A decade ago, oil&gas production in the UK stood at 4.5million barrels oil equivalent per day. Last year, that figure was 2.5mmboed. The UK Continental Shelf (UKCS) is in decline, but the UK oil&gas industry is most certainly not.
Significant opportunities remain domestically, be they in conventional oil&gas, alternative energy or the fast evolving domestic energy market.
The UK is a major centre for technology and innovation in oilfield services, with global potential underlining these islands as an important HQ destination and international hub. Beyond the operational landscape, Britain is a leading player in global capital markets and will continue to have a crucial role in the financing of oil&gas companies operating around the world.
The UKCS not dead in the water yet. Despite declining production levels in the UK, a daily output in the region of 2.5mmboed still ranks the UK among the top producing regions in the world.
Oil & Gas UK estimates that 25billion barrels of reserves remain to be discovered and produced from the North Sea. Production is forecast to continue towards the middle of the century and possibly beyond, if new technologies can deliver.
The scale of potential new discoveries and existing assets has, with notable exceptions, particularly in more frontier areas West of Shetland, fallen to a level that makes them less appealing to the major oil companies, which are pursuing more material targets globally.
However, this trend has created an exciting opportunity for a new wave of independents with lower materiality thresholds who can build attractive regional portfolios across exploration, appraisal, development and production assets.
Ultimately, though, all good things will come to an end and assets will need to be decommissioned. Oil & Gas UK reports there are about 470 installations, 10,000km of pipelines, 15 terminals and 5,000 wells that will need to be decommissioned.
This is big business in itself, estimated to require in excess of £23billion of expenditure – and, moreover, it will enable an additional expertise to be developed in the UK oil&gas industry with global significance as other basins move into their later life.
The UK also has a crucial role in global capital markets for oil&gas. The market capitalisation of oil&gas companies listed in the UK is about £667billion. Although the figure is dominated by BP, Shell and BG Group, there are about 130 oil&gas companies listed in the UK. Expand this to include natural resources stocks and the figure rises to about 300.
Of the 90 or so junior oil&gas companies listed on the AIM market, less than 20% are predominantly focused on the North Sea. Many of the larger players do have meaningful UK operations, but following last year’s acquisition of Venture Produc tion by Centrica, no one is entirely focused on the North Sea, although newly listed EnQuest is moving into this gap in the market.
Building on the equity markets outlined above, the UK is a major centre for debt and project finance. Despite the recent credit crunch, a significant number of British banking institutions enjoy a global reputation as financiers of oil&gas projects around the world. Many of the banking teams in London and Aberdeen have a global role for oilfield services within their organisations.
The UK has many advantages as a location for regional or global headquarters, and enjoys a favourable time zone relative to key oil&gas producing and consuming countries. There is a proven rule of law and a strong culture of corporate governance, supported by a stable fiscal regime – an important factor that the next UK Government, however it is formed, will hopefully appreciate.
Maintaining globally competitive corporate and personal taxation rates will be a key factor in the UK retaining many of these businesses and senior executives. Both are increasingly internationally mobile. Oil & Gas UK estimates that about 450,000 people in the UK are currently employed directly and indirectly by this industry. This talented workforce provides a major competitive advantage. So offering globally challenging careers supported by investments in training and apprenticeships is critical to help maintain this strength into future generations in the face of recently declining numbers of graduates entering the sector.
Alternatives also provide a significant opportunity set. A diverse and sustainable energy mix is a key commercial and political issue of global scale, and one that the UK and Europe are actively participating in.
The adoption of the new Renewables Directive in December 2008 is designed to maintain Europe’s position at the forefront of renewable-energy development and has established the 20/20/20 targets – 20% reduction in CO by 2020, 20% reduction in energy consumption and 20% of all energy to be renewable.
The opportunity that alternative energy and renewables present for many energy and service companies is obvious. Indeed, given the experience and expertise gained through oil&gas development, it would be surprising if such companies were not at the forefront of this.
Understanding of reservoirs and infrastructure is critical to make carbon capture and sequestration a success. Similarly, the development of offshore windfarms and tidal-energy projects require many of the same skills and technologies that are already being used to service the UK North Sea.
The domestic energy market is also an evolving opportunity. As recently as 2004, Britain was an exporter of natural gas.
That position has rapidly changed and we now import about half our gas needs, a figure that is set to increase into the future. Infrastructure has not evolved as quickly and now presents an opportunity and, indeed, a need for the UK.
For example, the UK currently has gas storage capacity equivalent to about 14 days of average demand. This compares with about 77 days in Germany and 90 in France. Declining conventional reservoirs, along with salt caverns, have potential future uses in gas storage. With the UK reliant on imports from further afield, energy security of supply is likely to remain a major issue.
The UK is favourably located for LNG imports. This is obviously attractive for our own consumption, but there is also further potential offered by infrastructure connections to continental Europe (parts of which are landlocked) that could help position the UK as an energy hub. With a deregulated and liquid market for trading commodities, I know there are further advantages in this respect.
The future of oil&gas in Britain firmly remains one of opportunity, as well as being one of significant change. Those individuals and organisations which can adapt their skills and strengths to benefit from this situation will thrive, ensuring our continuing role as a major centre in the global oil&gas industry.
Alec Carstairs is head of oil&gas M&A at Ernst & Young in Scotland