Debate Pack: Offshore oil and gas industry

Offshore oil and gas industry

This Commons Library Debate pack provides a summary of the state of the UK offshore oil and gas industries and outlines the industry, the regulatory framework and key challenges and long term issues for the industry. The Government has introduced an Energy Bill (HL) (2015-16) which addresses the objective to maximise the economic recovery of oil and gas in the UK Continental Shelf (UKCS).

State of the industry

The UK offshore oil and gas industry is important to the economy. The industry supports around 375,000 jobs; it contributed some 0.8% of GDP in second quarter 2015 down from a high of 2.5% in second quarter 2008.

Production levels of oil and gas from the UK Continental Shelf (UKCS) are in decline. The remaining potential of the UKCS is dependent on the future levels of investment. The rapid fall in oil prices since the middle of 2014, from over $100 per barrel (bbl) to below $30/bbl at times in January 2016, has put significant pressure on the UK offshore oil and gas industry.

Volume and value of production

Oil production declined steadily between 2000 and 2014, while gas production began to fall after 2004.

Oil prices over the period have risen from $28 per barrel in 2000 to highs of $111 per barrel in 2001-12 before falling slightly to just under $100 per barrel in 2014.

Against generally declining oil and gas production, rising prices over most of the period has meant industry income has remained at between £25 billion and £30 billion a year between 2000 and 2013.

Tax revenue has made an average annual contribution over the 10 years 2004 to 2014 of £7.4 billion, though it has declined rapidly in the last couple of years to just over £2 billion in 2014.

Employment in oil and gas

Oil and Gas UK reduced its estimate (in September 2015) of those employed in the oil and gas industry to 375,000 jobs from 450,000 at the start of 2014.

Oil & Gas UK estimated that at the start of 2014, the 450,000 employees comprised:

• 36,000 people directly employed
• 200,000 jobs in industry supply chains
• 112,000 jobs associated with these employees’ spending in the wider economy
• 100,000 jobs associated with the export of goods and services.

Changing regulatory framework

The regulatory functions for licensing offshore oil and activities previously exercised by DECC will in future be exercised by the Oil and Gas Authority (OGA). In the Scotland Bill (2015-16) , regulation and licensing of offshore energy is a reserved matter, this is regardless of which country the waters belong in the UK.

The Government’s Energy Bill (HL) (2015-16) responded to the need to maximise the economic recovery of oil and gas in the UK Continental Shelf (UKCS), the Bill:

• formally transfers the licensing, exploration and development functions currently carried out by the Department for Energy and Climate Change (DECC) to the Oil and Gas Authority (OGA).
• establishes the OGA as an independent regulator and a government company; it is currently an executive agency within DECC.

Recent Government announcements

In response to the oil and gas market changes, the Government announced on 28 January 2016 the following:

• a major new injection of cash into North East Scotland’s economy with the signing of a new £250m UK City Deal, jointly funded by the UK and Scottish Governments.
• £20m of new funding for a second round of new seismic surveys to unlock new exploration activity on the UK Continental Shelf (UKCS), To back genuine innovation, the data will be made publically available, with £1m allocated to award innovative use of data to unlock new fields. This additional investment will also help to accelerate drilling new wells, replenishing our reserves and leading to new infrastructure projects.
• an Oil and Gas Ambassador will be appointed to help ensure the best possible access for UK companies to markets overseas, promote the North Sea around the world and boost inward investment.
• a new Ministerial group on Oil and Gas, chaired by Energy and Climate Change Secretary, has been set up to support the oil and gas industry. The group will coordinate the UK’s response to the oil price and focus on exports, skills and investment.
• the Oil and Gas Authority will publish a UKCS Decommissioning plan by the early summer, as decommissioning is a fact of life in a mature basin, that will enable the £15bn Aberdeen service sector to become the centre of a new global market for decommissioning and help UK firms to be ready to capitalise on the huge opportunities that are coming in the years ahead. This will be supported by the Natural Environment Research Council who are investing up to £1m in new projects to support the development of expertise in the UK on decommissioning and its environmental management.

Long term future for offshore oil and gas

The principle long term issues surrounding the industry are:

• continuing and increasing cost pressures resulting in falling in employment
• the growing pace of decommissioning while ensuring that the remaining infrastructure supports new developments where necessary
• declining tax revenues but the need for a fiscal regime that supports investment
• a very uncertain price outlook
• competition from other sources of oil and gas in the UK and from other energy sources such as renewables

Detailed briefing papers

There is further detailed briefing in the following Library Briefing papers

• UK Offshore oil and gas industry
• Taxation of North Sea oil
• Oil prices
• The Energy Bill 2015-16: Background and changes in the Lords