North Sea oil threatened by high costs and red tape

Chief executive of Oil and Gas UK Malcolm Webb

The UK oil industry must act immediately to tackle “unsustainably high costs” if it is to carry on producing successfully from the North Sea, a report from its own trade body shows.

Oil & Gas UK’s 2014 economic report, published yesterday, said the sector needs to raise more than £1 trillion but is finding it increasingly difficult to compete for investment internationally.

It said as much as 24 billion barrels of oil equivalent (boe) still lie in UK waters but identified three key points to be addressed if recovery is to be maximised.

As well as “radical fiscal and regulatory reform”, Oil & Gas UK said the industry must also act “immediately” to address its unsustainably high, and rising, costs. Greater collaboration across the industry with and across governments will also be critical for success.

It said: “Oil & Gas UK believes that all three of these tasks are of equal importance and that it is crucial to the future of the industry that all three are successfully delivered.”

Yesterday’s report follows the group’s recent “activity survey”, which showed that record investment in 2013 coincided with a crisis in exploration and fast rising costs.

Oil & Gas UK’s chief executive, Malcolm Webb, right, said: “This country depends on oil and gas for some 70 per cent of our primary energy needs and oil and gas from the UK offshore areas supply nearly 50 per cent of that. Our industry has a crucial role to play in the future wellbeing of this country.

“This report reaffirms our sector’s position as the country’s largest industrial investor, supporter of some 450,000 jobs, successful exporter of oil field goods and services, and a provider of secure primary energy for the United Kingdom.

“However, to support a lasting and sustainable future, we’re calling for greater collaboration – between governments, between government and industry and within industry itself to face and fight the challenges ahead.”

Webb said that full implementation of Sir Ian Wood’s recommendations for regulatory reform and far-sighted changes to the fiscal regime are needed in the next 12 to 18 months to stimulate new investment in exploration and production.

“Alongside this, the industry must improve its efficiency and reduce its costs as a matter of utmost urgency,” he added.

The report highlights many initiatives already under way to boost exploration and production, and says figures for the first half of 2014 were “encouraging”.

After several years of double-digit decline, official figures currently indicate a 1 per cent increase in production compared with the same period in 2013, based on strong investment in recent years.

However, operating costs are now about 60 per cent higher than they were just three years ago.

Webb said: “The magnitude of the task ahead means that over £1tn of expenditure will be required if the recovery of above 20 billion boe is to be achieved.”