Kevin McGrory: We must act to ensure future for UK oil and gas

By The Newsroom
Published 7th May 2010, 00:59 BST
Updated 7th May 2010, 01:11 BST
THE UK is a mature oil and gas province, past its peak, competing for investment in a global market. Nevertheless, huge reserves of oil and gas remain.

Industry association Oil and Gas UK (OGUK) estimates that up to 25 billion barrels of oil equivalent could still be produced from UK waters. OGUK forecasts that with sufficient investment the UK could be producing 1.5 million barrels a day in 2020, enough to satisfy about 50 per cent of forecast energy demand.

The average size of new fields gets smaller over time. The average in 2009 was 20 million barrels, compared to 500-plus in the 1970s. Small fields are not as attractive to large multinationals because their primary goal is to replace reserves.

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The government has encouraged smaller independent companies to enter the market. In 2008, 80 per cent of UK exploration wells were drilled by small independents, but exploration is usually funded by equity capital and funding disappeared when the financial crisis hit. This, coupled with a fall in the price of oil from $140 to $40 per barrel and high costs due to contract lag, led to a reduction in the number of wells drilled in 2009.

The oil price seems to have stabilised at around $80 per barrel and costs have fallen, but funding remains an issue. OGUK has suggested government should incentivise exploration drilling by advancing recovery of costs without delaying until the costs can be offset against revenue.

Revenues from small fields don't justify the costs of installing a platform and pipeline, so existing infrastructure is used. Much of this was installed in the 1970s and 1980s. New users provide income which offsets the costs of maintaining the infrastructure, extending its economic life. However, a disparity between the amount the new user offers to pay and that which the owner demands often leads to protracted negotiations.

The government could consider abolishing Petroleum Revenue Tax. It was abolished in 1993, for new fields only. Removing it on older fields would extend their economic life.

Industry has lobbied government unsuccessfully to guarantee the tax relief. If we are to avert the premature demise of the UK as an oil and gas province, government may have to think again.

• Kevin McGrory is a partner in Shepherd and Wedderburn's Energy Practice