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ECONOMIC REPORT
2016
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Figure 25: Unit Development Costs by Year of Approval
0
5
10
15
20
25
30
35
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Unit Capital Cost of New Developments (£/boe)
Year of Field Approval
Maximum
Average
Minimum
Source: OGA, Oil & Gas UK
Operating Expenditure
The Short-Term Reaction
When the Brent oil price averaged $109/bbl and the month-ahead NBP gas price averaged 53 p/th in the first half
of 2014, the oil and gas industry was attractive. Even a high cost mature basin like the UKCS, where the average
unit operating cost (UOC) was $29.30/boe, was generally profitable.
However, by mid-2015, the collapse in prices meant that almost a third of all UK producing oil fields were suddenly
in a loss-making position. The only near-term response available to companies was to try and reduce their cost
base and improve efficiency as quickly as they could. The industry’s delivery was impressive and, although some
supply chain companies were unable to survive, the flurry of bankruptcies that might have been expected did
not materialise. Instead, £1.7 billion was removed from the cost of operating like-for-like assets in 2015 and the
average UOC dropped by 28 per cent to $20.95/boe.
That same focus continued through the first half of 2016 as prices fell further and companies attempted to retain
profitability or minimise losses. Average UOCs are expected to fall to around $16/boe this year, driven not only by
cost reductions, but also by an increase in production and the depreciation of the pound against the dollar. This
means UOCs have almost halved since peaking in 2014.
Unit operating costs have almost halved
since peaking in 2014.