Oil & Gas UK Economic Report 2015

7.6 Operating Expenditure

their total operating expenditure this year by around four per cent to £9.3 billion. Companies report further likely reductions of six to ten per cent in 2016 as greater benefits from the cost reduction and efficiency improvement programmes are realised. The future beyond 2016 is extremely uncertain and price and market movements will undoubtedly affect the behaviour of companies in the longer term. One cost that is likely to increase over the remainder of the decade is the cost of carbon. The extraction of offshore oil and gas in itself is a significant industrial consumer of energy, with around ten per cent of gas produced from the UKCS used to run offshore installations. As such, the industry is a big emitter of greenhouse gases (GHG) and is covered by the European Union Emissions Trading Scheme (ETS), which is now in its third phase (2013 to 2020). In 2014, the UK upstream industry, comprising 100 offshore installations and 26 onshore terminals within the scheme, emitted 14.7 million tonnes of CO 2 equivalent (mainly CO 2 and methane) amounting to about three per cent of the UK’s total GHG emissions. It is estimated that the UKCS’ current costs of ETS compliance are £20-25 million per year. After 2020, the annual cost could rise to £125-150 million if ETS reforms deliver a carbon price of €25/tonne (te) CO 2 . More information about carbon price and GHG emissions can be found in Appendix A.

1

The cost of operating on the UKCS rose to £9.7 billion in 2014, slightly higher than the estimate published in Oil & Gas UK’s Activity Survey in February 2015 22 and a nine per cent increase from2013. Operating expenditure in the UK has now increased by a third since 2011, a worrying trend that the industry recognises it needs to tackle. Some degree of operating cost increase is to be expected in a mature basin, reflecting the increasing complexity within and between assets. Such a trend is inevitable as both the number of operators and the number of small fields continue to grow. However, expenditure growth over the last three years has far exceeded what may be seen as acceptable, averaging ten per cent per year since 2011. The UKCS has reached a stage where, for many assets, any further rise in annual operating costs cannot be sustained, particularly during a period of flat or falling oil prices. Even as far back as May 2014, before the severe fall in price, companies active on the UKCS recognised the significance of the problem of rising costs coupled with falling production and began to intervene. Details of pan-industry initiatives to reduce costs and increase efficiencies can be found in Section 5. Oil & Gas UK gathered data this summer that show that, on average, UKCS operators expect to reduce

2

3

4

5

6

Figure 38: Operating Costs

7

12

Q4 2014 Forecast

8

10

-4%

-6 - 10%

8

Q2 2015 Forecast

9

6

4

10

2

Operating Cost (£ Billion - 2014 Money)

0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Oil & Gas UK

22 Oil & Gas UK’s Activity Survey is available to download at www.oilandgasuk.co.uk/activitysurvey

53

ECONOMIC REPORT 2015