Economic Report 2018

ECONOMIC REPORT 2018

1. Foreword

Oil & Gas UK’s 2018 Economic Report demonstrates that the UK offshore oil and gas industry, now in its sixth decade of production, can continue to transform and reinvent itself.

Industry is emerging from one of the most significant and challenging downturns and the steps taken to date in response to the collapse in oil price have delivered tangible results. However, pressures still remain, particularly on the supply chain and on drilling activity. The drive for competitiveness therefore remains central to the UK’s long-term success. Working closely with government and regulators, the sector has become more competitive and the foundations are being laid to add a generation of productive life to the basin. But we can never rest on our laurels as other basins also continue to make improvements. Recent fiscal and regulatory changes have helped to position the UKCS as one of the leading destinations for investment. Ensuring a stable and predictable fiscal regime will be key to maintaining this position, especially with Brexit approaching. Industry also needs to demonstrate it can continue to improve its business and operational efficiency. Taken together, these actions will enable us to remain on track to maximise economic recovery from the UKCS. Even with increased oil and gas prices, cost control and capital discipline remain high on operators’ agendas. As our report shows, companies are indicating that any new investments need to break even at lower prices, often in the region of $40-50/boe. All evidence shows investors will continue to favour a conservative outlook because of the ongoing volatility of oil price movements. The fact that six major new capital projects have received operator approval in the first eight months of the year, two more than 2016 and 2017 combined, demonstrates the basin’s improved competitiveness. Any increase in activity is positive news for companies across the supply chain, but many still face persistent challenges. Revenue and activity reductions in recent years have stretched cash flow and margins, resulting in a loss of capacity. Coming from such a low baseline of activity, there has to be concern around the ability of the supply chain to sustainably service an increase in demand. We must learn from the past and move away from the boom and bust of previous cycles. We cannot afford to return to a position of cost escalation and instability seen previously. However, increased demand for goods and services will naturally push some costs higher, and margins do need to recover across much of the supply chain. In response, through Oil & Gas UK’s Efficiency Task Force, industry is focussed on driving further efficiency improvements, without which the basin will become less competitive. Further collaboration and more innovative contracting strategies are examples of this new way of working. A healthy balancemust nowbe struck to ensure a sustainable trajectory for the industry. There is renewed confidence in the long-term future of the UKCS, outlined in Vision 2035. This shared ambition aims to add a new generation of productive life to the basin and double the opportunity for the supply chain. However, whilst production performance remains strong, there is serious concern around the longer-term impact of low rates of drilling. A 50 per cent decline in drilling activity over the last five years means real concern about the ability of industry to realise its potential. Allied to this and despite an increase so far this year, we need to continue to see more capital investments being committed to on the UKCS. The competitive foundations are in place, and we must now build upon this to support an increase in activity.

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