Investment in North Sea set to plummet by £ 1 bn this year

Jul 01, 2007 02:00 AM

Investment in the North Sea is set to plummet by £ 1 bn (EUR 1.5 bn) this year in the face of rising costs, falling gas prices and the government's fiscal regime, a benchmark report by the oil and gas industry warned.
The 2007 economic report by Oil & Gas UK, the new pan-industry trade body, reveals that increasing costs and higher taxation is already having an impact on the North Sea industry's ability to retain its global competitiveness. And unidentified oil majors have shelved several exploration and production projects, according to industry sources.

The North Sea has long been one of the most expensive oil and gas provinces in the world and operating costs have soared by 40 % since 2005. But production has failed to keep pace with the rising costs.
Total spending on exploration, development and production of oil and gas reserves rose by 20 % to £ 11.5 bn (EUR 17.1 bn) last year. But the total investment this year is expected to fall to between £ 10 bn (EUR 15 bn) and £ 10.5 bn (EUR15.7 bn) because of the "severe pressure" on the competitiveness of the UK Continental Shelf. The report forecasts a fall in revenue to the Exchequer from £ 11 bn (EUR 16.5 bn) to £ 8 bn (EUR 12 bn) this year.

Trisha O'Reilly, the director of communications for Oil & Gas UK, said: "We are facing some major challenges. Capital efficiency has declined. We are spending more but we have delivered less than intended."
Ms O'Reilly continued: "Production has declined faster than we anticipated, due to reservoir performance and slippage of projects, but also falling gas demand as buyers switch to coal."

She warned: "Investment is likely to fall following a two-year surge. There are signs that [the North Sea] is beginning to come off the boil and we are beginning to see projects being parked for the time being."
The investment forecasts follow in June's revelation that oil giant Shell is planning to sell off some of its major offshore assets in the northern North Sea and to scrap proposals for a £ 25 mm (EUR 37 mm) sub-sea centre of excellence in Aberdeen, Europe's oil capital. But the UK Oil & Gas report states that with an estimated 25 bn barrels of oil still to be recovered there is still a "huge prize" to be won by the industry.

Ms O'Reilly denied suggestions of pessimism in the industry. She stressed: "We are still seeing significant levels of activity in the UKCS. It is still a good place to do business. It isn't going to get any easier in a mature basin. And we are going to have to keep on looking at how we can improve our competitiveness."
A second report, published by the Scottish Enterprise Energy Team, forecasts considerable scope for Scottish companies in the UK Continental Shelf with 25 fields predicted to start production this year.

Brian Nixon, the energy team director, said: "The report shows that total expenditure this year will continue at the same high levels as last, with spending by 2011 only slightly lower than levels between 2002 and 2004 and that the success of the industry at the moment is extending its lifespan and delaying decommissioning work.”
"We hope it will be a very handy tool for SMEs [small to medium enterprises], in particular, to help them take advantage of any opportunities on offer to grow their businesses."

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