WoodMac forecasts fall of up to 20% in N. Sea costs by 2016 due to crude oil price slump

Oil barrel symbolCapital and operating costs in the North Sea oil and gas energy sector will decrease steadily this year as operators respond to lower oil prices.

And, thereafter, Edinburgh-based analyst Wood Mackenzie  warns that  ‘fundamental’ changes in offshore working practices are required to sustain these costs savings.

Near term pre-Final Investment Decision (FID) projects are expected to be best placed to benefit from reductions and development costs for these projects could fall 10-20%. Operating costs will decrease by up to 15% in the UK and 10% in Norway.

Wood Mackenzie asserts that upstream cost deflation is inevitable for the North Sea industry, as it emerges from a period of intense development activity over the past five years. This caused severe cost inflation as operators competed for access to services.

Malcolm Dickson, Principal North Sea Analyst for Wood Mackenzie, explains: “High capital and operating costs are the single biggest issue for companies in the UK and Norwegian sectors of the North Sea today.

“Even before the oil price crash, developing and operating fields while making a profit was challenging and we expected some cost deflation in the sector as activity cooled. The drop in oil price has accelerated the need for lower costs, as companies adjust to protect their cash flows, and changes are now required to correct the industry’s cost base. 

“We expect that there will be a gradual decrease in capital and operating costs in 2015 and 2016, the most significant reductions likely to be a 30% fall in drilling costs, as rig and vessel rates come down due to oversupply.

“We have already seen rig rates dropping significantly with reductions of up to 20% for new contracts agreed in 2015. 40% of mobile rigs in the UK are either currently without contract or due to come off contract by the end of 2015, giving scope for high reductions in future contract renewals.”

“We also expect development costs for near-term pre-FID projects to drop by up to 18% in the UK and 11% in Norway. Projects that are already under development are likely to see less deflation, as many of the costs are locked in by existing contracts.”

The outlook for costs beyond 2016 is much less clear and depends to a large extent on what happens to the oil price.

Wood Mackenzie assumes steady price recovery, towards Brent reaching $85-barrel real from 2018 onwards.

Dickson said: “Assuming the oil price rises as we think it will, the lower cost base achieved over this year and next can only be sustained through fundamental changes in practice and increased collaboration between the operators and the service sector.”

 

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