UK North Sea firms seek savings on well design, maintenance plans
UK North Sea oil and gas operators are looking to standardised well designs, delaying non-essential maintenance and collaborating more with service providers to become leaner businesses in a lower oil price environment, industry sources said.
As Brent crude oil prices continue to hover around $50 per barrel, innovative methods to cut costs and optimise assets remain a top priority for North Sea oil operators and services providers.
An initial wave of job cuts earlier this year has already lowered North Sea production costs and the industry is looking for further optimisation gains.
While continuing to trim labour costs, operators are asking for standardized design of wells, postponing non-essential maintenance and inspection contracts, and working closer with service providers to lower the cost of services.
New projects, particularly smaller or higher cost fields, continue to be delayed but decommissioning projects, which had been postponed when oil prices were higher, are on the rise, according to industry sources.
“There is a big push across the board to cut costs anywhere it is possible and weed out any in-efficiencies. At prices below $50/bbl companies are forced to optimize their operations and they are becoming much more lean,” said Fiona Legate, UK Upstream Research Analyst at WoodMackenzie.
In a new report published last month, Wood Mackenzie forecasted up to 140 fields on the UK continental shelf (UKCS) will be decommissioned in the next five years, under the assumption that oil rises to $85/bl. A further 50 UKCS fields may be plugged and abandoned if oil prices settle at $70/bl, it said.
Cost cutting and production optimization has already lowered the average operating cost from £17.80/ barrel of oil equivalent in 2014 to £17/boe this year, according to Oil & Gas UK. The industry body expects the cost to fall sharply in the coming year, to around £15/boe by the end of 2016.
Changes in operating costs (new versus existing fields)
In a report published last month, Oil and Gas UK highlighted the collective action already taken by industry and the UK government over the last year, to improve the UKCS competitiveness.
The government has introduced tax reforms to incentivise investment, created a new regulator-- the Oil and Gas Authority-- to steer industry shifts, while companies build on these efforts by delivering cost and efficiency improvements.
A spokesman for Apache Corp, which has one of the lowest unit cost of production in the North Sea, said that the reduction in the cost of new projects has been important, “enabling those projects to proceed despite lower commodity prices.” But he also noted that the North Sea remains an expensive place to operate and that further cost reduction was essential.
One of the newer strategies has been for operators and service providers to work on standardized well solutions rather than have a well and a Christmas tree designed specifically for each project.
“This is beginning to happen for new fields and to a lesser extent for new wells on existing fields,” said Legate. An off-the shelf solution may not be an option for more technically challenging fields, such as the recently approved Culzean projects, a high pressure and high temperature field which will require higher specification equipment than more conventional fields.
In the case of Culzean, operator Maersk Oil and JX Nippon and BP (Britoil) will benefit from UK government support for high pressure high temperature (HPHT) projects in the form of the HPHT Cluster Area Allowance. The allowance was introduced as part of this year’s budget to help with the additional costs associated with developing HPHT fields.
The cost cutting drive across the industry has impacted new maintenance contracts as oil companies now delay maintenance and inspections as much as they can, said WoodMacKenzie’s Legate. This doesn’t include essential maintenance, she added.
Cutting maintenance, however, has a knock on effect on production. UK saw a sharp decline in production over the last few decades, due to unscheduled maintenance, project delays and poorer than expected recovery. This production decline slowed in 2013 after the UK oil and gas industry spent $45 billion dollars between 2011 and 2013 on clearing the backlog of maintenance which operators had delayed.
Low oil prices have continued to delay the development of new projects, and have also brought much closer cooperation between operators and service providers when it comes to fees and contracts.
“Now there is a lot more negotiation between companies and service companies trying to work together,” Legate said.
Companies are also continuing to optimise labour costs. Shell, BP and Chevron said over the summer they will lengthen the work cycle for offshore workers, replacing a two-weeks offshore, three-weeks onshore rota system with three-weeks offshore, three-weeks onshore.
The new system is due to be implemented from January next year. However, workers’ unions in the UK have objected to the rotas, saying that they could have a major impact on workers’ safety.
Cost cutting and optimization is unlikely to stop here as companies are forced to become more efficient in order to survive.
Deidre Michie, Oil & Gas UK’s chief executive said that because of the plunge in the oil prices, exploration has fallen to its lowest level since the 1970s. Since so few new projects are gaining approval, capital investment is expected to drop by between £2 billion and £4 billion per year, from £14.8 billion in 2014.
“It is likely that capacity may have to be reduced still further in order for the business to weather the downturn,” Michie said.
By Vanya Dragomanovich