Economic Report 2016 - Oil & Gas UK

ECONOMIC REPORT 2016

Figure 25: Unit Development Costs by Year of Approval

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Maximum Average Minimum

30

25

20

15

10

5

Unit Capital Cost of New Developments (£/boe)

0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year of Field Approval

Source: OGA, Oil & Gas UK

Operating Expenditure

The Short-Term Reaction When the Brent oil price averaged $109/bbl and the month-ahead NBP gas price averaged 53 p/th in the first half of 2014, the oil and gas industry was attractive. Even a high cost mature basin like the UKCS, where the average unit operating cost (UOC) was $29.30/boe, was generally profitable. However, by mid-2015, the collapse in prices meant that almost a third of all UK producing oil fields were suddenly in a loss-making position. The only near-term response available to companies was to try and reduce their cost base and improve efficiency as quickly as they could. The industry’s delivery was impressive and, although some supply chain companies were unable to survive, the flurry of bankruptcies that might have been expected did not materialise. Instead, £1.7 billion was removed from the cost of operating like-for-like assets in 2015 and the average UOC dropped by 28 per cent to $20.95/boe. That same focus continued through the first half of 2016 as prices fell further and companies attempted to retain profitability or minimise losses. Average UOCs are expected to fall to around $16/boe this year, driven not only by cost reductions, but also by an increase in production and the depreciation of the pound against the dollar. This means UOCs have almost halved since peaking in 2014.

Unit operating costs have almost halved since peaking in 2014.

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