'Worrying' decline in oil and gas production

The oil and gas industry's future is currently being reviewed

The sharp decline in production of oil and gas from under British waters is "worrying" industry leaders.

Trade body Oil and Gas UK says there is record investment this year of £13.5bn.

But its annual report on the industry's economic impact highlights the sharp fall in output of 19% during 2011 and 14% in 2012.

It says the industry's latest estimates of the continuing decline suggest a further fall of at least 8.5% during this year, with no recovery next year.

Only from 2015 should the current high level of investment begin to have an impact on raising output.

However, the level of investment will fall from £13.5bn this year to between £8bn and £10bn from 2015.

'Premature decommissioning'

The annual report also raises concerns the cost of extracting the average barrel of oil is rising rapidly.

The proportion extracted of each potential barrel of oil or its gas equivalent (boe) fell to 60% last year. Only seven years ago, the production efficiency rate was above 80%.

Because of challenging geology and unplanned shutdowns on offshore platforms, the unit cost per barrel for extracting oil from British waters, known as the UK Continental Shelf (UKCS), has gone up four-fold over the past decade.

This is described by UK Oil and Gas as "a worrying trend that could have a major influence on the longevity of the UK Continental Shelf".

The cost differs across oil and gas fields. It can cost as little as £5 per boe, with an average cost rising to £13.50, but it can rise, in one case, to £70 per barrel, which is roughly what the barrel is worth on the market.

Several fields now cost more than £40 per barrel to operate.

"Oil and Gas UK has found that much of the cost escalation is concentrated in a small number of fields, but the general trend for unit operating costs is rising markedly and this will not change unless the decline in production is reversed," says the report.

"If there were to be a fall in commodity prices, the more expensive assets would have to be shut down and could face premature decommissioning".

'Worrying decline'

Malcolm Webb, chief executive of Oil and Gas UK, said: "There is much more that needs to be done. Despite impressive investment in new developments, the production efficiency of existing assets has been in worrying decline, with a number of fields failing to produce as expected.

"The Department of Energy and Climate Change (in Whitehall) and the industry are working to tackle this serious concern through a joint task group."

Another group has been set up, led by industry veteran Sir Ian Wood, to take an independent look at the recovery of the UK's offshore oil and gas.

In other data in this year's economic impact report, the industry body says it is supporting about 450,000 jobs.

The report says the offshore sector generates almost £40bn a year, including £7bn in export earnings.

Investment last year rose to £11.4bn, and during 2011 and 2012, the DECC gave approval for projects that will require £22bn of capital expenditure, yielding two billion barrels of production over time.

Mr Webb said: "The recent sharpening of focus within government and industry has given investors confidence."

"With 15 to 24 billion barrels of oil or the gas equivalent still remaining to be developed, the UKCS possesses great potential for contributing to economic growth for decades to come".

'Volatile commodity'

Political reaction to the latest figures focused on the level of investment and the implications for next year's independence referendum.

Finance Secretary John Swinney said: "In time, the record levels of investment that we are currently seeing will raise production, which will see the sector continue to make a significant contribution to the public finances.

"With up to 24 billion recoverable barrels with a potential wholesale value of £1.5 trillion, more than half of the resources in the North Sea, by value, still to be extracted, it is clear that the industry will make an important contribution to the Scottish economy for decades to come.

"This latest report suggests that the industry will be active beyond 2050".

The UK government's Energy and Climate Change Minister, Greg Barker, welcomed the report which he believed showed the industry in "excellent health".

He added: "The report shows the positive impact the government's fiscal policy has had on the UK Continental Shelf.

"Field allowances and providing certainty over decommissioning relief will unlock billions of pounds of investment that would otherwise not have taken place.

"The report makes it clear that the UK's targeted tax regime will help ensure that we maximise the economic production of the country's oil and gas reserves.

"The UK government can afford to provide this support, even at the expense of short-term revenues, because of the size and diversity of the UK economy."