Activity Survey 2015

ACTIVITY SURVEY 2015

6.6 Operating Expenditure The cost of operating the UKCS has again risen from £8.9 billion in 2013 to a record £9.6 billion in 2014. However, the rate of increase has slowed from 15.5 per cent in 2013 to almost eight per cent. Around half of the operating expenditure growth is attributable to new assets on the UKCS, whilst the other half has come as a result of cost increases on existing assets. In real terms, operating costs had been largely contained until 2010 but have since escalated at an average rate of nine per cent per year. Alongside this, the rate of production decline accelerated, placing additional cost pressure on the UKCS. Cost control had already become a major theme of the industry even before the precipitous fall in oil price. The slowing of the cost growth rate in 2014 may reflect early signs that the ongoing cost reduction initiatives across the UKCS are starting to take effect. As production revenues fall, companies will need to reduce further their operating expenditure in response to the new business outlook. Whilst plans from quarter 4 2014 still indicate there could be further short-term growth in operating expenditure, it is clear that significant work to reduce the UKCS cost base has accelerated in the early part of 2015. Operators are setting themselves demanding targets for cost reduction ranging from 20 to 40 per cent. If a cost reduction of 20 per cent were to be achieved, this would take costs back to a level last seen between 2008 and 2012.

Figure 34: The Cost of Operating the UK Continental Shelf

12

Quarter Four 2014 Forecast

10

8

Potential Impact of Cost Reduction Initiatives

6

4

2

Operating Cost (£ Billion - 2014 Money)

0

2003

2005

2007

2009

2011

2013

2015

2017

2019

Source: Oil & Gas UK

Unit Operating Costs As anticipated, the average UOC has risen again to £18.50/boe in 2014. It must decline towards the end of the decade if the UKCS is to have a long-term future. Caused by both a fall in production and growing costs, the average UOC on the UKCS increased in real terms by an average of 13 per cent per year from 2003 until 2011, a figure that accelerated to an average of 19 per cent from 2011 to 2014.

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