North sea oil and gas costs to fall

Low oil price causing efficiency improvements and job losses

Operating costs for UK oil and gas assets is expected to fall by 22% by the end of 2016, while the sector has lost 375,000 jobs since the start of 2014, according to an industry-wide report.

Trade association Oil and Gas UK's economic report, reveals the impact that the low oil price has had on the North Sea sector and predicts there are still “very challenging times” remaining.

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.

“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. It is likely that capacity may have to be reduced still further in order for the business to weather the downturn.”

Exploration for new resources has fallen to its lowest level since the 1970s. The small number of new projects gaining approval means capital investment is expected to drop from £14.8 billion last year to as little as £2 billion in each of the next three years.

However, the report says the sector is making good progress in efforts to remain competitive internationally and is predicted to have reduced operating costs by 22%, more than £2 billion by the end of next year.

The average operating cost per boe (barrel of oil equivalent) across all North Sea fields is expected to fall from £17.80 in 2014 to £17 this year, and to around £15/boe by the end of 2016. The 15% reduction from 2014 to 2016 almost reverses three consecutive years where the operating cost has increased.

Mike Tholen, Oil & Gas UK’s economic director, said: “We are now seeing companies’ commitment to improving cost and efficiency reflected in industry performance. 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.”