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Monday 5 December 2016

Costs are down by up to 70pc as oil plummets - Providence CEO

Published 13/12/2015 | 02:30

The falling price of a barrel of oil - which has plummeted by more than 60pc in the past 18 months - is having a deflationary effect on costs for oil producers
The falling price of a barrel of oil - which has plummeted by more than 60pc in the past 18 months - is having a deflationary effect on costs for oil producers

The cost of exploring Irish waters for oil and gas has fallen significantly, thanks to the declining price of oil, Providence Resources chief executive Tony O'Reilly Junior told the Sunday Independent.

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The falling price of a barrel of oil - which has plummeted by more than 60pc in the past 18 months - is having a deflationary effect on costs for oil producers.

As finance and activity dry up, suppliers are forced to drop their prices.

Energy consultants Wood Mackenzie recently predicted that costs in the North Sea, which is one of the most expensive and challenging regions for operators in the world, will fall by 15pc through to the end of 2016.

"Costs have fallen massively. We are seeing 50pc, 60pc, 70pc cost reductions on some rigs, equipment and services costs," said O'Reilly. "A couple of years ago, we were looking at costs of €500,000 a day for some rigs. Now we are seeing costs of €100,000 a day for the same rigs for new contracts in 2016.

"For anyone who is investing now in assets that are still a few years away from production, this value can't be underestimated.

"You are capturing huge cost savings now and will be coming into a rising market when you finally start producing."

Falling costs make Irish oil more profitable, said David Horgan, chief executive of Petrel Resources.

"We have been assuming that you need a price of around $60 a barrel to make a reasonably discovery in the Irish Atlantic economical. But that might be as low as $40 a barrel, depending on how far you can push down costs."

Financing conditions are improving, O'Reilly added.

Providence is still seeking a farm-out partner for its license at Barryroe, the country's first commercial oil find, to help carry the costs of drilling.

"In our case, like everyone else, we did see the supply of finance slow. But that is definitely changing. We are now seeing a variety of companies express interest - because now is the time to act to benefit from low costs. We have seen a noticeable change in investor interest in the fourth quarter, a big uptick."

Analysis, Pages 6-7

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