fro m

k n o w n

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Resources

P r o d u c t iv e p o t e n t ia l a s s u m in g n o e c o n o m ic o r t im e c o n s t r a in t s

RFCT

Ring Fence Corporation Tax (as applied to upstream oil and gas production in the UK)

SC

Supplementary Charge (a corporate tax applied to upstream oil and gas production in addition to RFCT)

Semi-submersible rig

U s e d f o r d e e p w a t e r d r illin g . T h e y h a v e b a lla s t e d c o lu m n s t o r e m a in o n lo c a t io n b y e it h e r m o o r in g lin e s o r d y n a m ic p o s it io n in g s y s t e m s . U s e d f o r e x p lo r a t io n a n d d e v e lo p m e n t d r illin g .

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Small pools

F i e l d s i n t h e s i z e r a n g e o f 0 t o 50 m i l l i o n b o e f o r w h i c h t h e r e i s n o p l a n n o r in t e n t io n t o d e v e lo p a p la n b y o p e r a t o r s

Subsea tie-back

Subsea tie-backs usually connect small reservoir accumulations, developed using subsea trees and manifolds, back to a host platform f o r o n w a r d p r o c e s s in g a n d o r t r a n s p o r t a t io n

UKCS

U K C o n t in e n t a l S h e lf

Unconventional resources

R e s o u r c e s t h a t a r e p r o d u c e d o r e x t r ac t e d u s i n g t e c h n i q u e s o t h e r t h a n t h e c o n v e n t io n a l m e t h o d

UOC

U n it o p e r a t in g c o s t

US Lower 48 States

All the states in the United States that are adjoining

Wildcat well

E x p lo r in g f o r o il a n d g a s in a n u n p r o v e n a r e a

WTO

W o r ld T r a d e O r g a n iz a t io n

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ECONOMIC REPORT 2017

Notes

66

ECONOMIC REPORT 2017

oilandgasuk.co.uk

@oilandgasuk

[email protected]

Oil & Gas UK

ISBN 1 903 004 94 2 © 2017 The UK Oil and Gas Industry Association Limited, trading as Oil & Gas UK 68