North Sea: challenged economics





  • North Sea: challenged economics
  • Professor Alex Kemp, with OE

Over the past three years the North Sea oil and gas industry has made a very painful adjustment to the dramatic fall in oil prices. Costs have been dramatically cut, accompanied by substantial job losses and rates reductions.

Oil & Gas UK estimates that average unit development costs have fallen from US$23.90/boe, in 2014, to $15.20/boe in 2016, and possibly $8 – $10/boe in 2017. Average operating costs are similarly estimated to have fallen from $29.70/boe in 2014, to $21.10/boe in 2016, and possibly $14.10 – $14.60/boe in 2017.

These are astonishing changes. Economic modelling by Linda Stephen and the present author indicate that the near-term effects of substantial cost reductions greatly reduce the income of the whole supply chain. But in the medium and longer term, the development of new projects may be incentivised to such an extent that the total income of the supply chain exceeds what it would have been before the cost reductions were implemented.

The industry’s performance in terms of production efficiency has improved substantially since it reached a low of 60% in 2012. It now exceeds 71% reflecting major improvements to a wide range of operating procedures. This has been at least partly responsible for the increase in production from 1.49 MMboe/d in 2014 to 1.73 MMboe/d in 2016, with a further increase to over 1.8 MMboe/d in 2017 being very possible.

While these developments are clearly encouraging, there are other less favourable trends. The UKCS is a mature province. The average size of a new development is now only c.20 MMboe. The perceived prospectivity among investors reflects this and explains, at least in part, recent very low levels of exploration, even with c.$100/bbl oil. Recently, drilling costs have reduced substantially, and significant seismic data have been made freely available. Whether these factors will really enhance the exploration effort remains an open question. The success rate could be increased, but the likely size of discovery remains small, with the possible exception of West of Shetlands, where costs remain particularly high.

For the long term, detailed economic modelling by Linda Stephen and the present author suggests that, with a $60 investment screening price (reflecting the “lower for longer” scenario), aggregate production from 2017-2050 could be around 11 billion boe. This compares with over 43 billion boe produced since 1967. The modelling indicates that investment expenditure on new field developments falls substantially over the next few years. Yearly production peaks in the near future and declines to very low levels by 2050.

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