Oil and gas industry body the Well Services Contractors Association (WSCA) has warned that the UK industry faces another “resource flight” when a global upturn comes.
The Aberdeen-based WSCA says the effects for the UK could be crippling, causing rising costs, which would make much of the North Sea basin uneconomical and result in the UK seeing a dramatic drop in hydrocarbons production. It says in its Business, Investment and Confidence Report 2009: “Action needs to be taken to ensure that activity occurs now to preserve resources within the UK industry, and enable us to meet the challenges presented by maturing assets in the UK.” The report notes that the well services sector in the UK North Sea has seen a marked drop in demand for its services since late 2008, after oil prices dropped from a peak of above $140 a barrel in July 2008 to less than $40 by the end of 2008.
Ronnie MacGregor, a director of Baker Hughes UK, and WSCA chairman, said: “We have seen a dramatic reversal in the fortunes of our sector in the last year when we were anticipating a buoyant future. This was based on the view that, while the oil price had dropped from its peak, it was likely to remain at a level high enough to maintain the increased levels of activity seen since 2006.
“However, with the decline in the oil price to below $40 a barrel by the end of 2008 and the credit crunch preventing smaller operators accessing development capital, activity and confidence levels have fallen dramatically.
“Revenue and profitability levels of the sector fell significantly in 2008 and are expected to fall further in 2009 to levels last seen in 2005, when we came out of the last downturn.
“Despite the current recovery in the oil price, confidence in the sector remains low.
“The drop in demand for well services has resulted in a decrease in capital investment and also in investment in new technology by WSCA members. Spare capacity in the sector has increased to 13%, reflecting the decrease in demand for services.
“Employment levels have failed to meet the levels expected in last year’s report and are expected to fall further in 2009 with this trend continuing into 2010. Almost 30% of our UK employees are used for international work, the highest since 1997, causing concern there is not enough UKCS activity to keep UK-based employees fully utilised.”
Mr MacGregor added that a major effect of the downturn was that clients were pursuing a lowest cost rather than best value approach in letting contracts.
He said: “While operators have experienced significant unit cost inflation over the last few years, our report shows that the well services sector, with cost increases of less than 6.5% a year since 2003, has not been a major contributor to the cost inflation.”
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