Foreword

Welcome to Oil & Gas UK’s 2008 Economic Report. In a year where demand for energy has risen to the top of the international agenda, it is right to focus on the achievements of our own offshore oil and gas industry and its contribution to the UK’s economy.

The current scale of this industry in the UK reflects the £400 billion which we have spent over the last forty years on exploration, development and ongoing investment and operations throughout the UKCS. The industry now provides high quality employment for 450,000 and should deliver around £21 billion in taxes this year, both from direct taxation of production and the wider economic activities of the UK supply chain; it will also benefit the balance of payments to the tune of £45 billion.

In 2008 we anticipate that around one billion barrels of oil and gas will be produced from the UK Continental Shelf (UKCS). This should meet all of the UK’s oil demand and some 70-75% of gas demand in 2008. Undoubtedly we need to do all we can to continue to bring new production on-stream and maximise the recovery of the UK’s indigenous oil and gas reserves. This is emphasised by the government’s own forecasts which highlight that oil and gas, whether produced in the UK or not, will account for a growing portion of the UK energy supply - up to 80% in 2020.

Whilst we may have produced nearly 38 billion barrels of oil and gas over the last forty years, the UK still has substantial oil and gas potential. It is estimated that somewhere between 16 and 25 billion barrels of oil and gas remain to be recovered from the UKCS, with BERR carrying a high case of 39 billion barrels still to be recovered. Recovering these remaining reserves is not a certainty. It will require massive additional investment, both in money and expertise. Currently we are spending around £13 billion a year across our offshore activities. This includes expenditure of more than £ 1 billion per year to extend the life of many of our existing offshore assets and onshore plants. This investment is necessary to keep assets operating for decades longer than originally envisaged to realise the full potential of the UKCS. To sustain this rate of expenditure industry, regulators and government alike must ensure that the UK remains globally competitive in the current investment climate. At the same time we are relentlessly pursuing our goals to minimise the environmental impact of our industry and ensure that this is the safest oil and gas province in the world.

It is good to see that the government shares our belief in the future potential of this industry. This was emphasised by the meeting which took place at the end of May 2008 between the Prime Minister and Chancellor of the Exchequer and the Board of Oil & Gas UK which promoted a positive discussion on current barriers to investment and a range of measures to overcome them. We are eager to do all we can to enhance recovery and unlock the full potential of the UKCS and keen to work closely with government in this endeavour.

Changes to the fiscal regime regarding decommissioning announced in Budget 2008 are a helpful example of this new dynamic which can provide a benefit to all concerned. These measures will help extend the productive life of many of our older fields which might otherwise have to be decommissioned and, in turn, aid the development of further small oil and gas fields which could not support their own infrastructure. In a similar vein, the Secretary of State for Business has recently announced plans which may exempt investments in unprofitable parts of older fields from Petroleum Revenue Tax (PRT). This could affect around 30 of our older fields and whilst BERR suggests that it could liberate an additional 20,000 barrels of oil per day over time, we believe the potential prize is significantly higher. Importantly, the changes regarding PRT acknowledge that high tax rates can deter investment and may impair ultimate recovery.

There is growing recognition of the contribution our supply chain is making in its own right to the economy, whether measured in terms of employment, direct taxation or exports. Whilst the industry in the UK is a global leader in offshore and subsea engineering, it is still highly reliant on domestic business to provide the foundations for its international success. Currently, each £billion spent by the industry provides around 20,000 jobs across the supply chain. Our supply chain forms a key part of the wider energy sector in Britain and is well positioned to take advantage of the surge in global energy investment. Supply chain exports are increasing rapidly and at £4-5 billion per year now represent about a quarter of total exports of goods and services by the UK’s energy industries sector.

Looking forward, our industry will help define the UK’s reputation as a leading energy nation, able to provide the technology, human resources and skills needed to meet the world’s demand for energy. At Oil & Gas UK we want to do all we can to help meet this challenge. Our membership continues to increase, up by a quarter over the last year, as companies recognise the strength of purpose and the clarity of vision that a unified pan-industry trade association can provide.