In our EY ninth annual review of the UK oilfield services (OFS) industry to be published this month, based on the latest data, unlike other subsectors that have seen a modest return to growth, we have seen a continued decrease in subsea activity.
A large number of OFS companies continue to be negatively impacted by reduced demand for onshore and offshore services and products, continued pressure on pricing – particularly from North Sea customers – and a decrease in international activity due to the completion of large projects that were not replaced.
This has been offset somewhat by diversification outside traditional oil and gas projects, into areas such as decommissioning and renewables. Margins also remained depressed due to the pressure on pricing, the delivery of contracts awarded during the downturn at much lower margins and limited scope for further significant cost base reductions, given the level of cuts in prior years.
However, the picture does look brighter going forward. Exports have been growing and backlogs increasing, with companies reporting significant commercial opportunities in the near term, increased order levels and completed projects being replaced by a number of new packages of work. The outlook is a gradual recovery as larger greenfield oil and gas projects are sanctioned and demand increases for deepwater subsea umbilicals, risers and flowlines (SURF) activity.
A number of large-scale developments have completed in recent years, but there has been an increase in the number of projects reaching final investment decisions in 2018 and 2019. FID could be reached on as many as 38 new offshore projects over the next three years, with the developments varying in magnitude and complexity.
In the short term, most projects are expected to be satellite and tie-back brownfield projects of a small to medium scale. As indicators such as these point towards an improving market outlook, we believe the time has never been more opportune to drive transformational changes in business models and ways of operating in response to the disruption the industry is facing from long-term trends such as changes in customers practices and landscape, the technology and digital revolution and energy transition.
To capitalise on the emerging opportunities and to win back investors’ confidence that sustainable, enhanced shareholder returns are achievable, companies will need to consider capital reduction and asset lightening, shifting their focus from building peak-demand capacities to meeting short and mid-cycle demand levels, more integrated offerings, technology-driven business models and smaller, smarter and more flexible workforces.
With the UK’s tradition in subsea, proven entrepreneurship of the sector and continued attractiveness for new business opportunities, the UK should be well placed to capture the benefits of this transition.
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