A press release put out by Oil & Gas UK in early February says the oil and gas industry in the UK could suffer from the current financial crisis. “Urgent measures are needed to prevent the effects of the global recession combined with the banking crisis from dampening new investment in the recovery of the UK’s still significant oil and gas reserves” For those who don’t know, Oil & Gas UK is a representative organization for the UK offshore oil and gas industry. Its members are made up of companies licensed by the UK government to explore for and produce oil and gas in UK waters as well as companies that make up any part of the industry’s supply chain The volatile press release accompanied the publication the organization’s annual survey of activity for the industry. The Oil & Gas UK 2008 Activity Survey, which summarizes planned expenditure on the UK continental shelf (UKCS) by 75 oil and gas companies, indicates the combination of low oil prices and the freezing of capital markets will have a serious effect on E&D activity over the next 12-18 months. This aging petroleum province has been fighting for E&P dollars for some time and had recently made headway in attracting more companies to developing the estimated 25 Bboe in remaining reserves. According to Malcolm Webb, Oil & Gas UK chief executive, “The UKCS is clearly a mature oil and gas province, but production has responded to a step-up in investment in 2005-2006, and as a result, the annual rate of decline has slowed from 7.5% to 5% in 2008. This year and next, however, capital investment in exploration and development is forecast to drop, thus hitting future production. We cannot stand by and simply allow the decline rate to accelerate. “Of the UK’s remaining 25 Bboe, the survey tells us that companies have plans to invest £44 billion to recover 9.6 Bboe,” Webb said. “Our research shows that if investment could be sustained at around £5 billion per annum, the industry could hold production decline at 4% to 5% a year on average.” The problem is that if investment falls, decline will again accelerate. The organization’s latest estimate indicates capital investment in new and existing fields fell from a peak of £5.6 billion in 2006 to just under £5 billion in 2008, despite rising oil prices. The present scarcity of capital means new investment is being secured for only the most attractive projects, which means investment will fall to somewhere in the range of £3.5-4.5 billion in 2009 and could decline further to between £2.5 billion and £4 billion in 2010. According to Oil & Gas UK the break-even oil price for new field investment is now more than $40. That means that only one-third of the new developments currently under consideration can hope to break even at current costs. “Since the oil price was last in the $40-45 per barrel range four years ago, the cost base and supplementary charge on corporation tax have both doubled,” Webb explained. “The fundamental mismatch of the tax rate and business environment is detracting from the value of investments, rendering them less competitive. This becomes particularly apparent when oil prices are lower.” Though exploration and appraisal drilling activity in 2008 (109 wells) was on par with 2007, there is no such hope for 2009. Oil & Gas UK believes there will be a rapid reduction in drilling in 2009. In 2008, analysts estimated 113 wells would be drilled in 2009. Oil & Gas UK’s latest survey predicts there will be only 77 wells, only 34 of which have secured a drilling rig. “The UK oil and gas industry is at a crossroads,” Webb said. There are many commercial opportunities that could attract investment in the right circumstances, but in the short term, the UK needs to focus on mitigating the effects of the downturn. “The industry is working hard to adjust its cost structure and retain its impressive skills base, but we need government help to ease the flow of capital from banks to smaller exploration and production companies, improve the availability of credit to the supply chain and ease the tax burden on new oil and gas developments,” Webb said. The organization is already in talks with the government to devise measures that address these concerns. No doubt, the UK could use some bold, swift policies that will help ameliorate a crisis that is expected to exist for quite some time. The full report is available here