The annual Offshore Technology Conference in Houston presents the UK oilfield services (OFS) with the perfect opportunity to highlight its position as a core component of Britain’s manufacturing and service base, given its importance to the domestic oil and gas sector and status as a key exporter.
In Ernst & Young’s inaugural annual review of the sector, launched in March, we quantified the size of this hugely diverse marketplace. Our analysis, which is based upon publicly available information, identified an industry with annual revenues in excess of £25billion employing more than 100,000 personnel.
For the purposes of our analysis, we categorized the UK OFS industry into the following value chain segments:
o Reservoir/seismic (revenues of £0.7bn generated in 2010)
o Exploration and production drilling (2010 revenues of £5.6bn)
o Engineering, fabrication and installation (2010 revenues of £9.0bn)
o Operations (production and maintenance) (2010 revenues of £7.6bn)
The financial turmoil of the past few years has generated significant discussion and uncertainty within the wider oil and gas industry regarding the potential impact on oilfield services.
A variety of issues have been considered including a potential reduction in energy demand, increased financing costs, cost focus in the value chain and the potential impact of contract delays, cancellations and renegotiations.
Our data indicated that the sector has managed the financial crisis well, with the operations segment showing the greatest revenue growth between 2008 and 2010 – some 13%.
Oilfield services survive on upstream activity and spending. The recovery in global demand for oil from the low point of the downturn has been reasonably robust, driven by non-Organisation for Economic Co-operation and Development (OECD) countries.
Furthermore, in the “new policies” section of its latest World Energy Outlook, the International Energy Agency (IEA) anticipates that global energy demand will increase by some 40% between 2009 and 2035, or around 1.45% per annum. Again, this is largely attributed to non-OECD countries such as China, India and areas of the Middle East.
Additionally, the IEA estimates that approximately half of the conventional oil production required by the end of the next decade is yet to be developed or found and may total approximately two-thirds by 2030.
The era of cheap oil is over; new supplies will cost more to develop and the challenges associated with satisfying energy demand are only likely to intensify.
Enhanced oil recovery and investment in new developments is therefore required to replace existing production and satisfy the expected growth in demand.
The UK North Sea has continued its recent revival despite the unwelcome tax changes imposed upon the region in last year’s Budget.
Apache’s $1.75billion acquisition of Exxon Mobil’s North Sea asset portfolio, Total’s $800million pre-emption on GDF Suez’s sale of a 10.4% stake in the Elgin and Franklin fields and BP’s commitment to its £4.5billion development off the West of Shetland are further evidence of the continued attractiveness of the region.
Given the relative maturity of the UK North Sea and the OFS sector, it is unsurprising that most of the industry’s growth has been in the elements of the value chain focused on developing known prospects and operating mature assets.
The exploration and development of resources in deepwater and frontier regions will be large, complex projects that require development of new technology and deployment of groundbreaking products. The engineering, installation and fabrication players based in the UK are crucial to the success of access to these resources.
The outlook for 2012 for the UK OFS industry is healthy, driven by the price of Brent being above $100 since February 2011, improving order book positions and increased industry focus on quality and health and safety.
Future challenges and, in fact, opportunities include the continued transition from domestic supplier to exporter and the ability to move into the renewable and unconventional energy sectors.
However, although carbon reduction targets remain in place in regions such as the EU, with many governments now struggling to reduce large budget deficits, financial support for renewable energy projects is likely to be scaled back or deferred.
With fiscal austerity measures likely to be in place for the next 2-5 years the renewable energy sector now looks likely to present a longer-term opportunity for OFS companies.
For UK OFS companies to be successful in the long term, they need to continue to be recognised in the global marketplace, as this is where significant growth will arise.
The most successful UK OFS companies will be those who establish:
o Global geographic footprints and access to growth markets;
o Relationships with national oil companies;
o Technologies that reduce cost, improve performance or enhance access to hydrocarbons;
o Outstanding health and safety records; world-leading risk monitoring and management techniques;
o Provision of integrated solutions rather than individual products or services; scale to deliver larger projects and on such projects satisfy customer requirements on financial stability;
o Unconventional extraction exposure; products and services that can be applied to the decommissioning industry.
The outlook for all is potentially excellent.
Ally Rule is an oil and gas partner at Ernst & Young in Aberdeen and author of the firm’s annual review of the UK oilfield services industry