The UKCS in 2005 - Sustaining Success, Competing for the Future

1. The UKCS in 2005 - Sustaining Success, Competing for the Future Steve Harris Communications Director UKOOA

2. UKCS in 2005 - Sustaining Success, Competing for the Future Introduction – the Global perspective

3. Oil Price (£2005) 80 80 70 70 60 60 $/bbl $/bbl £ £ /bbl /bbl 50 50 Price Per Barrel 2005 Prices Price Per Barrel 2005 Prices 40 40 30 30 20 20 Average oil price over Average oil price over period period 10 10 $47 $47 $24 $24 $33 £ £ 39 39 £ £ 16 16 £ £ 20 0 0 1965 1965 1970 1970 1975 1975 1980 1980 1985 1985 1990 1990 1995 1995 2000 2000 2005 2005 Source Source : Wood Mackenzie / UKOOA : Wood Mackenzie / UKOOA Demand for crude oil has surged, with an obvious impact on crude oil prices World Spare Oil Production Capacity Source: EIA, Sept ‘05 • Crude oil prices have risen to prices last seen in the 70’s • From a low of $11 in 1998 to $60+ in 2005 • This time less of a price shock • Driven by growth in demand rather than drop in supply • Rising global oil prices have lead to • Increase in UK fuel prices • Rising gas prices • Placing additional strain on UK and Global economy

4. However, UK is better placed than many to face oil price rises • UK Economy is less sensitive to oil price • Oil intensity halved since 1975 • UK has been a net oil exporter for 25 years • Could still be a net exporter until end of decade • Currently saves imports of over £30 billion • Tax Revenues from UKCS have surged in last 12 months • Expect to reach £10 billion in 2005/6 • Revenues doubled from UKCS in a year

5. Substantial opportunities remain in the UKCS, but life is getting harder • Produced 34 billion boe* over the last four decades *(barrels oil equivalent) • Could still have another 28 billion boe (inc yet-to-find) • Reserves replacement in 2004 (DTI) • Produced 95 bcm gas (billion cubic metres), replaced 25 bcm (26%) • Produced 725 million bbls oil, replaced 460 million bbls (64%)

6. UKCS faces strong competition - even around the North Sea • UK finding costs relatively high ($/bbl) • Netherlands – half cost of UK (Southern Gas Basin) • Norway – fifth cost of UK (Central / Northern N Sea) • New UK developments typically modest in size • UK discoveries now (25 million bbls oil or 3 billion m3 gas )(historic field sizes +/-500 million bbls oil, +/-100 billion m3 gas) • Norway – modest to very large • Reflects maturity of UKCS • UK has advantages • Extensive infrastructure coverage aides swift development • Shared sense of urgency (Window of Opportunity) • Wide diversity of investors (circa 120 in UK vs. circa 30 in Norway) • Ready access to UK & European gas markets

7. UKCS in 2005 - Sustaining Success, Competing for the Future How is the UKCS responding in 2005

8. Capital Investment Capital Investment Capex Trends 2002 Capex Trends 2002 - - 2005 2005 5.0 2002 2002 - - 2005 2005 Estimate June 2005 4.5 4.0 Capex £ Billion Estimate 3.5 Jan 2005 3.0 2.5 2002 2003 2004 2005 Both investment and expenditure on increase in 2005 • Total Spend in UKCS could reach £10 billion in 2005 (Exploration, Capex & Opex) • Capital investment has turned round over last 15 months • Was declining rapidly post 2002 • Could reach £4.5 billion in 2005 (forecast £3.8 billion in Jan) • Est. 24 projects approved in 2005 • vs 27 in 2004 & 14 in 2003 • Operating costs expected to exceed £5 billion in 2005, • £0.3 billion increase on 2004, • Increasing expenditure to extend life of assets and infrastructure

9. Activity has increased in 2005, but still to feed through to production • Development well drilling is increasing • First time in three years • Drilled 166 in 2004, compared with 113 for Q1/2 – 2005 • Still to assess impact on production • Est 16 start-ups in 2005 (vs. 11 in 2004)

10. Oil price is not the only factor driving activity on UKCS • Industry and DTI through PILOT have collaborated to promote a positive business environment • Recognising high cost and maturity of UKCS • Sought new means to encourage investment, attract new players and maximise economic recovery • 2001: Progressing Partnership • 3 voluntary processes designed to facilitate asset churn • Fallow acreage exploit or drop, preemption transparency, negotiation conduct • 2003/4: Infrastructure Access Code of Practice • Facilitates satellite development through existing extensive infrastructure • 2004/5: Brownfields Initiative • Quantifies remaining potential and window of opportunity • Initiatives to share best practice and encourage new technology • Asset Stewardship process to ‘encourage’ full exploitation • Ongoing decommissioning working group

11. Resources and skills are in high demand across oil industry • Supply chain is working flat out • Takes six – twelve months for full impact to flow through to wider sector • Drilling Rigs • Drilling fleets are fully booked for 2005, very few left for 2006 • Rig-rates doubled (jack-ups) or trebled (semi-sub) • Increasing collaboration in drilling programmes • 2 Jack-ups, 3 semi-subs returned to N Sea in last year • Katrina added to shortage of rigs • Skilled personnel in tight supply across industry & supply chain • ILT Capacity and Capability initiative • Industry Technician training programme now producing 100 new technician apprentices per year

12. UKCS Exploration & Appraisal Activity 2000 - 2005 100 90 Appraisal 80 Exploration 70 60 Number of Exploration & Appraisal Wells (Including sidetracks) 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 Exploration & Appraisal - benefiting from recent initiatives • Exploration & Appraisal activity surged • expect 80 wells for 2005 • Benefited from range of collaborative PILOT / DTI / Industry initiatives • Fallow / promote / Commercial CoP / Infrastructure CoP • Heightened rate of E&A is critical to future of UKCS • 2002/3 slump in E&A is impacting the rate of new developments

13. Insights from 22nd & 23rd licensing rounds 22nd Licensing round • 97 licences offered to 58 companies • 15 new entrants • 3 firm commitment wells • Planned in a $30 world • Focus on heartlands • Balance of risk and consolidation • Proof PILOT initiatives are working 23rd Licensing round • 152 licences offered to 99 companies • 24 new entrants • 17 firm commitment wells • Planned in a $40+ world • Interest centered on less explored, • Mid-North Sea High, Moray Firth, East Shetland Platform, Atlantic Margin • Renewed focus on heavy oil • Higher risk domains Number licences awarded 22nd & 23rd rounds

14. UKCS in 2005 - Sustaining Success, Competing for the Future What is driving the success of the UKCS in 2005

15. Percentage Total Spend Percentage Total Production Increasing diversity of investors is benefiting UKCS • Over the last five years there has been an increasingly diverse range of companies investing in the UKCS • Medium/large producers now produce 40% of UKCS production • From asset transfer and result of mergers • Small producers are growing in number and increasing their share of production • Majors remain a foundation of UKCS • New business models are being applied across UKCS

16. New Entrants have led growth of UKCS over last five years % • 35 new entrants since 1999 • Inc small, medium and large operators • Now account for third of total capital investment • All investors have a choice of where and when to invest • Critical to maintain the attractiveness of the UKCS

17. UKCS in 2005 - Sustaining Success, Competing for the Future Long term Opportunity

18. The UKCS has a long future ahead of it This is the tale of two futures

19. ………… with substantial rewards Projected tax revenues from UKCS (based on $40 projection) • There are substantial rewards for Government and Industry if we can sustain the attractiveness of the UKCS

20. UK emerging as global centre for oilfield goods & services • UK oil & gas industry supported by a substantial oilfield service sector • Grown rapidly over last decade • Now a major export industry • Increasing number service companies support European, African & Middle East operations out of UK • UK is global leader in key oilfield technologies • e.g. Subsea, Drilling technology • Subsea set to grow in the UK as industry seeks to extend field life.

21. UKCS in 2005 - Sustaining Success, Competing for the Future How do we sustain current success in years ahead

22. Lessons from the recent past • Need to maintain a stable business environment • Oil and gas prices are volatile • UKCS is a mature high cost basin • Tax increases in 2002 rocked investor confidence in UKCS • In the following two years against relatively flat oil prices • Exploration & Appraisal dropped • Development drilling declined • Capital investment declined • DTI & Industry through PILOT have done a great deal to restore investment climate • Investment confidence has since returned to UKCS 14 Rigs stacked - Autumn, 2003

23. Conclusions • Without UK oil & gas, the nation would be even more exposed to the impact of current oil prices • Fundamentals remain, the UKCS is a mature, high cost basin • Activity and Investment have increased in 2005, but the full impact is still to feed through to production • Oil price is not the only factor driving activity on UKCS • PILOT initiatives have created a positive business environment • Investor confidence is critical • Increasing diversity of investors is benefiting UKCS • New Entrants have lead growth of UKCS over last five years • All investors have a choice of where and when to invest • Critical to maintain the attractiveness of the UKCS