Action by the UK’s offshore industry to improve efficiency should reduce operating costs on existing assets by more than £2 billion ($3 billion) by the end of 2016, claims Oil & Gas UK in its latest report.

The sector is also set for its first annual production increase for 15 years, the report adds, so the unit cost of operating UK oil and gas assets should also improve.

Mike Tholen, Oil & Gas UK’s economic director, said: “Strong investment in asset integrity over the last four years, coupled with measures being taken to improve the efficiency of assets offshore, have resulted in better output from many existing fields and we expect the rate of decline in production from those fields to slow significantly over the next two years.

“Taken together with the start-up of the sizeable Golden Eagle field [in late 2014 in the UK central North Sea], the government’s provisional data show that production in the first half of 2015 was 3% higher than the same period in 2014.”

The cost reduction/efficiency initiative has been in motion over the past year and a half, and last week Oil & Gas UK last week launched its efficiency task force to accelerate change. 

Tholen said: “We anticipate that by the end of 2016, [UK] companies will have reduced the cost of operating their existing assets by 22%. Whilst the improvement will be offset to some extent by £1.1 billion ($1.7 billion) of operating expenditure relating to new fields brought onstream in the intervening period, these new developments are vital for the future of our industry, in terms of both oil and gas production as well as the commercial opportunities they bring for the supply chain.”

Higher production should reduce the average operating cost per boe across all UK fields from an estimated £17.80 ($27.40) in 2014 to £17 ($26) this year, the report suggests, and by a further £2-3/boe ($3-4/boe) to around £15/boe ($23/boe) by the end of 2016.  

Deirdre Michie, Oil & Gas UK’s chief executive, said: “Last year, more was spent than was earned from production, a situation which has been exacerbated by the continued fall in commodity prices. This is not sustainable and investors are hard-pressed to commit investment here because of cash constraints.

“Exploration for new resources has fallen to its lowest level since the 1970s and with so few new projects gaining approval, capital investment is expected to drop from £14.8 billion [$22.8 billion] (2014) by £2-4 billion [$3-6 billion] in each of the next three years.

“Difficult decisions have had to be made across the industry. We estimate that employment supported by the sector has contracted by 15% since the start of 2014 to 375,000 jobs. It is likely that capacity may have to be reduced still further in order for the business to weather the downturn.”

She added: “The industry is under a lot of pressure and it is now widely recognized that a transformation in the way business is done is required if the UK sector is to become more resilient and competitive in a world of sustained lower oil prices…

“The government’s restructuring of the tax regime to provide a more fiscally competitive proposition and its funding of seismic surveys to open up new areas for exploration are steps in the right direction but with lower commodity prices expected over a prolonged period, it is now time to consider further lightening of the tax burden to help drive maximum economic recovery of our oil and gas.”