It is generally accepted that the UK oil output has passed its peak and the future is decline. The rate of that decline, however, is uncertain. The latest UKOOA Economic Report predicts that UK output will increase from 3.2million barrels oil equivalent per day in 2005 to 3.7million in 2007, and then fall to 3million in 2010.
Last month Alistair Darling, the Trade and Industry Secretary, announced a record breaking round of licences offers in the 24th licensing round. There were 150 licence oil and gas exploration and production licences issued to 104 companies covering 246 blocks – the highest number ever. Furthermore oil companies are making record profits and the UK Treasury is raking in record tax revenues, but that doesn’t necessarily mean that all is well. Indeed, there are some worries about the future of the industry.
Reports have indicated that the North Sea is becoming less competitive. UKOOA's report has shown that, while exploration and appraisal activity remains encouragingly strong, cost inflation, a forecast fall in production of 250,000 barrels per day, and signs of a drop in capital investment this year following three years of growth, raise concerns about the future of the industry. Economists have also suggested that the massive rises in oil &gas prices over the past three years or so have masked the financial impact of the production declines.
Different reports seem to suggest different things about the long-term future, however the reality is that the UK Oil and Gas continues to be a very profitable industry and one, which many companies, including new entrants are keen to be involved in. 2007 is unlikely to be any different.
It is clear that the past year has been a bumper one for oil and gas deals, with more than 230 deals announced globally. Aberdeen companies have had their fair share of these as well, for example the Halliburton deal. Mergers and acquisitions activity depends on a vibrant market and with commodity prices strong, the long-term outlook for the industry would appear sound. Reports have indeed suggested that merger and acquisition activity in the industry in 2007 looks set to be another promising year.
There are fiscal changes ahead that could be good news for the North Sea. The announcement that HM Revenue & Customs wishes to set up a joint group with the industry to explore various tax issues is welcome. Furthermore there are proposed changes to petroleum revenue tax (PRT), which also spells good news. With advances in technology and increases in commodity prices, it is likely that some fields that have been decommissioned may, in the future, become viable projects for redevelopment and they no longer will fall within the scope of PRT. Indeed, the impact of technological advances should continue to assist the industry in the future.
That is not to say that are not concerns about the year ahead. A recurring theme of 2006 was a skill-shortage in the industry, and that issue again is likely to be at the forefront of the industry's mind. Furthermore, there are also plenty concerns over the impact European working time regulations will have, if they are applied to the letter.
Overall whilst it seems there are different conclusions that can be drawn on the long-term future of UK oil and gas, and despite some threatening signs, there is nothing to suggest that 2007 is set to be anything but another successful year for the industry.