The North Sea oil and gas industry is facing its biggest challenge as it reports its worst annual performance for forty years, according to Oil and Gas UK. Rising costs in 2014 coupled with falling oil prices meant that the industry spent £5.3bn more than it earned from sales. This was the worst figure for the industry since the 1970s.
Malcolm Webb, Oil & Gas UK’s Chief Executive, said: “the ability of the industry to realise the full potential of the UK's oil and gas resource was hamstrung by escalating costs, an unsustainably heavy tax burden and inappropriate regulation.”
Oil and Gas UK predicted that the industry is set to fall further in 2015, with an additional decline apparent in the drilling sector. Only 14 of the expected 25 wells were drilled in 2014.
It is expected that oil and gas firms will continue to slash investment by over 80% in coming years if oil prices do not start rising adequately.
The cost of producing a barrel of oil has risen to a record high, whilst oil prices have dipped. Between 2010 to mid-2014, world oil prices had been very stable on the whole, but in the second half of 2014, world oil prices fell below $50 per barrel – less than half of the $110 cost per barrel in the first half of the same year.
According to other industry reports, the cost per barrel is expected to rise by only 1% in 2015 as the industry continues to cut back on costs. Oil & Gas UK said the "bleak" findings of the report highlighted the importance and urgency of government action to secure the long-term future of the industry.
Chancellor George Osborne commented on the report, vowing to support the North Sea oil and gas industry: “We've got record investment in the North Sea and there's a lot of oil still in there.
"We want to continue to maximise investment in the North Sea to make sure it continues to provide jobs and economic benefits to the whole of the UK. The North Sea is a great national asset and we will do everything to protect it.
“I've already cut taxes in the North Sea and we're now looking at what more we can do to work with industry to support investment in this important sector."
Scotland’s Energy Minister, Fergus Ewing, underlined the importance of increasing exploration levels and sustaining investment in North Sea activity to ensure sufficient production. “This should help protect future tax receipts and ensure a fair return to the nation,” he said.
"With lower prospectivity than many other global regions and pressure to tackle the high cost environment in the basin, the Scottish Government is clear that in order to maximise economic recovery and the Total Value Added by the sector to the economy, essential fiscal and regulatory reforms must continue to be progressed with urgency."