Contractors can play a key role in the bid to restore the international competitiveness of the UK’s oil and gas, as the sector looks towards making significant cost improvements by 2016.
This is according to Oil & Gas UK’s Economic Report 2015, which highlights the need for the North Sea industry to take action to improve efficiency by reducing operating costs by more than £2bn. This is after production failed to match up to the 9% hike in operating costs in 2014.
“Last year, more was spent than was earned from production, a situation which has been exacerbated by the continued fall in commodity prices,” notes Oil & Gas UK chief executive Deirdre Michie, who highlights that headcounts in the sector have contracted by 15% since the start of 2014. “It is likely that capacity may have to be reduced still further in order for the business to weather the downturn.”
How ‘expensive’ oil and gas contractors actually cost less
Whilst further reduction of headcount is bad news for permanent employees, ContractorCalculator CEO Dave Chaplin believes contractors could benefit from the anticipated cost-cutting measures: “As well as offering a more cost-efficient alternative to permanent hires, contractors provide a low-risk solution which is ideally suited to this volatile market.
“Contractors might appear to cost more if you only consider day rates, but you only hire contractors for the periods that you need them, there are no additional costs of employment such as employee benefits, and no expensive onboarding or redundancy costs.”
Cost-cutting measures highlighted include analysing business process and standardisation. Also emphasised was the important role contractors have to play in ensuring that the sector is able to adapt to the oil price drop through the implementation of innovative methods, such as geographic restructure, which won’t have the same immediate impact as cost-cutting, but will yield greater benefits in the long run.
The report states proposed methods could take between 12 months and three years to achieve and can only come about through collaboration between operators, contractors and small to medium sized enterprises.
Will a recovery in production create contract opportunities?
Despite poor exploration levels throughout 2014 – drilling in the North Sea has fallen to levels last seen in the 1970s - a recovery of some sorts appears to be in effect, meaning there will be opportunities for contractors, despite capital investment reduction.
The Government’s provisional data shows that production in the first half of 2015 was up 3%, compared to the same period last year. Meanwhile, seven exploration wells were drilled during the first half of 2015, along with three appraisal wells.
Oil & Gas UK economic director Mike Tholen believes this to be indication of a gradual recovery for the sector: “Strong investment in asset integrity over the last four years, coupled with measures being taken to improve the efficiency of assets offshore, have resulted in better output from many existing fields and we expect the rate of decline in production from those fields to slow significantly over the next two years.”
Should contractors focus skills development on decommissioning?
While circumstances have resulted in reduced investment in the sector, one upside for contractors is the potential to benefit from decommissioning.
Decommissioning expenditure is expected to rise from £1bn in 2014 to over £2bn in 2018, by which time over 50 fields will either be approaching or undertaking decommissioning. Around 475 installations, 10,000 kilometres of pipelines, 15 onshore terminals and 5,000 wells will all eventually have to be decommissioned, making for plenty of opportunities.
“Decommissioning is becoming an increasingly proliferate source of income. With no production boom in the oil and gas sector expected anytime soon, contractors may want to consider looking towards decommissioning,” concludes Chaplin.