Outlook for the UKCS in 2007

Unit Technical Costs

As mentioned above, companies operating on the UKCS have been experiencing cost inflation in the order of 20% per year throughout 2005 and 2006 which has fed through to committed spending plans and resulted in sharp increases in expenditure.

Figure 33 is an illustration of the extent of cost inflation. Oil & Gas UK’s annual survey of activity found that the cost of developing and producing a single, new barrel of oil or gas equivalent (Unit Technical Cost or UTC) rose by 45% to $22/boe between 2005 and 2006. As expected by many, commodity prices, particularly gas, have fallen and, when combined with the higher taxes which took effect from January 2006, the competitiveness of the UKCS is progressively being reduced.

It is predicted that this trend will continue, with the average UTC for projects coming on-stream from 2007 to 2009 rising to $25/boe. As a result, some of the more expensive developments may not go ahead, so this estimate of future costs may, in part, correct itself, but with the adverse consequence of less production.

Figure 33: UKCS New Developments’ Unit Technical Cost 2005-2009