Wednesday 9 September 2015

Investment in U.K. North Sea oil and gas projects could drop as much as 80 percent by 2017 as the collapse in oil prices forces the industry to cut back.

Capital investment across the industry of 14.8 billion pounds ($22.8 billion) last year will probably decline by 2 billion to 4 billion pounds annually to 2017, Oil & Gas U.K., an industry lobby group, said in its annual economic report Wednesday.

"This great industry of ours is facing very challenging times," Deirdre Michie, Oil & Gas U.K.'s chief executive officer, said in a statement. "Exploration for new resources has fallen to its lowest level since the 1970s" and few new projects are gaining approval from "hard-pressed" companies, she said.

The decline in crude prices of more than 50 percent over the past year has forced the oil industry to review projects and reduce operating costs. The U.K. North Sea is one of the world's most expensive areas to operate and resources that were first tapped in the 1960s are depleted. Employment supported by the industry has shrunk by 15 percent since last year and the lobby group predicts more reductions.

"Last year, more was spent than was earned from production, a situation which has been exacerbated by the continued fall in commodity prices," Michie said. "A continued low oil price will inevitably cause companies to reflect on the long-term viability of their assets."

Cost Reductions

The industry has become more efficient as prices declined, leading to an estimated 22 percent cut in the cost of operating existing assets by the end of next year, the report said. Average operating cost per barrel across all fields will fall from about $26 a barrel this year to $23 by the end of 2016. Brent crude, the regional benchmark, traded at about $48 a barrel Tuesday.

These efforts also resulted in "better output from many existing fields," Mike Tholen, the industry group's economic director, said in the statement. "We expect the rate of decline in production from those fields to slow significantly over the next two years."

Oil output from the North Sea rose in 2014 and is expected to rise again this year, according to the Paris-based International Energy Agency, as projects approved when prices were above $100 a barrel come online. The current gains are a temporary relief for an industry facing long-term decline and the IEA expects output to fall again in 2016. The U.K. has recently set up an oil regulator, the Oil & Gas Authority, to lay out a plan for improving the competitiveness of the North Sea.

Efforts to reduce costs and improve efficiency were visible last month when some oil producers reported earnings. North Sea-focused EnQuest Plc said on Aug. 19 that operating expenditure for this year was on track to come in 10 percent lower than 2014 at around $38 a barrel.

Source: Bloomberg