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Alls Well that Ends Well

15th December 2017

Short History

Given the continued rising price trend from 2004 to 2008, the Oil & Gas industry banked on high oil prices, in excess of $100 per barrel (bbl), as the norm. Add in a hint of market speculation to stoke oil company and service company forecasts and the industry outlook was rosy. The only issue to manage was to ensure oil and gas remained the energy resource of choice at a level that maximised income for all but discouraged the large-scale take-up of alternative, renewable sources (wind, wave, biofuel, etc.).

The outcome of this, was a huge expansion in unconventional oil and gas production (most notably US shale) that was economical in a +$90/bbl scenario. However, whilst enjoying the increased revenues from the oil price escalation, fundamentals were being ignored. The double whammy of increasing cost of service and an alarming drop in production efficiency were the two major contributors to a huge escalation of extraction costs.

Accepting that every boom is a bust in-waiting, when this surging supply and falling demand hit, the industry turned to the traditional correcting mechanism of Saudi Arabia playing their OPEC-leading role as swing producer by cutting production to protect prices. Problem was this time round Saudi didn’t blink and the rest is history.

As the oil price dropped, those with high costs of production began to suffer. The graphs below hint at the impact these events had on profitability of the different producing regions.

Current Outlook

To combat this effect, huge global cost-cutting initiatives were started. New projects postponed, vendors squeezed and industry-wide redundancies served up at a level never seen in the history of oil and gas production.

However, this only tackled half the problem. Fixed asset costs are a significant contributor to overall production costs, so improving production efficiency of offshore facilities, i.e. producing more with current facilities, is the most effective way to reduce them.

The chart below from UK Oil & Gas Authority (OGA) demonstrates the decline production efficiency in recent years. The turnaround in 2015 was effected by a successful industry initiative with a a target to reach 80% by the end of 2018.

For the UK, the goal is to move out of the highest $/bbl position. With future oil and gas supply likely outstripping demand for the foreseeable future, countries with the highest $/bbl (like the UK) will be unsustainable and will struggle to remain competitive in the search for future investment.

However, the UKCS has significant opportunities to improve its outlook and regain attractiveness for project investment: -

Production Recovery

The OGA’s leading strategy is to Maximising Economic Recovery (MER) and a key focus area is re-establishing production from shut-in wells requiring an increase in well intervention operations to restore and safeguard production.

With the aim of increasing the current 10% activity rate, well intervention work will increase significantly in the next 3 years however, given the industry has laid off a sizeable percentage of the required workforce, how will this be achieved?

Experience Needed

Drilling and well services contractors will execute this work, but suffered the greatest cuts in offshore workforce as work dried up. They also need to recover financial positions as reduced service rates and cost of redundancies has impacted profitability. During the early stages of this coming up cycle, the work load will outstrip resources, and the resource gap will be bridged using contractor personnel.

WJF Technical Support LTD can source and place experienced technical staff in both contract and permanent positions anywhere in the world. With particular strength and knowledge in the drilling, completion, well intervention and pipeline & process sectors.

Improve UKCS Performance

By providing experienced technical support to the industry, we at WJF Technical Support LTD are making a small, but important, contribution to the well site delivery of the valuable work required to improve MER and ensure that UKCS recovery is achieved in a safe and sustainable way.

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