Markets & Investment BUSINESS OUTLOOK 2020: Oil & Gas UK
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BUSINESS OUTLOOK 2020
BUSINESS OUTLOOK 2020:
Markets & Investment
1
BUSINESS OUTLOOK 2020:
Markets & Investment
Our vision is to ensure the
UK Continental Shelf becomes the Contents
most attractive mature oil and gas
province in the world with which to 1. Foreword 3
do business. 2. Industry in Review 4
Read all our industry reports at
3. Commodity Markets: Oil 6
www.oilandgasuk.co.uk/publications 4. Commodity Markets: Gas 8
5. What Does the Commodity Price
Environment Mean for the UKCS? 10
Cash Flow and Profitability 11
UKCS Expenditure and Investment 12
Drilling Activity 14
Production: Helping Meet
UK Energy Needs 15
Supply Chain 16
2BUSINESS OUTLOOK 2020
Foreword
The global spread of the Coronavirus is having a devastating impact on As our report shows, we now face a situation where E&P production
people and their loved ones as well as our established way of life, our revenues could be almost half the level of just two years ago, despite the
businesses and our economy. same level of output. This trend is unsustainable for many and without
intervention could lead to the loss of businesses, jobs and skills anchored
As a sector only just beginning to emerge from one of the worst downturns in the UK.
in its history, our findings show its position is now paper thin and we have
significant concerns about the resilience of our supply chain especially, to As the leading representative body for the sector, OGUK is proud to
absorb further pressure. champion an industry renowned for its ability to innovate and adapt
in extraordinary times. However, coming so soon after the previous
The most dramatic fall in oil price in almost 30 years and the remaining downturn and with no certainty as to how long these difficult times will
market uncertainty will undoubtedly impact investment decisions. last, governments and regulators should be in no doubt that this challenge
In the short, medium and longer term, serious questions remain for has many dimensions, and this industry will need sustained and targeted
governments as to how we can protect the sector which is a vital part support if it is to weather the storm.
of the UK’s critical infrastructure and so ensure the UK can continue to
enjoy secure and affordable energy today and in the coming weeks and
months and as we transition to a lower-carbon future.
Protecting this industry now is also essential to meeting our net-zero
aspirations, with any loss of capabilities in our energy regions, businesses, Deirdre Michie
jobs, skills and infrastructure diminishing our ability to either lead from Chief Executive
the front, or potentially to follow, in providing the net-zero solutions the OGUK
UK and the world will need.
3BUSINESS OUTLOOK 2020
Key Facts
The Brent price has fallen by more than 55% in early 2020, to below $30/bbl,
with the potential to fall even further
The spread of Coronavirus has affected global oil demand significantly
– 2020 is expected to see the first demand fall since 2009
£ The current commodity price environment
will cause industry significant challenges
The longevity of the price
crash is not yet clear
Substantial supply increases following the collapse of the OPEC+
agreement have resulted in a considerably oversupplied market
The NBP gas price more than halved in 2019, and has been
trading at less than 25 p/th in February and March 2020BUSINESS OUTLOOK 2020
Supporting the UK economy The industry is an important asset for the UK
now and in a net zero future – helping fuel the economy
The UK oil and gas industry makes an important economic
contribution across the UK. Supporting 270,000 across the UK
jobs
Roadmap 2035 outlines how the sector can help ensure that the UK continues
to benefit from a secure energy supply alongside an affordable, responsible and
managed transition to net zero. This will only be achieved through a joined-up
approach across government, regulators and industry.
Paying £350 billion over the last 50 years and more
than £1.1 billion in taxes in each of the last two years
£350
Billion
billion
The industry’s production operations are responsible for around
3% of the UK’s total greenhouse gas emissions 3% Adding £15 billion to the value of the UK economy £15
billion
Effective stewardship of the industry will ensure that it continues to provide wide-
Reducing the UK’s energy
ranging economic benefits and that companies remain anchored in the UK to support
import dependency
the energy transition
The industry’s people, skills and resources will Supporting the development Investing in renewable energy sources
be an important part of meeting net zero of CCUS and hydrogen
Remaining competitive is key. The focus and support of Government and industry need to progress proposals for a sector deal, at pace. This will help ensure
government is vital. that companies are able to sustain their operations now and prosper in the years to come.
5BUSINESS OUTLOOK 2020
Commodity Markets: Oil Business Outlook 2020 The Brent price
100
1.6
2008-2011 2014-2018 - Facts and Figures has fallen by 55%
in 2020
D
1.4 1996-2000 1985-1995
90
2020
80 1.2
to $30/bbl
Nominal Daily Brent Price ($/bbl)
70
1
– with a lack of
Indexed Brent Price
60
0.8
equilibrium in
50
the market
Business Outlook 2020
40 0.6
30
0.4
20 The Brent price The Coronavirus
has fallen by 55%
10
0
0.2
- Facts and Figures in 2020
outbreak has reduced
global oil demand
DRAFT v2
0
2018 2019 2020 1 2 3
Year
4 5 6
Source: EIA
significantly
Source: EIA
Brent averaged $64.3 per barrel (bbl) last year and has seen a countries are able to withstand low prices. Brent futures prices
to $30/bbl and 2020 could
general downward trend since late 2019. Falling global demand currently remain below $40/bbl for the majority of 2020– and with a lack of see the first
equilibrium in annual decline
as a result of the continued spread of Coronavirus (COVID-19) below $45 in 2021, demonstrating the cautious outlook in the
the market
Strong domes�c
since 2009
had lowered prices to around $50/bbl in late February. This market. Whilst some past downturns have seen a relatively
marked decline in demand was then compounded by a quick recovery, such as in 2008, others have resulted in a more
oil and gas
significant increase in supply as constraints within OPEC+ prolonged period of low prices, such as from 1985 onwards. produc�on
countries were removed — leading Saudi Arabia and Russia, The Brent price The Coronavirus OPEC+ countries
has fallen by 55% outbreak has reduced helps minimise to increase
are planning
amongst others, to increase output. This ‘perfect storm’ in the The US Energy Information Administration (EIA) now forecasts the UK’s
in 2020 global oil demand produc�on, adding to the
market resulted in prices falling below $30/bbl on 16 March, that Brent will average around $43/bbl this year — $18 lower dependence
significantly supply and demand
a fall of over 55 per cent since the beginning of 2020 and the than its previous estimate — with other banks and agencies on imports
imbalance
lowest price since early 2016. outlining the potentialtofor a lower
$30/bbl annual average (potentially
and 2020 could
as low as $35/bbl). – Thiswith aprice
lack of environment will cause see the first
At the time of writing, it is unclear how long prices will remain significant cash flow and investment
equilibrium in challenges for all areas
at this level, given the uncertainty over the continued impact of the UK industry, thethe
fullmarket
Strong
since 2009
implications of which are still being
domes�c
annual decline
Domes�c
of Coronavirus on demand and the length of time OPEC+ considered. oil and gas There
produc�on are 51%
gas
produc�on more
was enough
6
to meet 51%
helps minimise than
of gas demand- Facts and Figures dependence oil products
on imports in 2019 74% oil
BUSINESS OUTLOOK 2020
DRAFT v2
Strong domes�c Domes�c E&P revenues could
Oil Market Dynamics 51%
The continued spread of the Coronavirus has impacted the 110 oil and gas produc�on
There are fallindustry
The by almost is 50%
gas
global economy significantly. In early March the International produc�on important for
Monetary Fund (IMF) reported that growth expectations
Total Global Demand more
was enough
to meet 51%
compared with
energy
two yearssecurity
ago,
in 2020 would now be lower
The Brent pricethan the 2019 rate ofThe
2.9Coronavirus
per
105
helps
OPEC+ minimise
countries
Total Global Supply than
of gasaverage
The demand NBP due togas
NBP lowerprices fell
Global Oil Supply / Demand (Million bpd)
has fallenfor
cent, with the potential by further
55% downward revision. The the planning
are UK’s to increase and 74% of commodity
and can also help
outbreak has reduced
OECD base case in is 2020
now 2.4 per cent but also outlines
globalthat
oil demand100
dependence adding to the
produc�on, 2oilbillion
gas products boe
price was by 50% during
prices the path
advance 2019
35 p/th
on imports
supply and demand
in 2019 74% oil to net zero
the impact of Coronavirus could ultimately cut growth rates
significantly in company plans without –and hit a low ofand
government 20 p/th
by half this year (to 1.5 per cent). This would represent the imbalance in early 2020
commi�ed investment regulatory support is vital
to $30/bbl and 2020 could
slowest rate of growth since 2009. 95
in 2019
– with a lack of
equilibrium in
see the first
annual decline – the lowest average 50%
Consequently, the
the International
market Energy Agency (IEA) has
since 2009 90 There are The
for industry
over a decade is The UKCS may be in
slashed its oil demand forecast for 2020 — indicating that important for a cash-loss posi�on
it now expects the first annual decline in oil demand since more energy security this year
2009. First-quarter demand is expected to be around 2.5
million barrels per day (bpd) lower than last year and the
85
than
and can also help for
IEA low case outlines the potential for demand to be at least 2 billion boe advance the path Anyonly
newthe
investments
730,000 bpd lower across the full year. This drop in demand 80 to net zero third �me increased
will receive
resulted in a fall in Brent to below $50/bbl in late February —
2010 2011 2012
in 2013plans 2014
company without 2015 2016 2017
– government2018and 2019 2020 in 40 years
scru�ny due to
£
commi�ed investment regulatory support is vital
before the further impact of an increase in supply.
Source: IEA, EIA
market
condi�ons
Throughout 2019 Strong domes�c
and early Domes�c
2020 OPEC+ countries had E&P are
the start of April. There revenues couldthat supplyE&Ps
expectations from will take steps Delivering Roadmap 2035
already restricted output by 1.7 million bpd in orderproduc�on
to bring 51% will help reduce UK’s
oil and gas these countries couldfall increase
by almost by 50%
around 4 milliontobpdpreserve reliance on energy
equilibrium to the market, prior to the impact of Coronavirus gas
— potentially resulting in an unprecedented differential – delays and deferralsimports
produc�on cash flow are expected
on demand. This action was crucial in supporting wasprices
enough between supply andcompared
demandwithof 5–6 million bpd in early Q2.
at more than $60/bbl and it had been anticipated to meet 51%
that two years ago,
These unique market conditions resulted in the most severe
helps minimise of gas demand due to lower
further constraints would
the UK’s
recent demand dependence
be put in place to counter the
and 74% of
fall. The failure to reach agreement and
price decline since that seen during the Gulf War in 1991.
commodity Any new investments
– with reduc�ons The industry is
oil products prices will receive increased
subsequent collapse of existing supply restrictions
on imports mean
in 2019 74% oil
in ac�vity and
due to Many supply
scru�ny expected
investment
now producing Supply chain com
£
that OPEC+ countries are now free to increase supply from market
condi�ons
chain companies
have seen
20% morewill forcome under
increased pressu
significant 30% lower costs7
revenue andBUSINESS OUTLOOK 2020
Commodity Markets: Gas
The UK’s day-ahead National Balancing Point (NBP) gas price 80
has now been on a downward trajectory for more than a
year, reflecting global trends. Prices averaged 34.7 pence 70
Nominal Monthly Average NBP Gas Price (Pence per Therm)
per therm (p/th) in 2019, and more than halved from over
60 p/th at the start of the year to less than 30 p/th by the
60
close of the year. This average was 42 per cent down on 2018
(60.3 p/th) and 30 per cent below the ten-year average of
49.3 p/th. 50
The trend has continued in the first few months of 2020, 40
with prices averaging 25 p/th through to mid-March, having
reached a low of just over 20 p/th in mid-February. The
2
30
ongoing decline has been the result of shifting supply and
demand dynamics in the market and has resulted in real
challenges to gas operations across the basin. 20
10
The
The average
average NBP
NBP NBP
NBP gasgas prices
prices fellfell 0
2018 2019 2020
gas price was
gas price was by 50% during
by 50% during 2019 2019
35p/th
p/th
Source: ICIS Heren
35
andandhit hit a low
a low of p/th
of 20 20 p/th
in early
in early 20202020
in in 2019
2019
– the
– the lowest
lowest average
average 50%
50%
for for over
over a decade
a decade
8BUSINESS OUTLOOK 2020
Gas Market Dynamics Business Outlook 2020 Domes�c
UK gas demand fell by 2 billion cubic metres (bcm) in 2019
— a decrease of 3.9 per cent — and is now 22 per cent lower - Facts and Figures
Growing flexibility in the market — mainly provided by the
increase in LNG availability — have fundamentally changed gas produc�on was
enough to meet
E
than ten years ago. This trend is the result of various factors, the dynamics of the UK gas market. The increasingly physical
primarily improved energy efficiency and changing energy linkages and exposure to other international gas price markers
51%
use patterns. are applying significant downward pressure.
Following a significant increase in gas demand for electricity In the short term, given ample volumes of continental gas and
generation in 2016 to offset declines in the use of coal, gas use LNG imports, it is likely that the UK market will continue to be of UK demand in 2019
in power generation has declined. In 2019, electricity generated
Business Outlook 2020
oversupplied, which will act to keep prices relatively low.
56%
from gas decreased by 2 per cent and is now 10 per cent lower
than 2016. This has been offset by an increase in generation Domes�c
from renewable sources including wind, solar, hydro and - Facts and Figures gas produc�on was
bioenergy. Renewable output grew by 13 per cent in 2019 alone enough to meet
and is now more than four times greater than in 2010.
EXTRAS v1
51%
of UK gas
The UK benefits from a strong and increasingly diversified gas
supply, including volumes flowing from domestic production, imports come
interconnectors with continental Europe and increasing LNG
of UK demand in 2019 from Norway
shipments from around the world.
56%
Although there was a small decline in UK gas production Domes�c LNG imports increased
in 2019, domestic supply was enough to meet 51 per cent gas produc�on was by more than
of national demand. However, around 20 per cent of the
produced volumes were exported, mainly to Belgium and
enough to meet
150%
51%
the Republic of Ireland (totalling more than 90 per cent of last year – mee�ng
of UK gas
39%
exports), and the remainder used domestically. Remaining
UK demand was met by pipeline imports from Norway, via imports come
interconnectors (mainly from the Netherlands), and LNG
shipments. of UK demand in 2019 from Norway of imports
9BUSINESS OUTLOOK 2020
What Does the Commodity Price
Environment Mean for the UKCS?
The current commodity price environment will pose It is important the industry stakeholders, including
significant challenges across the UK offshore oil and government and regulators, understand the severity of the
gas industry. Lower prices will affect the revenues of all challenges industry is facing and support the steps taken to
companies, further stretch balance sheets and impact maintain the viability of businesses and operations.
investment rates.
This industry is essential to providing secure and affordable
It will be important to take time to fully understand how energy now and, with the right stewardship, will continue to
the current dynamic will unfold, however E&P companies do this in the decades to come. This can be achieved whilst
are evaluating all options to preserve cash and sustain their supporting the drive to net-zero greenhouse gas emissions
operations — including activity deferrals and cancellations. through the industry’s skills and resources.
It is also important to note that each company will be in a
different position depending on their own operations and
financial structure.
The impact will be felt by supply chain companies almost
immediately as the lower-than-anticipated levels of activity
start to take effect. This comes at a time when many areas
of the supply chain are already facing fundamental financial
challenges, in light of significantly reduced revenue and
margins in recent years. There is limited scope for many
companies to absorb further cost reductions.
10- Facts and Figures
DRAFT v2
BUSINESS OUTLOOK 2020
Cash Flow and Profitability 70
Gross Revenue
Post-Tax Expenditure
60
The reductions in commodity prices will affect E&P
Post-Tax Cash-Flow
company revenue and spending plans. OGUK had previously
50
anticipated that expenditure levels in 2020 would be in line
Cash-Flow (£ Billion - 2019 Money)
The Brent price The Coronavirus OPEC+ countries The average NBP
with those in recent years, and the long-term average for the has fallen
40by 55% outbreak has reduced are planning to increase
basin, at around £15 billion (in 2019 money); however, these in 2020 produc�on, adding to the
gas price was
global oil demand
35 p/th
plans are now under intense scrutiny by all companies. 30 significantly supply and demand
imbalance
Production in 2018 and 2019 was effectively level at around to $30/bbl
20 and 2020 could
618 million barrels of oil equivalent (boe), with a range of – with a lack of see the first in 2019
equilibrium
10 in annual decline – the lowest average
600-610 million boe anticipated for 2020. Even so, revenues the market since 2009 for over a decade
generated from stable rates of production have varied 0
considerably. OGUK estimates that UKCS production revenue
was over £28 billion in 2018, falling to around £24.5 billion -10
last year. Based on a longer-term Brent price of $40 and NBP
gas price of 25 p/th, it is estimated that revenue would be -20
just over £15 billion this year — a decline approaching 50 per
1976
1984
1992
2000
2008
1970
1972
1974
1978
1980
1982
1986
1988
1990
1994
1996
1998
2002
2004
2006
2010
2012
2014
2016
2018
2020
cent in just two years. This figure will vary depending on how
Source: OGUK, OGA, BEIS
the price dynamic unfolds in the coming months.
It is feasible that this year will see the UKCS experience negative Strong domes�c
E&P companies Domes�c
will look to reduce and delay expenditure, E&P revenues could E&Ps will take steps
cash flow for only the third time in the 40 years since the basin produc�on 51%price fall by almost 50% to preserve
oil and gas
investment and activities to mitigate the commodity
gas will
first saw positive cash generation. At $40/bbl and 25 p/th, risk and maintain positive cash flow. Access to finance cash flow
OGUK expects that the UKCS would effectively be cash-flow produc�on was enough
also be constrained as investors review the market outlook compared with
to meet 51% two years ago,
neutral — i.e. revenue and expenditure are at similar levels. If and
helps await commodity price recovery.
minimise of gas demand due to lower
Brent averaged $35 then the basin would fall into a negative the UK’s and 74% of commodity
– with reduc�ons
cash flow position of around £1.2 billion. Wood Mackenzie dependence oil products prices
in ac�vity and
estimates that a prolonged $35 price could mean a global fall on imports in 2019 74% oil investment expected
in cash generation of $380 billion (£290 million) this year.
11has fallen by 55% Stronghas
outbreak domes�c
reduced Domes�c
are planning to increase E&Pprice
gas revenues
was could
in 2020 global oil demand produc�on, adding to the51%
oil and gas produc�on fall by almost 50%
35 p/th
BUSINESS OUTLOOK 2020 significantly supply and demand gas
produc�on imbalance
was enough compared with
to $30/bbl and 2020 could to meet 51% two years ago,
– with a lack of in
due2019
UKCS Expenditure and Investment helps
see the minimise
first of gas demand to lower
equilibrium in
the market
the UK’s
annual
Any decline
new
dependence
since 2009
investments The industry is
and 74% of
oil products
Unit opera�ng
–commodity
the lowest
prices
for
costs
average
over a decade
will receive increased are being sustained
35 120 on imports
scru�ny due to now producing
in 2019 74% oil
at around
£
2014 Asset UOC Curve
30 UOC ($/boe)
UOC (£/boe)
100 market
condi�ons
2019 Asset UOC Curve 20% more for $15/boe
Unit Operating Costs ($/boe - 2019 Money)
30% lower costs
Unit Operating Costs (£/$ per boe - 2019 Money)
25
80
There are
$1 e
The industry is The
– less UKCS
than may be in
/bo
5
20
compared to 2014 50% of those
– delays and deferrals important for a5 years
cash-loss posi�on
15
60
more
are expected
energy security this year
ago
40
than
10
for onlywill
thetake steps and can also help
Strong domes�c E&P
advancerevenues
the path could Domes�c
2 billion boeE&Ps
51%
20
third �me
5
oil and gas Many supply produc�on Supply
in company plans without
fall
to netby almost 50%
zero
– government and Government support
gaschain companies
to preserve
in 40 years Sector deal propo
0 produc�on chain companies was
commi�ed will come under compared
enough investment support isisvital
regulatorywith
0 cash
required to help
flow outline how the s
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
have seen to meet 51%of UKCS Assetsincreased pressuretwo years ago,
Percentage
Source: OGA, OGUK, BEIS the industry can con�nue to Source: OGA, OGUK
helps minimise of gas demand due to lower
significant overcome challenges provide energy
Operating Costs the UK’s and 74% of commodity
– with reduc�ons
dependence revenue and oil products prices
The UKCS has seen significant improvement in its OGUK estimates that around 85 perascent of assets which
a result in ac�vity and now alongside
on imports margin in 2019 74% oil
competitiveness, efficiency and productivity in recent years. produced at least 1 million boe last of year have UOCs under
expected investment expectedsuppor�ng
reduc�ons in net zero
These improvements will help performance, but the industry $40/boe, compared with two-thirds in 2014,
ac�vity anddemonstrating
investment
recent years reduc�ons
remains significantly challenged on a number of fronts. the improved efficiency of E&P companies. The highest-cost
asset in this group is now around $64/boe, compared with Any new investments The industry is
willUKCS
receive increased
There aremore than $100/boeThe
Across the UKCS overall, unit operating costs (UOCs) averaged
$15.2/boe (£12.50) in 2019. This compares with 2014 when
industry is
in 2014. The may
scru�ny due to
be in
now producing 141 wells
important for a cash-loss posi�on
more 20% more for
£ were drilled
average UOCs were $32/boe (or £20/boe) — a greater than The improved costenergyprofile security
has been achieved through market
this year
condi�ons
50 per cent improvement in US Dollar terms.
than
reductions in operating expenditure and increased
30%
in lower costs
2019
production — last year
andthe
can UK
alsoindustry
help produced 20 perforcent
only the
2 billion more,
boe at a 30 per centadvance the path
lower cost than in 2014. It isthird
likely�me compared to 2014
that operating coststowill
in company plans without
net zero
be reduced further
– government and
expenditure comes under increased
oilandgasuk.co.uk/businessoutlook
this year as all
in 40 years – 38% more
– delays and deferrals
are expected
commi�ed investment regulatory support scrutiny.
is vital than 2018
12commi�ed investment regulatory support is vital
BUSINESS OUTLOOK 2020
Capital Investment
Total capital investment last year was almost £5.5 billion 18
— similar to 2017 and 2018. This is in line with the long- Any new investments
term average, in real terms, over the last two decades (not 16 will receive increased
including 2011–15, which reflected an unsustainable level of Forecast Range
scru�ny due to
£
investment and a period of low capital efficiency). 14 Capital Investment
market
Capital Expenditure (£Billion - 2019 Money)
condi�ons
OGUK expects that capital investment will be lower in 2020, 12
with £4–4.5 billion anticipated (a 20–30 per cent decrease).
This reflects expected activity deferrals, as most projects 10 – delays and deferrals
which are not yet fully committed are likely to be re- are expected
evaluated. However, there is an element of uncertainty with 8
this outlook as companies continue to evaluate the longevity
and impact of the price crash. 6
Many supply Supply chain com
OGUK had anticipated that there would be an increase in 4 chain companies will come under
new field investment approvals this year, with up to 10 have seen increased pressur
projects progressed, representing £5 billion of investment 2 significant
and up to 500 million boe of reserves. This level of new revenue and
investment approvals is no longer likely. Companies will be 0 margin as a result
looking to preserve cash as long as possible and will take 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 of expected
reduc�ons in 2020
ac�vity and investmen
an increasingly conservative approach to new approvals. recent years
Source: OGA, OGUK
reduc�ons
Although companies take a long-term market view, the
majority of these projects will be too expensive to pass
investment hurdles at current price levels.
This trend will be reflected around the globe, with Rystad
Some projects may still manage to attract some limited Energy estimating that at least $100 billion (£76 billion) is
investment, especially if prices recover to some degree, but likely to be stripped from E&P company budgets this year,
investors are likely to watch how the market dynamic unfolds with the potential for this to grow depending on market
oilandgasuk
before making any significant commitments. developments.
13globalglobal
oil demand produc�on, adding
produc�on, to theto the
adding
3535p/th
oil demand
p/th
significantly supplysupply
and demand
and demand and hit a low
significantly and hit aoflow
20 of
p/th
20 p/th
imbalance
imbalance in early 2020 2020
in early
BUSINESS
and 2020 OUTLOOK 2020
andcould
2020 could
in 2019
see thesee
first
the first
annualannual
declinedecline
in 2019
– the lowest average
– the lowest average 50%
50%
Drilling Activity
since 2009
since 2009 for over aover
decade
for450 a decade
Exploration Appraisal Development Decommissioned
400
Along with investments in new capital projects, OGUK now
Total Wells Drilled and Decommissioned
anticipates a reduction in drilling activity this year. At a
350
$60–65 price range OGUK had expected the number of wells
drilled to be in a similar range to 2019. However, based on 300
recent experience, it is conceivable this could be down more
than one-third, reflecting the reductions seen in 2015–16 and 250
signalling a return to record-low levels. Coupled with this,
OGUK would also expect the E&P
Domes�c rate of well decommissioning
revenues could E&PsE&Ps
will will
taketake
steps Delivering Roadmap 20352035
Domes�c E&P revenues could 200 steps Delivering Roadmap
to slow. Companies51%may place increased attention on lower- will help reduce
will help UK’s UK’s
reduce
produc�on
produc�on
cost activities which
51% fall by
fallalmost
by almost50%50% to preserve
to150preserve
gas maximise
gas the potential of existing well reliance on energy
reliance imports
on energy imports
stock,
was enough such as well interventions to safeguard,
compared with with restore or cashcash
flowflow
was enough compared
increase
to meet
to51% production rates.
meet 51% two years
two ago,
years ago, 100
of gas of
demand
gas demand due todue
lower
to lower
and 74% of74% of
andis commodity
commodity
It
oil products
likely that drilling activities which
are not firm
prices prices
– with–reduc�ons
with
50 reduc�ons
oil products in ac�vity and and
commitments
in 2019in 2019 with
74% oil contracts in place will
be delayed or in ac�vity
74% oil investment expected
investment expected
cancelled, and it is possible that some contracted activity 0
1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019
may also come under pressure.
Source: OGA, OGUK
As well as reducing the rate at which reserves are progressed
The through
industry toisproduction,
The industry is Thehave
this will UKCS may may
TheaUKCS be inbe
significant in on
impact 141141
wells
wells Drilling couldcould
Drilling
be down
nownow
moremore
be down thanthan
important
important
supply for for
chain companies, witha many
cash-loss posi�on
a cash-loss
drilling posi�on still
contractors
energy security
feeling
energy the effect of a periodthis
security year
this year
of lower activity and day rates were drilled
were drilled one-third as as
one-third
companies looklook
companies
in recent years. Rystad Energy estimates that global demand
and canand
for also
canhelp
also help
mobile for by
drilling rigs could fall only the the15 per cent this
a further
for only
in 2019
in 2019 to defer ac�vity
to defer ac�vity
advance the path
advance the path
year.
to net to
zeronet zero third �me
third �me
– government and and
– government in 40inyears
40 years – 38% moremore
– 38%
regulatory support
regulatory is vitalis vital
support than than
20182018
14in 2020
has fallen by 55% outbreak has reduced
in 2020 global oil demand
BUSINESS OUTLOOK 2020 significantly
to $30/bbl
– with a lack of
to $30/bbl and 2020 could
equilibrium in
Production: Helping Meet – with a lack of
equilibrium in
see the first
the market
Strong domes�c
annual decline
UK Energy Needs 7 7
the market since 2009
oil and gas
2,000
1,800
6 6
Less than 70% chance of Less than 70% chance of produc�on
development - 0.9 billion boe
development - 0.9 billion boe
Oil Production Gas Production
1,600 helps minimise
More than 70% chance of More than 70% chance of
5 5 development - 1.1 billion boe
development - 1.1 billion boe the UK’s
Production (Million boe Per Year)
1,400
dependence
Oil and Gas Resources (Billion boe)
Oil and Gas Resources (Billion boe)
1,200 on imports
4 4
1,000
800 3 3
Strong domes�c
600
Sanctioned Volumes Sanctioned Volumes Strong domes�c Domes�c
oil and gas
There are
- 4.6 billion boe - 4.6 billion boe
produc�on 51%
400
2 2
oil and gas produc�on gas
200
1 1
produc�on more
was enough
helps minimise
to meet 51%
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
helps minimise than
the UK’s
of gas demand
dependence
Source: OGUK, OGA, BEIS
0 0 Source: OGA, OGUK the UK’s
Source: OGA, OGUK
dependence 2 billion boe
and 74% of
on imports
oil products
on imports in 2019 74% oil
in company plans without
The UK produced almost 1.7 million boepd (618 million boe) OGUK expects that production will be in the range of 600–610 commi�ed investment
last year — the same level as 2018 and 20 per cent higher million boe in 2020. However, lower levels of investment and
than 2014. This was the equivalent of 51 per cent of UK gas drilling activity now will affect the level of new production There are
demand and 74 per cent of demand for oil products. Along coming onstream in the near future. There are The industry is
more T
with significant improvements in production efficiency, the important for a
turnaround in production has been underpinned by a series more
There is still significant resource opportunity to unlock, with than security
energy t
of new investments coming on stream. More than 40 new 6.6 billion boe in company plans through to 2035, as well than 2 billion boe
fields have commenced production since 2014, with these as further additions through recent exploration successes. and can also help f
fields accounting for around one-third of production last However, in the current environment very few projects 2 willbillion boe advance the path
innet
company t
to zero plans without
year. receive investment approval, until companies have a clearer –commi�ed investment
in company plans without government and i
understanding of the longer term market dynamic. commi�ed investment regulatory support is vital
15There are 141 wells compared
be down to more
2014
important for a cash-loss posi�on – delays and deferrals
more energy security this year were drilled
are expected one-third as
BUSINESS OUTLOOK 2020
than in 2019
companies loo
to defer ac�vit
2 billion boe
and can also help
advance the path
for only
Any new theinvestments The industry is Unit opera�ng
will
thirdreceive
�me increased
Supply Chain to net zero
– government and scru�ny
in 40 yearsdue to Many supply now – 38% producing
more
are being sust
Supply chain companies
will come under at around
in company plans without
£
chain companies than 2018
commi�ed investment
Following significant reductions between 2014–16, revenues
regulatory support is vital market
The current combination of commodity prices and the wider
condi�ons have seen
20% more for
increased pressure $15/boe
and margins across the supply chain have remained relatively
flat and OGUK had expected a similar outturn in 2020. This
impact of the Coronavirus mean that the sector is all significant
more exposed. This is likely to result in a higher numberrevenue
the
of
30% lower costs
and – less than
/
financial position has already stretched balance sheets to consolidations and insolvencies in the– delays market. Access to
and deferrals margin
compared to 2014 as a result 50% of those
unsustainable levels in many cases, with companies facing finance across the industry in the coming months will be of expected 5 years ago
are expected reduc�ons in
common challenges in their ability to service increasing debt crucial. It is important that the government works closely ac�vity and investment
recent years reduc�ons
levels whilst investing in new capabilities. The anticipated with our industry, as with others, to help weather the current
further reduction in activity levels and increased cost Anyto
pressures new investments
ensure that they do not resultThe inindustry
permanentis Unit opera�ng costs
pressures will place further strain on the finances of supply damagewill receive
to the UK’sincreased
capabilities. are being sustained
chain companies — however, the full extent of the impact scru�ny due toMany supply now producing Supply chain companies
at around
Government support S
£
chain companies will come under is required to help o
remains to be seen. Demand levels will return, but this may market
These capabilities
condi�ons
are crucial in providing
have seen 20% more
energy for pressure$15/boe
security
increased the industry c
take time. The wider impact of the Coronavirus outbreak will now and will continue to be so as the UK moves towards
also be felt as companies may find it more difficult to source
significant 30%
net zero. Government and industry must work at pace in lower costs overcome challenges p
$1 e
revenue and – less than
/bo
goods from, and export to, the global market. the coming months tomargin secure a sector deal that ensures
to 2014 as our
oilandgasuk.co.uk/
5
compared a result 50% of those n
supply –chain
delays and deferrals
can sustain their
reduc�ons in businesses and capabilities
of expected 5 years ago s
are expected n
Rystad Energy estimates that, at a global level, total oilfield today and prosper in recentyears to come.
years The companies in this
ac�vity and investment
reduc�ons
services revenues could fall by 8 per cent if Brent averages sector form an important part in positioning the UK as a
$40/bbl, or 15 per cent if prices fall to an average of $30/ world leader in CCS and hydrogen. If these capabilities are
bbl. A more prolonged period of lower prices will also cause lost then the country risks missing out to other nations on
a negative impact on revenues in 2021. It is likely that manyMany supplythis crucial opportunity.Supply chain companies Government support Sector deal proposals
areas of the supply chain would struggle to absorb additionalchain companies will come under is required to help outline how the sector
have seen
and sustained cost and activity reductions of this level. OGUK increased pressure the industry can con�nue to
will also be closely monitoring any impact on employment significant overcome challenges provide energy
across the sector, given its close relationship with levels revenue
of and
oilandgasuk.co.uk/businessoutlook
as a result now alongside
activity and investment. margin
of expected suppor�ng
reduc�ons in net zero
ac�vity and investment
recent years reduc�ons
16BUSINESS OUTLOOK 2020
Our Business Outlook Report reflects
on the sector’s past performance and
assesses its future prospects.
The information that forms the basis of this
report is provided by our members from across
the industry, uniquely positioning us to set out the
business outlook for the whole sector.
oilandgasuk.co.uk @oilandgasuk
info@oilandgasuk.co.uk Oil & Gas UK
© 2020 The UK Oil and Gas Industry Association Limited, trading as OGUK
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