KN40044

KEY NOTE Gas Industry Market Report : June 2004

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This report covers: gas industry, oil, natural gas, natural gas liquids, exports, sales,imports, crude oil, primary oils, the oil fields, the gas fields, key, trade associations, Russia's role in oil and gas, terrrorist attacks, oil prices, greenhouse gas emissions, consumption, capital expenditure, drilling intentions,

Companies covered include: BG Group, BP Exploration Operating Company, Centrica, Shell UK, Talisman Energy UK, Total E & P UK,

EXECUTIVE SUMMARY

This Key Note Market Report analyses the UK offshore oil and gas industry, which covers oil and gas reserves in the UK Continental Shelf (UKCS). In 2002, the total value of sales of oil, gas and related products was virtually static, at £24.12bn. However, based on the fact that oil prices rose in 2003, Key Note estimates that the market increased in value by around 5% to £25.32bn. Revenues from royalties and taxes fell by 6.8% to £4.91bn in 2002.

Oil is the largest sector and accounts for more than half of production in terms of millions of tonnes of oil equivalent (mtoe). Output of oil peaked in 1999, since when it has been declining as UKCS reserves become depleted. Gas production peaked in 2000 and, again, has been followed by a decline as reserves are used up. Unless new reserves are discovered and/or the rate of consumption decreases, the output of oil and gas from the UKCS faces a long-term decline.

The UK market is influenced by several factors, some of which are external to the UK. Although the UK has an important oil and gas industry within a European context, on the international stage it is very small as far as reserves are concerned and is using up its reserves at a faster rate than many countries with much larger reserves. As a consequence, the UK will become increasingly dependent on imports, many of which will be from countries with which, traditionally, the UK would not have sought trade relations, owing to political or cultural differences and/or past conflicting interests. Coupled with this future dependence on imports, there is concern about disruption of oil and gas supplies. In particular, the threat of terrorist attacks on oil/gas infrastructures both within and outside the UK — e.g. pipelines transmitting supplies across vast distances of Europe, Russia and beyond — is increasing.

Issues of concern within the UK offshore oil and gas industry are decommissioning and `greenhouse gas' emissions. As UKCS reserves become depleted, offshore installations no longer have any use and must be dismantled and removed in accordance with approved environmental procedures. These add a burden to the finances and resources of the UK industry. Regarding greenhouse gas emissions, a final decision has yet to be made concerning the extent to which these must be reduced in the context of the EU Emissions Trading Scheme. A drastic reduction could pose difficulties for some oil and gas companies. The UK Government is encouraging development in the UKCS via its new Frontier Licence, in the 22nd offshore licensing round announced in March 2004. This new licence offers a financial incentive to companies investigating opportunities in the UKCS.

The industry will increasingly be developed by smaller companies than in the past; the large international operators in the North Sea are focusing their attention on other parts of the world, where oil and gas can be extracted more economically. In the UKCS, most activity will be through the development of smaller reserves, many of which are being linked to existing fields and infrastructures. Fewer large reserves are now being discovered and the more recently discovered smaller reserves are usually technologically and economically challenging to develop into viable commercial propositions.

TABLE OF CONTENTS

Text © 2004 Key Note

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Last updated by Amanda Porteous July 2004