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Crude Economics
North Sea Oil Might Not Be Dead Yet

Here’s some much-needed good news for the UK’s energy interests: oil companies operating in the North Sea are finding new ways to trim costs and—surprisingly—continue to turn a profit in the region’s maturing fields. The FT reports:

Average operating costs in the UK North Sea have fallen 45 per cent since the crash from $29 per barrel to about $16, according to Oil & Gas UK, the industry group. Much of the savings have come in the form of worker lay-offs, and service providers being forced to accept lower payments from producers. But more efficient ways of working — from simplification of well designs to pooled procurement of ships — have also played their part.

“We’ve seen improvements around the world in productivity … but possibly the most impressive has been in the North Sea,” says Simon Henry, chief financial officer of Royal Dutch Shell.

This is a pattern similar to what we’ve seen in America’s shale industry: firms that had perhaps grown comfortable with a prolonged period of $100+ per barrel crude have been forced to take a long, hard look at their operations and identify areas in which they’re capable of trimming the fat. And, while oil majors are doing that, services companies are being forced to slash their prices in a bid to keep the whole industry afloat, all of which adds up to lower operating costs, which are helping to keep projects running in offshore fields along the coast of Scotland just as they are in the heart of Texas.

Given how much of a struggle developing its sizable shale gas reserves has been for the UK, this will come as an especially welcome development. For other producers, and especially for the world’s petrostates, this should ring alarm bells. As the FT points out, North Sea oil production is relatively expensive, making it “a litmus test of the industry’s ability to adapt to ‘lower for longer’ market conditions.” Watch out, OPEC: private producers can’t seem to stop finding new ways to crank out the crude.

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