The UKCS in 2005 - Sustaining Success, Competing for the Future

1
The UKCS in 2005 - Sustaining Success, Competing
for the Future

• Steve Harris
• Communications Director
• UKOOA

2
UKCS in 2005 - Sustaining Success, Competing
for the Future

• Introduction the Global perspective

3
Demand for crude oil has surged, with an obvious
impact on crude oil prices
World Spare Oil Production Capacity
Source EIA, Sept 05

• Crude oil prices have risen to prices last seen
  in the 70s
• From a low of 11 in 1998 to 60 in 2005
• This time less of a price shock
• Driven by growth in demand rather than drop in
  supply
• Rising global oil prices have lead to
• Increase in UK fuel prices
• Rising gas prices
• Placing additional strain on UK and Global economy

4
However, UK is better placed than many to face
oil price rises

• UK Economy is less sensitive to oil price
• Oil intensity halved since 1975
• UK has been a net oil exporter for 25 years
• Could still be a net exporter until end of decade
  
• Currently saves imports of over 30 billion
• Tax Revenues from UKCS have surged in last 12
  months
• Expect to reach 10 billion in 2005/6
• Revenues doubled from UKCS in a year

5
Substantial opportunities remain in the UKCS,
but life is getting harder

• Produced 34 billion boe over the last four
  decades (barrels oil equivalent)
• Could still have another 28 billion boe (inc
  yet-to-find)
• Reserves replacement in 2004 (DTI)
• Produced 95 bcm gas (billion cubic metres),
  replaced 25 bcm (26)
• Produced 725 million bbls oil, replaced 460
  million bbls (64)

6
UKCS faces strong competition - even around the
North Sea

• UK finding costs relatively high (/bbl)
• Netherlands half cost of UK (Southern Gas
  Basin)
• Norway fifth cost of UK (Central / Northern N
  Sea)
• New UK developments typically modest in size
• UK discoveries now (25 million bbls oil or 3
  billion m3 gas )(historic field sizes /-500
  million bbls oil, /-100 billion m3 gas)
• Norway modest to very large
• Reflects maturity of UKCS
• UK has advantages
• Extensive infrastructure coverage aides swift
  development
• Shared sense of urgency (Window of Opportunity)
• Wide diversity of investors (circa 120 in UK
  vs. circa 30 in Norway)
• Ready access to UK European gas markets

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UKCS in 2005 - Sustaining Success, Competing
for the Future

• How is the UKCS responding in 2005

8
Both investment and expenditure on increase in
2005

• Total Spend in UKCS could reach 10 billion in
  2005 (Exploration, Capex Opex)
• Capital investment has turned round over last 15
  months
• Was declining rapidly post 2002
• Could reach 4.5 billion in 2005 (forecast 3.8
  billion in Jan)
• Est. 24 projects approved in 2005
• vs 27 in 2004 14 in 2003
• Operating costs expected to exceed 5 billion in
  2005,
• 0.3 billion increase on 2004,
• Increasing expenditure to extend life of assets
  and infrastructure

9
Activity has increased in 2005, but still to
feed through to production

• Development well drilling is increasing
• First time in three years
• Drilled 166 in 2004, compared with 113 for Q1/2
  2005
• Still to assess impact on production
• Est 16 start-ups in 2005 (vs. 11 in 2004)

10
Oil price is not the only factor driving activity
on UKCS

• Industry and DTI through PILOT have collaborated
  to promote a positive business environment
• Recognising high cost and maturity of UKCS
• Sought new means to encourage investment, attract
  new players and maximise economic recovery
• 2001 Progressing Partnership
• 3 voluntary processes designed to facilitate
  asset churn
• Fallow acreage exploit or drop, preemption
  transparency, negotiation conduct
• 2003/4 Infrastructure Access Code of Practice
• Facilitates satellite development through
  existing extensive infrastructure
• 2004/5 Brownfields Initiative
• Quantifies remaining potential and window of
  opportunity
• Initiatives to share best practice and encourage
  new technology
• Asset Stewardship process to encourage full
  exploitation
• Ongoing decommissioning working group

11
Resources and skills are in high demand across
oil industry

• Supply chain is working flat out
• Takes six twelve months for full impact to flow
  through to wider sector
• Drilling Rigs
• Drilling fleets are fully booked for 2005, very
  few left for 2006
• Rig-rates doubled (jack-ups) or trebled
  (semi-sub)
• Increasing collaboration in drilling programmes
• 2 Jack-ups, 3 semi-subs returned to N Sea in last
  year
• Katrina added to shortage of rigs
• Skilled personnel in tight supply across industry
  supply chain
• ILT Capacity and Capability initiative
• Industry Technician training programme now
  producing 100 new technician apprentices per year

12
Exploration Appraisal - benefiting from recent
initiatives

• Exploration Appraisal activity surged
• expect 80 wells for 2005
• Benefited from range of collaborative PILOT / DTI
  / Industry initiatives
• Fallow / promote / Commercial CoP /
  Infrastructure CoP
• Heightened rate of EA is critical to future of
  UKCS
• 2002/3 slump in EA is impacting the rate of new
  developments

13
Insights from 22nd 23rd licensing rounds

• 22nd Licensing round
• 97 licences offered to 58 companies
• 15 new entrants
• 3 firm commitment wells
• Planned in a 30 world
• Focus on heartlands
• Balance of risk and consolidation
• Proof PILOT initiatives are working
• 23rd Licensing round
• 152 licences offered to 99 companies
• 24 new entrants
• 17 firm commitment wells
• Planned in a 40 world
• Interest centered on less explored,
• Mid-North Sea High, Moray Firth, East Shetland
  Platform, Atlantic Margin
• Renewed focus on heavy oil
• Higher risk domains

Number licences awarded 22nd 23rd rounds
14
UKCS in 2005 - Sustaining Success, Competing
for the Future

• What is driving the success of the UKCS in 2005

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Increasing diversity of investors is benefiting
UKCS

• Over the last five years there has been an
  increasingly diverse range of companies investing
  in the UKCS
• Medium/large producers now produce 40 of UKCS
  production
• From asset transfer and result of mergers
• Small producers are growing in number and
  increasing their share of production
• Majors remain a foundation of UKCS
• New business models are being applied across UKCS

16
New Entrants have led growth of UKCS over last
five years

• 35 new entrants since 1999
• Inc small, medium and large operators
• Now account for third of total capital investment
• All investors have a choice of where and when to
  invest
• Critical to maintain the attractiveness of the
  UKCS

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UKCS in 2005 - Sustaining Success, Competing
for the Future

• Long term Opportunity

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The UKCS has a long future ahead of it
This is the tale of two futures
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with substantial rewards
Projected tax revenues from UKCS (based on 40
projection)

• There are substantial rewards for Government and
  Industry if we can sustain the attractiveness of
  the UKCS

20
UK emerging as global centre for oilfield goods
services

• UK oil gas industry supported by a substantial
  oilfield service sector
• Grown rapidly over last decade
• Now a major export industry
• Increasing number service companies support
  European, African Middle East operations out
  of UK
• UK is global leader in key oilfield technologies
• e.g. Subsea, Drilling technology
• Subsea set to grow in the UK as industry seeks to
  extend field life.

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UKCS in 2005 - Sustaining Success, Competing
for the Future

• How do we sustain current success in years ahead

22
Lessons from the recent past

• Need to maintain a stable business environment
• Oil and gas prices are volatile
• UKCS is a mature high cost basin
• Tax increases in 2002 rocked investor confidence
  in UKCS
• In the following two years against relatively
  flat oil prices
• Exploration Appraisal dropped
• Development drilling declined
• Capital investment declined
• DTI Industry through PILOT have done a great
  deal to restore investment climate
• Investment confidence has since returned to UKCS

14 Rigs stacked - Autumn, 2003
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Conclusions

• Without UK oil gas, the nation would be even
  more exposed to the impact of current oil prices
• Fundamentals remain, the UKCS is a mature, high
  cost basin
• Activity and Investment have increased in 2005,
  but the full impact is still to feed through to
  production
• Oil price is not the only factor driving activity
  on UKCS
• PILOT initiatives have created a positive
  business environment
• Investor confidence is critical
• Increasing diversity of investors is benefiting
  UKCS
• New Entrants have lead growth of UKCS over last
  five years
• All investors have a choice of where and when to
  invest
• Critical to maintain the attractiveness of the
  UKCS