Dramatic oil and gas efficiency improvements to drive down costs in 2016

Industry body Oil and Gas UK has predicted that the average operating cost per barrel of oil equivalent (boe) produced will fall from £17.80 to £17 by the end of this year, and by a further £2-3 to around £15/boe by the end of 2016. Total annual production will also increase this year for the first time in 15 years, according to the body's annual economic report.

Around 20 billion boe remains to be discovered on the UK Continental Shelf (UKCS), but the industry has been heavily hit by historically low oil prices, according to Oil and Gas UK chief executive Deirdre Michie. However, the latest projections provided the first sign that efforts to restore competitiveness were beginning to take effect, she said.

"Last year, more was spent than was earned from production, a situation which has been exacerbated by the continued fall in commodity prices," she said. "This is not sustainable and investors are hard-pressed to commit investment here because of cash constraints. Exploration for new resources has fallen to its lowest level since the 1970s and with so few new projects gaining approval, capital investment is expected to drop from £14.8 billion in 2014 by £2.4bn in each of the next three years."

"The industry is under a lot of pressure and it is now widely recognised that a transformation in the way business is done is required if the UK sector is to become more resilient and competitive in a world of sustained lower oil prices. The challenges are being tackled head on - even before the oil price fall, industry's attention was focused on improving our cost competitiveness whilst upholding the safety of the workforce," she said.

Last week, Oil and Gas UK announced a new industry 'efficiency task force' (ETF), to be led by its co-chair John Pearson. The ETF will formalise company-specific efforts to increase cooperation and boost operating efficiency, focusing on three areas for possible improvement: cultural and behavioural changes, standardisation and day to day business processes.

A new industry regulator, the Oil and Gas Authority (OGA), began work on 1 April this year following the recommendations of Sir Ian Wood in his 2014 report to the government. The OGA is in charge of implementing a strategy of maximising economic recovery (MER UK) as set out in the Wood Review, in conjunction with industry and the UK Treasury.

In its report, Oil and Gas UK estimated that 65,000 jobs, or 15% of the total, had been lost across both the industry and its wider supply chain since the start of 2014. It has anticipated further cuts "in order for the business to weather the downturn".

Michie said that she was "confident" that cost and efficiency improvements meant that business had "turned a corner". However, she said that further divestment and decommissioning was possible as companies "inevitably ... reflect on the long-term viability of their assets".

"The government's restructuring of the tax regime to provide a more fiscally competitive proposition and its funding of seismic surveys to open up new areas for exploration are steps in the right direction but with lower commodity prices expected over a prolonged period, it is now time to consider further lightening of the tax burden to help drive maximum economic recovery of our oil and gas," she said.