The speakers at Wednesday's Oil & Gas UK economic report release highlighted the need for a major transformation to take place within the oil and gas industry. All noted that problems in the UKCS began long before the decline in oil prices, and rising costs have been a troubling factor.
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Pearson. Images from OE staff. |
“The core issue here is inefficiency,” said John Pearson, Group President Northern Europe and CIS, Amec Foster Wheeler. “We have become very inefficient over the years. We did this to ourselves and we can get ourselves out of it.
“This is in our hands to fix. Don’t waste the crisis,” he urged. Pearson said that the industry has wasted previous oil decline crises before, and told the audience that the oil and gas industry cannot afford to not transform like other industries such as Automotive.
“We can’t change the oil price, but we can do something about cost,” Pearson said. “In terms of unit capital expenses, we have seen 20% CAGR over the decade. No other industry can sustain that.”
Oil & Gas UK Chief Executive Deirdre Michie opened the breakfast with the less than happy news that in 2014, the UKCS spent more on operations than it earned from production.
“The situation has been exacerbated due to the sharp fall in commodity prices,” she said. “We are all too well-aware that this is unsustainable and that investors are unwilling to commit to fresh activity. That is a deeply worrying place to be in.”
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Michie. |
Adam Davey, economics and market intelligence manager, Oil & Gas UK, noted that the volatility in oil prices is nothing new, but declared the difference between the oil price drop in 2010 and now is that no one expects a quick recovery this time. “We will be in the $40s per barrel for the foreseeable future and we need to readjust the business to make sure it copes,” he said.
Davey noted two of the largest spending items: capital investments and operating costs. And Oil & Gas UK’s data showed a dramatic rise in investment from £6 billion in 2010 to its peak of £14.8 billion in 2014. Davey says this investment is expected to fall at a rate of £3-4 billion over the next few years. He attributed the rise in spend due to recently sanctioned projects such as Clair Ridge, Schiehallion/Quad 204, Laggan-Tormore, Mariner, Golden Eagle.
“Many of those projects are not yet complete,” he said. “The capital investment, some sanctioned 2-3 years ago, is still being spent in 2015, 2016 and 2017.
“There’s very little new fresh investment,” he said. “Without more investment, investment could go down to £4 billion per annum by 2017. The average is around £8 billion per annum.”
Of the other biggest spend, operating costs, Davey said while costs are fairly controlled there was a dramatic spike in 2010 and since then costs have grown 10% per annum.
“The increase is stark, and while some of this is good spend, the increase is so stark that some must be inefficient,” he said. “It’s not all bad. Some of this investment has gone to improve production. Asset reliability is increasing. There’s a tradeoff between spending now and enjoying benefits later.
“However, no matter how you look at it, such increases, must be exceptional, we cannot continue to see cost growth at 10% per annum in the UKCS.”
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