UK E&P Economic Report Paints Bleak Picture

The UK upstream faces a very difficult time unless the government can provide vital support for the sector, according to the industry group Oil & Gas UK (OGUK). Securing and sustaining investment in the sector is critical if the UK is to quickly realise a net-zero future, it said March 16 as it published its 2021 Business Outlook. 

The pandemic, which began after the commodity price began to weaken, has led to a significant decline in offshore activity levels and overall levels of expenditure falling by more than a quarter in the last year alone. And while commodity prices are recently back to pre-Covid-19 levels, the recovery offshore is still very fragile, OGUK told journalists at a briefing March 15. It expects a 5%-7% drop in output this year and next as operations including maintenance work – such as on the major Forties pipeline – put off last year is executed this year with the easing of restrictions on working conditions.

Production from UK waters still managed to meet around 70% of the country’s oil and gas needs in 2020, evidencing the continued need for indigenous supply. There are also some early signs of improved sentiment emerging, with new investors continuing to be attracted by the remaining potential of the North Sea: deals representing about $2.7bn and covering some 350mn barrels of oil equivalent have already been made this year.

But for this to continue companies will need fiscal and regulatory support, OGUK's market intelligence manager Ross Dornan told press, referring to the long-delayed Transition deal, formerly the Sectoral deal.

To realise the UK’s shared climate goals, as well as maintain affordable energy and a strong base for the UK’s energy supply chain to build from, OGUK reinforced that government policy and regulation must continue to prioritise domestic production over imported energy.  

OGUK CEO Deirdre Michie said £3 ($4.2)bn worth of investment has been deferred from company plans in 2020 and 2021. "A climate-friendly future needs significant investment in indigenous opportunities so companies right across the sector can continue to develop low-carbon solutions. That is why we are working with the government to deliver a transformational North Sea Transition deal, which will drive forward carbon capture and storage; hydrogen; and low-carbon projects across the UK."

The Transition deal, whereby a series of mutual obligations will protect the industry while ensuring the net-zero carbon goal is reached without losing security of oil and gas supply, is still to come. Dornan said it would be separate from the review of the licensing conditions which the government is also working on. The day before the launch, the upstream regulator, which operates at arm's length from government, produced guidance for companies to follow throughout the life-cycle of projects in order to retain the licence to operate.