From Aderdeen (IF): The rampant cost inflation which UK North Sea producers have been battling against in recent years was starkly highlighted at an industry event in Aberdeen.

Dan Cole of McKinsey & Co’s London-based oil and gas practice said offshore inflation was way out of line compared to the general economy. The annual rise in inflation in Britain from 2000-2014 was 2.5%, but the cost of operating an offshore installation went up by 12% per annum in that period. Meanwhile, the development cost per barrel rose by 21% annually between 2004 and 2013.

Cole told last week's Oil & Gas UK (OGUK) breakfast that with an oil price of $55/bbl, nearly half of North Sea fields were uneconomic.

In case anyone was struggling to understand what the steep percentage rises meant, he said if the fast-food industry faced the same inflation, a burger which cost £2 in 2000 would be a staggering £13 today. The 2015 burger is still priced at less than £3.

Cole said that cost inflation in the oil and gas industry was not due to increased activity, or the supply chain becoming more profitable. Factors behind cost increases included the likes of higher wages and greater inefficiency.

He said a way forward was to consult with the aerospace and automotive industries, where cost inflation since the start of the century had averaged just 1% a year.
Aerospace manufacturing had kept costs down by parts standardisation and by more collaboration with the supply chain, while the automotive sector was benefiting from standardisation and increased collaboration between rivals.

Oonagh Werngren, OGUK’s operations director, who chaired the breakfast briefing, said, ‘Tax reforms announced in the … 2015 budget and the establishment of the new regulator, the Oil & Gas Authority, have laid the foundations for the regeneration of the North Sea and the industry is now building on this by delivering the cost and efficiency improvements required to secure its long-term future.’

Ms Werngren said there is now a concerted effort to tackle the fundamentals that have driven cost escalation here matched by tough decisions on resources and projects taken by individual companies.

‘The goal is to achieve a more internationally competitive … province and attract the fresh investment needed to unlock the North Sea’s remaining potential,’ she said. ‘Achieving this will require a 40% reduction in the industry’s cost base.’

OGUK said the Mercer consultancy has been commissioned to carry out a survey of daily rates paid to independent contractors, allowing companies to benchmark their rates against the market. The industry body has also established a database of spare parts held in inventories across the sector which will allow replacement equipment to be sourced quickly and efficiently with the aim of reducing production downtime.

Meanwhile, Step Change in Safety is carrying out a mapping exercise of control of work and training processes to identify priority areas where standardisation will achieve improvements in efficiency.

‘Our vision for 2020 is an industry actively exploring and maximising recovery of the UK’s oil and gas, a supply chain providing a strong engine for growth with lifting costs less than $20/bbl,’ Ms Werngren said. ‘The sector now has to deliver the bold action and behavioural change needed to make the vision a reality.’