Economic Report 2018

The significant difference between the higher cost base of the UKCS and that of the NCS can largely be attributed to some fundamental differences between the two basins:

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• The UKCS is a more mature basin than the NCS, with a larger share of production from later-life assets. UOCs tend to increase as fields reach the later stages of their productive life, as operational expenditure does not fall at the same rate as production. In 2017, 72 per cent of the UKCS operational expenditure was on fields which have produced more than 75 per cent of their reserves, whereas on the NCS this figure was less than 50 per cent. • The UKCS consists of a more complex network of smaller fields than the NCS. Only 35 per cent of UKCS production in 2017 derived from fields with an original reserve size of more than 300 million boe. On the NCS more than 85 per cent of production came from fields within this category. Larger fields can benefit from economies of scale and require less infrastructure per boe to operate. Smaller fields may also have increased technical and economic challenges which result in them being more expensive to operate. • The UKCS has a more ‘diverse’ operator structure than the NCS. Around two-thirds of NCS production is operated by Equinor, while the eight largest operators on the UKCS account for around two-thirds of UKCS production. Having fewer and larger operators allows for economies of scale to be optimised and also reduces the complexities associated with commercial arrangements. However, greater levels of efficiencies can still be gained by operators who are focused on their core strengths and portfolios. UKCS Capital Expenditure Similar to UOCs, the UKCS has seen significant improvements in unit development costs (UDCs). The level of capital expenditure per boe has more than halved in recent years. Between 2010-14 the average UDC of newly sanctioned projects on the UKCS was $26/boe, falling to $13/boe between 2014-17. This 50 per cent reduction is amongst the greatest across comparable basins, with only the NCS achieving greater UDC improvements.

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3

4

5

6

Figure 21: Unit Development Costs in Comparable Offshore Basins

60%

30

7

2010-14 UDC (LHS)

2014-17 UDC (LHS)

50%

25

UDC Reduction (RHS)

8

40%

20

9

30%

15

20%

10

10

Reduction in Unit Development Costs

10%

5

Unit Development Costs ($/boe - 2017 Money)

11

0%

0

Malaysia Mexico - Gulf of Mexico

Brazil

Norway

India West Africa US - Gulf of Mexico

UKCS

Source: Rystad Energy

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