Economic Aspects Of Cost Savings In The Ukcs
Authors: Kemp A.G. , MacDonald Bruce 
Published: October 2008

Declining production in mature fields, relatively small new field developments, the fall in oil prices, and the high tax takes in "old" fields have combined to squeeze profit margins on petroleum exploration in the UKC'S. Achieved reductions in development and operating costs can help to sustain activity levels over the next two decades. Contractors as well as oil companies and the Government will benefit from the substantial number of induced extra field developments achieved from cost savings of 20%.

Introduction

In the present operating environment the continued healthy development of the UKCS depends to a considerable extent on the achievement of fi.wthercost savings. Currently oil prices are relatively low. They are comparable to what they were over 20 years ago in real terms. Production from the early generation of large, prolific fields has long passed plateau levels and operating margins are now relatively low. Effective tax rates on these mature fields are still substantial despite he large reduction in Petroleum Revenue (PRT) in the 1993 Finance Act.

Many of the new prospective fields are small with costs per barrel often being relatively high. Some prospective fields, especially gas condensate ones, have very substantial reserves, but the reservoirs often have high temperature, high pressure characteristics. Their development may well require cost reductions as well as technological progress.

This paper examines some economic aspects of cost reductions. The effects of savings in investment and operating costs are examined. Emphasis is placed on the effects of such savings in enabling more new projects to proceed than would otherwise be the case. The net effect on total new expenditure on field development activity is examined.

In the petroleum sector the assessment of projects is generally by discounted cash flow methods, These emphasise the time value of money. It follows that any savings in time between expenditure on exploration and appraisal (E and A), development expenditures and the related field production increases the net present values (NPVS) and rates of return from the projects. The extent of such possible improvements is examined in this paper.

Effects of Cost Savings on Activity in Central North Sea (CNS) and Northern North Sea (NNS)

Methodology and Assumptions

The effects of achieved cost reductions in CNS and NNS have been examined with respect to all known fields including (a) mature fields which have been producing for many years, (b) fields currently under development, and (c) discovered fields which are not yet under development and in some cases have not even been fully appraised.

The exercise was undertaken through the use of a large computerised financial model developed at the University of Aberdeen to simulate future activity levels in the UKCS. Primary inputs into the model include all the publicly available information on currently producing fields relating to their historic and expected production rates, investment costs, operating costs and abandonment costs. From a variety of sources information has also been gathered on all new discoveries which have not yet been developed or even fully appraised in some cases.