Oil & Gas UK Economic Report 2015

A Three-Pronged Approach Towards Regeneration Over the last year, there has been collective action by industry, the regulator and the UK Government to improve the UKCS’ competitiveness, encourage fresh investment, and extend the life of existing assets and infrastructure that may otherwise be decommissioned: • HM Treasury announced a range of tax reforms, including the Investment Allowance, in the March 2015 Budget to help attract fresh investment. This received continued endorsement in the summer Budget 2015 (see Section 7.5 for more details under promoting investment). • The new regulator, the Oil and Gas Authority (OGA), has been established and will work to improve stewardship of the basin. • The industry is now building on these efforts by delivering the cost and efficiency improvements required to secure the UKCS’ long-term future (further details below). All the indications are that there will not be a swift increase in commodity prices to offset the increasingly expensive cost base in the UKCS. The industry must instead rapidly adapt to a world of lower prices. There are no easy choices. A decade ago, the industry was seen to be able to prosper at such oil prices. Since then, costs have risen, production has fallen and infrastructure has aged. The industry recognises it needs to improve efficiency and reduce costs for safe and sustainable operations and is responding quickly to the challenge. When businesses come under pressure, cost reduction tends to take priority for up to nine months. New projects on the UKCS are simply not attracting investment so operators and contractors have to make tough decisions on budgets and capacity. Such behaviour is inevitable and has already been seen by many businesses as they seek to regain control and balance expenditure against income. Alongside cost-cutting, however, there is an appetite for innovation and efficiency improvement that will deliver value for both client and supplier. Experience shows, however, that significant efficiency improvements cannot happen overnight. These changes often take 5.3 Industry Response

longer to implement but yield greater benefits than simply cost cutting. The transformation, outlined in Figure 13 opposite, can take between 12 months and three years to achieve and can only come about through true co-operation and a cultural change in the shape of collaborative working between operators, major contractors and small to medium sized enterprises (SMEs). There is also an important role for unions, governments, regulators and trade associations. Oil & Gas UK Efficiency Task Force While recognising that some behavioural change will be company-specific, Oil & Gas UK is taking the lead to help drive pan-industry initiatives to achieve efficiency improvements and transformational change. It is important for companies to consider how they can support this transition. The focus on pan-industry initiatives is being formalised under Oil & Gas UK’s Efficiency Task Force with the objective of driving improvement in efficiency over the next two years and beyond, creating a sustainable industry. A dedicated well-resourced team has been set up within Oil & Gas UK to focus on three workstreams:

• Business Process • Standardisation • Co-operation, Culture and Behaviours

Industry is also seeking to learn from other sectors that have overcome similar challenges. PwC, commissioned by the Oil and Gas Industry Council, recently published a study 4 highlighting success in other sectors (such as automotive, rail and chemicals) from which industry is drawing tangible measures that can be transferred to offshore oil and gas.

4 The Cross Sector Efficiency Study is available to download at http://pwc.to/1P0xdmF

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ECONOMIC REPORT 2015