United Kingdom Oil and Gas Report Q2 2012

BMI View: Unexpected North Sea tax changes don’t appear to have killed off North Sea investment activity,but assets continue to move from the established players to smaller, independent operators which are preparedto accept lower returns or to work the assets harder. Volumes will continue to come under pressure, with theUK facing a steady rise in oil and gas imports. Disruptions to supply from the closure of the Coryton refinery,as a result of the Petroplus’ collapse, point to near-term fuel price volatility.

The main trends and developments we highlight in the UK Oil and Gas sector are:

.. In February 2012, Energy Minister Charles Hendry launched the 27th UK offshore licensing round.This time, 2,800 blocks are being offered as the government attempts to maximise the remainingpotential of the UK North Sea. The latest offering, which closes in May 2012, follows the successful26th round in 2010, which resulted in the largest number of licences issued since offshore licensingbegan in 1964.

.. The UK government has approved the development of the Clair oil field, west of Shetland. This is oneof the UK’s oldest undeveloped fields and should be brought into production by a BP-led consortiumby 2016, with potential peak output of 120,000 barrels per day (b/d).

.. BMI is assuming average daily UK liquids output for 2012 of 1.18mn b/d, recovering slightly from thedepressed level seen in 2011, when various production and maintenance issues undermined supply,particularly in the first half of the year. By 2016, UK oil production is unlikely to be above 1.0mnb/d. Oil consumption is expected to have hit 1.65mn b/d by this point, creating a net crudeimport requirement of at least 698,000b/d.

.. According to a press release from oil industry consultant Wood Mackenzie, confidence in the sectorcaused UK offshore capital investment to reach GBP7.5bn in 2011, representing an all-time high. In its2011 annual review, the firm said it expects investment to remain consistently high until at least 2014,as new fields are brought into development and incremental projects on existing fields progress,including over GBP2bn of investment in the West of Shetlands area in 2012.

.. In September 2011, US-based Apache Corporation agreed to buy oil and gas assets in the North Seafrom Exxon Mobil, including the Beryl field, for US$1.75bn. Apache is seeking to boost production inone of its most successful regions. This deal highlights the continued appetite for mature UKproducing assets among independent operators. Other oil majors including BP, Total and Royal DutchShell are also in the process of selling UK asset packages.

.. The BMI assumption for 2012 domestic gas production is 55.0bn cubic metres (bcm), down somewhatfrom the level recorded a year earlier. Gas consumption in 2012 is expected to fall following a milderwinter. Medium-term UK gas demand continues to rise, thanks partly to demand from the powerindustry, implying a need for rising imports. Should demand reach 97.4bcm by 2016, as predictedby BMI, the UK could be importing 49.4bcm of gas.

At the time of writing we assume an OPEC basket oil price for 2012 of US$99.38/bbl, falling to US$97.23/bblin 2013. Global GDP in 2012 is forecast at 3.2%, up from an assumed 3.1% in 2011, reflecting a falteringrecovery in the US and an uncertainty with regard to the eurozone debt crisis. For 2013, growth is estimated at3.7%..