Oil & Gas UK Economic Report 2015

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ECONOMIC REPORT 2015 53
7.6 Operating Expenditure
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 201522 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
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 CO2
equivalent (mainly CO2 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) CO2. More
information about carbon price and GHG emissions can
be found in Appendix A.
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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Operating Cost (£ Billion - 2014 Money)
Source: Oil & Gas UK
Q4 2014 Forecast
Q2 2015 Forecast
-4%
-6 - 10%
Figure 38: Operating Costs
22 Oil & Gas UK’s Activity Survey is available to download at
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