Current Press Releases Oil & Gas UK Forecasts Continuing Strong Investment but Warns of Declining Capital Efficiency Oil & Gas UK, the leading representative organisation for the UK offshore oil and gas industry, today (25 February 2008) revealed that while the UK oil and gas industry continues to invest heavily, a worrying trend of declining capital efficiency is making the UK continental shelf (UKCS) less competitive in a global context. On the publication of Oil & Gas UK's 2007 Activity Survey, Malcolm Webb, chief executive of the organisation, said: "Investment continued strongly on the UKCS in 2007 with £12 billion being spent in exploring for, developing and extracting the UKs oil and gas reserves. The report shows there is continued appetite for investment but cost inflation of 15 to 20 per cent a year is reducing the efficiency of such sums and denting the competitiveness of projects on the UKCS." The new report highlights the major tension between costs and activity on the UKCS. Investment in developing new oil and gas reserves dropped by around £1 billion to £4.9 billion in 2007; this fall in investment would have been more dramatic without the impact of significant cost inflation. Investments in the UKCS are only a third as efficient in 2007 as five years ago. To put this in context, four years ago, the industry invested £3.4 billion (2003 money) to develop and over time deliver 1.3 billion barrels of reserves. In 2007, £4.9 billion was invested in order to deliver just 600 million barrels of oil and gas over time. Operating existing assets also continued to get more expensive in 2007. The new report shows operating expenditure rose by £500 million in 2007 to £6.2 billion and is expected to rise further to around £6.5 billion in 2008, reflecting a steady but substantial increase in expenditure on asset integrity as well as further inflationary pressure on the UKCS. Mike Tholen, Oil & Gas UK's economics director, commented: "The survey does, however, show that there are significant opportunities to sustain investment of £29 billion over the next ten years. £12 billion, or 40 per cent, of that investment is secured but getting the green light for the remaining 60 per cent (£17 billion), and the development of the associated 2.7 billion barrels of production, will depend on these possible projects competing favourably with those in other basins around the world." The decline rate of UK oil and gas production slowed markedly in 2007 to 5 per cent, and all of this reduction was in gas. While some of this drop was due to natural decline, there was also a fall in demand for UK gas due to the mild 2006/7 winter and the greater use of Norwegian and Dutch supplies. Meanwhile, oil production responded to the start-up of 20 new fields in 2007 and over the year, remained static at 1.6 million barrels. It is expected that 15 more fields will start up in 2008 and overall production is expected to decline at only 4 per cent a year until the end of the decade. While exploration and appraisal drilling activity rose in 2007 from 70 wells to 111 wells, the increase was largely accounted for by appraisal drilling instigated by the need to reduce technical and commercial risks in such a high cost environment. Exploration drilling in pursuit of new oil and gas reserves increased in 2007 from 29 to 34 wells, two thirds of which were drilled near to existing fields. Initial indications are that the accompanying 60 per cent increase in spending on exploration and appraisal to £1.3 billion resulted in 13 discoveries totalling 300 to 400 million barrels of oil and gas. Worryingly however, despite the increase in spending, this was less than was discovered in 2006. While the commercial viability of developing these discoveries is still to be assessed, recent trends tell us that challenges exist in developing small accumulations in the current cost environment. Malcolm Webb concluded: "Over the years, the valuable experience gained in a maturing oil and gas basin means that the UK now has access to world-class people and technology, extensive infrastructure for bringing oil and gas ashore and a range of well-established initiatives to improve the efficiency of working practices. However, the North Sea's maturity also makes it more sensitive to cost inflation which is clearly affecting its capital efficiency and hence competitiveness. "It must be recognised that, even in the current price environment, the tax regime continues to have an impact on long-term investment confidence. The primary challenge facing industry, regulators and Government now is to ensure that the UK remains globally competitive, enabling it to attract the required investment in future and keep the supply chain engaged on the UKCS." The full report is available on the Oil & Gas UK website http://www.oilandgas.org.uk/issues/economic/index.cfm -Ends- Notes to Editors Oil & Gas UK is the leading representative organisation for the UK offshore oil and gas industry.  Its members are companies licensed by the Government to explore for and produce oil and gas in UK waters and those who form any part of the industrys supply chain. It has 67 members. Costs in 2007 money 2006 2007 2008 forecast Total production (million boepd) 2.9 ~2.8 2.6-2.7 Oil production (million boepd) 1.6 ~1.6 1.6 Gas production (million boepd) 1.3 ~1.2 1.1 Total expenditure (£billion) 12.4 ~12.4 12.9-13.3 Capital expenditure (£billion) 5.8 ~4.9 4.6-5.0 Operating expenditure (£billion) 5.8 ~6.2 6.5 E & A expenditure (£billion) 0.8 ~1.3 1.8 Capital and operating cost per barrel ($/boe) 23 ~27 29 (2009-10) Exploration wells drilled 29 34   Appraisal wells drilled 41 77   Development wells drilled 192 163   New field approvals 13 15   New field start-ups (number, million boe over time) 14 (213) 20 (1000) 15 (330) Volumes discovered (million boe) 500 ~300-400   Taxation paid (£billion) 9.1 ~8.0 ~8.0 Effective price (combination of oil/gas price, $/boe) 58 56   boepd: barrels oil and gas equivalent per day For further information, please contact: Sally Fraser Press & PR Manager Oil & Gas UK 232/242 Vauxhall Bridge Road London SW1V 1AU                                                                  Tel:         020 7802 2404/2400 Fax:        020 7802 2401 Email:    sfraser@oilandgasuk.co.uk Pager:    07659 183 999 25/02/08