Cost cutting takes toll on UK offshore industry

Offshore staff

ABERDEEN-- Cost-cutting measures, dwindling backlogs of work, and pricing pressures are increasingly taking their toll on the offshore oil and gas industry particularly the supply chain, according to a report commissioned by Subsea UK.

In the second of its business confidence studies, supported by Scottish Enterprise and compiled by Douglas Westwood, Subsea UK says the latest findings proved the reality of concerns raised in the initial report but the findings still reflect an element of optimism and determination to succeed in some quarters.

“Many suppliers are pointing to the last quarter of 2009 into 2010, concerned that the backlog will have dried up appreciably by then and with little indication of where the new order book is coming from,” says Alistair Birnie, Subsea UK’s CEO. “This concern has been fuelled by a lack of front end activity on the ground that would normally be visible and which suggests that there may be further delays in new projects coming through.”

But the longer-term outlook is more positive with deepwater exploration drilling continuing, with high rig utilization being reported.

“There have also been some surprising results on the ground, particularly in the area of IRM (inspection, repair and maintenance) where, although not a panacea, demand has been held up better than had been expected,” says Birnie. “Furthermore, companies in specialist niche markets are reported to have performed well with some reporting better results in 2009 than that of the previous year.”

Brazil, West Africa, and deepwater Gulf of Mexico regions continue to be active with a number of complicated, multi-year drilling and construction programs, while developing areas such as India and the Black Sea are experiencing increased customer interest in any spare capacity available.

The wider drilling contractor market, however, is still showing signs of weakness especially within the jackup and mid-water floater market, the report says. More resilient to market uncertainty is the deepwater capable fleet though a more challenging pricing environment is anticipated.

Cost-reduction measures combined with a slowing down of backlog orders are expected to start affecting equipment manufacturers and performance in 2010 with pricing pressure and rumors of mergers and acquisitions adding to the uncertainly.

The weakening of the UK and North America markets, combined with uncertainty and deferment of projects means prices in these regions are being eroded and margins coming under increased pressure, the report says.

This is further impacted by diminishing backlogs and cost-reducing measures across the sector.

It is a similar outlook for integrated oilfield companies. A contraction in customer spending, reduced activity, and pricing is having a significant detrimental effect on onshore North America activity as are reduced activity in weak regions including the UK, Saudi Arabia, Russia, and the Capsian. While this does not directly affect the subsea market, cash-flow is increasingly less favorable overall, and cost reductions are in play, affecting all their business areas to an extent, according to the report.

Stronger markets are prevalent in Latin America, Norway, and Africa with stronger pricing margins being retained.

Access to capital remains a significant issue for smaller E&P companies struggling to access capital for development and well programs, while the strength of the US dollar is impacting on revenues.

The report finds that the deepwater sector within integrated oil companies is managing to avoid cost-cutting measures at this time, and the indications are that any spare capacity is quickly absorbed, keeping rig day rates high.

The Subsea UK study shows that the outlook for 2010 is more optimistic with a growth in exploration and production expenditure expected by more than half of companies surveyed. Thirty-two percent indicated that spending would be up by 20% or more with 13% saying that they would rise appending by 10-20% and 8% expecting more modest increases of 1-10%.

07/06/2009