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Last Updated: Tuesday, 22 November 2005, 09:09 GMT
Is UK oil output running on empty?
By Adam Porter
In Perpignan, France

North Sea oil rig
North Sea oil output is declining rapidly

How much will you pay for fuel?

This is a question people often ask themselves. How much will it cost to fill my car? How much will it cost to heat my home?

But are there more hidden costs to the British citizen other than just the cash they hand over to oil companies, gas providers and electricity generators?

British North Sea oil output has declined steadily since 1999.

This, accentuated by the sharp rise in global crude prices, is now taking a big chunk out of Gordon Brown's budget. That missing chunk has to be met by the UK taxpayer.

Gordon Brown recently called on the eleven nations of OPEC to increase their supply capacity.

However, as OPEC was quick to point out the biggest fall in production by any major producer since 1999 is not an OPEC nation. It is the UK.

Steady decline

"Maybe politicians have just come to realise the situation," says Mike Wittner, global head of energy market research at Calyon Bank.

"But markets are not really surprised. UK oil production has been declining for several years."

These declines do seem to be irreversible now
Deborah White, Societe Generale

The rate of decline has ranged from 6% to 17%, year-on-year.

Experts say this is not surprising.

"It is because the way offshore fields are developed, [which is] all in one go and produced as fast as possible, for economic reasons," says Dr Michael Smith, head of research analysts EnergyFiles.

"When they start to decline, they do so fairly rapidly. All these big fields came on stream roughly at the same time so they have all tended to reach their maximum at the same time, then combining to decline."

No turning back

The UK produced an average of 2.72 million barrels a day (mbpd) in 1999, hitting a high of 3.1 mbpd in August.

But by June 2005 this had fallen to 1.7 mbpd, a drop of 34%.

"These declines do seem to be irreversible now," says Deborah White, senior energy analyst at Societe Generale.

"In my experience, even when [oil] prices are extremely high and spending [on extraction] is extremely high, it has been virtually impossible to reduce decline rates below 3%."

North Sea oil rig
Experts say higher investment can stem the rate of decline

What is also interesting about the UK's declining oil output is that it has been rather consistent.

In 2000, production was down 8.1% from its 1999 high, then falling 6.8% in 2001.

The decline slowed to 0.5% in 2002, prompting calls that an output 'rebound' was on the cards.

But 2003 saw an 8.8% decline, rising to 10% in 2004.

This year has seen a similarly startling decline. In February, year-on-year levels were down 13%, rising to 17% in March.

Discovery shortage

"The UK will eventually have to import," Mike Wittner argues.

"Declines will continue. There is only one new field of any size - the Buzzard field - set to come online. Otherwise it's just bits and pieces."

The International Energy Agency (IEA) has forecast a slight pick-up in UK output next year to 1.85 mbpd but it too sees a continuing decline to 1.66 mbpd in 2007.

Oil field in Tel Aviv
The Treasury does benefit from higher oil prices

Even the UK Offshore Operators Association (UKOOA) says that declines are inevitable. Even with increased spending of about 4.3bn a year, it believes the decline will still be about 7%.

A new round of oil field licences handed out this year may also fail to stem the fall in crude production.

At least that is what the Department of Trade and Industry says.

"Eight new fields started production during the past year," it reported.

"But production from these fields was insufficient to make up the general decline in production from older established fields."

"There might be some reduction in decline [rates]," says Dr Smith.

"But there is unlikely to be any growth because the depletion in big old fields is greater than likely discoveries in the new marginal small fields found under new licences."

Economic impact

Declining oil output has a direct economic impact upon British citizens through lower tax revenues.

Average oil production fell by 940,000 barrels between 1999 and 2005.

Assuming an average oil price of $60 a barrel and using some back of the envelope calculations, that would work out at 33.82 per barrel.

In this scenario, the UK would lose an average of 31.7m a day, equivalent to 11.6bn a year.

For transport, where most of our oil is used, there isn't a viable alternative right now
Dr Michael Smith, EnergyFiles

This would translate into an annual loss per person of 193.38.

Gordon Brown is, of course, also getting vastly increased tax revenues from the major oil companies as prices have spiralled.

In 1999, oil hovered around $20 per barrel and has since trebled in price.

But the price increases can also be a double-edged sword.

Gas solution?

As Britain becomes a net importer of oil, as it first did this summer, not only does falling output cost money. So does the very expensive energy - oil, gas and liquefied gas - bought to replace it.

In this respect, government figures do not provide much hope for North Sea gas output either.

Gas rig
Experts say gas is not the solution to the UK's energy problems

Output fell 5.5% in the second quarter of 2005, according to DTI figures, while imports increased by 53.5%.

"Gas has replaced nearly all our power generation," says Dr Smith.

"But gas has its own problems. UK gas imports are increasing dramatically but otherwise there is no [other] significant energy source.

For transport, where most of our oil is used, there isn't a viable alternative right now nor will there be one in the next five to ten years."

The UK is facing a sea-change in attitudes towards oil.

Whilst high prices may ease the pain right now by providing extra tax for the chancellor, our own supplies are dwindling.

"I am forecasting that the UK will be a net importer of oil around 2007," says Dr Smith. "By 2015 the UK will need to import between 600-700,000 bpd."

How much those imports will cost you and your family is an open-ended question.

But unlike North Sea oil, it is one that will not simply fade away.

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