According to the UK government, the UK attracts 40% of total Japanese, US and Asian investment into the European Union. The oil and gas sector is well established and has attracted investment for more than 35 years. The industry is a significant sector of the economy, contributing over 20% of total industrial investment and creating well over 270,000 jobs. As of 2004, the UK was the fourth largest gas producer, and the 13th largest oil producer.

East Brae

The oil and gas sector has seen change in recent years as the original exploration and development companies have passed ownership of some mature and marginal fields to independents and new entrants. As the UK North Sea has matured, there has been a shift from mainly searching for new large oil and gas discoveries to improving the productivity of existing fields, as well as developing smaller fields that were previously not considered economically viable. As a result, a new and important sector has emerged, attracting new investment while the larger companies have sought to consolidate their portfolios and redeploy to larger projects in other areas of the world.

There is considerable potential for further UK Continental Shelf (UKCS) activity on many fronts – particularly the further development of existing fields, use of existing infrastructure to develop smaller fields and exploration of frontier areas. The UK government is keen to sustain current levels of investment and attract new investors to ensure that recovery from the North Sea is maximised.

GLOBAL VIEW
Crude oil prices have risen dramatically in the world market. In a relatively short period prices have risen from a low of $10 per barrel in 1998 to over $70 per barrel in 2005. The industry is facing challenges in trying to increase supplies to match rising global demand. Security of energy supply has become a major concern around the world. Oil prices remain uncertain in the short-term, due in large part to the political instability of key oil exporting regions; supply disruptions due to natural events, such as weather; and a higher-than-expected demand in major developing economies.

With this instability comes opportunity. The UK is well positioned as a significant producer and has traditionally been a net exporter of oil. However, as UK (and global) demand for gas increases while the output from the North Sea declines, the UK will switch from energy self sufficiency to a major energy importer in a relatively short period of time. The UK is looking towards additional new investment in oil and gas production, to curtail imports as far as possible. According to the Department for Trade & Industry (DTI), up to 43 billion barrels of oil equivalent could still be recovered from the UKCS.

THE UKCS CHALLENGE AND OPPORTUNITY
The UK Continental Shelf is a relatively high-cost, mature basin. Significant opportunities remain, but the industry is faced with a number of key issues in developing oil and gas prospects. These include: technical challenges, increasing costs, funding, price volatility, exchange rate fluctuations, and fiscal and political stability. The UK government’s main influence lies with the latter three, and will have an effect on decisions that investors make.

Since the 2002 introduction of the Special Corporation Tax (SCT), and budget measures announced in December 2005, perceptions of UK fiscal risk have and will increase with investors. In fact, the recent increase of a flat rate tax without any sort of public commitment to review the situation if prices fall significantly undermines the UK’s credibility in creating an environment attractive to investors.

Notwithstanding the recent announcement of a tax increase, and despite the fact that the finding costs are high and the average discovery size is decreasing, the UK still has its advantages. There is extensive infrastructure in place, which is attractive to development and investors. There are approximately 120 oil and gas companies investing in the UK. PILOT, the industry and government initiative, chaired by the Energy Minister, works to create an appealing investment climate for the UKCS to maintain competitiveness. PILOT, originally created in 1998 as the Oil and Gas Industry Taskforce, has already made a significant contribution to tackle issues of declining investment through a number of initiatives.

One example is the fallow block initiative, which aims to stimulate activity on fallow blocks through a process which allows for the relinquishing and reassignment of blocks, where the initial term of the licence has expired and there has been no activity for a period
of years. The objective is to contribute to a quick and efficient exploration of the UKCS. If sufficient activity is not carried out in the licences, the acreage may be relinquished so as to enable others to be given the opportunity to work with the same area with other ideas. Another joint initiative on brownfield development is looking to stimulate production of an estimated three billion barrels of additional oil from mature fields.

As a consequence of the aforementioned factors and initiatives, there is upturn in oil and gas activity and an increase in the number of development, as well as exploration and appraisal, wells being drilled. Underpinning this renewed effort is a cooperative framework between industry, government and the unions through initiatives such as PILOT, and through the UK Offshore Operators Association (UKOOA).

The UK government recognises the need for investment, and has provided incentives for new entrants, including an exploration enhancement supplement. In fact, there were 35 new entrants since 1999 including small, medium, and large operators accounting for a third of total capital investment. In summary, the UK attracts investment through:

• Generally good business environment
• Access to opportunities
• Sources of finance
• Skilled supply chain
• Infrastructure access
• Skilled workforce

Malcolm Webb, UKOOA’s Chief Executive, says: “The UK remains a vibrant and highly-active oil and gas province, one in which the industry makes a massive contribution to society and where investment opportunities are available for all types of companies. The industry is determined to play its part in keeping it that way.”

For more information, contact:
Anna C Hensel, External Affairs Manager

Marathon Oil Corporation,
and Chairman of BABi Energy Forum on:
Tel: +44 (0)20 7298 2628
E-mail: ahensel@marathonoil.com