Looking back at 2015, it was not a good year for the oil and gas industry. The political uncertainty surrounding the price of oil and how long it will be depressed has contributed to a lack of activity and has been the major preoccupation for most companies. In particular many businesses agonised over how far to re-align their cost base or reduce their capital spend. If they go too far, in terms of staff reductions, then when the industry recovers some are concerned as to whether or not the skills base will return.
This situation is nothing new; previous downturns have repeatedly demonstrated that a strong oil price doesn’t encourage businesses to focus on optimising efficiencies. When the oil price is high, companies want things done quickly and they are prepared to pay over the odds to achieve this, which can increase the cost base and mask inefficiencies in the business. The challenge for many companies has been how to run sustainable businesses in an economy where the price of oil is low and this involves them amending their cost base accordingly. On the positive side, the lower fuel prices have been a blessing for other industries such as the transport and fishing industries.
There has also been a knock-on effect on the wider economy in the North- East with house-building, leisure, hotels and retail all being affected. The top end of the housing market is slowing down and it will be interesting to see the levels of Christmas footfall in the main shopping centres. It may be easier to book a hotel room in Aberdeen at short notice, but that’ll be little comfort to the city’s wider economy.
So what does 2016 hold? Unfortunately, by all accounts, it will be another difficult year. Companies that will do well are those that adopt new technologies to become leaner and more profitable along with those that internationalise so they are not so reliant on the North Sea. The challenge will be to reduce overheads without making cuts in vital areas such as training, particularly in an industry were safety standards are paramount. We are also likely to see more industry consolidation with bigger companies swallowing up the smaller players. Many companies will struggle to survive so we may also see an increase in insolvencies. There may however be opportunities for new technologies to enter the market.
However, the oil and gas industry in Aberdeen has a reputation for bouncing back after difficult times, so for those prepared to innovate, keep a keen eye on costs and take advantage of overseas markets, the outlook in 2017 is likely to be much brighter.
Niall Farquharson is a partner at Johnston Carmichael.
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