Britain is poised to produce more oil and gas for the first time in 15 years despite plummeting oil prices and 65,000 job cuts, the UK industry's trade body said on Wednesday.
Annual production is likely to increase on the back of a 3% rise in first-half output against a year ago and the start-up of a major field known as Golden Eagle, Oil & Gas UK (OGUK) said.
Investment is also expected to result in a significant slowdown in the rate of decline in production from many North Sea fields in the next two years.
Oil & Gas UK's economic director Mike Tholen said: "Strong investment in asset integrity over the last four years, coupled with measures being taken to improve the efficiency of assets offshore, have resulted in better output."
The oil and gas industry has taken a pounding as crude prices have fallen from more than US$100 a barrel to less than US$50.
Companies have cut investment in new projects and slashed jobs as a supply glut has put pressure on prices.
OPEC countries have maintained production to fight off a challenge from shale producers in the US.
Exploration for new resources has fallen to its lowest level since the 1970s, OGUK said.
With so few new projects gaining approval, capital investment is expected to drop from £14.8bn in 2014 by £2bn-4bn in each of the next three years.
Companies such as BP (LON:BP.) and Royal Dutch Shell (LON:RDSB) have announced cuts, hitting supply companies such as Wood Group (LON:WG.) and Petrofac (LON:PFC) and Weir Group (LON:WEIR).
But other producers such as Premier Oil (LON:PMO) say they should be able to maintain investment in key projects despite efficiency drives.
Other smaller firms such as Enegi Oil (LON:ENEG), Hurricane Energy (LON:HUR) and Independent Oil & Gas (LON:IOG) are also involved in projects in the region.
Job cuts
OGUK estimates that employment supported by the sector has contracted by 65,000 since the start of 2014 to 375,000 jobs.
OGUK's chief executive Deirdre Michie said: "It is likely that capacity may have to be reduced still further in order for the business to weather the downturn."
But the association said the sector’s efforts to restore international competitiveness were starting to take effect.
Efficiency improvements are expected to lead to an estimated £2bn, or 22%, reduction in the cost of running existing assets by the end of 2016.
Tholen said: "Whilst the improvement will be offset to some extent by £1.1bn of operating expenditure relating to new fields brought on stream in the intervening period, these new developments are vital for the future of our industry, in terms of both oil and gas production as well as the commercial opportunities they bring for the supply chain."
The more positive production outlook will help to reduce the average operating cost per barrel of oil equivalent (BOE) for across all fields from an estimated £17.80 in 2014 to £17 this year.
It will fall by a further £2-3/BOE to around £15/BOE by the end of 2016. The 15 per cent reduction from 2014 to 2016 almost reverses the last three years of increases.
Companies had produced more than 43 billion BOE to date from the UK Continental Shelf and almost half again remains to be extracted.
Tax burden
Michie urged the British government to further reduce tax on the industry.
“I am confident we have turned a corner with improvements in cost and efficiency," she said.
"However, a continued low oil price will inevitably cause companies to reflect on the long-term viability of their assets.
“The Government’s restructuring of the tax regime to provide a more fiscally competitive proposition and its funding of seismic surveys to open up new areas for exploration are steps in the right direction, but with lower commodity prices expected over a prolonged period, it is now time to consider further lightening of the tax burden.”
The Golden Eagle Area Development, about 44 miles north-east of Aberdeen in the UK North Sea, started production in November 2014.
Nexen Petroleum UK Ltd., a wholly owned subsidiary of China's CNOOC, operates the field, which is expected to hit peak production of about 70,000 barrels of oil per day in 2015.
Nexen holds a 36.5% interest. Partners include Maersk Oil North Sea (31.56%), Suncor Energy (26.69%) and Edinburgh Oil and Gas (5.21%).