Offshore wind power and oil and gas production costs have fallen sharply since the oil price downturn in 2014, helped by new ways of working.
Over the last few years, the UK has seen the costs of producing energy offshore – from oil and gas to wind power – fall sharply. The trend involved big reductions in manpower and equipment rates as oil prices fell from 2014, but it also reflects new ways of working, alongside advances in technology – and in the wind sector, greater economies from scale and maturity. Innovative and efficient new companies along the entire supply chain have helped drive the change, with new ways of thinking and doing business.
Oil & gas turnaround.
Since 2014, the UK oil and gas sector has seen production costs fall from among the highest in the world, to levels that can once again compete for investment on a global basis. The UK’s Oil & Gas Authority (OGA), estimated in its 2017 Economic Report that sector-wide action pushed unit operating costs down by 42% between 2014 and 2016, to around $17/barrel of oil equivalent (boe) – this improvement is greater than that achieved by any other oil and gas basin, according to the OGA.
Already the lower costs are stimulating fresh activity. Another 19 projects are now expected in the UK sector of the North Sea in the next 5 years, according to analysis from GlobalData. It claims projects agreed upon in 2016 cost around half as much as projects finalised in 2013.
As well as a fall in new project costs and costs per unit output, production efficiency (PE) also improved in 2016 for the fourth consecutive year to 73%, according to the OGA, representing additional production of 157 million boe compared to 2012. The PE figure is derived from comparing actual production to the theoretical maximum economic potential of the fields and associated infrastructure, and it represents an important performance indicator for the sector.
The gains for offshore wind have been even more impressive. In early September, the latest government auction attracted bids from offshore windfarm proposals at less than half the cost seen in the last auction in 2015, with prices clearing at just £58/MWh from 2022-23 – that is below the cost of new gas plants, and compares very favourably to the Hinkley C nuclear plant at well over £90/MWh from 2026.
Because the bids were well below expectations, more new capacity can be funded. So, rather than the anticipated 2GW, over 3GW will be built at three North Sea locations – Triton Knoll, Hornsea Project 2 and Moray. The UK’s offshore wind sector, at 5.4GW, is already the world’s largest.
While the lower cost outturn is the same in both sectors, the factors that led to the declines have been very different.
The North Sea oil and gas sector, which built up some of the highest costs in the world during the times of $100/bl oil, had little choice but to streamline operations to survive following the oil price fall and collapse in upstream capex. The situation had become so bad that the vast majority of projects sanctioned when prices were high and delivered over the last five years were delayed and overbudget, according to the OGA.
The inefficiency was largely due to the way in which projects were approached, according to respondents to the OGA’s latest survey. What was required was a more cost-conscious approach, and the sector had to quickly find new ways of doing things. Technological advances have helped, but the remedies have been less about a major breakthrough, and more about doing things differently, taking advantage of innovations that already exist in other industries and challenging out of date practices. Digitisation, for example, has focused on developing systems to do the heavy lifting to achieve productivity gains, rather than expensive hardware upgrades in what is a mature province. Much of the excess has now been removed and the industry is back to a more normal level of operation, in line with the price. This means new gains will be harder to come by, but the supply chain are taking on the challenge.
In the case of offshore wind, the reduction in oil and gas activity from 2014 meant huge oversupply in offshore construction services, which has reduced day rates for almost all offshore services. But the main offshore wind cost driver has been scale, which has now reached an industrial level, bringing costs down dramatically. Wind turbines are getting larger – rising from 2MW to 5MW, and now 8MW, with 10MW units on their way – while the supply chain is maturing, getting larger and more efficient.
There has also been pressure on offshore wind to cut costs as government subsidies were lowered, while the political environment to decarbonise helped create momentum among investors.
BP for one, has said it expects its production costs to keep falling from less than $15/barrel today (half 2014 levels) to below $12/bl by 2020. And in the wind sector, some observers are forecasting that turbine sizes will double again by 2024, driving down costs further.
To oversee the process of keeping the sector operating as efficiently as possible, the OGA has set out its “Vision 2035”, which involves close collaboration with industry, government and other relevant stakeholders to create further competitive advantage. The group’s work should help define the oil and gas elements of the UK Government’s emerging Industrial Strategy.
The OGA also supports the Industry Behaviours Charter, which is a collective commitment to work effectively, efficiently and co-operatively, and includes 40 Oil & Gas UK members, with a further 43 active efficiency champions driving good practice within their organisations aimed at driving down costs.
In addition, the Oil and Gas Technology Centre has been set up in Aberdeen to help foster innovation, and the Efficiency Task Force (ETF) was formed two years ago. The ETF recently said that businesses adopting an “open door to change” mindset was the secret to the recent success.
While there is unlikely to be a repeat of the supply chain cost reductions seen in the wake of the oil price crash, the challenge now is to consolidate gains and make sure the impressive momentum that exists in offshore wind development and oil and gas cost reduction continues. This is essential to ensure future investment and a strong regional supply chain in the North Sea, from which talent can be exported globally. Maintaining the momentum can only be done by challenging existing norms, harnessing the latest technology and continuously evolving. Whether it’s achieving scale for renewables or efficiency for oil and gas, by offering innovative solutions and thinking differently, our assets and operations are making a significant contribution to cost reduction and efficiency in the offshore sector. Both offshore sectors have faced tremendous challenges, which are being impressively overcome.
We are supporting these challenges and looking forward to a great North Sea energy mix for the long term.
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