Third Supplementary memorandum by UKOOA
Please find attached the latest information
regarding production forecasts for the UK Continental Shelf, prepared
by the Economic Advisory Group for PILOT, using data provided
by UKOOA's members and analysed by Prof. Alex Kemp and his team
at Aberdeen University. This information supersedes that supplied
to you in our evidence which was based upon data collected in
Please note, in particular, the term "unrisked"
attached to some of the graphs and the explanation of this term
which is to be found on page six.
INDUSTRY ACTIVITY SURVEY 2001
Note for PILOT by the Economic Advisory
The annual Industry activity survey was commenced
in August 2001 and followed the format of previous years with
Operators providing detailed project data to both UKOOA and the
DTI. Aggregation and analysis of the data continues but it is
now timely to provide feedback on the high level messages of the
survey. These are:-
The forward production profile and
remaining reserves are broadly unchanged from the year 2000 survey.
Capital costs necessary to deliver
the above production have increased sharply.
Intermediate targets for 2005 (proposed
in June) are realistic and appropriate.
The "Vision 2010" production
target of three million boepd remains a challenge, a gap of at
least 0.8 million boepd remains to filled in year 2010.
The survey is based on the investment intentions
of Operators in the summer of 2001, at that time oil prices were
close to $25 a barrel. Since then oil prices have fallen to below
$20 a barrel, continued weakness in the oil price could have a
significant impact on investment plans for 2002.
Following the success of the joint industry/DTI
activity survey of year 2000 an update was initiated in August
2001 with a joint invitation from UKOOA/DTI to Operators requesting
their participation in the year 2001 survey. All Operators were
requested to provide data (production profiles, capex, opex, tariffs
and removal costs) on all UKCS projects for which they are the
Operator. These projects are classified by maturity status, namely
Sanctioned, Incremental, Probable and Possible; for the latter
three categories Operators were requested to indicate the probability
of the project proceeding within the next five years. The definitions
of these categories are given below:
Sanctioned: Fields in production
or under development
Incremental: New projects within
sanctioned fields (typically infill drilling, compression and/or
Probable: New fields with greater
than 50 per cent chance of proceeding within five years
Possible: New fields with less than
a 50 per cent chance of proceeding within five years
The survey data have been collected under a
strict confidentiality process with subsequent data aggregation
and analysis being carried out on behalf of UKOOA by Professor
Alex Kemp (University of Aberdeen). The DTI has received the same
data and is undertaking similar analysis in-house. To respect
the confidentiality process this paper contains no data or commentary
on the characteristics of individual projects or the investment
intentions of individual Operators.
The survey does not cover exploration or appraisal
activity. Such expenditure is not included in the capex
data. Similarly, the production forecasts do not include
any contribution from future exploration success. To the extent
that exploration success has been delivered since the last survey
and that such discoveries merit classification, in the opinion
of the Operator, as a Probable or Possible development then such
data are captured by the survey.
The purpose of this paper is to provide PILOT
with a summary of the conclusions from the survey and implications
for Industry activity levels and PILOT targets.
An excellent response to the year 2001 survey
has been achieved with information on many new projects being
provided. The table below summarises the response and compares
this with the data from earlier surveys. The data reflect the
investment intentions of Operators during the summer of 2001.
The survey data and subsequent analysis does not take account
of any adverse impact the events of 11 September 2001 may have
on future investment levels in the UKCS. The oil price has fallen
significantly since the late summer, when the data were collected
from Operators, further declines may put at risk the projections
of production and capex contained in this assessment.
UKOOA SURVEYOCTOBER 2001
|Number of fields/projects
The survey confirms that the number of Possible projects
is significantly higher than last year.
This section provides an overview of UKCS production and
compares the forecasts with those from the previous survey. The
chart below illustrates aggregate UKCS production on an unrisked
basis. Overall production is expected to be lower in the next
three years with slight increases thereafter. (Gas production
has been converted into barrels of oil equivalentboeterms
using a factor of 5,800 scf/boe.) In the period 2001-20 production
is shown to be lower by some 86 million boe compared to the year
2000 survey. Although we have more potential projects going forward
than in the year 2000 survey this has not translated into higher
reserves. Indeed it is perhaps disappointing that, despite some
notable exploration success over the last year, the overall production
prognosis is broadly similar. By way of contrast the year 2000
survey revealed an increase in projected 2000-10 production of
1.5 billion boe over the year 1999 survey.
The following two charts illustrate the specific contribution
of oil and gas on an unrisked basis. Both register lower production
in the early years. For oil the shortfall is recovered in the
later years leaving oil production higher (to 2020) by 430 million
bbls. Gas production is sharply lower in the period to 2006 and
in cumulative terms remains some 3 TCF below the prognosis of
year 2000. It is difficult to be specific on the causes of this
without compromising the confidentiality of the data, but it is
clear that the contributions from Incremental, Probable and Possible
projects are all down from the year 2000 survey data. It is likely
that some of the individual projects in these categories have
experienced a material reduction in reserves.
Of course, the production prognosis is far from certain and
results from the aggregation of a large number and variety of
projects. The following graph illustrates the risk associated
with the production profile by highlighting the contribution from
the maturity categories and the inclusion of a risk weighted profile.
The latter is derived by simply multiplying the relevant production
stream by the probability of the project proceeding, as advised
by the Operator. Visually, the impact of risking the production
is to flatten the production profile in the early years. Note
that a significant gap remains with respect to meeting the Vision
target of 2010 production of three million boepd. Some progress
has been made towards narrowing this target over the last year
though a considerable challenge remains.
Arguably the risking approach above is too severe with low
probability projects shown as making too little contribution.
An alternative is to build some additional slippage into the timing
of the projects but without risking the actual production contribution.
It is generally the case that survey data from Operators are provided
on the basis that the phasing of first production from new projects
is the most optimistic date achievable. Such projects are unlikely
to be accelerated but are vulnerable to slippage as a result of
various factors, such as unresolved technical and commercial issues,
economic viability, partner alignment, transportation ullage,
The graph below assumes that all the Probable projects are
slipped one year and all the Possible projects slipped two years.
The timing of Sanctioned and Incremental projects are unchanged;
the data itself are unrisked.
The graph illustrates that slippage flattens the UKCS production
profile with the prospects of more or less static aggregate production
for the next four to five years. It is debatable how realistic
such arbitrary assumptions are but perhaps this representation
is indicative of the production outcome that would transpire if
oil prices continue to soften or resource constraints emerge in
delivering the near term increases in demand from the supply chain.
The analysis on Industry capex complements that on production,
discussed above. On a cautionary note EAG would advise that capex
projections beyond the first five years are not particularly meaningful.
Many operators do not forecast detailed investment projections
beyond this period. Such projections therefore have the familiar
rapid decline in expenditure in the more distant years.
The first graph and table of statistics below compares the
year 2001 survey results with the previous year. The most notable
feature is the higher capex in all categories of projects. On
an unrisked basis the potential expenditure is some £5 billion
greater in the period 2002-05. Over the longer period from 2001-20
this increase is close to £6.5 billion. Most of this increase
is attributable to increased expenditure expectations on the sanctioned
and probable portfolio. Recognising the fact that the production
outlook, discussed above, indicates a small change over the same
period the analysis indicates a deterioration in basin economics.
We would normally expect an increase in capex on this scale to
deliver an increase in reserves. The fact that this has not occurred
could be a signal that the sanctioned production profile is not
fully costed; further increases in capex in the medium term could
become a feature of subsequent surveys. Other explanations for
the capex increase could be from cost pressures (such as rising
rig rates) and deferral of expenditure from year 2000 and 2001.
Drilling costs represent nearly 50 per cent of the future industry
Despite this deterioration in basin economics it is encouraging
to note that the Industry is maintaining its commitment to the
UKCS by maturing the many investment options summarised in the
UKOOA SURVEYSTATISTICS (2001 SURVEY)
|Field Category||No of Fields
||Reserves Million boe||Capex £ millions
||10,938 (11,253)||8,105 (4,450)
|Probable fields||64||2,612 (2,239)
|Possible fields||84||1,600 (1,784)
Data from 1 January 2001.
2000 Production = 1.6 billion boe, figures in brackets denote
2000 survey data.
The following chart illustrates the capex projection by exposing
the probability categories. The solid line represents the risked
capex, derived by multiplying the relevant capex stream by the
probability of the development proceeding. This approach to risking
still produces arguably a somewhat peaky profile, with risked
capex in 2002 rising close to £4 billion. It should be remembered
that a large and growing proportion of the expenditure remains
to be sanctioned and is therefore at risk. The sanctioned (blue)
capex is less than half the potential spend in the year 2002 and
a much smaller proportion thereafter.
Complementing the approach taken with the production forecast,
the graph below illustrates the impact of slipping all the Probables
one year and all the Possibles two years. This generates a smoother
capex profile with estimates averaging circa £3.5 billion
pa until 2005.
Operating costs remain a stable feature of UKCS activity
with the trend forecast close to £4 billion pa until 2005.
The graph below represents the unrisked opex picture.
There are currently a number of metrics covering investment
and production that PILOT has established for the UKCS. These
are well known but in summary these are:
PILOT Vision for 2010: Production at three million
boepd and capex at £3 billion per annum (the later to include
removal costs plus E&A costs); and
Intermediate Targets for 2005: Aspirational production
target of four million boepd and capex at £3 billion per
annum (this to be measured on a three year rolling average).
The two graphs in this section illustrate the challenges
that remain in meeting these aspirations, starting with production.
For production the gap to the "Vision 2010" target
of three million boepd has narrowed by some 0.3 million boepd
since the year 2000 survey and now stands at around 0.8 million
boepd on an unrisked basis. The risked production forecast for
2010 is 1.8 million boepd leaving a very large gap to the target.
Whilst modest progress has been made over the last year there
is still time to close the gap through future exploration success,
deeper development of undeveloped discoveries and further incremental
activity in existing fields.
The survey confirms that the aspirational production target
of four million boepd for 2005 remains feasible though it will
require the development of nearly all of the incremental reserves
and Probable fields to secure it. Interestingly, the risked production
outcome for 2005 is 3,897 mboepd whilst the outcome from slipping
Probable and Possible fields by one year and two years respectively
is virtually identical at 3,915 mboepd.
For capex (graph overleaf) the large visual gap in 2010 is
to be expected at this stage. It is envisaged that the gap will
begin to narrow once 2010 becomes within the detailed five year
capex planning horizon that many Operators adopt. The extent of
this will depend in large measure on as yet unidentified new developments
arising from future exploration success and progress towards further
commercialisation of existing discoveries.
The graph below includes the removal cost estimates captured
by the survey and estimates of future E&A spend (though not
contingent development capex), conservatively included at £300
million per annum. The most recent DTI survey on exploration activity
(January 2001) indicated that such expenditure could be as high
as £500 million in 2002, falling thereafter.
In the medium term the target of £3 billion in 2005
looks achievable. The capex slippage case discussed earlier generates
capex of £3.2 billion in 2005 (this excludes the contribution
from E&A and removal costs). The risked capex figure for 2005
is £1.3 billion, which is unrealistically low for the reasons
As an Industry the pressure continues to ensure that development
costs are kept as low as possible as improvements are made though
sharing best practice and applying new technology. The notion
of a capex target is therefore secondary to the objective of securing
maximum production, capex is simply a means to an end. If projects
can be delivered at lower costs this is in the best interest of
all the stakeholders. The key measure for success is sustaining
The survey has also collected data on the expected timing
and magnitude of removal costs for the UKCS. The graph below represents
the profile of cumulative removal costs for the UKCS alongside
a comparison with forecasts from earlier surveys. The current
survey predicts that the aggregate removal costs for the basin
are broadly unchanged from data in the year 2000 survey (circa
£8 billion year 2001 money) though there are phasing changes.
Overall the timing of the spend has been brought forward by comparison
to the year 2000 data. These data are important in respect of
the Vision target for capex which includes expenditure on removal
The higher cost trend without any corresponding material
increase in reserves revealed by the survey is unexpected, and
represents a key cause for concern. It is unclear whether this
survey had identified a trend or whether there are special "one-off"
In many ways this analysis confirms the growing maturity
of the basin and the continuing challenge to curb the adverse
trend in basin extraction costs.
Many opportunities remain as evidenced by the large number
of individual projects that Operators have identified. Bringing
all these to fruition along with future exploration success will
be necessary if the Vision 2010 is to be delivered.
Following on from this analysis, EAG makes the following
recommendations to PILOT.
The new survey data suggests that the proposals for intermediate
targets (for year 2005) on production and capex presented by the
EAG to PILOT in June 2001 remain valid. The EAG therefore proposes
that PILOT should endorse these intermediate targets on the following
production: an aspirational target of four million
boepd in year 2005; and
capex: a target (three year rolling average) of
£3 billion per annum. The capex target includes development
expenditure, removal cost expenditure and exploration and appraisal
These interim targets are however, subject to caveats for
adverse changes in oil prices and the fiscal regime.
Year 2002 capex
The analysis suggest a wide range of capex outcomes for year
2002 ranging from £2 billion for sanctioned expenditure to
in excess of £4.5 billion if all possibilities are included.
History suggests that the recent surveys have been over optimistic
in the early years and that a prudent approach should be taken.
For the current survey we also have the renewed uncertainty over
the direction of oil prices through the next year. If the slide
below $20 continues then it is likely that some slippage to project
schedules will begin to become more significant. Taking account
of these factors the survey suggest that capex for 2002 will be
at or around similar levels for 2001 and that an outcome in the
range £3.3 billion to £3.8 billion is likely.