It's turning out to be a good week for the North Sea after the UK's new Conservative government introduced a new Energy Bill to give new powers to the new Oil and Gas Authority to boost the economic recovery of hydrocarbons from the UK Continental Shelf.

The halving of oil prices since June last year is finally having a positive impact, with Wood Mackenzie forecasting capital and operating costs in the UK and Norway's upstream sectors to drop steadily this year as operators respond to lower oil prices.

Wood Mackenzie projects that the biggest reductions will come in drilling costs, which could come down by a third by the end of 2016.

Near term pre-final investment decision projects are expected to be best placed to benefit from reductions - and development costs for these projects could fall 10-20%, the firm said, with operating costs to fall by up to 15% in the UK and 10% in Norway.

Wood Mackenzie said the UK and Norway would deflate at different rates, based on distinct rig and labour markets and varying activity levels, but cautioned that the outlook for upstream costs beyond 2016 was "much less clear" and would be largely driven by what happens to the global oil price.

Wood Mackenzie's principal North Sea analyst Malcolm Dickson said the firm assumed steady price recovery, towards Brent reaching flat $US85 real from 2018 onwards.

"Assuming the oil price rises as we think it will, the lower cost base achieved over this year and next can only be sustained through fundamental changes in practice and increased collaboration between the operators and the service sector," Dickson said.

OPEC anticipation

On that front, the news got a bit worse this week with news that OPEC was bracing for a global oil glut that will last longer than many producers are expecting, which would force industry to make deeper spending cuts.

The Saudi Arabia-led Organisation of Petroleum Exporting Countries meets next week to consider whether to cut production or retain the status quo to maintain output and force high-cost producers out of business with low prices.

Saudi Arabia's Al Hayat newspaper quoted an unnamed OPEC source this morning as saying the Kingdom would not sacrifice its market share for other people's interests, especially if there was no cooperation on oil policy from outside OPEC.

The strategy has worked with global spending cut by some 40%, while Norwegian energy intelligence firm Rystad Energy has cut its forecast for non-OPEC liquids growth potential over the next five years by about half, from 5.5 million barrels per day to between 2-3.3MMbpd.

Latest oil field research shows investments in oil and gas production are estimated to drop 20% in 2015 compared to 2014, according to Rystad, which also said that outside OPEC, $US200 billion in annual capex is considered to be axed over a two-year period.

Ultimately, for every billion dollars being cut in development capex on marginal projects, the production shortfall would amount to 10,000bpd.

Only US production has been visibly impacted with the trend turning from 20% annual growth during the first quarter of the year to a flat trend in the second quarter. The shortfall of global offshore production may be steeper if oil prices stay low throughout the year.

"In the longer run, anything below $US90 /bbl is not sustainable due to this steep but delayed supply response and increasing global base declines, while the cost of new production will remain high," Rystad Energy's oil trade analyst Nadia Martin said this week.

Wood Mackenzie asserts that upstream cost deflation is inevitable for the North Sea industry, as it emerges from a period of intense development activity over the past five years.

This caused severe cost inflation as operators competed for access to services.

Dickson said high capital and operating costs were the single biggest issue for companies in the UK and Norwegian sectors of the North Sea today.

"Even before the oil price crash, developing and operating fields while making a profit was challenging and we expected some cost deflation in the sector as activity cooled," Dickson said.

"The drop in oil price has accelerated the need for lower costs, as companies adjust to protect their cash flows, and changes are now required to correct the industry's cost base.

"We expect that there will be a gradual decrease in capital and operating costs in Norway and the UK in 2015 and 2016, the most significant reductions likely to be a 30% fall in drilling costs, as rig and vessel rates come down due to oversupply.

"We have already seen rig rates dropping significantly with reductions of up to 20% for new contracts agreed in 2015, with 40% of mobile rigs in the UK and 23% in Norway either currently without contract or due to come off by the end of 2015."

This, he said, gave scope for high reductions in future contract renewals.

Wood Mackenzie also expects development costs for near-term pre-FID projects to drop by up to 18% in the UK and 11% in Norway.

"Projects that are already under development are likely to see less deflation, as many of the costs are locked in by existing contracts," Dickson said.

Upstream capital investment is falling this year in both the UK and Norway, which means competition within the supply chain is increasing as operators scrutinise costs and project execution.

"As well as looking internally for efficiency gains, North Sea operators are now negotiating with contractors," Dickson said. "This is because the opportunity for cost reductions is highest in uncontracted spend such as pre-FID projects and new brownfield developments.

"In general we expect to see costs fall a little further and quicker in the UK - for instance, lower rig utilisation will mean cheaper drilling in the UK.

"However, many of the UK's new projects are technically challenging, and standardised solutions are not an option, meaning there are few contractors capable of supporting them.

"The remaining pre-FID projects are smaller (averaging just $US375 million in capex) and are generally operated by independent E&P companies - so economies of scale within the supply chain are harder to achieve."

Norway looks set to be a hotspot for projects which are due to take FIDs this year and will maintain investment levels around 65% higher than the UK out to 2017, Dickson added.

"Although Norwegian costs are expected to fall less than in the UK in local currencies - the effect of Norwegian Kroner depreciation will mean that some costs fall further in dollar terms," he said.

"This effect will be most sharply felt in operating costs. Norway has some of the highest labour costs in the industry, and Kroner depreciation will make them more competitive in the global market."