The UKCS offshore oil and gas market supply chain is not averse to challenge having ridden the wave of the oil price collapse, Brexit and Covid-19 over the last decade.
However, the supply chain is suffering from a new breed of challenges arising from project, fiscal and political uncertainty, which has increased the prospect for disputes.
The causal factors are multiple and overlapping but, in summary terms, the industry is reeling from international competition for resources resulting in an exodus from the UK, a lack of qualified personnel and available resources and financial insecurity.
In this article, we explore how each of these may impact the supply chain going forward and what steps can be taken to mitigate their effects.
Political uncertainty and UKCS exodus
Although the UK is committed to reaching net zero only by 2050, many fear that the future of offshore oil and gas in the UK could change overnight. While the current UK Government issued 27 new licences in 2023 for oil and gas exploration, by January 2025, at the latest, there will be a General Election, and this is currently predicted to lead to a change in government.
Presently, the two main political parties hold diametrically opposing views on the future of oil and gas exploration. The current government intends to continue issuing new licences, but on an annual basis, while the Labour Party has announced that it would oppose all new oil and gas licensing if they win the General Election.
This uncertainty is already impacting drilling rates and operator appetite for new projects has been severely dampened by the Energy Profits Levy. It is also causing some rig owners currently operating in the UK to look for work in the other more profitable and positive markets such as the Middle East, Brazil, Southeast Asia and the US Gulf. A decision to leave the UK increases the likelihood of supply chain contracts being terminated for convenience or for cause and it is in exercising such termination rights that difficulties and disputes continue to arise.
Project uncertainty and personnel challenges
Competition for resources and shortages of qualified personnel have continued to plague the sector this year for various reasons including competition with the developing offshore wind market.
Lead times for the procurement of equipment and services have increased and have been coupled with high inflation, which has impacted the cost of equipment, as well as reducing profit margins for supply chain companies. Some suppliers have been forced to perform work late, others have done so at a loss, or worse have been unable to perform the work at all.
Parties have found themselves in dispute as a result and often for reasons that are largely outside of their control.
Financial uncertainty and payment challenges
Financial uncertainty and tight margins make prompt payment to suppliers essential. Failing to do so results in suppliers experiencing financial difficulty, potentially giving rise to an inability to perform as required and insolvency.
OEUK’s Supply Chain Report 2023 recorded that while 75% of companies have 30-day payment terms, only 45% of payments are made on time.
OEUK’s Supply Chain Principles have now been updated to include 30-day payment terms as good practice. Where payment terms are not met, then depending on the contractual terms, suppliers may have a right to interest, suspend services or terminate the contract. Where a contract does not provide for termination in the event of non-payment, then it will be difficult for a supplier to terminate for repudiatory breach, but may still give rise to a dispute between the parties.
Protecting the supply chain
With all this uncertainty and difficulties in the UKCS market, steps need to be taken to protect it, particularly its supply chain.
The OEUK’s Supply Chain Report 2023 report set out various proposals for both the government and the industry to achieve this. These include:
- Creating an internationally competitive and level playing field in the UK to encourage supply chain innovation and sustained investment for a net zero future.
- Providing a stable regulatory and fiscal framework which provides the supply chain with a predictable and attractive business environment in order that investment in supporting the UK’s energy security continues.
- Informed decision making and policies which ensure visibility and certainty of opportunity for the supply chain and maintain capability and capacity in the supply chain.
- Fair allocation of contractual risk and reward, paying invoices on time, and encouraging innovative ways of working by operators and others.
- Operators increasing visibility, predictability, and certainty of upcoming work scopes to enable supply chain companies to invest in future activity with confidence.
- Improving competitiveness through increased collaboration on demand planning, project scheduling and resource sharing.
Although there are likely to be challenges to implement these principles in practice, they will go some way towards mitigating the issues identified above.
Glenn Kangisser is a Partner and Fiona Cain a Counsel in the Energy team at Haynes and Boone in London.
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