Insight: Costs are killing the North Sea!
Friday, December 20, 2013
I'm not sure I should take issue with a knight of the realm but I do believe Sir Ian Wood's interim review of Maximising Economic Recovery in the UKCS is insufficiently focused on COSTS.
Why do I believe this?
Two general reasons and then two specific reports about the UKCS and the NOCS;
Firstly, it is well known that as basins mature, costs per boe rise. This is an inevitable consequence of companies sensibly developing the bigger, simpler, fields first and leaving those that are deeper or have more complex reservoir geology and reservoir dynamics, or have more ‘challenging’ hydrocarbons or are in deeper water until later.
The cartoon below illustrates this concept: early in the life of a play/basin, Value creation is prolific; at a later stage, Costs are overwhelming, Value destruction occurs.

Indeed the expectation that this happens is a key driver of the bigger companies exiting the North Sea for areas that offer higher margins per barrel for example Angola, Brazil, the Caspian and so on, or at least favouring the latter over the former if not completely departing. Thus as the UKCS for example matures, bigger companies with plenty of financial muscle and experience in the application of technology are replaced by a host of smaller, sometimes less well-endowed, companies.
Secondly, as I mentioned in an earlier article, IPA's development project benchmarking data base shows that cost over-runs, delays and production shortfalls are unnervingly common, not simply in the UKCS and NOCS but everywhere. A significant driver is management’s swallowing whole simple economic models that ‘prove’ that getting faster to 1st Oil or Gas increases NPV when in fact overdue haste breeds failure.
Then we need to note that specific UKCS development projects, for example:
· Rosebank (West of Shetland; Chevron operated): estimates of projected costs up to $8 billion
and
· Bressay (Northern North Sea; Statoil operated): estimates of projected costs up to $7 billion,
are being cancelled or delayed because heavy costs are making them uneconomic. So the reality is that global industry price inflation is being superimposed on top of the inevitably rising costs per boe.
Furthermore delays and cost over-runs occur even in the well (NPD) regulated NOCS, with the NPD reporting that 24 development projects have over-run by a combined NOK49 billion, with just three of them:
· Skarv (BP operated)
· Valhalla redevelopment (BP operated)
and
· Yme (Talisman operated)
reported as having over-run by NOK42 billion in total. And some would argue that the NPD is in fact an agent of rising costs in the NOCS……
So I suggest we have a problem in the UKCS and NOCS for which we need to seek all manner of solutions, perhaps especially using technology, backed up by a fresh wave of industry consolidation.
Why do I mention consolidation? My own belief is that we will wait a long time for the actions of governments to persuade the many companies now working in the UKCS and NOCS to act coherently together and that – I emphasise this is just my personal opinion – a wave of consolidation is needed as an enabler of coherent strategies and actions.
Does technology have any role at all to play in delivering better Development Projects and reducing COSTS (cost per boe)?
Oftentimes when I ask such questions, I hear about technologies that are actually solutions looking for a problem to solve. Here I think the problem is quite clear.
Have a Merry – and frugal- Christmas!
Author: David Bamford
Company: Petromall