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Costs in North Sea to fall over next 18 months - consultancy

01 June 2015

Leading energy consultancy Wood Mackenzie expects costs in the North Sea to fall by 10-20% by the end of 2016. In a new report, the consultancy’s principal North Sea analyst Malcolm Dickson says the likely reduction in costs in the UK and Norway's Upstream sectors offers some much-needed good news for operators there.

"We have already seen rig rates dropping significantly with reductions of up to 20% for new contracts agreed in 2015. 40 per cent of mobile rigs in the UK and 23 per cent in Norway are either currently without contract or due to come off by the end of 2015, giving scope for high reductions in future contract renewals," he says.

Dickson expects operating costs to fall by 10% in Norway and 15% in the the UK in 2015 and 2016, with the most significant reduction likely to be a 30% fall in drilling costs, as rig and vessel rates come down due to oversupply.

He also expects development costs for near-term pre-FID projects to drop by up to 18% in the UK and 11% in Norway. Projects that are already under development are likely to see less deflation, as many of the costs are locked in by existing contracts, he says.

The report lists the difficulties facing North Sea operators. "High capital and operating costs are the single biggest issue for companies in the UK and Norwegian sectors of the North Sea today. Even before the oil price crash, developing and operating fields while making a profit was challenging and we expected some cost deflation in the sector as activity cooled. The drop in oil price has accelerated the need for lower costs, as companies adjust to protect their cash flows, and changes are now required to correct the industry's cost base."

The rising cost of working in the North Sea basin has been a growing problem for the industry that was exacerbated by the large fall in oil prices since last November.

The report concludes that beyond next year the future for the basin is more opaque.

"The outlook for costs beyond 2016 is much less clear and depends to a large extent on what happens to the oil price. Wood Mackenzie assumes steady price recovery, towards Brent reaching flat US$85 real from 2018 onwards. Assuming the oil price rises as we think it will, the lower cost base achieved over this year and next can only be sustained through fundamental changes in practice and increased collaboration between the operators and the service sector."

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