The UK oil and gas industry is expected to approve less than £1bn of fresh capital in new projects this year, as lower oil and gas prices drive investment below the average £8bn/year seen over the last five years, according to industry association Oil & Gas UK.

 

The group, launching its 2016 Activity Survey on February 23, said that low returns from existing production due to reduced commodity prices left little to re-invest.

 

Total capital expenditure is also falling. It is expected at around £9bn this year, the association said, down from £11.6bn last year and £14.8bn in 2014.

 

The UK Continental Shelf is entering a phase of "super maturity," the association said. Oil & Gas UK chief Deirdre Michie said: "The report highlights the challenges that the falling oil price poses in our capability to maximise economic recovery of the UK’s offshore oil and gas."

 

Brent crude has dropped from over $100/barrel in 2014 to around $30/b. Oil & Gas UK said that if the price remains at around $30/b for the rest of 2016, some 43% of UK oil fields were likely to run at a loss.

 

Oil & Gas UK says that there could still be 20bn barrels of oil equivalent available, but action will need to be taken to fully benefit. Operators must cut costs and the government should consider tax changes, it said. There has been some success with cutbacks. Unit operating costs are down by a third from an average $29.30/barrel in 2014 to $20.95 in 2015. They are expected to fall again this year to $17/b, which is a 42% improvement in two years.

 

But Michie said the government needed to help with changes to the tax system. Producers pay special taxes at a headline rate of 50%, or up to 67.5% for the older fields paying Petroleum Revenue Tax. "A significant permanent reduction in those rates is now urgently needed," said Michie.

 

Other potential fiscal changes would include measures to help late-life assets, incentives for exploration and improving the effectiveness of the industry's investment allowance, Oil & Gas UK said.