OE 2015: UKCS to See $3.1B Cost Improvement amid Further Jobs Pain

OE 2015: UKCS to See $3.1B Cost Improvement amid Further Jobs Pain
The UK's North Sea industry will see a further $3.1-billion cost improvement by 2016 as it suffers further job losses amid lower capital investment.

The UK's North Sea Industry expects to see a GBP 2 billion ($3.1 billion) cost improvement by 2016, according to a report released Wednesday by industry group Oil & Gas UK. However, the organization also noted that capital investment on the UK Continental Shelf is expected to fall from GBP 14.8 billion ($22.6 billion) in 2014 by between GBP 2 and GBP 4 billion over the next three years, with further job losses to add to after an estimated 15-percent decline in  the workforce since the start of 2014.

Oil & Gas UK's Economic Report – published on day two of Aberdeen's biennial Offshore Europe exhibition and conference – shows that the UK oil and gas sector has been particularly challenged by the drop in commodity prices due to the combination of declining production and a sharply rising cost base. However, it noted that concerted action by the industry is leading to an estimated 22 percent (more than GBP 2billion) 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, the organization added.

Oil & Gas UK Economic Director Mike Tholen commented in a statement:

"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 three percent higher than the same period in 2014, an indication that over this year, we are likely to see annual production increase.

"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 GBP 2 billion). Whilst the improvement will be offset to some extent by GBP 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."

Oil & Gas UK Chief Executive Deirdre Michie added:

"Difficult decisions have had to be made across the industry. We estimate that employment supported by the sector has contracted by 15 percent 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 industry is under a lot of pressure and it is now widely recognized 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.

"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 proposition 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 consider further lightening of the tax burden to help drive maximum economic recovery of our oil and gas."

Read other Offshore Europe 2015-related news at bit.ly/1UyQBy7.

A former engineer, Jon is an award-winning editor who has covered the technology, engineering and energy sectors since the mid-1990s. Email Jon at jmainwaring@rigzone.com

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