The cost of developing and running North Sea oil fields is expected to drop by around 20% this year and next, but probably not by enough to encourage firms to proceed with many projects, according to a leading energy consultancy.
Wood Mackenzie said that the cost will fall as oil and gas firms respond to the decline in oil prices by reducing investment. This will then encourage suppliers of support services to cut the prices they charge, in order to retain market share. Wood Mackenzie projects that the biggest reductions will come in drilling costs, which could come down by a third by the end of 2016, as rig and vessel rates fall due to over-supply.
Malcolm Dickson, principal North Sea analyst for Wood Mackenzie, said: “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 outlook for costs beyond 2016 depends to a large extent on what happens to the oil price. Wood Mackenzie assumes a steady price recovery 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.”
The drop in oil prices is also likely to result in further job losses in the North Sea oil industry, according to the new chief executive of Oil & Gas UK. Deirdre Michie said there is a strong prospect of a permanent fall in the numbers employed in the industry.
Noting that oil and gas firms have cut around 5,000 jobs and cut the pay of many workers since the crude oil price plunged, Ms Michie said the “painful process of attrition” will continue over the coming months.
Meanwhile, the drop in oil prices is also having an impact on the renewable-energy sector. Ian Marchant, chairman of the Infinis renewables group, has announced underlying earnings of £142.8 million for the year to the end of March, a 3.8% drop compared with the previous year. He said: “The company’s contracting strategy over the past year mitigated the fall in wholesale power prices.
However, if oil prices remain at current levels for a number of years, this will clearly have an adverse impact on the performance of the company in future years.” Infinis generates energy from land-fill gas and onshore wind turbines.