* Modest fall in oil price could have profound effect
* Costs reaching "unsustainable" levels
* Collaboration needed to improve economies of scale
By Claire Milhench
LONDON, June 18 Britain's North Sea oil and gas
industry faces a bleak future where more fields are likely to
become uneconomic and shut in as platforms close - unless costs
can be controlled, operators say.
For some elderly platforms in the Northern North Sea, time
is running out. If the industry does not get to grips with costs
quickly, fresh investment is likely to dry up, forcing
unsaleable rusting rigs to be abandoned.
"From a cost point of view, the chickens are coming home to
roost," said Tim Walsh, senior vice president, asset integrity
services at Lloyd's Register Energy. "If we don't see reductions
in cost then there is a danger operators would face even greater
challenges in maintaining asset integrity."
Some of these spiralling costs are driven by age. As
production declines, fixed costs must be supported by smaller
revenue streams, and with older platforms deteriorating,
maintenance costs are building. Other cost increases have been
laid at the door of services companies and input prices.
"As a harsh offshore area, the North Sea has always been
intrinsically expensive, but that's now being exacerbated by the
age of some of the facilities and the associated amount of
downtime that's emerging," said Philip Whittaker at the Boston
Consulting Group (BCG).
"In 2008 there were excessive margins in the system to
squeeze the service providers, but now there isn't. So they have
to look for a different way of doing business."
The industry hopes to force costs down by improving
production efficiency, tackling supply chain
problems and improving collaboration and infrastructure access.
Trade body Oil & Gas UK's Activity Survey put average unit
operating costs (UOC) at 17 pounds ($28.85) per barrel in 2013
but the number of fields with a UOC greater than 30 pounds per
barrel doubled in the previous 12 months.
In 2013, the cost of operations in the UK Continental Shelf
(UKCS) rose by 15.5 pct to 8.9 billion pounds. For 2014 it sees
costs rising further to around 9.6 billion pounds.
"This is becoming unsustainable - costs are getting to a
level in the UK where they are making some developments
uneconomic," said Amjad Bseisu, chief executive of EnQuest, the
largest UK independent producer in the UKCS.
Shelving a new project is one option for cost-conscious
majors, like Chevron's Rosebank and Statoil's
Bressay, which have the option of investing elsewhere.
"The North Sea is undoubtedly moving up the supply cost curve
and oil companies may take the view that there are better places
to spend their money, unless fiscal terms adapt to stay globally
competitive," said BCG's Whittaker.
Existing facilities with high operating costs present
Speaking at Oil & Gas UK's conference in Aberdeen last week,
John Pearson, group president, Europe at oilfield services
company AMEC, said the average barrel produced in the UKCS, with
gas included, is now worth around $60 a barrel, and many of the
mature field lifting costs are very close to that.
"The slow decline of production just makes that worse," he
said. "We've all made many cuts, but these were either less of
the same thing, or the same thing for less. Neither of those is
completely sustainable - it's not a structural change in our
Andrew McCallum, director of corporate affairs and business
support at Dana Petroleum, agreed: "At the current oil price
level certain developments and activities are economic but even
if there is just a small decrease in the oil price, that changes
pretty dramatically. We're now in an environment where a
fluctuation of just $10-$15 could have quite a profound effect."
He said the industry needed to pay closer attention to how
supply chains function: "More can be done to co-ordinate supply
vessels and the way that materials come to the infrastructure."
Desperate for solutions, the industry has set up a working
group of operators and contractors to look at ways of driving
costs down. The aim is to get the sector to work more
collaboratively and efficiently, to improve economies of scale.
"The real savings span the interfaces between the links in
the supply chain," said AMEC's Pearson. Standardisation also
offered a "huge seam of cost efficiency and predictability," he
Non-standardisation contributes to poor production
efficiency as suppliers may struggle to meet different customer
demands and technical specifications of ageing facilities, BCG's
"For example, on old sub-sea wells, installation tools may
no longer be available or specifications may even have been
lost. These technical bottlenecks generate inefficiencies such
as costly one-off replacement orders," he said.
($1 = 0.5893 British Pounds)
(Editing by William Hardy)