McKinsey: Restoring Economic Health to the North Sea 

Check out a real Mckinsey presentation on improving the economics of North Sea oil.

McKinsey: Restoring Economic Health to the North Sea

Key Learnings from the Presentation

The presentation from McKinsey, titled “Restoring Economic Health to the North Sea,” on 21 May 2015 presents an in-depth analysis and strategic recommendations aimed at addressing the economic and operational challenges facing the North Sea oil and gas sector. Here’s a detailed summary capturing the essence of the presentation:

Economic and Operational Challenges

• Cost Inflation and Operational Costs: The presentation starts by illustrating the cost challenge in the UK Continental Shelf (UKCS), highlighting a significant increase in annual inflation rates for operational costs from 2000 to 2014, which notably outpaced general inflation rates (e.g., Big Mac index). It provides data on the unweighted average of total lifting costs for 17 UKCS North Sea platforms, showing a steep increase in operational costs over time.
• Unforeseen Cost Increases: It points out the growth in operating costs was largely unforeseen, with actual figures significantly surpassing forecasts.
• Profitability Decline Due to Oil Price Fall: The fall in oil prices has drastically reduced the profitability of operations in the North Sea, with a considerable portion of UKCS production becoming unprofitable below certain oil price thresholds.

Key Findings

• Exceeding Costs for Wells: The number of wells plugged and abandoned annually now surpasses those drilled for exploration and appraisal, indicating a shift towards decommissioning rather than development.
• Increased Activity Not the Sole Culprit: The document clarifies that the cost increase is not solely due to increased activity levels, which only contributed a small portion to the overall cost increase.
• Significant Factors Behind Cost Increase: The major factors contributing to the cost surge include increased unit costs and greater inefficiencies, making up a significant portion of the cost escalation.

Strategic Recommendations

• Operational Efficiency: The presentation emphasizes the importance of addressing inefficiencies, highlighting successful practices in well delivery, such as standardization, simplification, lean drilling execution, and rigorous performance management. It outlines potential improvements across various aspects of well delivery, aiming to achieve substantial cost reductions.
• Best Practices and Innovation: It showcases examples of industries that have successfully mitigated similar challenges through innovation and operational excellence, suggesting the oil and gas sector could adopt similar strategies.
• Case Studies of Success: The document cites specific examples, such as Southwestern Energy’s operations in the Fayetteville Shale, to demonstrate the significant impact of adopting strategic improvements in drilling efficiency and cost reduction.

Main Takeaways

• The presentation concludes with a call to action for stakeholders in the North Sea oil and gas sector to embrace strategic changes focused on operational efficiency, cost reduction, and innovation. It argues that through targeted improvements in key areas such as well delivery and reliability, the sector can overcome its current challenges and restore economic health to the North Sea operations.

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