Analysis The Uk Oil And Gas Industry Environmental Sciences Essay

With this report is a PESTE Analysis of The Upstream Oil and Gas Industry in the United Kingdom. An analysis of the factors affecting the industry shows that it operates under legal, fiscal and environmental regulations where prices are determined by international organisations like the Organisation of Petroleum Exporting Countries (OPEC) and the Organisation of Economic Cooperation and Development (OECD). The Upstream Oil and Gas Industry in the United Kingdom is a mature one, and after 40 years of offshore exploration, the country remains self sufficient in oil and gas. This is an important sector for the UK, supplying the majority of the country’s energy needs, and virtually all the country’s transport fuel. Economic factors that affect the industry are oil demand, price, production, investment and employment. Awareness of sustainable development and renewable energy sources is the major social factor. Technology plays a crucial role in reducing the costs of exploration and production of oil and gas, in addition to making the process safer and more environmental friendly. There is considerable attention being paid to the affect of oil exploration operations on the environment, and this will also determine the future of the industry. The three scenarios that can emerge for the industry mainly depend upon the oil and gas reserves left in the North Sea, the viability of their exploration and the development of alternative renewable energy sources.

Introduction – PESTE Analysis of the UK Upstream Oil & Gas Industry

What is a PESTE Analysis?

PESTE shows which external factors are influencing a business or an industry, also measuring the market potential and situation.

This report is to understand and assess the various determinates of the external environment that influences the UK Upstream Oil & Gas Industry. The factors assessed include Political, Economic, Socio-cultural, Technological and Ecological. Once completed this PESTE model will provide an in-depth understanding of the situational factors that affect and have the potential to affect the UK Upstream Oil & Gas Industry now and in the future.

Political / Legal Factors

Political stability and a good law and order situation are conducive to the smooth functioning of the upstream oil industry. Wars and terrorism can prove detrimental to operations. There are also several legislation’s passed by individual governments and associations who affect the functioning of the industry.

2.1 Legislation

The Upstream Oil Industry in the United Kingdom is well regulated. In addition to the laws and regulations governing business in general, there are several laws that pertain to the Oil Industry specifically.

Petroleum Act 1998 (www.hmso.gov.uk/acts/acts1998/19980017.htm)

Hydrocarbons Licensing Directive Regulations 1995 (http://www.hmso.gov.uk/si/si1995/Uksi_19951434_en_1.htm)

Master Deed System 2003 (www.gnn.gov.uk/gnn/national.nsf)

The Offshore Installations (Emergency Pollution Control) Regulations 2002 (http://www.legislation.hmso.gov.uk/si/si2002/20021861.htm)

The Offshore Chemicals Regulations 2002 (http://www.legislation.hmso.gov.uk/si/si2002/20021355.htm)

The Offshore Combustion Installations (Prevention and Control of Pollution) Regulations 2001

(http://www.legislation.hmso.gov.uk/si/si2001/20011091.htm)

The Offshore Petroleum Activities (Conservation of Habitats) Regulations 2001 (http://www.legislation.hmso.gov.uk/si/si2001/20011754.htm)

2.2 Taxation

The North Sea Tax regime has three tiers, Petroleum Revenue Tax (PRT), Corporation Tax and a Supplementary Charge of 10%. The Budget proposals for 2004 are to remove from the scope of PRT, new tariff business.

2.3 OPEC & OECD

The Organisation of Petroleum Exporting Countries (OPEC) was formed in 1960 with 5 members. By the end of 1971 six other nations had joined. OPEC stabilizes prices in the international Oil markets with a view to eliminate fluctuations, by setting the production quotas in the member countries. “Oil Price History & Analysis”. WTRG Economics

In contrast, the Organisation of Economic Cooperation and Development (OECD) was instituted to counterbalance the role of OPEC and has a membership of 30 countries. The core of original members was located in Europe and North America but has expanded to include Asia, Latin America and the former Soviet bloc.

Economic Factors

As in every industry, there are economic factors affecting the health of the industry. It is abundantly clear that economic growth will remain the primary driver of energy demand.

3.1 World Economic Growth & Oil Demand

The global economy has grown at an average rate of about 3% per year since 1970, and the expectation is that it will continue to grow at the same pace over the next two decades (Raymond, Lee R., (2003). The most important factor governing upstream activities is the demand for Oil, which continues to increase.

3.2 Oil Prices

Crude oil prices behave much as any other commodity with wide price swings in times of shortage or oversupply. Currently the Brent Crude price is around $30 per barrel and is heavily influenced by the current world oil price set by the OPEC and OECD.

3.3 Oil Production

The current production rate is around 4.25 million boe per day (“North Sea Oil” Leopard Magazine 2003) this is expected to decline to 3.6 million boe per day by 2005. By 2010 the government has a target of 3 million boe per day, although some industry experts reckon that production will be below 2.5 million boe per day.

3.4 Employment in the Oil Industry

The Oil & Gas Industry in the UK, employs around 300,000 staff in exploration and production. Skill levels and multi-skill training are important issues keeping in view the technology improvements.

3.5 Financial Investment

Investment in upstream infrastructure like pipelines, tankers etc. results in more exploration activity.

Socio-Cultural Factors

The Upstream Oil & Gas Industry is indirectly affected by socio-cultural factors.

4.1 Awareness about Sustainable Development

Conservationists and more recently the general public are showing concern about saving non-renewable energy sources and switching to renewable energy sources.

4.2 Health & Safety at rigs

The perception of the Oil Industry has always been that it is a dangerous environment to work. Since the Piper Alpha disaster there has been a more conscious effort by the HSE and Industry bodies to make it a safer place to work. With the perception now changing the UK Upstream Oil Industry is now attracting a better quality of manpower.

Technological Factors

New upstream technologies will increase access to economically exploitable new liquids and gas reserves and reduce exploration, development and production costs. They will also mitigate adverse environmental efforts and risks to public health and safety from exploration and production activities. Technology and R&D activities will be responsible for the development of alternative energy sources.

5.1 Improvements in Oil Exploration & Production

In the past 10 to 15 years research and development within Oil and Service Companies has seen the development of powerful new and advanced technologies and tools for use in exploration, reservoir evaluation and production. Some of these are: 

3D, 4D, 4C Seismic Imaging.

Horizontal, Directional and Multilateral Drilling.

Advanced Drilling Completion and Stimulation Technologies.

Logging Tools and Nuclear Magnetic Resonance Imaging (NMRI).

Intelligent Completion & Reservoir Life Extension.

“New Energy Technologies in Upstream Oil & Gas”. The Middle East Economic Survey. 28th October 2002

5.2 Renewable Energy Technology

There are a wide range of renewable energy sources available and in the process of development and use. These are Biomass, Electricity, Geothermal, Hydropower, Solar, Wind and Tidal energy.

Ecological / Environmental Factors

The exploration, drilling and use of oil and gas will have to be kept in check due to the detrimental effects on the world ecosystem.

6.1 Ecological Impact

The ecology of the North Sea has deteriorated over 30 years of oil exploitation in spite of anti pollution regulations. Discharges of oil and chemicals have various lethal and non-lethal effects on fish, birds, molluscs, cetaceans and other mammals (“The Oil & Gas Industry – A guide for UK Activists”. Corporate Watch.) Seismic surveying, drilling and rig installation cause disturbance to seabed ecosystems. The numbers of certain varieties of fish have reduced drastically.

6.2 Climate Change

The rampant use of oil and petroleum products leads to Carbon Monoxide emissions (“The Oil & Gas Industry – A guide for UK Activists”. Corporate Watch), resulting in the greenhouse effect. It has been proved that there is a rise in temperatures, which will eventually lead to the melting of icecaps, the reversing of the Gulf Stream, and eventually great changes in climate all over the world. Flooding and coastal erosion will lead to massive population migration and loss of infrastructure all over the world.

Significant Issues / Trends in the UK Upstream Oil Industry

7.1 Reserves in the North Sea Basin

There are 260 oil and gas fields currently under development or in production on the UKCS (248 in 2001), with remaining reserves in these developments of around 11 billion boe (Alexanders Oil & Gas 2002). At the current rate of production, it will take around 10 years for the oil and gas to be exhausted. The future of the industry depends upon new finds and further development of existing fields

7.2 Viability of Exploration

Initial indications from a new survey reveal the UK offshore oil and gas industry has reached a critical point in terms of its international competitiveness, with projections of investment growth not being matched by increased production volumes. New technological developments in the upstream oil field aim to improve recovery rates of existing reserves (typically only 35% of which are currently recoverable by primary and secondary recovery technologies) and also reduce relative costs.

The volatility of the oil price has led to changes in the structure of the oil sector. There has been consolidation both horizontally and vertically in the traditional contracting supply chain. OPEC will continue to be a major force in setting world oil prices. Over 1998 / 1999 there was a severe reduction in oil price, but increases in the oil price since the end of 1999 have improved the cash flow for oil companies, however the recovery for the industry will depend on technology transfer and new oil finds.

7.3 Development of Alternative Energy Sources

Technology has come a long way in recent years with individuals, communities and businesses recognising the benefits of switching to renewable energy.

The Energy Saving Trust was set up by the UK Government after the 1992 Rio Earth Summit and is one of the UK’s leading organisations investigating the development of alternative energy sources. Their goal is to achieve the sustainable, efficient use of energy and to cut carbon dioxide emissions being the key contributor to global warming. The use of alternative energy sources is one way to address this vital goal.

Scenarios for the UK Upstream Oil Industry

Based on the above three issues that affect the upstream oil industry in the next decade, there could be three scenarios: the optimistic, the pessimistic and the middle of the road.

8.1 Optimistic Scenario

The need for affordable and clean energy will continue to increase, especially in growing economies as energy is of fundamental importance for the development of societies. The consumption of primary energy sources will increase over the next 20 year forecast and most of the increment in energy consumption will be in the form of fossil fuels (oil, natural gas, and coal). It is expected that fossil fuel prices will remain relatively low, and the cost of generating energy from renewable sources will not be competitive.

The fiscal climate of the UK will encourage the long-term investment necessary to secure the development of those supplies. In the UK, PILOT – a partnership of the UK Oil and Gas Industry and Government, will fulfill its vision set out for 2010. Over the next 25 years, the UK upstream industry will make 130 new discoveries and 240 new developments. Oil prices will stay at a “high” level and long term investment in new technology will increase productivity and find new sources of oil and gas. (“About Pilot – What is Pilot?” Pilot. 2003)

The industry will achieve a production level of 3 million barrels of oil equivalent per day in 2010 and a sustained investment level of £ 3 billion per year. There will be a 50% increase in the value of industry-related exports by 2005 and additional revenue of £1 billion from new businesses. There will also be a prolonged self-sufficiency in oil and gas for the UK with 100,000 more jobs than there would otherwise have been in 2010. (“About Pilot – What is Pilot?” Pilot. 2003

8.2 Pessimistic Scenario

Environmentalists and pro-conservation groups will influence all countries to maintain the delicate ecological balance of the planet by stopping the use of fossil fuels. UK government policy and programs will back alternative energy sources and the electricity generated will rise. At the regional level, the Energy Saving Trust will work with local authorities and a range of organisations to promote the implementation of alternative energy sources.

The environmental programs and government policies, particularly those designed to limit or reduce greenhouse gas emissions will be implemented. More support and financial funding for long-term renewable options to bring viable options to the market will achieve this. The Government will exceed its committed target and will achieve a 50% renewables target by 2010. The manufacturing sector all over the world will proactively implement methods to use renewable sources of energy.

In view of this, the price of oil will plummet, due to cleaner and cheaper alternatives for energy being available. The OPEC will loose control over regulating oil and the market will be competing with other sources of energy. This will reduce the investment in the upstream oil sector and the transfer of technology for exploiting oil more efficiently will slow down. Eventually, the phasing out and decommissioning of Oil rigs in the North Sea will commence earlier than expected.

8.3 Middle of the Road Scenario

The production of oil and gas in the UK peaked in 1999 and will continue to decrease over the years if there are no new significant discoveries in the North Sea Basin (“Analysis of the UK Oil Production”. PeakOil. 22nd February 2001). In the meantime renewable energy sources will get a boost with more funding and research & development efforts being committed in that direction.

The new technologies being used to make oil exploration more cost effective will not be transferred effectively to the rig, due to a lack of investment and funding. The price of oil will not be high enough for a comfortable cash flow in the upstream oil industry. The OECD will govern the prices of energy, as it will increasingly become non-fossil fuel based. UK will export most of its oil to the developing countries whose infrastructure would not have been upgraded enough to use renewable sources of energy.

Conclusion

On analysing the PESTE factors affecting the Upstream Oil industry, it is apparent that the major issues that will impact the health and longevity of the industry are the remaining reserves in the mature North Sea Basin, the viability of exploration and the development of alternative renewable sources of energy. From my readings I feel that with the technology that is constantly being developed by the Oil companies Exploration and Production in the Upstream Oil and Gas Industry in the United Kingdom will continue steadily for at least another 20 years.

Even with renewable energy sources becoming increasingly more evident, oil and gas will remain the most important fuels for the next 20-30 years.

References

Internet

1.”Industry survey reveals challenges ahead for UK offshore oil and gas”. Alexander’s Gas & Oil Connections. 27th November 2002.

2.”Analysis of the UK Oil Production”. PeakOil. 22nd February 2001.

3.”The Oil & Gas Industry – A guide for UK Activists”. Corporate Watch.

Raymond, Lee R., (2003) The Petroleum Industry in the 21st Century: Building on a Great Legacy. World Energy. 6 (2): 24-29

4.”About Pilot – What is Pilot”. Pilot.

5.”UKOOA Sustainability Strategy – Striking a Balance”. UKOOA. 2002.

6.”North Sea Oil” Leopard Magazine – Professor Alex Kemp

7.”North Sea Oil and the UK Economy”. UKOOA.

8.”Oil Price History & Analysis”. WTRG Economics. 22nd

9.”Is OPEC necessary?” Oil Online. 25th November 2002.

10.”New Energy Technologies in Upstream Oil & Gas”. The Middle East Economic Survey. 28th October 2002.

11.”Forces Driving the Petroleum Industry in 2000 and beyond”.

Energy Saving Trust Website