Economic Report 2016 - Oil & Gas UK

ECONOMIC REPORT 2016

With input costs associated with oil and gas operations falling sharply, it is important to consider the extent to which the reduction in UK operating costs is a result of industry-wide cost deflation compared with operational efficiency improvements. The IHS Upstream Operating Cost Index 22 measures quarterly changes in the costs of oil and gas field operations. This shows that in quarter two of this year, global upstream operating costs were on average 17 per cent lower than at their peak in the second quarter of 2014. Meanwhile, UK UOCs have fallen by around 45 per cent over the same period. The scale of the cost reduction in the UKCS is more than double the natural upstream operating cost deflation, suggesting that efficiency gains have been key to the improvement in the UK’s competitiveness. While the natural cost deflation reported by IHS will inevitably be influenced by oil price, there is a reasonable expectation that the efficiency improvements made will be sustained even if prices recover.

Efficiency gains have been key to the improvement in the UK’s competitiveness.

Figure 28: Global Upstream Operating Cost Index versus UKCS Unit Operating Costs

110

100

90

80

70

60

50

Index

40

30

Global Unit Operating Cost Index UK Unit Operating Cost Index

20

10

0

2014

2015

2016

Source: IHS, Oil & Gas UK

22 See www.ihs.com/info/cera/ihsindexes/Index.html

40