£2 billion worth of cost improvements expected in North Sea by 2016News // September 10, 2015
Oil & Gas UK’s Economic Report published on 9 September 2015 reveals the impact of the challenging business environment on the offshore oil and gas industry and provides the first signs that the sector’s efforts to restore international competitiveness are starting to take effect.
The annual report, published by the UK oil and gas industry’s leading trade association, finds that the sector has been particularly challenged by the drop in commodity prices due to production decline and the sharply rising cost base, but that concerted action by the industry to improve efficiency across the sector is leading to an estimated 22 per cent – over £2 billion – reduction in the cost of operating existing assets by the end of 2016.
Supported by the first annual production increase for 15 years, the unit cost of operating UK oil and gas assets will also improve.
Mike Tholen, Oil & Gas UK’s economic director, detailed the improvements: “Strong investment in asset integrity over the last four years, coupled with measures being taken to improve the efficiency of assets offshore, have resulted in better output from many existing fields and we expect the rate of decline in production from those fields to slow significantly over the next two years. Taken together with the start-up of the sizeable Golden Eagle field, the Government’s provisional data show that production in the first half of 2015 was 3 per cent higher than the same period in 2014, an indication that over this year, we are likely to see annual production increase.”
The industry has been focused on bringing costs down and improving efficiency for the past year and a half and Oil & Gas UK last week launched its industry task force to step up the pace of change.
Mr Tholen continued: “We are now seeing companies’ commitment to improving cost and efficiency reflected in industry performance. We anticipate that by the end of 2016, companies will have reduced the cost of operating their existing assets by 22 per cent (over £2 billion). Whilst the improvement will be offset to some extent by £1.1 billion of operating expenditure relating to new fields brought onstream in the intervening period, these new developments are vital for the future of our industry, in terms of both oil and gas production as well as the commercial opportunities they bring for the supply chain.”
This more positive production outlook will help to reduce the average operating cost per boe for across all fields from an estimated £17.80 in 2014 to £17 this year and by a further £2-3/boe to around £15/boe by the end of 2016. The 15 per cent reduction from 2014 to 2016 almost reverses the last three years of increases.
Deirdre Michie, Oil & Gas UK’s chief executive, said: “This great industry of ours is facing very challenging times. Last year, more was spent than was earned from production, a situation which has been exacerbated by the continued fall in commodity prices. This is not sustainable and investors are hard-pressed to commit investment here because of cash constraints. Exploration for new resources has fallen to its lowest level since the 1970s and with so few new projects gaining approval, capital investment is expected to drop from £14.8 billion (2014) by £2-4 billion in each of the next three years.
“Difficult decisions have had to be made across the industry. We estimate that employment supported by the sector has contracted by 15 per cent since the start of 2014 to 375,000 jobs. It is likely that capacity may have to be reduced still further in order for the business to weather the downturn. The Scottish Government’s Energy Jobs Task Force and New Anglia Local Enterprise Partnership are active in supporting affected businesses and employees.
“The industry is under a lot of pressure and it is now widely recognised that a transformation in the way business is done is required if the UK sector is to become more resilient and competitive in a world of sustained lower oil prices. The challenges are being tackled head on – even before the oil price fall, industry’s attention was focused on improving our cost competitiveness whilst upholding the safety of the workforce.”
The constructive tripartite approach to maximising economic recovery of the UK’s oil and gas by HM Treasury, industry and the new regulator, the Oil and Gas Authority, is crucial to supporting the industry’s transformation to a more attractive investment opportunity.
Deirdre Michie continued: “I am confident that we have turned a corner with improvements in cost and efficiency. However, a continued low oil price will inevitably cause companies to reflect on the long-term viability of their assets. Retaining infrastructure and delaying decommissioning will be essential to prolong production from existing fields and promote future new developments.
“The government’s restructuring of the tax regime to provide a more fiscally competitive proposi-tion and its funding of seismic surveys to open up new areas for exploration are steps in the right direction but with lower commodity prices expected over a prolonged period, it is now time to con-sider further lightening of the tax burden to help drive maximum economic recovery of our oil and gas.”
She concluded: “Over 43 billion boe have been produced to date from the UKCS and almost half again remains to be extracted. Maximising the recovery of our oil and gas resource will strengthen the country’s energy security, boost tax revenues, exports and the balance of payments as well as sustain high value activity and jobs in our world-class supply chain.
“This industry is embracing change. It is taking bold and purposeful action, for example through the Oil & Gas UK coordinated Efficiency Task Force’s pan-industry initiatives, to emerge leaner, fitter and with a competitive and efficient cost base that will ensure a positive and sustainable future.”