Economic Report 2018

ECONOMIC REPORT 2018

Although recent UDC figures for the UKCS are still relatively high compared with other basins, they are now in a much more competitive position. Average UDCs across the peer group were $9/boe between 2014-17, around 30 per cent lower than the UKCS. The main reason for this is that recent UKCS projects have been smaller in comparison and have tended to require higher levels of capital intensity. The Sustainability of Operating and Capital Expenditure Improvements The cost reductions seen across both operational and capital expenditures have been driven by a combination of the implementation of more efficient working practices, activity reduction and market forces (lower market prices), examples of which are outlined in Figure 22 below.

Figure 22: Examples of Market-Driven and Activity/Efficiency-Driven Cost Reduction

Market Rate-Driven

Activity and Efficiency-Driven

• Increased drilling efficiency • Optimised well design and construction • Collaborative rig contracts • Global/regional subsea agreements • Standardisation and simplification of processes and operations • Optimised maintenance regimes • Reduced contract and procurement costs

• Reduced rig rates • Reduced contract prices • Reduced employment costs

• Reduced day rates for offshore vessels • Reduced unit costs for subsea equipment • Reduced contract prices within engineering, procurement, installation and construction (EPIC) contracts • Foreign exchange effects

• Optimised logistics operations • Organisational restructuring

Overall, it is estimated that around two-thirds of the cost improvements seen seen across operational expenditure and greenfield capital expenditure have been driven by improved efficiencies and reductions in activity, with one-third being attributable to lower market prices. This indicates that the majority of the cost improvements are within the control of industry and could be managed sustainably during an upturn.

Figure 23: Summary of Drivers of UKCS Cost Reduction

Operational Expenditure

Greenfield Capital Expenditure

Brownfield Capital Expenditure

37%

38%

37%

38%

37%

38%

37%

38%

50%

50%

50%

50%

50%

50%

50%

50%

62%

63%

62%

63%

62%

63%

62%

63%

Market-Driven Reductions Market-Driven Reductions Market-Driven Reductions Market-Driven Reductions

Activity and Efficiency-Driven Reductions Activity and Efficiency-Driven Reductions Activity and Efficiency-Driven Reductions Activity and Efficiency-Driven Reductions

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