As oil prices appear to be stabilizing and supply and demand move towards equilibrium, there’s growing confidence in the sector that the worse is perhaps over.
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PwC’s latest report, A Sea Change: Emerging from a downturn, considers the outlook for the global oilfield service sector (OFS) and how the sector can move from crisis to success in a new world.
Commenting on the report’s findings, Adrian del Maestro, oil & gas director of research at PwC, said: “As oilfield service companies emerge from the turmoil, they will be operating in a landscape that has changed fundamentally in the past two years. In this new world we see an oil and gas sector focused relentlessly on cost reduction, with business models having to be resilient at lower oil prices. If we are poised for a recovery it is likely to be uneven. Exploration activity is reduced, the US tight oil sector has proved resilient, and the lifting of sanctions has allowed Iran to return to the world stage. In this brave new world, oilfield service companies will need to focus on several core themes in order to survive and succeed as the upturn takes effect.”
The report also highlights six key points that OFS companies will need to concentrate on over the coming months, from the double down on innovation and reducing the complexity of operations, to exploring partnerships and big data analytics. PwC experts also say that, while we are unlikely to see prices of US$100/bbl returning in the near to medium term at least, a more robust price in the $60-70/bbl should be realized in the next few years.
“The OFS sector has been particularly badly hit over the last couple of years by depressed prices and lower activity levels, further exacerbated by some key skills leaving the oil & gas sector for other industries," Kevin Reynard, office senior partner at PwC’s Oil & Gas Centre of Excellence in Aberdeen, said. “However, the global nature of many services businesses should position them well for any upturn, driven by activity in frontier basins, provided they make best use of their skillsets. And already many are starting to reap the benefits of rebasing how they deliver their services and working closely with the operator community to meet their needs. By developing innovative working practices, there is more, still, that can be achieved.”
Alan McCrae, energy tax leader at PwC, added: “There is no doubt that exchequer revenues have been significantly impacted by this prolonged downturn. However, the focus now needs to be on efficient and profitable growth to adapt to the new commodity price reality. With the right measures and actions in place, the OFS sector can survive, and indeed grow, in this rapidly evolving market. From a UKCS perspective, a successful OFS sector is the key to unlocking future success in a maturing basin.”
"Despite facing unprecedented challenges over the past few years the UK oil & gas industry has demonstrated drive and determination. Its efforts to make operations more efficient achieved the first increase in production in 15 years and a 45% drop in the cost of doing business this year. However, there is still much work to be done and this will require the joint efforts of industry, governments, the Treasury and the Oil and Gas Authority," Deirdre Michie, chief executive, Oil & Gas UK said. "The most important issues facing our sector are the lack of exploration and little new capital investment. I have written to the Chancellor ahead of his Autumn Statement to ask for Treasury's support to help increase asset trading. This could boost activity in the North Sea and adjustments to the tax regime could facilitate the trading of late-life assets. In addition, we need certainty in our fiscal regime by a recommitment to the Treasury’s ‘Driving Investment’ strategy for the sector and as part of the UK’s new industrial strategy, to recognize our supply chain as a key strength in the economy, with world leading capability – equally valued as aerospace or the automotive sectors, for example.
“The UK oil and gas industry is much more globally competitive than it was two years ago but we can’t underestimate the importance of government sending a strong signal of confidence and support,” Michie said.
Oil & Gas UK has written to the Chancellor asking for four commitments as part of the upcoming Autumn Statement:
• The UK government to re-affirm their continued commitment to the ‘Driving Investment’ fiscal strategy which recognizes the need for a more competitive, simple and predictable fiscal regime as the basin continues to mature;
Less than £100 million of fresh capital has been committed to the basin this year, with only one new field approved – this compares with five greenfield projects sanctioned last year with associated development capital at more than £4.3 billion.
These figures from Oil & Gas UK's Economic Report 2016 demonstrate that urgent action is required if industry is to maximize the economic recovery of the up to 20 billion bbl of oil and gas equivalent still available in the North Sea.
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