UK well services contractors have predicted they will suffer a 23% drop in revenues in 2015 as they to feel the full effects of the downturn in oil prices.
The drop in 2015 revenues would follow a mere 1% increase in revenues in 2014, to US$3.24 billion, when the UK North Sea industry was still riding high on record investment levels in 2013.
The figures have been released in the 2015 Oil & Gas UK Well Services Contractors Report, which looks at activity in the market segment in 2014. It says the results mask the full impact of the downturn, which started in summer 2014 and saw oil prices drop from US$110/bbl to $50/bbl by January this year.
According to the report, all companies it spoke to (85% of the UK well services contractors) reported a reduced demand for services in 2014, compared to 75% reporting an increased demand in 2013.
In 2014, the industry was also facing a fall in capital investment, which dropped 30% in 2014, and is expected to fall by a further 25% this year, as firms look to invest in more profitable and emerging regions. The falling exploration and appraisal activity levels in the basin has also led to a drop in spending on new technology, it says, and gaining support for new technologies from clients will become harder in 2015, it predicts.
However, despite the gloom, companies said there was still potential for new development in the UK North Sea, exploring underdeveloped areas and rejuvenating more mature regions.
Oonagh Werngren, Oil & Gas UK’s operations director, said: “Throughout the first half of 2014, it was clear that well services contractors continued to benefit from the high level of investment in the UK continental shelf (UKCS) which occurred in 2013. In the latter half of 2014, however, a number of companies reported a slow-down in the demand for their services and expect this trend to continue in 2015, with respondents predicting that the oil price fall will have a negative impact on drilling activity.”
Key findings
The fundamentals for this sector have been suffering for some time. Since 1996, the total number of wells drilled, including sidetracks, per year has been gradually declining, from around 400 per year to just over 158 in 2014, according to the report (see graph), with another drop anticipated in 2015. Since 2010, the drop has been 17.7%. Despite the drop, firms have found work in other areas, such as the development and maintenance of existing wells.
Spending on capital investment has suffered as companies face stiff competition from other regions around the world, with parent organizations spending more money in emerging markets and regions with a higher rate of return.
However, as well as reducing spending and recruitment, companies are seeking to make positive changes, says the report.
While there are concern that job losses will lead to another future skills shortage, some in the sector say “significant changes to the current business model are required.”
“Well service contractors recognize the importance of talking cost and improving efficiency and they continue to invest in technology and processes to support these goals,” says the report. “The well services contractor sector notes efficiency is a key area to focus on. The companies suggest that standardizing technologies across operators would greatly reduce manufacturing costs. They also recommend that technology aimed at increasing the lifespan of wells and improving the effectiveness of maintenance programs should be an area of focus.”
Image: Drilling activity on the UKCS. From the 2015 Oil & Gas UK Well Services Contractors Report.
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