Production at what cost?

Through the latter half of the 1990s, the UK North Sea offshore industry was eager to hold itself up as a shining example of a forward-looking business that had been streamlined by rigorous, if sometimes painful, cost-reduction practices.

Sep 22nd, 2000

Through the latter half of the 1990s, the UK North Sea offshore industry was eager to hold itself up as a shining example of a forward-looking business that had been streamlined by rigorous, if sometimes painful, cost-reduction practices. The organization credited for much of the claimed success, CRINE (Cost Reduction in the New Era)—supplanted last year by the government-industry supply-chain management initiative Logic (Leading Oil & Gas Industry Competitiveness)—was often heralded as a sector success story—although more by oil companies, generally, than by contractors and suppliers.

Some of that gloss may now have come off, it seems, with a new report on the province's production costs from London-based think tank the Centre for Global Energy Studies (CGES).

Putting results from its 1991 study of production from 60 UK and Norwegian North Sea fields side-by-side with the 170 scrutinized 2 years ago for this report, CGES found that, while the oil industry has doubtless been "successful in reducing costs...the magnitude of the reduction and success [is] not clear."

The upshot, reports study author Manouchehr Takin, is that the weighted average cost of pumping some 21 billion bbl of oil and 13 billion boe of gas out of the North Sea comes out at $9.20/bbl—markedly higher, at $11.50/bbl, in the UK than Norway's $8.10/bbl. Encouragingly though, Takin notes, with 9 billion bbl in reserves costing less than $10/bbl to lift, and another 8 billion bbl flowing for less than $15/bbl, there is "a huge resource base that could be developed under most future oil price scenarios."

Producing fields to persist

Should oil prices, in their continued volatility, plummet below the psychological $10/bbl point, Takin adds, output from producing fields "will not cease," because capital committed will be viewed as sunk cost and production can continue as long as operating costs are covered.

As the UK North Sea, heartened by the promise of billion-pound-plus investments from both Shell Expro PLC and BP PLC, gears up anew, the CGES study is clearly cause for celebration, for, on the one hand, with large cash outlays in place from the province's two biggest operators to develop new—if smaller—fields, the long view for the North Sea has its share of blue sky.

Right hand, left hand

Yet, on the other hand, CGES's comparison of costs for 1991 vs. 1998lays bare a truth more difficult to face. Judging average unit costs of production in these 2 years against one another, the UK offshore industry has less reason to be triumphalist about its cost-cutting successes. Pumping out a barrel from the North Sea, it turns out, cost $14.70 in 1991 and, by 1998, $12.20, translating to a 17% cut in production costs.

The target set by CRINE, as an industry-run body, was to carve out 30% of sector costs. To believe the CGES, industry is just over half-way there.

So hope for further cost-cutting that will sustain the region—or "improved competitiveness" as is the slight shift in focus—now rests with LOGIC. With LOGIC's Satellite Accelerator project, now backed by three majors, gathering steam, its logistics project group starting "implementation," and its e-commerce initiative back on the rails after being outpaced by earlier oil company on-line schemes, the augurs, fortunately, are good.

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