A new report published by Oil & Gas UK has projected that the North Sea industry will need a £2bn reduction in operating costs of existing assets by the end of 2016.

The new economic report says that the oil and gas industry industry is making efforts to improve international competitiveness in a challenging business environment.

The report said that the offshore sector is facing challenges such as a drop in commodity prices due to reduced production, and the increasing costs.

Oil & Gas UK 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 from many existing fields and we expect the rate of decline in production from those fields to slow significantly over the next two years.

"Taken together with the start-up of the sizeable Golden Eagle field, the government’s provisional data show that production in the first half of 2015 was 3% higher than the same period in 2014, an indication that over this year, we are likely to see annual production increase."

The improvement will be balanced to some extent by operating expenditure of £1.1bn relating to new fields brought on stream in the intervening period.

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According to the report, the positive production outlook is expected to help reduce the average operating cost per barrel of oil equivalent (boe) for across all fields.

The cost will be reduced from an estimated £17.80 in 2014 to £17 this year and by a further £2-£3/boe to around £15boe by the end of next year.

"Exploration for new resources has fallen to its lowest level since the 1970s and with so few new projects gaining approval."

Oil & Gas UK chief executive Deirdre Michie said: "Last year, more was spent than was earned from production, a situation which has been exacerbated by the continued fall in commodity prices.

"This is not sustainable and investors are hard-pressed to commit investment here because of cash constraints.

"Exploration for new resources has fallen to its lowest level since the 1970s and with so few new projects gaining approval, capital investment is expected to drop from £14.8bn (2014) by £2bn-£4bn in each of the next three years."

Michie added that employment generation in the sector has dropped by 15% since the start of 2014 to 375,000 jobs.

Michie said: "Over 43 billion boe have been produced to date from the UKCS and almost half again remains to be extracted.

"Maximising the recovery of our oil and gas resource will strengthen the country’s energy security, boost tax revenues, exports and the balance of payments as well as sustain high value activity and jobs in our world-class supply chain."

Image: UK’s North Sea industry anticipates £2bn cost reduction by 2016. Photo: courtesy of Southpark.