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LONDON (Alliance News) - UK offshore trade body Oil and Gas UK on Wednesday said operating costs in the North Sea will fall by almost a quarter by the end of 2016 as the industry continues to battle the fall in oil prices, higher costs, and falling production.
Although the industry faces a difficult few years ahead, the situation seems to be progressively improving and the trade body is expecting production to rise from the area for the first time in 15 years during 2015.
Oil and Gas UK, in its Economic Report on the North Sea, said there has been four-successive years of record investment in the North Sea but the return on that investment is being "severely undermined" by cost inflation as companies try to make older North Sea gas fields more economic in light of the collapse in oil prices since the middle of 2014.
"Last year, more was spent on UK offshore oil and gas operations than was earned from production, a situation that has been exacerbated by the continued fall in commodity prices," said the trade body.
Oil prices have fallen from around USD115 per barrel in the middle of 2014 to only USD49 per barrel on Wednesday.
Those rising costs and falling revenues led to a GBP4.20 billion cashflow deficit in 2014 for companies operating in the UK North Sea, the largest deficit recorded since 1976.
That has caused numerous companies, including major players such as BP PLC and Royal Dutch Shell PLC, to cut jobs, defer investment and slash expenditure, especially on exploration as they try to focus on increasing profitability from producing assets.
Oil and Gas UK said exploration has fallen to its lowest level since the 1970s and there is no sign of this improving in the near term. That will lead to companies in the area investing between USD2.0 to USD4.0 billion less in capital investment over the next three years compared to the USD14.80 billion invested in 2014.
In its lifetime, the North Sea has produced around 43.0 billion barrels of oil equivalent, and there is thought to be around 22.0 million barrels left to discover and produce.
The industry received a huge boost at the end of August when BP, Maersk Oil and JX Nippon said they would invest billions of pounds into developing the Culzean gas field - the largest new field discovered in the UK North Sea for a decade. GBP3 billion is to be invested in the North Sea and in the supply chain from the field, boosting jobs, and the field is expected to produce enough gas to meet 5% of total UK demand at peak production in 2020 to 2021.
In terms of overall jobs, the North Sea has been hard hit. Since the start of 2014, the amount of people employed by the offshore oil and gas sector in the UK, including in the supply chain, has fallen by around 15% to 375,000 from 440,000, and Oil and Gas UK believes more job cuts are to come if the sector is to weather downturn.
One of the reasons why operators in the North Sea have been particularly hurt by the fall in oil prices is because the gas fields are older, and the North Sea is now one of the more expensive areas in the world to operate and produce.
One expectation among many industry observers was for M&A activity to substantially increase in the wake of the tougher market conditions, as companies group together to improve efficiencies and look to capitalise on the current environment. However, Oil and Gas UK said this has "not materialised" in the North Sea, citing the mega GBP47.0 billion planned merger between Shell and BG Group PLC as the exception.
"Furthermore, even if additional corporate deals fail to happen, individual assets on the UK Continental Shelf are still likely to change hands. Many of the UK Continental Shelf's established players are seeking to divest their non-core assets and rationalise portfolios, while an increasing number of small private equity-backed businesses are looking to invest," said the trade body.
It has been a team effort to address the problems in the North Sea. The UK government has committed to helping the industry as it tries to boost the industry through new tax regimes, and companies have been working with the Oil and Gas Authority to try to bring industry wide change.
Last week, the Oil and Gas Efficiency Task Force was launched with the job of making the sector more competitive and maximising economic recovery.
"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," said Oil and Gas UK.
Oil and Gas UK said it is working with companies and other parties to reduce operating costs by around 22%, representing around GBP2.0 billion in cost savings per year, by the end of 2016.
That will be supported by the first annual production increase from the North Sea for 15 years in 2015, the trade body added. In the first half of 2015, production rose 3% year-on-year.
"This more positive production outlook will help to reduce the average operating cost per barrel of oil equivalent for across all fields from an estimated GBP17.80 in 2014 to GBP17 this year and by a further GBP2 to GBP3 per barrel to around GBP15 per barrel by the end of 2016. The 15% reduction from 2014 to 2016 almost reverses the last three years of increases," said Oil and Gas UK.
By Joshua Warner; joshuawarner@alliancenews.com; @JoshAlliance
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