Ofgem’s Winter 2007- 8 Consultation SeminarBirmingham, 27th June 2007

David Odling, Oil & Gas UK

The UK Continental Shelf in 2007and

The Future of UK Gas:a ‘Phase Diagram’

(i) the UKCS in 2007

3

UK has been producing oil and gas for more than 30 years

New Reserves

Production

Ultimate Recovery~ 60 + billion?

0

15

30

45

60

1970 1975 1980 1985 1990 1995 2000 2005

billi

on b

oe

(bar

rels

oil

equi

vale

nt)

Discovered Produced

4

UK oil and gas production and international comparison

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1970 1975 1980 1985 1990 1995 2000 2005

Milli

on b

oepd

GasOil

Source: DTI

0.0 5.0 10.0 15.0 20.0

Indonesia

Kuwait

Nigeria

United Kingdom

Algeria

Venezuela

United Arab Emirates

Norway

Mexico

China

Iran

Canada

Saudi Arabia

USA

Russian Federation

Million boed

GasOil

Source: BP Statistical Review

Annual oil and gas production in UK

In 2006, UK was 12th

largest producer in the world

5

0

2

4

6

8

10

12

2003 2004 2005 2006 2007 2008 2009 2010

£bi

llion

200

6 re

al te

rms

E&ACapexOpex2005 survey

0

2

4

6

8

10

12

2003 2004 2005 2006 2007 2008 2009 2010

£bi

llion

200

6 re

al te

rms

E&ACapexOpex2005 survey

UKCS expenditure up £2 billion in 2006 v 2005

In 2006:• Spent ~ £11.5 billion • Capex & Opex ~ £5.5 bn each; Exploration & Appraisal ~ £0.6 bnOutlook• Expect to spend £40 billion 2007- 2010• 25% up on previous year’s survey forecast

UKCS Total Expenditure

6

BUT, costs of new developments rising rapidly

• Technical Costs drive the economics of new developments• Unit costs ($/boe) have risen 45% since 2005

– Signals difficulty if oil & gas prices decline• Operating costs now average $9-10 /boe

– Compared with $5-6 three years ago• Northern & Southern North Sea the most expensive areas

– Consider impact of declining gas prices on SNS

Unit Technical Costs

0

5

10

15

20

25

30

2005 2006 2007-09 average

$ pe

r boe

pro

duce

d 20

06 re

al te

rms

opex / boecapex / boe

$15 / boe

$25 / boe$22 / boe

7

Comparing current plans with the long term prize

0

5

10

15

20

25

1

Exploration(Yet to Find)

Undeveloped Discoveries

Brownfields

Sanctioned Investments /In production

Produced 1.1 bln boe in 2006 Source UKOOA 1.1.07

4.0 – 8.2

8.1

2.5 – 4.0

1.5– 4.5

UKCS - Projected Reserves / Resourcesest. 16 - 25 billion boe

billi

on b

oe

Current Activity / Plans

8.1 billion boe

0.8 billion boe

1.4 billion boe

~ 0.5 billion boe

Exploration in ‘06

8

Time will not wait - there is a window of opportunity

• Around 45% of infrastructure could be decommissioned by 2020, unless current activity is sustained

• If investor confidence is maintained, decommissioning could be delayed by 10-15 years in many of the existing systems

Example of major hub life extension

0

20

40

60

80

100

120

2006 2010 2015 2020 2025 2030

Brownfield

Pro

duct

ion

Existing Production

E&A +New Devt’s Economic

cut -off point

0

20

40

60

80

100

120

2006 2010 2015 2020 2025 2030

’

9

What should we look like in 2020 ?

• There is an “Appetite for Action”

0

1

2

3

4

5

2006 2008 2010 2012 2014 2016 2018 2020

Mill

ion

boep

d Oil and Gas Demand

The Better Future

Existing Production Base

Source: UKOOANote: Outlook Nov ‘06 data

UKCS – Tale of Two Futures

10

In Summary

• Plenty to play for on the UKCS

But ……….

• Increasingly difficult

• Increasingly costly

• Above all, it needs a much more sensitive fiscal and regulatory regime, tuned to the maturity of the UKCS, if the maximum economic recovery of our oil and gas reserves is to be achieved.

(ii) the Future of UK Gas:

a ‘Phase Diagram’

Report by Poyry Energy Consultingfor Oil & Gas UK

12

Historical and future evolution of UK gas market

0

20

40

60

80

100

120Ja

n-95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

Jan-

16

Jan-

17

Jan-

18

Jan-

19

Jan-

20

nom

inal

p/th

erm

Phase I:'Oversupplied

liberalised island'

Phase II:'Interconnection and increasing oil prices'

Phase III:'Supply margin

squeeze'

Phase IV:'Capacity excess'

Phase V:'Investment and demand'

ILLUSTRATIVE

13

Possible worlds in Phase IV and into Phase V

0

30

60

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

p/th

erm

Historical UKgas price

LNG wars

Oil index

Delink

Collapse

Oil-indexed gas contract price at $80/bbl for oil

Oil-indexed gas contract price at $50/bbl for oil

Oil-indexed gas contract price at $20/bbl for oil

14

0

20

40

60

80

100

120

140

160

180

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Sup

ply-

dem

and

(bcm

/yea

r)

DemandInterconnectionNorwegianLNGUKCSHistorical

Phase III:'supply margin squeeze'

Phase IV:'capacity excess' Phase V:

'investment and demand critical'

Transition to Phase V

15

0

10

20

30

40

50

60

70

80

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

Gas

use

(bcm

/y)

Fast CCGT growth, high price world Base Low CCGT growth, low price world Historical

Gas demand from power generation in high and low worlds(“high” and “low” refer to electricity prices)

16

70

75

80

85

90

95

100

105

110

2000 2001 2002 2003 2004 2005

bcm

Forecasted 2005/06 UKCS supply Demand

Shifting change in UKCS supply and UK demand forecasts for 2005-6

17

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Vol

atili

ties

(%)

UK House Prices Coffee Coal UK Gas (Heren Monthly Index) US Gas (Citygate prices)

UK gas

US gas

Coffee

Coal

House prices

Volatility of monthly traded products

18

0

50

100

150

200

250

300

350

400

450

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Vol

atili

ty (%

)

UK Gas HH Carbon FTSEGold Silver Platinum PalladiumBrent Crude UK Electricity Pool UK electricity (NETA)

UK electricity

UK gas

Carbon

Daily volatilities

19

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

0 6 12 18 24 30 36 42 48 54 60Months

Pro

porti

on o

f tra

des

NBP Gas (OTC) Brent Crude Henry Hub UK NBP gas (electronically traded) UK Electricity

Proportion of trades at each month on forward curve in 2006

20

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

Pric

e (p

/ther

m)

Investment based on current price

Investment based on internal forecasts

UKCS investment only, based on current price

2012: First Norwegian pipeline is completed in Internal Forecast scenario

2015: First Norwegian pipeline is completed in Current Price scenario

2017: Rapid growth causes prices to recover from crash.

2020: In Internal Forecast scenario, second Norwegian pipeline is completed.

2022: Demand stabilizes, causing a temporary drop in prices

2017-2025: Extra invested capacitycauses prices to be generally lowerin scenarios with investment than without.

Effect of new import pipeline on UKCS price

21

0

5

10

15

20

25

30

35

40

45

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

Pric

e (p

/ther

m)

Investment based on current price

Investment based on internal forecasts

UKCS investment only, based on current price

2011: In "current price" scenario Terminal 3 project is completed; in "internal forecast" scenario Terminals 1 and 2 are also completed.

With 16bcm/y of extra capacity "internal forecast" scenario has lower prices; however as this capacity is not "must-run" price differential is not significant.

2019: In "current price" scenario, Terminal 1 project is completed

Effect of new LNG import terminals on UK gas price

For further information, please refer towww.oilandgas.org.uk

(see Industry Issues – Economics, Energy Policy & Gas)Poyry’s report – published in June 2007

Activity Survey 2006 – published in February 2007Economic Report for 2007 – to be published in July

Thank you!

The UK Continental Shelf in 2007and

The Future of UK Gas:a ‘Phase Diagram’