#FRopinions – OPEX costs in the North Sea

In the first of a series, Fifth Ring speaks to leading figures in the global oil and gas industry to find out how today’s operating environment and industry trends affect the way in which they work. 

The cost of North Sea operations

The North Sea currently produces almost half of the UK's energy requirements but, with rising operating costs, the region is facing significant challenges if it is to prove its long-term viability.

A project control manager for a major global oil and gas operator spoke to us on the subject. “Operating in the North Sea is becoming increasingly expensive to the extent that it is becoming a deterrent to investment, particularly when there are more favourable investments worldwide that provide a better return.“

A recent report by Oil and Gas UK showed that it is now five times more expensive to extract a barrel of North Sea oil than it was in 2002.

Businesses in the region now need to factor costs into decision-making more than ever. The price of operating in the North Sea has steadily increased over the last 20 years and, in a region where exploration and production are in decline, this has placed growing pressures on even the largest producers.

“To some extent, there has been complacency within the industry with regard to spending. Designs have become ‘gold plated’, manpower rates have been increasing in excess of inflation and so on. It is not a case of merely reducing cost now, but ensuring we obtain value for money so our standards and quality are maintained.”

And therein lies the challenge.

Rising OPEX costs are having a detrimental impact on oil and gas production according to the survey we've just completed.The survey, carried out as part of our #FRopinions series revealed that 67% of respondents believed it to be the case, with 33% believing it didn’t.

There have been many calls from leading industry figures to reduce costs – not least the influential Wood Report and a recent Oil and Gas UK report, which showed it is now five times more expensive to extract a barrel of North Sea crude as it was in 2002.

Calls for greater collaboration, cost sharing, new technology and ways of working between operators and the supply chain will all play a part in helping reduce costs. In doing so, new projects become more viable and opportunities for investors open up. Cutting CAPEX also enhances recovery potential, thus extending life-of-field.

With regard to the United Kingdom Continental Shelf (UKCS), operators have also called for a favourable – and consistent – fiscal policy to be implemented by government to provide additional incentives to industry. How this will manifest itself is still the subject of considerable conjecture, due in no small part to the Scottish referendum.