North Sea energy sector forecasts cost-savings of £2bn by end of 2016

JEWEL IN THE CROWN: Nexen's Golden Eagle oil field
JEWEL IN THE CROWN: Nexen’s Golden Eagle oil field

The annual Economic Report published today by Oil & Gas UK 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 report finds that the sector has been particularly challenged by the drop in commodity prices due to production decline and the sharply rising cost base.

It also finds that concerted action by the industry to improve efficiency across the sector is leading to an estimated 22% – worth more than £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.

See also: ‘Grave market risks’ mean N. Sea oil companies must adapt or die, UK regulator tells Holyrood MPs

Mike Tholen, Economics Director, Oil & Gas UK 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 (Nexen) Golden Eagle field, the Government’s provisional data show that production in the first half of 2015 was 3% 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 Efficiency task force to step up the pace of change. 

Tholen continued: “We are now seeing companies commit to improving cost and efficiency reflected in industry performance.

“Whilst the improvement will be offset to some extent by £1.1 billion of operating expenditure relating to new fields brought on stream 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.”
Economic Report 2015 Infographics v3
“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.”

This is still well below the current £10-barrel average operating cost achieved by Nexen UK – the wholly-owned Chinese national oil corporation subsidiary.

The 15% reduction from 2014 to 2016 almost reverses the last three years of increases. 

Deirdre Michie, Oil & Gas UK chief executive, added: “This industry 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% since the start of 2014 to 375,000 jobs.

“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 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.”

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