Oil and gas contractors seeking work in the UK’s Continental Shelf (UKCS) in the North Sea have been given some encouraging signals that prospects may improve, despite an overall negative sentiment.
The Aberdeen & Grampian Chamber of Commerce’s (AGCC) 24th Oil and Gas Survey points towards decommissioning and renewable energy as potential sources of North Sea contracts, as firms up their involvement in these areas. Meanwhile, mounting concerns over future skills shortages and an increasing emphasis on efficiency could result in rising contractor demand over the long term.
“As we look further to the future, the outlook is more positive with most investment categories seeing forecast increases,” notes AGCC CEO Russell Borthwick. “Once again perhaps a sign that an upside will come.”
Confidence in UKCS prospects sees moderate recovery
The outlook in the UKCS remains relatively bleak, but there are some glimmers of hope. When asked about how confident they are in their prospects over the year ahead compared with this time last year, three quarters of respondents claimed to be less confident. Only 7% are reportedly more confident.
One bright side is these figures mark a moderate improvement on the historic lows recorded in the 23rd Oil and Gas Survey, carried out six months ago. For Borthwick, this could be an indication that fortunes within the sector may begin to improve:
“In the previous two surveys we carried out, we found confidence had hit record lows, with an all-time low in November 2015. This time, while the figure is still firmly in negative territory, it has marginally improved, which may perhaps show we are near the bottom of the curve.”
Contractors on hand as firms continue to slash headcounts
Unsurprisingly, the negative sentiment has resulted in sustained headcount reduction. On average, operators have slashed 15% of their workforce over the past twelve months, with a further reduction of 17% expected over the coming year. Compared with the 14% reduction reported in the previous survey, this suggests that the rate of job reduction has at least steadied over the past six months.
Headcount reductions are in line with activity, which is similarly disappointing. Only 14% of North Sea contractors report to be working at or above optimum levels – a decline of 65% from the historic high recorded in 2013.
Nonetheless, this could bode well in the long run for contractors who choose to remain in the sector. With the UKCS workforce weakening as a result of continued lay-offs, once the sector eventually recovers, hiring intentions will rebound strongly as firms seek the resources to operate at full capacity.
Interestingly, cutting costs is no longer viewed as the highest priority amongst companies. 42% cite increasing efficiency and productivity as their main priority, compared with 23% who emphasise cutting costs. This may also bode well for contractors who can provide their services on an ad-hoc basis in line with demand.
Skills shortage concerns continue to go unaddressed
Future contractor demand looks to be further intensified by the increasingly worrisome talent shortfall that the North Sea is heading towards. Experts have recently warned of the ‘brain drain’ that the industry faces if firms don’t endeavour to retain and upskill essential talent, yet the issue continues to go unaddressed.
In addition to the headcount reductions, the net balance of contractors undertaking staff development has fallen sharply from +13% to -22%, whilst the amount undertaking research and development has dropped from +15% to -5%.
This is in spite of the fact that half of the survey’s respondents identified skills shortages as an issue currently constraining business, whilst 43% flagged up the loss of staff to other companies as having a similar impact.
“It is concerning to see a declining trend in investment for R&D and staff training which are both critical to ensuring a successful future. This reduction in investment is understandable but it is critical for the sector that we retain the best staff and invest in R&D to secure our future,” the report reads.
“With the talent pool decreasing, and concerns over skills shortages mounting, contractors who decide to hang in there could eventually be considered vital components in ensuring the UK oil and gas sector retains its functionality,” adds Chaplin.
Decommissioning heads alternative sources of contracts
In the meantime, contractors are advised to look towards decommissioning as a potential source of contracts. Oil and Gas UK’s Activity Survey 2016 estimates that 80 oil and gas fields will cease production over the next five years, whilst the UK industry will also see the removal of 144 platforms between 2019 and 2026.
It appears that more firms are taking note of the revenue available from decommissioning, with 85% of contractors expecting to increase their involvement in decommissioning work over the next three to five years – a 6% increase on the previous survey.
However, whilst decommissioning can offer contractors an immediate source of income, oil and gas partner at Bond Dickinson Uisdean Vass warns that it should be viewed as a last resort: “Although decommissioning will offer great opportunities it is like the funeral industry – we want to put it off for as long as possible.”
Whilst decommissioning is set to become the primary alternative source of contracts, renewable energy could prove another emerging market for contractors to explore. 63% of respondents expect to engage more in renewables activity – a sharp increase from the 46% reported in the last survey.
Overseas sentiment markedly improved
Confidence was relatively higher in non-UKCS markets. A net balance of -41% of respondents are more confident about their current international activities, which is broadly consistent with the figures from the previous survey (-37%). Whilst still in negative territory, the balance of contractor optimism in future international activities has improved markedly from -16% to -3%.
Meanwhile, contractors have also been reporting higher activity in their overseas portfolios over the last two years. Whilst the 27% of firms operating at optimum levels in overseas markets is also a historic low, it almost doubles that of the UKCS.
The disparity between the UKCS and the overseas market is attracting increasing interest from firms. Vass highlights that almost a third of companies are taking action to secure opportunities in places such as Iran and Mexico.
“With the international oil and gas market faring notably better than the UKCS, contractors who want to continue conventional oil and gas work might be advised to explore opportunities abroad, at least until the North Sea starts to recover” concludes Chaplin.