Economic Report 2019

ECONOMIC REPORT 2019

4.3 Expenditure and Investment

Operational Expenditure In line with strong production performance, UK producers are demonstrating robust cost control. Unit operating costs (UOCs) — a function of operating expenditure and production — are expected to remain at $15–16/boe in 2019, in line with levels since 2016 and around half the levels of 2014. Almost £3 billion has been taken out of UKCS total operating expenditure between 2014–18 (from £10–7.1 billion), while production has increased by 20 per cent during the same period. A level of $15–16/boe represents a more sustainable level for UKCS operations and is in line with the longer-term trend prior to the spike in operating costs between 2010–14. Reductions in UOCs have been achieved across the board on the UKCS, with the upper range of operator UOCs falling by more than $80/boe.

Figure 15: UKCS Operator Unit Operating Costs

140

Operator UOC Range Weighted Average UOC

120

100

80

60

40

20

Unit Operating Costs ($/boe - 2018 Money)

0

2014

2015

2016

2017

2018

2019

Source: OGA, OGUK

As a result of these reductions, E&P company portfolios are nowmore competitive and robust, with greater ability to withstand price volatility. Around 7 per cent of fields are anticipated to have UOCs of greater than $60/boe this year (representing only around 1 per cent of production), in comparison with almost 20 per cent of fields in 2014 (representing almost 10 per cent of production). A competitive and sustainable cost base is crucial to unlocking new investment in the basin, as any new opportunities have to meet strict investment criteria. E&P companies are therefore fully focused on maintaining, and in some cases building on, cost reductions and efficiency improvements. With financial pressures ongoing within the supply chain, there is a need to continue to drive new contracting and operating models which help support the sustainability of the supply chain whilst unlocking new investment opportunities. Despite the improvements in UOCs, costs in the UK remain comparably high internationally, mainly due to the maturity of the basin. Production volumes generally fall more quickly than operating costs as assets mature, with this being reflected in increased UOCs over time. Average field production in the basin is around 5,000 boepd, a reduction of more than 20 per cent comparedwith a decade ago, andmore than 70 per cent lower than 20 years ago.

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