Economic Report 2018

ECONOMIC REPORT 2018

Survival – The downturn put extreme pressure on service companies’ revenue. Deals have enabled companies to reduce their cost base in a bid to offset declining margins.

Geographical optimisation – M&A activity has allowed companies to access new regions, or indeed strengthen their positions, without needing to start afresh or struggle to gain a foothold. An example of this was the acquisition of Dalma Energy’s Omani and Saudi Arabian business by KCA Deutag. This allowed KCA Deutag to increase its presence in the Middle East and gain access to the significant Saudi Arabian onshore drilling services market. Integrated offering – Many of the deals seen in the last three years have enabled parties to acquire and combine specialist expertise not already held in-house. Most major deals, such as the merger of Technip and FMC and the Joint Venture between OneSubsea and Subsea 7, have seen companies combine capabilities to provide a wider range of project services and unlock greater efficiencies. Differentiated offering – Having a unique offering is key to any company, and M&A activity has helped strengthen existing in-house capabilities in specific fields. For example, the GE-Baker Hughes deal enhanced both companies’ digitalisation offerings and enabled the new, merged company to offer more niche services. Early engagement – The increased scale of the newly combined outfits means they can offer services across the field development process. By entering the process with operators early, companies are more likely to lock-in multiple service contracts for any one project, providing a consistent approach to project design, construction and installation – a benefit to both supplier and operator. As an alternative to M&A, companies have also been partnering up with other suppliers to achieve integrated solutions without the need to undergo a lengthy sale and purchase process. Aker Solutions has been operating in this way on several projects, co-operating with companies such as ABB, Subsea 7 and Saipem. There is also an increasing trend of supply chain companies offering fuller, life-of-field services, which will see them supply equipment and services (such as maintenance) throughout the duration of field life. This provides service companies with sustained income that is less susceptible to expenditure cuts. The Future Development of UKCS Supply Chain Costs In order to maintain its improved internationally competitive position, it is critical that the UK oil and gas industry retains its focus on sustaining the cost improvements that have been implemented in recent years. This is especially important during any upturn in activity as investors gain greater confidence in the market. It is expected that there will be an increase in activity levels in the basin in the coming years as companies look to approve new projects, leading to increased demand on the supply chain. Coupled with this, many supply chain companies remain stretched in terms of cash flow and have lost some capabilities. This creates some concern around the potential impact of inflationary cost pressures on industry due to increased demand on a stretched supply base. Cost control remains a fundamental driver for E&P companies who are only willing to sanction investments at levels consistent with a ‘lower for longer’ commodity price. Therefore, if costs for oil field goods and services are seen to rise, then further efficiencies will need to be achieved to ensure project out-turn costs meet long-term investment criteria. Figure 29 outlines the potential capacity constraints within the supply chain in light of expected demand levels through to 2021. It is anticipated that cost pressures will be felt most acutely in areas of greatest demand and capacity constraint, but may also be felt more widely.

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