The extractive industries in the UK comprise oil and gas production, mining and quarrying. These sectors continue to play a major role in the UK economy, contributing total Gross Value Added (GVA) of £13 billion in 2020 and directly employing some 60,000 people.
Overview of the extractive sectors in the UK
The UK’s extractive industries comprise oil and gas production, mining and quarrying. The extractive sector has made a sizeable contribution to the UK economy for many years and remains an important sector in the UK. In 2020, industry gross value added (GVA) was £13 billion. The extraction of oil and gas and associated support service activities accounted for 85% of the sector’s GVA. The UK EITI website provides more detailed information on the sector in general and the oil and gas and mining and quarrying sectors in the UK.
Oil and Gas sector
The UK oil and gas industry is in its sixth decade of offshore production. Between 2014 and 2019, UK oil production increased by 19% – a significant turnaround given that the basin had previously seen a consistent decline in production since 2000. Gas production also increased until 2017 but has since fallen back with an overall growth over this period of just 4% This increased/maintained production rate derived from both improved performance of existing oil and gas fields and the addition of capacity from new field start-ups which more than compensated for natural decline from existing fields. Production volumes in the next decade and longer term will require a balance between new investment in the UK Continental Shelf (UKCS) and the need to transition to a low-carbon economy as the UK works to meet its legally-binding target to bring greenhouse gas emissions to net zero by 2050. The sector has committed to halve its own Greenhouse Gas (GHG) emissions by 2030 and cut them by 90% by 2040 and will actively lead on carbon capture storage and hydrogen opportunities to reduce the UK’s carbon emissions.
The industry continues to transform and reinvent itself. In real terms, total operating costs fell by around 30% between 2014 and 2019, with most of these cost savings deemed sustainable in the long-term. However, ongoing uncertainty and volatility in commodity prices continue with a conservative outlook and new investments need to break even at prices in the $40 to $50 per barrel region. The number of field approvals fell slightly in 2019 but drilling activity picked up from the historically low levels in 2018.
The industry’s profitability continued at a subdued level, with net receipts from taxation of around £1 billion in 2019. The UK Government is committed to having an oil and gas tax regime that is internationally competitive in order to encourage investment in the UK, while at the same time ensuring a fair return for the nation and to address climate-related commitments. The production tax regime has been designed to reflect the cash flow of the basin and as such production tax receipts have varied significantly in recent years driven by volatility in product prices.
The UK oil and gas industry supports hundreds of thousands of jobs in Scotland and across the rest of the UK. According to latest ONS data, the sector was directly responsible for around 40,000 jobs in 2019, with many more supported in the industry’s wider supply chain plus those jobs that depend on the UK’s oil and gas industry. It is estimated a total of around 270,000 jobs UK were supported by the upstream oil and gas industry in 2019, many of them highly skilled.
Whilst cost control and capital discipline remain high on industry’s agenda, the ingenuity of the UK oil and gas industry’s people and the communities they work in cement the long-standing importance of this industry to the UK’s economy. This is not just through the payment of production taxes and licence fees (as disclosed in the EITI reconciliation), but also ensuring the UK’s security of energy supply through providing the equivalent of more than half of the UK’s oil and gas demand, thus giving a significant contribution to the balance of trade, as well as through the development of technology, innovation and skills that cascade out of industry and often support the transition to a lower carbon future.
In early 2020, the rapid spread of the virus Covid-19 triggered a global pandemic which continues to have significant impact for the oil and gas industry. Governments around the world employed various mechanisms, national lockdowns in most cases, in an attempt to contain the spread of the virus and minimise its impact on global and local economies. These mechanisms, the lockdowns in particular, together with other underlying market conditions, led to an unprecedented drop in worldwide demand and consumption of oil and oil products. Globally, the International Energy Agency (IEA) estimates that oil demand in 2020 will fall to 91.7 million barrels per day (bpd) down 8.4 million bpd on 2019 levels. The resultant collapse in demand as the pandemic emerged drove down the prices of oil and other energy commodities, with oil price falling by 70% from a high of $69 per barrel in January to a low of $20 per barrel in late April. Whilst oil prices have risen since April, they are still in the low $40s per barrel and the average price year to-date is circa $41 per barrel, $23 below the average for 2019. The collapse in commodity price has created a challenging operating environment with significant adverse consequences for liquidity, profitability and, in extreme cases, the viability of companies in the sector and its interdependent supply chain.
Naturally, the prioritisation and protection of employees’ health and safety offshore and onshore has remained industry’s primary concern. Financial discipline, a frequent phrase in recent years, has re-emerged as a survival theme with companies slashing or deferring discretionary capital and operating expenditures, continuing hydrocarbon production where feasible in order to protect cash flows and, in worrying signs for the future, the announcement by a few majors of redundancy programs for UK and overseas operations.
In the short term, which could entail the next two to three years, the industry continues to wrestle with the ongoing impact of the restrictions caused by the pandemic on the oil and gas economy. The long-term impacts are less clear and will depend on many factors including the future oil price and global demand, together with the impact of the evident structural shift into energy transition.
These developments are a cause for concern for workers in the industry who have faced uncertainty in recent years due to the cost focussed environment and are now facing further uncertainty with the impact of Covid-19. Whilst transitioning to a net-zero economy will present employment opportunities, concerns as to how this can be done equitably and with opportunities for the current workforce to re-skill and transition are key for communities dependent on the oil and gas industry as a primary employer.
Mining and Quarrying Sector
Construction minerals are essential to the UK economy, improving our housing stock, transport networks, commercial and industrial buildings, energy and water infrastructure, schools and hospitals.
The main element of construction minerals in volume terms is the extraction of primary aggregates, including quarried crushed rock and both land-won and marine dredged sand & gravel. A total of 199 million tonnes of primary aggregates were produced in the UK in 2019, compared with 91 million tonnes of energy minerals, including coal, oil and gas. Aggregates are largely recovered from indigenous sources and imports remain limited, estimated to represent less than 5 million tonnes per annum. Information available at GB-level only provides further insight on the relative balance of the various sources of aggregates. In 2018, 180 million tonnes of primary aggregates were produced, 117 million tonnes of crushed rock and 63 million tonnes of sand & gravel. Marine-dredged aggregates satisfied about 22% (14 million tonnes) of the total construction needs for sand & gravel.
In addition to the extraction of primary aggregates, materials can also be obtained from the recycling of Construction, Demolition and Excavation Wastes (CDEW), or derived from other industrial, production or extractive processes, referred to as secondary aggregates. Recycled aggregates are the product of processing inert construction and demolition waste, asphalt planings and used railway ballasts into construction aggregates. Secondary aggregates are derived from other industrial processes, such as other mineral extraction operations including ball clay and china clay production, or waste from slate production. Other sources of secondary materials include blast furnace and steel slags, incinerator bottom ash (IBA), furnace bottom ash (FBA), coal-derived fly ash (CDFA) and crushed glass sand. Collectively, recycled and secondary aggregates contribute significantly to the total aggregates demand: although there are no official statistics available on the contribution of these materials to the total aggregates market, the Mineral Products Association estimates that, in 2018, recycled and secondary sources of aggregates accounted for 28% of total aggregates supply in Great Britain, significantly higher than the European average.
The underlying geology across the UK determines the local availability of construction minerals, and aggregates (especially crushed rock) may be transported long distances when necessary. As resources are not always distributed evenly, inter-regional movement of aggregates is required to balance local availability with the wider geographic demands of the market. The South East, for example, has its own supplies of sand & gravel alongside recycled aggregates, but relies heavily on crushed rock brought in by rail from the East Midlands and South West and by sea from Scotland. It also uses marine dredged sand & gravel from coastal waters.
Market drivers for construction minerals include general UK economic and construction growth. Short-term weaknesses had already emerged in construction minerals demand since 2018, driven by slowing activity in commercial constructions. In 2020, market sales of primary aggregates and construction mineral products such as ready-mixed concrete, asphalt and mortar, slumped as a result of the Covid-19 pandemic and the impact of the spring lockdown on general construction activity. Sales of construction minerals and mineral products started to recovery quickly from a low base over the summer, but the broader picture points to a long road ahead and concerns about growth stalling toward the year end. Demand over summer 2020 was fuelled by released pent-up activity post-lockdown in housing and infrastructure, but as the catch-up is gradually winding down, sales volumes remain significantly below pre-pandemic levels. The long-term demand prospects for aggregates demand are nonetheless positive, underpinned by higher planned investment in infrastructure projects and housing. The Mineral Products Association expects demand to accelerate from 2021 and throughout the 2020s, supported by work on major infrastructure projects, including High Speed 2, and the anticipated delivery of various five-year investment programmes within regulated sectors in roads, rail and water and sewerage.
Whilst there appear to be sufficient indigenous mineral resources available to support future demand requirements, there are issues around the supply-mix that will need to be addressed. Industry statistics point to a persistent under-replenishment of land-won sand and gravel permitted reserves. Meanwhile, whilst recycled and secondary sources of aggregates and imports have a definite role to play, their growth potential is constrained by the amount of suitable material available to recycle (mainly from demolition) and its suitability for various applications. Demand for indigenous quarried and dredged aggregates is likely to remain significant and these remain subject to often lengthy and complex planning and environmental permitting controls before they can be extracted.
Construction minerals extraction and related downstream manufacturing activities are distributed throughout the UK and extraction businesses make a variety of tax, financial and non-financial contributions to national and local governments and local communities that are outside the current scope of EITI reporting. This includes the Aggregates Levy, employment taxes and businesses rates. At the extraction stage, the annual cost of the Aggregates Levy reached £397m in 2019. The industry also supports a significant supply chain of plant, equipment and transport suppliers and professional services. Other construction-related mineral extraction includes clay for brick-making, limestone and chalk for cement manufacture and the production of high-quality dimension stone and slate.
The construction minerals industry is also in the scope of the European Union Emissions Trading System, Climate Change Agreements linked to the UK Climate Change Levy, Streamlined Energy and Carbon Reporting and Energy Saving Opportunity Scheme, all of which are focused on carbon reduction or energy efficiency. In 2020, the UK concrete and cement sector set out a roadmap to become net negative by 2050, removing more carbon dioxide from the atmosphere than it emits each year. It has identified that net zero can be met through decarbonised electricity and transport networks, fuel switching, greater use of low-carbon cements and concretes as well as Carbon Capture, Utilisation or Storage (CCUS) technology for cement manufacture. A net negative industry by 2050 could be achieved by using the natural, in-use properties of concrete which include its ability to absorb carbon dioxide during use, and the benefit of using the thermal properties of concrete in buildings and structures to reduce operational emissions. The concrete and cement industry has already taken considerable early joint action and due to investment in fuel switching, changes in product formulation, and energy efficiency including plant rationalisation, its direct and indirect emissions are 53% lower than 1990 - decarbonising faster than the UK economy as a whole.
Whilst coal still plays a part in the UK’s energy mix, its contribution is declining. Although the UK still has a significant coal resource there are only a small number of operating mines, predominantly opencast. In terms of underground mines, Eckington in Derbyshire, one of a few remaining small mines, closed in January 2019. That being said, West Cumbrian Coal received planning permission in March 2019 for the Woodhouse Colliery, which is anticipated could produce up to 3.1 million tonnes/year of metallurgical coal for the steelmaking industry.
Industrial and metal minerals
Minerals such as limestone and silica sand have numerous non-construction uses, ranging from iron and steel and glass making to cleaning acidic power station emissions and improving the performance and sustainability of UK agriculture. China Clay or Kaolin support a wide range of industrial markets including ceramics, paper and specialist applications such as fillers for pharmaceuticals, paints, adhesives and animal feeds, while Ball Clays are used principally in the ceramics industry for industrial applications, including sanitaryware, tile manufacture and tableware. Future extraction trends for industrial minerals will depend on movements in UK and overseas markets and on the competitiveness of operating costs and the business environment in the UK.
Over the last 18 months there have been significant developments in this area. Anglo American plc took over Sirius Minerals in March 2020 and development of the Woodsmith Mine, a major new polyhalite mine in the North Yorkshire moors is accelerating. In the South West, the Drakelands Tungsten mine that was closed in October 2018 has a new owner, Tungsten West, which is developing plans to restart the mine early in 2021. Elsewhere, plans to reopen the South Crofty Tin mine in Cornwall by Cornish Metals (formally Strongbow Exploration) continue and the company reported on a successful drilling programme in summer 2020. Cornish Lithium recently reported it has found “globally significant” lithium grades in geothermal waters and is preparing for work on its pilot plant. Cornwall Resources are also moving forward with the development of their Redmoor project, of a significant tin, tungsten and copper deposit and a mining scoping study has recently been completed. The significant resource of gold at Curraghinalt in Northern Ireland (Dalradian) and Cononish in Scotland (Scotgold), where a recent announcement has been made to accelerate plans to double production, are other exciting examples that illustrate the continuing importance of the UK as a mineral producer.
The UK has had no overarching national mineral strategy, policy or plan recognising the economic importance of a steady supply of essential minerals and mineral products, from domestic sources or imported. The current relevant planning documents for each part of the United Kingdom are:
- In England, the National Planning Policy Framework (England),
- In Scotland, Scottish Planning Policy 4: “Planning for Minerals” and “National Planning Framework/Scottish Planning Policy”
- In Wales, Planning Policy Wales and Minerals Technical Advice Note 1 and 2 (MTAN1 and MTAN2)
- In Northern Ireland, Strategic Planning Policy Statement for Northern Ireland, (SPPS)
The English National Planning Policy Framework (NPPF) states in paragraph 203 that “It is essential that there is a sufficient supply of minerals to provide the infrastructure, buildings, energy and goods that the country needs. Since minerals are a finite natural resource, and can only be worked where they are found, best use needs to be made of them to secure their long-term conservation.”
In 2018, in response to the lack of overarching strategy, the minerals industry produced the UK Minerals Strategy which sets out the importance of the sector to the UK economy and highlights measures necessary to ensure that demand for minerals and mineral products is supplied sustainably over the next 25 years.
- MPA (2020), Profile of the UK Mineral Products Industry – 2020 edition. (awaiting official publication)
- MPA (2020), The Contribution of Recycled and Secondary Materials to Total Aggregates Supply in GB in 2018. Available at : https://mineralproducts.org/documents/Contribution_of_Recycled_and_Secondary_Materials_to_Total_Aggregates_Supply_in_GB_in_2018.pdf
- MPA (2020), Increased summer demand for mineral products gives way to winter concerns. Press release, November 2020. Available at: https://mineralproducts.org/20-release38.htm
- MPA (2019), AMPS 2019: 8th Annual Mineral Planning Survey report. Available at: https://mineralproducts.org/documents/8th_AMPS_Report_2019.pdf
- MPA UK Concrete (2020), UK concrete and cement sector sets out roadmap for beyond net zero. Available at : https://thisisukconcrete.co.uk/Perspectives/UK-concrete-and-cement-sector-sets-out-roadmap-for.aspx