Almost half (43 percent) of UK oil and gas firms are planning further cost cuts to help manage the impact of the industry downturn, according to the fifth annual Bank of Scotland report on the oil and gas industry.
The Re-evaluating Strategies report gathered views from across the industry, including its supply chain, and found that nearly a third (32 percent) of businesses plan to cut more jobs this year as the oil price takes longer to recover than expected. As many as 53 percent of companies surveyed believe that maintaining a highly skilled workforce will be the biggest cost challenge they will face in the North Sea over the next 12-24 months.
Of the 141 companies questioned, more than half (58 percent) have had to introduce efficiency measures or cut costs over the last year. For just over half (51 percent) of all respondents, this has involved making redundancies. Firms in Scotland felt the brunt of the losses most severely with six in ten (63 percent) businesses reducing their workforce. This compares to an average of 42 percent across firms surveyed in England and Wales.
These cuts also appear to be having a reputational impact, according to the study, making the industry less attractive to potential talent. Two-fifths (41 percent) of respondents worry young people will not see the sector as a viable career option, creating a skills gap that is further exacerbated by the cyclical nature of the industry.
The report revealed a cutback in international expansion intentions too, with just over two thirds of firms (67 percent) stating that they are looking at international opportunities, which is down on 91 percent last year. This is largely driven by a considerable drop in interest in North America, says the study, traditionally the favourite investment area for UK firms.
Despite the slump in oil prices over a fifth (22 percent) of businesses are still looking at North Sea expansion opportunities. This is being entirely driven by smaller and mid-sized companies who find it easier to diversify and embrace new technology, according to the report. None of the larger firms surveyed planned any North Sea growth. A quarter of the firms (25 percent) surveyed also said they had grown through the downturn through diversifying into new sectors and investing in new technology.
Coping Through the Downturn in the North Sea
The five most popular strategies being implemented in order to meet the cost challenges in the North Sea are; making day-to-day operational efficiencies (67 percent), rationalizing supply chains (66 percent), adopting new technology (63 percent), followed by adopting new processes (60 percent) and product development (55 percent).
Four in ten businesses began to diversify their operations (40 percent) last year and this is set to continue in 2016, according to the study. However, plans have changed since last year’s oil and gas report. Interest in onshore shale gas has dropped, with a third of companies (31 percent) giving it a high priority compared to half (47 percent) last year. Smaller firms have maintained their interest in renewables work (2015: 37 percent, 2016: 37 percent) and the appetite of mid-sized companies in this area has grown significantly, from 46 percent in 2015 to 57 percent in 2016. Large, global operators (57 percent) see decommissioning as a major diversification opportunity.
No Price Recovery Until 2018
A third (33 percent) of operators said exploration and development activity will remain subdued until oil prices recover. Asked when they expect oil prices to recover, a third of respondents (33 percent) stated that it would be 2018 before the price of Brent crude oil reaches $75-80 per barrel. Four in ten (38 percent) believed the rise would happen no sooner than 2020. Large companies were especially conservative, with six in ten (58 percent) betting on 2020, and five percent on 2022 or later.
“The decline in the price of oil has made headlines around the world, and its knock-on impact on investment and employment has created economic headwinds that are being felt, not just by the industry but across the wider economy,” said Stuart White, area director, commercial banking, Bank of Scotland, in a statement that was sent to Rigzone.
“With oil prices currently hovering around the $50 mark there is hope that prices have bottomed out and have begun to slowly and modestly recover. Many businesses however, undoubtedly face more difficult decisions on cost savings, jobs and investment,” he added.
“While the blow from depressed oil prices has been severe for many businesses and individuals impacted by job losses, the sector is proving itself to be among one of the most resilient industries in the UK. There are still choppy waters to navigate, but we remain committed to supporting our clients within the sector,” White concluded.
“The UK faces the dual challenges of the low oil price and declining investment,” said Stephen Halliday, group president of Wood Mackenzie, Verisk Maplecroft and 3E Company, in a statement on Oil & Gas UK’s website.
“Progress has been made in making the sector more attractive, particularly with lower tax and a new regulator. However, action needs to be taken to ensure that we optimize investment returns and make use of existing infrastructure. Costs have been coming down, but the industry needs to see more collaboration, standardization and exploration in order to maximize the value of the UK North Sea,” he added.