Oil & Gas UK Economic Report 2015

5. Maintaining Competitiveness – Seizing the Cost and Efficiency Challenge

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5.1 Cost Growth

In response, Oil & Gas UK commissioned fresh studies to examine the drivers behind the rise in costs on the UKCS, working with a range of organisations including McKinsey. This analysis showed that capital costs per barrel of oil equivalent (boe) had increased by 18 per cent from 2004 to 2013 on a compound annual growth rate (CAGR) and operating costs per boe had risen at a 12 per cent CAGR. In both instances, the growth reflected the trend of declining volumes in both new and existing assets coupled with general cost increases in activities. The rise in costs has been evident across fields of all ages and in all regions of the UKCS, although costs have been better controlled in the southern North Sea (SNS). It appears to be driven by three factors: increased commodity costs driving up unit costs; growth in activity (both in the UK and overseas) resulting in

As the UKCS evolves, it is inevitable that the costs of operating the basin and developing new opportunities will become an increasingly significant factor in its competitiveness, particularly as production declines from maturing fields and the size of new discoveries get smaller over time. Cost growth on the UKCS, particularly since 2010, has been significantly higher than in other oil and gas provinces, including those around the North Sea. At the start of 2014, even with oil prices above $100, it had become apparent that the UKCS would become an increasingly uncompetitive destination for investment unless actionwas taken to address inflationary pressures and significantly improve the cost and efficiency of operations.

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Figure 10: Weighted Average Lifting Costs for UK and Other Regions

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Angola

Brazil Egypt

Denmark Indonesia

Netherlands

Nigeria

Norway

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UK

US (Gulf of Mexico Deepwater)

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Linear (UK)

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Average Lifting Cost/boe ($)

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: Wood Mackenzie

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ECONOMIC REPORT 2015

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