Shift from short-term survival to long-term success vital for O & G supply chain

As the UK’s oil and gas sector begins to show signs of recovery from the toughest year on record, it is vital that the oilfield services (OFS) industry makes a permanent shift in strategy from short-term survival to long-term success, according to analysis recently published by EY.

The ‘Review of the UK oilfield services industry’ report, reveals that the overall annual turnover of UK OFS declined for the first time since the EY review started in 2008, from £40.6bn in 2014 to £35.7bn in 2015 (-12.2 per cent). However, despite the year-on-year decrease the 2015 figure still represents a significant contribution to the UK economy and is the third highest annual turnover for the sector in the history of the report.

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EY’s data also shows that 2015 was the first time that the turnover of each of the OFS supply chain categories (reservoirs, wells, facilities, marine and subsea and support and services) fell in one year.

Although the data has shown a decline in activity, the analysis indicates that the stablisation of the oil price in the US$50 – $60 region and the early signs of new investment provide grounds for cautious optimism.

Derek Leith, EY Partner and Head of Oil and Gas Tax, said: “With the worst of the downturn over and signs of recovery becoming more prevalent, the UK oil and gas sector has reached tipping point with the supply chain playing a pivotal role. As such, the future viability of the oilfield services industry will be largely determined by the decisions and actions taken by leaders in 2017.

“It is essential that the hard-won benefits achieved by oilfield services companies as a result of the unforgiving low oil price environment, such as greater efficiencies and innovative approaches, are sustained and not abandoned as the oil price starts to recover.

“It may be that the current oil price will prevail for the foreseeable future, so the oilfield services industry must push beyond cost reduction to higher margin sustainable business. This needs to be characterised by new commercial relationships, new technology and innovation.

“The UK oilfield services industry demonstrated its credentials as a global leader by employing agility and courage during the last two years. There is now the potential to grow further both domestically and internationally, but these opportunities are unlikely to be realised unless strategies shift in focus from short-term survival to long-term success.”

Export activity was a substantial share of 2015 turnover and slightly greater in relative terms than 2014. Nevertheless, there was an absolute decline of £1.7bn as a result of the contraction in international activity, albeit not as pronounced as the decline in UK Continental Shelf (UKCS) activity.

The report highlights the opportunities for significant export growth through internationalisation targeting the right growth markets, the development of the Oil & Gas Technology Centre and an increase in demand for decommissioning services.

Derek Leith continued: “Decommissioning offers the UK oilfield services industry an excellent opportunity to grow a significant line of business with huge export potential. The UK supply chain must offer high quality, cost-effective goods and services if they are to succeed in the fiercely competitive global market.

“Significant co-ordination, collaboration and support will be needed in order to help deliver an optimum decommissioning solution for the UKCS and to take advantage of an important export opportunity in the years to come.

“However, we need to start to view decommissioning in a different way. It needs to be integrated with ongoing oilfield operations and development activity as part of an integrated approach to maximising economic recovery and delivering value.”

Consolidations and strategic alliances look set to become an increasing trend in 2017, particularly in high-cost areas of development such as marine and subsea, according to the report.

Industry-wide consolidation is likely to be driven by larger players with healthy balance sheets seeking strategic acquisitions in order to: expand their integrated services via new technology, increase their international footprint or reduce risk by diversifying into other markets. Financial stress is also likely to force consolidation.

The report also says there are positive signs that 2017 will attract more, but still modest levels, of capital expenditure.

Derek Leith said: “It would be premature to suggest that capital expenditure is set to recover dramatically this year. As one of the world’s higher cost basins, a significant increase to exploration and development spend in the North Sea would be regarded as bullish in the current environment.

“Despite this, there are encouraging signs in the form of new sources of capital taking ownership of assets, including the eventual arrival of much anticipated private equity investment in the second half of 2016.

“Such investment not only shows faith in the long-term prospects for profitable recovery of oil and gas in the North Sea, it should also signal the arrival of some much needed investment to further improve productivity and reduce the operating costs of North Sea assets.

“Despite the decision by some of the oil majors to offload UK assets, new entrants have not been averse to acquiring assets with development potential, reflecting their belief that attractive returns can still be achieved over time.”

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