WELL SERVICES CONTRACTORS REPORT 2014 OIL & GAS UK

Transcription

1 WELL SERVICES CONTRACTORS REPORT 2014 OIL & GAS UK WELL SERVICES CONTRACTORS REPORT 2014

2

3 WELL SERVICES CONTRACTORS REPORT 2014 Contents 1. Foreword 5 2. Summary of Key Findings 6 3. Introduction 7 4. Financial Data Gross Revenue Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) Capital Investment and New Technology Spend Sector Resources UK Employees Graduate Engineers, Technicians and Apprentices Operational Issues UK Government/Industry Initiatives and Organisations The Well Services Contractors Forum s Mission Gaining Recognition for Technology Promoting the Alignment of Objectives with Operators, Suppliers and other Contractor Companies Encouraging Efficient Contracting Processes The Future Outlook Degree of Optimism Major Challenges and Suggested Actions 19 page 3

4 WELL SERVICES CONTRACTORS REPORT 2014 page 4

5 1. Foreword Thank you for taking the time to read the 2014 Oil & Gas UK Well Services Contractors Report. We hope you find it both informative and interesting. The well services contractor sector is of considerable importance to the UK offshore oil and gas industry, providing significant levels of investment, revenue and jobs. This report, compiled from a survey of the member companies in Oil & Gas UK s Well Services Contractors Forum, provides insight into the sector s performance and confirms that well services contractors represent an important proportion of the 35 billion supply chain, as outlined by Oil & Gas UK and EY in the report released on the UK Upstream Oil and Gas Supply Chain Economic Contribution in April In 2013, the well services contractor sector recorded gross revenue of $3.2 billion ( 2.06 billion), which includes revenue from two additional companies compared to last year s survey. A like-for-like comparison between the companies which participated in this year s and last year s report indicates a marginal decrease in gross revenue from 2012 to 2013 but reflects an overall strong performance since Meanwhile, capital investment in the sector in 2013 was the highest on record since 2008 at $212.5 million ( 136 million), with spend on new technologies accounting for nearly 27 per cent of this total. These figures have been achieved despite a record low in exploration drilling activity on the UK Continental Shelf (UKCS) over the past three years, demonstrating the breadth of services offered by well services companies. Respondents to the survey report strong demand for remediation, redevelopment and intervention support for existing wells. The sector also provides a significant level of employment, with over 15,000 jobs supported by UK well services contractors in A particularly encouraging statistic is the continued increase in the recruitment of apprentices, which shows that the sector is committed to the development of new employees. Levels of optimism among well services companies were high in 2013 and are expected to remain within the positive territory despite an expected decrease in Overall, there is a strong degree of confidence in the future of the UK well services contractor sector given the high levels of activity on the UKCS and the belief that the Wood Review will result in operational improvements across the basin and an increase in exploration rates. However, there are challenges to be overcome, such as rising operating costs and difficulties in recruiting and retaining skilled personnel Jorgen Berg Chair of Oil & Gas UK s Well Services Contractors Forum Oonagh Werngren Operations Director, Oil & Gas UK page 5

6 WELL SERVICES CONTRACTORS REPORT Summary of Key Findings This report highlights the following key findings observed within the UK well services contractor sector in 2013: Gross revenue for the sector was $3.2 billion in The sector earnings before interest, tax, depreciation and amortisation (EBITDA) were $482 million in 2013, with the EBITDA margin decreasing to 15 per cent from 18.5 per cent in This reflects the increasing costs of operations on the UK Continental Shelf. A like-for-like comparison with 2012 reveals that capital investment increased by 9.7 per cent in 2013, representing the highest level of capital investment from the sector since Over 15,000 people are employed in the well services contractor sector. Seventy-five per cent of well services contractor firms reported an increase in demand for their work in There are high levels of optimism for the future of the UK well services contractor sector, although it is acknowledged that the industry as a whole is facing a number of significant challenges, such as increased operating costs and difficulties in recruiting and retaining skilled personnel. page 6

7 3. Introduction This report aims to provide an insight into the ongoing performance of the UK well services contractor sector and highlights the key issues facing these companies on the UK Continental Shelf (UKCS). The financial information is from services provided to operators in drilling and maintaining exploration, appraisal, development and production wells, and does not include that which arises from the design, manufacture and sale of drilling equipment. The data for this report have been collated from responses to a questionnaire that was distributed to members of Oil & Gas UK s Well Services Contractors Forum. This year, an additional two companies responded with data for the report, which strengthens the overall representation of contractors within the publication and covers the vast majority of activity in the well services contractor sector on the UKCS. The data were collected during February and March The companies surveyed include: Aker Qserv Archer (UK) Ltd Baker Hughes Expro North Sea Ltd FMC Technologies Ltd Franks International GE Oil & Gas Halliburton Read Cased Hole Ltd Schlumberger Oilfield Services The questionnaire results are illustrated in an aggregated form and, for comparison purposes, data are shown from the earliest available date. Not every member of the forum provided data for each question. Currency figures are in US dollars and are in money of the day An EY report (commissioned by Oil & Gas UK) on the UK Upstream Oil and Gas Supply Chain Economic Contribution is available to download at The section in this report on well services contractors encompasses data beyond the membership of Oil & Gas UK s Well Services Contractors Forum and includes financial information arising from the design, manufacture and sale of drilling equipment. page 7

8 WELL SERVICES CONTRACTORS REPORT Financial Data Companies were asked to provide financial data relating to their activity on the UKCS. This information does not include revenue from the design, manufacture and sale of well equipment Gross Revenue The UK well services contractor sector recorded gross revenue of $3.2 billion ( 2.06 billion) in This represents a 4.9 per cent increase from 2012 when gross revenue was at $3.05 billion ( 1.9 billion); although, it is important to note that this increase in revenue is the result of two additional companies submitting financial data for the first time in this year s report. When like-for-like financial information is compared, a 2.2 per cent decrease in gross revenue is observed from 2012 to Figure 1 shows that the accuracy of gross revenue forecasting has significantly improved over the previous two years. The forecast gross revenue for the sector in 2013 matches the actual reported figure. For this year, gross revenue is forecast to be $3.3 billion, a projected increase of 3.1 per cent. Figure 1: UK Well Services Contractor Sector Gross Revenue Gross Revenue ($Billion) Gross Revenue ( Billion) Previous Year Forecast ($Billion) Previous Year Forecast ( Billion) Wells Drilled Gross Revenue Forecast Number of Wells Drilled on the UK Continental Shelf The gross revenue of the sector has increased by 45.5 per cent over the period 2010 to This growth has been achieved despite a decline in the number of wells drilled for exploration, appraisal and development on the UKCS. The total number of wells drilled, including side tracks, decreased by 6.3 per cent from 175 in 2012 to 164 in 2013, whilst since 2010, the total number of wells drilled on the UKCS has decreased by 14.6 per cent 2. 2 Oil & Gas UK s Activity Survey 2014 is available to download at page 8

9 This is an indication of the diverse work being carried out by well services companies. They have reported strong demand from operators to develop existing wells through remediation and intervention techniques, effectively demonstrating that the strength of the sector is not tied directly to drilling activity on the UKCS Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) Earnings before interest, tax, depreciation and amortisation (EBITDA) are an indicator of the health of a business, reflecting the operating profit before adding back the specific non-cash items of depreciation and amortisation. EBITDA is not a proxy for cash flow, since EBITDA does not account for movements in working capital (stock, debtors and creditors). In 2013, EBITDA was $482 million ( million), representing a 14.1 per cent decrease on the 2012 figure of $561 million ( million). This is 21 per cent lower than was forecast, indicating that the decrease in EBITDA was unexpected. The EBITDA margin, the ratio of EBITDA to gross revenue, has also decreased to 15 per cent in 2013 from 18.5 per cent in This reflects the increase in operating costs on the UKCS 3. Figure 2: Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) ,000 EBITDA 30% EBITDA Previous Year Forecast EBITDA Margin 25% % % % 200 5% 100 0% Forecast $ Million EBITDA Margin 3 Oil & Gas UK s Activity Survey 2014 is available to download at page 9

10 WELL SERVICES CONTRACTORS REPORT Capital Investment and New Technology Spend Capital investment by the UK well services contractor sector was at $212.5 million ( 136 million) in 2013, a 14.2 per cent increase on the reported 2012 figure ($186 million). This is the highest level of capital investment from the sector since Even excluding financial data from the additional companies participating in this year s report, total capital investment increased by 9.7 per cent in This increase reflects the record levels of investment in 2013 of 14.4 billion ($22.5 billion) in new and brownfield developments on the UKCS 4. Spend on new technology was at $57 million ( 36.5 million) in 2013, accounting for 26.8 per cent of the total capital investment. Whilst still representing a significant proportion of capital investment, this figure signifies a decrease from 41.2 per cent in 2012 and could be the result of the challenges in encouraging the uptake of new technologies. The amount of capital investment is forecast to drop to $162 million in Figure 3: Total Capital Investment and Spend on New Technology Total Capital Spend New Technology Spend 400 Previous Year Forecast: Capital New Technology as Percentage of Capital Previous Year Forecast: New Technology 70% 350 $ Million % 50% 40% 30% 20% New Technology as Percentage of Capital 50 10% 0 0% Forecast 4 Oil & Gas UK s Activity Survey 2014 is available to download at page 10

11 5. Sector Resources UK Employees In 2013, 15,339 people were employed in the UK well services contractor sector. Although this represents a 12.5 per cent increase from 2012 (13,635), this is due to the inclusion of employment data from two additional companies this year. Despite well services companies citing a shortage of skilled personnel and high attrition rates as a key operational constraint, employment levels have remained consistently high since Attrition rates within the well services sector (the staff turnover) increased to 12 per cent in 2013; this is largely driven by employees moving between well services firms and not necessarily leaving the sector. Well services companies report that international demand for UK employees is high, demonstrating the strength of the UK workforce Figure 4: Total Employment within the UK Well Services Contractor Sector 16,000 14,000 Total Number of UK Employees Previous Year Forecast Percentage of UK Employees Against Worldwide 10% 9% 6 8% Number of UK Employees 12,000 10,000 8,000 6,000 4,000 2,000 7% 6% 5% 4% 3% 2% 1% % Forecast Percentage of UK Employees Against Worldwide 0 page 11

12 WELL SERVICES CONTRACTORS REPORT Graduate Engineers, Technicians and Apprentices The total number of technicians (1,846) and graduate engineers (1,315) employed within the sector has declined by 17 per cent and 23 per cent respectively, however, the overall levels are in line with the long-term average for the sector. Despite the overall decline, there was a 15.3 per cent increase in new graduate engineers recruited in There has also been a continued rise in the number of apprentices employed (244 in 2013) 5, which is expected to increase by a further 28.3 per cent in These figures demonstrate that despite the difficulties in retaining employees, well services companies are committed to recruiting and developing new staff. Figure 5: Number of Technicians, Graduate Engineers and Apprentices 2,500 2,000 Total Number of Graduate Engineers Total Number of Technicans Total Number of Apprentices Number of New Graduate Engineers Recruited During the Year Number of New Technicians Recruited During the Year Number of New Apprentices Recruited During the Year Number of Employees 1,500 1, Forecast 5 Figures for recruitment of apprentices are only available from 2012 page 12

13 6. Operational Issues 1 Respondents to the survey were asked to provide an insight into the operational issues that they currently face. Seventy-five per cent of respondents reported an increased demand for their services in 2013, illustrating that there is a significant level of demand for such services on the UKCS. Eighty-eight per cent of companies reported difficulties in attracting and retaining experienced staff, with 75 per cent of companies outlining that activity outside the UK is resulting in a shortage of personnel and equipment for activities on the UKCS. However, relevant safety and environmental issues are largely not creating operational constraints. This shows that safety and environmental responsibilities are an accepted aspect of well services contractors operations on the UKCS. Figure 6: Operational Issues Is increasing activity outside the UK creating a shortage of equipment and personnel within your organisation? 75% 25% 6 Do you experience operational problems as a result of environmental constraints? 12% 88% 7 Do safety requirements cause any detrimental operational issues? 100% 8 Do you have difficulties recruiting and retaining skilled staff? 88% 12% 9 Was there increased demand for your services in 2013 in comparison to 2012? 75% 25% 2013 Yes 2013 No 2012 Yes 2012 No 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of Yes or No page 13

14 WELL SERVICES CONTRACTORS REPORT UK Government/Industry Initiatives and Organisations Well services companies were asked to rate the importance and effectiveness of a number of government/industry initiatives and organisations, which have been established to encourage improved safety standards, drive more efficient business practices and stimulate increased collaboration across the industry. Respondents identified the four most important initiatives and organisations as Step Change in Safety, Industry Mutual Hold Harmless (IMHH) Agreements, Oil & Gas UK and Value Contracting. With regards to effectiveness, the highest ranked were Step Change in Safety, Oil & Gas UK, IMHH Agreements and the Supply Chain Code of Practice (SCCoP). While a number of initiatives and organisations are deemed important, respondents ranked several as being largely ineffective, suggesting that increased effort is required to improve their success. Dialogue between the Well Services Contractors Forum and a number of these bodies is in progress to ensure the required improvements are implemented. Figure 7: Importance and Effectiveness of UK Government/Industry Initiatives and Organisations Average Rating 1 = Poor 4 = Good Importance 2013 Effectiveness Rating = Neutral 2012 Importance 2012 Effectiveness page 14

15 8. The Well Services Contractors Forum s Mission 1 The Well Services Contractors Forum has four key aims: Gaining recognition for technology Promoting the alignment of objectives with operators, suppliers and other contractor companies Challenging the barriers to maximise recovery of UKCS reserves Encouraging efficient contracting practices Respondents to the survey were asked questions surrounding the delivery of these four key aims Gaining Recognition for Technology Well services companies believe that in recent years there have been significant advances in technologies developed within the sector and industry support for this has remained stable. The rewards received for value-adding technologies is expected to increase in 2014, but despite this, the overall usage of existing technologies is expected to decline. The survey also reveals that a number of companies believe that increased use of risk/reward contracts would enhance industry s recognition of the benefits of developing and introducing new technologies. This includes a significant positive impact on aspects such as the recovery efficiency of hydrocarbons and may lead to time and cost savings. Figure 8: Recognition of Technology Good Fairly Good Use of Existing Value- Adding Technologies Support for Development of New Technologies Reward for Value- Adding Technologies 8 9 Average Rating Neutral Fairly Poor Poor Forecast page 15

16 WELL SERVICES CONTRACTORS REPORT Promoting the Alignment of Objectives with Operators, Suppliers and other Contractor Companies The survey shows that there is significant room for improvement in terms of alignment between the well services contractors objectives and those of the operators and supplier companies. Further collaboration is required within the industry to maximise economic recovery on the UKCS. Well services companies have reported improved alignment with other contractors within the supply chain, however, there is still scope for further improvements, specifically with regards to communication and sharing experiences and best practices. Figure 9: Alignment of Objectives with Operators, Suppliers and Other Contractors Excellently Aligned Alignment of Company/Operator Objectives Alignment of Company/Supplier Objectives Well Aligned Alignment of Company/Other Contractor Objectives * newly added question in the 2013 survey Aligned Poorly Aligned Not Aligned page 16

17 8.3. Encouraging Efficient Contracting Processes The well services contractor sector continues to consider IMHH Agreements and LOGIC Standard Contracts as being the most effective initiatives for promoting efficient contracting processes. In contrast, reasonable levels of liability, the reduction of bureaucracy, the use of risk/reward contracts and the well services model ITT are identified as being underused within the industry. The survey has revealed a generally improving trend in the use of these initiatives, but there is room for greater commitment to them in order to improve efficiency, by simplifying processes and reducing costs. Figure 10: Initiatives to Encourage Efficient Contracting Practices Good Use of LOGIC Standard Contracts Use of Industry Mutual Hold Harmless Agreements Reasonable Levels of Liability Reduction of Bureaucracy Effective Use of Risk/Reward Contracts Use of Well Services Model ITT 5 Average Rating Neutral Poor 9 page 17

18 WELL SERVICES CONTRACTORS REPORT The Future Outlook 9.1. Degree of Optimism In 2013, well services contractors reported high levels of optimism for the future. Despite an expected reduction in overall levels of optimism in 2014, there remains a significant degree of confidence in the sector. This reflects the high levels of activity on the UKCS and the belief that the Wood Review 6 will result in operational improvements across the basin and will stimulate an increase in the currently low exploration rates. The forecast decrease in optimism in 2014 is in line with the trend identified within the quarterly Oil & Gas UK Business Sentiment Index. This is largely being driven by high operating costs on the UKCS, a shortage of skilled personnel and the current low levels of exploration drilling. Figure 11: Degree of Optimism about the Future of the UK Well Services Contractor Sector Very Optimistic Optimism for the Future Optimistic Average Rating Neutral Pessimistic Very Pessimistic Forecast 6 The Wood Review UKCS Maximising Economic Recovery: Final Report is available to download at page 18

19 9.2. Major Challenges and Suggested Actions Although there is optimism for the future, there are a number of challenges facing the well services contractor sector and the UK offshore oil and gas industry as a whole. Increasing operating costs are seen as a key challenge. The Oil & Gas UK Activity Survey reveals that operating expenditure on the UKCS increased by 15.5 per cent in 2013, with a further increase of 7.9 per cent forecast for 2014; a trend which is believed to be unsustainable in the long term. The new consultation with HM Treasury on an ultra high pressure high temperature (uhpht) tax allowance is welcomed by the well services contractors, with the expectation that this measure will stimulate new investment in uhpht developments. It has also been suggested that tax benefits for the development of new technology would have a significant benefit in driving efficiencies throughout the industry. However, the announcement of the bareboat charter tax measure, which is expected to significantly increase operating costs on the UKCS, is a factor that is dampening optimism within the sector. The well services companies welcome the announcement in the 2014 Budget that the UK Government will conduct a full review of the fiscal regime of the UKCS. The full implementation of the Wood Review 8 is also considered pivotal in ensuring the future of the UKCS. A new, strong and fully resourced regulatory body has been welcomed by the sector, in the hope that this will encourage new investment on the UKCS, stimulate drilling activity and enforce greater collaboration throughout the industry. It is also hoped that greater improvements in efficiency and opportunities for collaboration, in addition to alignment of objectives throughout the industry, can be achieved through improving the effectiveness of industry initiatives and organisations Oil & Gas UK s Activity Survey 2014 is available to download at 8 The Wood Review UKCS Maximising Economic Recovery: Final Report is available to download at page 19

20 WELL SERVICES CONTRACTORS REPORT 2014 page 20

21

22 Oil & Gas UK (Aberdeen) 3rd Floor The Exchange 2 62 Market Street Aberdeen AB11 5PJ Tel: Oil & Gas UK (London) 6th Floor East Portland House Bressenden Place London SW1E 5BH Tel: ISBN The UK Oil and Gas Industry Association Limited, trading as Oil & Gas UK info@oilandgasuk.co.uk WELL SERVICES CONTRACTORS REPORT 2014 OIL & GAS UK