Two thirds of companies in north east Scotland have made job cuts in the past year, but optimism that the end could be in sight has risen, according to a survey.
The annual 25th Oil and Gas survey, conducted by Aberdeen & Grampian Chamber of Commerce in partnership with the Fraser of Allander Institute, says the job cutting, including permanent and contract staff, has been higher than at any time in the history of the survey, which was launched in 2004.
More than two-thirds of employers shed staff over the past year - by 15% at operators and 7% at contractors – and fewer companies are working at above optimum levels than ever before, the survey says.
But, optimism is on the rise, it found, and a study by business consultants KPMG said there could be increasing merger and acquisition activity in the industry as companies move from “survival mode” and look to the future.
Oilfield services companies that have adapted their businesses during the downturn and have relatively stable trading patterns are beginning to think strategically about how to position themselves for future growth opportunities. With fragile stability returning to oilfield spend and activity, KPMG expects to see a modest revival in M&A activity in the service sector through 2017 and 2018.
Short to medium term deal activity will be driven by technology and solutions, rather than capacity requirements; and the relative weakness of sterling should provide a boost to inward investment in the UK.
Alan Kennedy, KPMG partner and UK head of oilfield services, said that the growing sentiment in the sector was that the market had stopped getting worse, prompting companies to start looking ahead to new opportunities.
“There is a growing view that things have stopped getting worse, at least in some areas of the sector. Companies that are in reasonable shape in terms of their balance sheets, have sorted out their finances and have stabilized their trading at today’s lower level are beginning to think strategically again and looking ahead three to five years. M&A growth through acquisition is a big tool in the box for them when there’s limited organic growth to be achieved through new projects in the current market.
“The market themes that we expect to see through 2017 and 2018 are global integration of services over the life of field, diversification into downstream and adjacent space, non-cash mergers and private deals, as opposed to auctions.”
According to the 25th Oil and Gas survey, some optimism is returning to the business, with signs that the rate of job cutting could slow in the year ahead. Six months ago, operators were predicting a 17% reduction in numbers which has now fallen to 5%, with a similar reduction from 2% to 1% by contractors.
Furthermore, 12% of contractors are more confident about their activities in the UKCS in the current year, compared to 7% in May, while 47% - down from 75% - are less confident.
Two out of three respondents believe the sector has already reached the bottom of the current cycle, or will do so within the next year, and a further 25% feel it will be within the next one to two years.
According to the survey, 43% of respondents reduced pay in the past year, including 15% who cut it by average of 10%. Some 40% of firms surveyed - compared to 25% in the previous survey - reported making significant changes to terms and conditions, including salary and bonus payment reductions, as well as changes to shift pattern and working hours, pension contributions, medical plans and benefits packages.
James Bream, research & policy director at Aberdeen & Grampian Chamber of Commerce, said: “We're likely to remain in an uncertain position through 2017 and ‘the bottom’ will arrive at different times and feel different for each company.
“It is clear that companies are striving to become fitter, leaner and they are working hard to look for new markets to secure their future and employment levels where that is within their control.”
Historic trends
In the spring of 2013, a peak of 79% of contractors were working at or above optimum levels. This has steadily declined and only 12% of contractors have been working at or above optimum levels, the lowest figure since the survey began.
Just under 80% of contractors said they would “definitely” or “possibly” be more involved in decommissioning in the next three to five years, and 53% said they would “definitely” or “possibly” be more involved in renewables.
Seventy percent expect to be involved in unconventional oil and gas activity in the UK, with 64% involved outside the UK.
Current industry challenges
Despite most firms (58%) expecting the decision to leave the EU to have no impact, almost a third (31%) expect the result to have a negative impact and 8% felt that the impact would be extremely negative. Only 3% predict a positive impact.
Ninety one percent of firms said the oil price fall since 2014 has had a negative impact on their businesses, with almost three quarters reporting the effect as extremely negative. Seven percent reported no impact and 2% reported a positive effect.
The Oil & Gas Authority (OGA), which was established as an independent government company in October, appears to be starting to have an effect.
Forty percent of operators said its creation has had a positive impact on their businesses.
Of those asked if skills shortages might arise in the future because of poor workforce planning, 39% said “yes” but thought it could be avoided. A further 27% also thought it was the case, but was unavoidable
*The 25th Aberdeen & Grampian Chamber of Commerce Oil and Gas Survey is independently conducted by the Fraser of Allander Institute. The survey was conducted in September 2016 and represents the views of 130 firms employing a total of 308,661 employees in the UK.
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