This Commons Library briefing paper provides a summary of the state of the UK offshore oil and gas industries and outlines the industry, the regulatory framework and key challenges for the industry.Jump to full report >>
This Commons Library briefing paper provides a summary of the state of the UK offshore oil and gas industries and outlines the industry, the regulatory framework and key challenges for the industry. The Government has introduced an Energy Bill (HL) (2015-16) which is considering how to respond to the need to maximise the economic recovery of oil and gas in the UK Continental Shelf (UKCS).
The UK offshore oil and gas industry is important to the economy. The industry directly supports around 375,000 jobs; it contributed some 0.8% of GDP in second quarter 2015 down from a high of 2.5% in second quarter 2008 (ONS. GDP(O) Low Level Aggregates Quarter 2 (Apr to June) 2015 - Month 1)
Production levels of oil and gas from the UK Continental Shelf (UKCS) are in decline. The remaining potential of the UKCS is dependent on the future levels of investment. The rapid fall in oil prices since the middle of 2014 from over $100 per barrel (bbl) to some $55/bbl by December 2014 and below $50/bbl at times to September 2015 has put significant pressure on the UK offshore oil and gas industry.
Trends since 2000 are shown below. While oil and gas output volumes fell by almost half between 2000 and 2009, higher prices meant total income increased to 2008. Since then production has fallen by another 40% but continued higher prices, at least until 2013, meant revenues were around 15% higher than 2009.
However, oil prices as measured by the Brent price fell from $110 per barrel (/bbl) in mid-2014 to $55/bbl at the end of December 2014 and traded below $50/bbl at times up to October 2015 and below $40/bbl at the end of December 2015 (see below for further discussion).
As a result industry incomes are likely to be much lower in 2014 and into 2015.
The price of Brent crude oil reached an all-time high above $145/bbl in July 2008. After more than three years of (unusual stability) in the range of $100-115/bbl, Brent prices collapsed dramatically in the second half of 2014. Brent prices fell from $110/bbl in mid-year to $55/bbl at the end of December and was trading around $50/bbl in October 2015 and below $40/bbl in late December 2015, the lowest level since 2008 during the depths of the world recession.
This slide in crude oil prices began in mid-2014 as the slowdown in demand growth in developing countries reinforced the effect of the continuing expansion of crude oil supply in North America, largely from shale oil, leading to a rapid build-up of excess commercial stocks.
The decline in price accelerated in late-November when the Organisation of Petroleum Exporting Countries (OPEC) declined to cut its output to rebalance the market and abandoned its earlier, successful, short-term management of supply in an effort to regain market share
It is said the main reason for the policy change was to counter the effect of the increase in US oil output principally from shale oil and from lower prices for shale gas.
The annual average UK wholesale gas price fell from 68 pence per therm (p/th) in 2013 to 50 p/th in 2014.
However, this decline had little to do with the slide in the oil price, at least until the last few weeks of 2014.
The collapse in oil prices was not matched by those of gas and, by January 2015, the gap between Brent oil prices and wholesale gas prices, expressed in barrels of oil equivalent (boe), was the narrowest since the 2009 recession.
There were an estimated 36,600 employees in Great Britain working in companies engaged in the extraction of oil and gas or related support activities at the end of 2013.10
Around three quarters of these jobs (27,600 employees) were based in Scotland, and of these the majority were based in Aberdeen City (23,400 employees).
A further 8,200 employees were working in businesses mainly engaged in the manufacture of refined fuels from crude petroleum in 2013 – these are not counted in the figures above. If these employees are counted as part of the oil and gas industry, then the total number of people directly employed was 44,800.
The regulatory functions for licensing offshore oil and activities previously exercised by DECC will in future be exercised by the Oil and Gas Authority (OGA). In the Scotland Bill (2015-16) regulation and licensing of offshore energy is a reserved matter, this is regardless of which country the waters belong in the UK.
In June 2013, the then Secretary of State for Energy and Climate Change, Edward Davey asked Sir Ian Wood to conduct a review into the recovery of oil and gas from the UK’s continental shelf (UKCS).
The Government published its response on 20 March 2015. The Infrastructure Act 2015 established the framework for MER UK in primary legislation and provided the Secretary of State with the power to raise a levy to finance the Oil and Gas Authority (OGA).
In its response to the Wood Review, the Government said that it would establish the Oil and Gas Authority (OGA) to “undertake the licensing, exploration and development functions work currently carried out by DECC”.
It was established as an arm’s length body accountable to the Secretary of State, DECC and became an executive agency on 1 April 2015.
The OGA is now an established body with a management team of eight people and offices in Aberdeen. Progress on its main activities were outlined in September 2015. It is expected total staff will be around 180.
The Health and Safety Executive (HSE) Energy Division (ED) is responsible for regulating the risks to health and safety arising from work in the offshore industry on the UK Continental Shelf (UKCS).
To apply the UK's legislation and monitor safety within the offshore oil and gas industry, HSE's Offshore Division has a team of specialist inspectors who provide expertise in the regulatory inspection; well engineering; occupational health; process safety; fire and explosion; marine and structural; evacuation and escape; mechanical; electrical; and diving.
In the UK, the HSE publishes an Annual Offshore Statistics & Regulatory Activity report
The Department for Energy and Climate Change is responsible for the framework of environmental protection measures that has been developed to minimise the impact of oil and gas activities
This offshore environmental protection regime covers oil and gas development throughout its life cycle, from the initial licence application to the final decommissioning of facilities. All activities that could potentially impact on the environment are subject to assessment, and significant activities are controlled through the issue of permits, consents or authorisations
There is also an inspection and enforcement regime in place to confirm compliance with the conditions included in the environmental approvals
Two recent forecasts of the medium outlook for UKCS oil and gas production have been published by Oil and Gas UK and by DECC.
Oil and Gas UK have forecast expected oil and gas production to 2019. There are two major components to its forecast – production from existing assets and production from new field start-ups.
Output from fields that were already in production prior to 2014, the large majority of fields that represent ‘the base’ (see figure below), is expected to decline by around 12 per cent.
This is a slight increase in the decline rate from 2013 as many fields advance through the later stages of production and anticipates a drop-off in brownfield investment as competition for limited investment funds intensifies.
That loss of production is expected by Oil and Gas UK to be offset by around 67 million boe from new fields, split equally between those that commenced production in 2014 and those expected to start in 2015. Whilst there is reasonable confidence in the output from 2014 start-ups, there is greater uncertainty around a further 15 fields scheduled to come on-stream in 2015.
If first production on these new start-ups is delayed, then the central forecast may not be realised.
Further into the future, the UKCS’ production performance becomes even more uncertain. There are still a number of significant ongoing developments yet to produce first oil or gas that will offer a significant boost to production towards the end of the decade.
As a result, Oil and Gas UK’s most cautious production estimate shows an upturn by 2017.
The previous section looked at the medium term challenges facing the UK offshore oil and gas industry, this section discusses the long term future for the sector.
Any discussion of the longer term must recognise the considerable uncertainties; these are likely to include:
Commons Briefing papers CBP-7268
Author: David Hough