North Sea oil industry foresees £2bn cost reduction.

The offshore oil industry has for the first time witnessed signs that suggest their energies to restore international competitiveness are taking effect.

Oil & Gas UK’s annual economic report admits that the industry has faced difficulties caused by the price drop in commodities because of a decline in production and harshly rising costs. However, the industry’s actions to holistically strengthen efficiencies are paying dividends, leading to an estimated 22% reduction in operation costs by the end of 2016, over £2bn.

Other industry-pleasing results include the first annual production increase for 15 years and an anticipated improvement in the unit cost of UK oil and gas operating assets.

Oil & Gas UK’s Economic Director, Mike Tholen, highlighted that an improvement in output had resulted from the strong investments into the integrity of assets alongside efforts to improve offshore asset efficiency. He mentioned that production throughout the first half of 2015 displayed a 3% increase on 2014, which acts as a clue to expect further annual production increases.

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Tholen went on to comment that industry performance is clearly reflecting the commitment of companies who have chosen to improve their cost and efficiency levels. Progression will be restricted to some extent due to the £1.1bn of operating expenditure in new fields brought on stream; however, for the long-term these developments are key to the industry.

Oil & Gas UK CEO, Deirdre Michie,  admitted that the industry faces more challenges ahead. Last year, the production industry spent more than it earned, a detail aggravated by the ongoing falls in commodity prices.

Furthermore, levels of current investment are not sustainable with investors hard pressed to commit further  due to cash constraints. Research into new resources is at its lowest since the 1970s and with such a small number of new projects receiving approval, capital investments are forecast to fall £2-4bn over the next three years, from 2014’s £14.8bn.

These concerns  are forcing tough decisions across the industry. The annual economic report disclosed that largely due to the crash in world oil prices, the total number of people employed in the sector has shrunk 15% since 2014, from 440,000 to 375,000. According to Michie, this may not be the last of it either as to survive the downturn further reductions are expected despite percentage rises in production.

The UK Gas and Oil industry is under pressure to become more resilient if it is to compete in a world of sustainably lower oil prices.  Michie shares, “the challenges are being tackled head on – even before the oil price fall, the industries attention was focused on improving our cost competitiveness whilst upholding the safety of the workforce.”

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