Oil & Gas UK Economic Report 2014

So, after a decade of rising costs, higher taxes and higher prices, how do oil or gas field economics compare with ten years ago? Price risk is inherent in the oil and gas business and leaves investors exposed to price shocks at any stage throughout a project’s life, after initiating capital investment. Figure 29 illustrates how net present values have a much wider range of uncertainty in today’s environment. The crucial difference between a project today and a decade ago is the impact on its economics if exposed to price, cost or fiscal change.

The absolute value of a 20 per cent cost increase or price fall today is much greater than it was ten years ago, making today’s projects more sensitive to cost over-runs or price shocks. A reduction in the oil price to $80/bbl, for example, would mean that around one third of today’s inventory of probable developments would be unlikely to proceed and cessation of production of some fields would be accelerated alongside decommissioning of related platforms and infrastructure.

Figure 29: Sensitivities to Costs and Prices of Net Present Values in 2004 and 2014

140

120

Operating Cost (+/- 20%)

Brent Oil Price (+/- 20%)

100

80

60

Operating Cost (+/- 20%)

Net Present Value

40

20

Brent Oil Price (+/- 20%)

0 0

Opex

Price

Opex

Price

Source: Oil & Gas UK

2004

2014

50

ECONOMIC REPORT 2014