Economic Report 2019

Although good progress is being made, delivery of these projects still carries an inherent degree of uncertainty. It is crucial that industry and government continue to work constructively to maintain the UK’s comparative advantage over other global basins, otherwise the UKCS may lose out amidst strong competition for international investment. Maintaining stable and predictable fiscal conditions throughout any governmental or political change is a vital component of this. Supply Chain Sustainability and Investment While it is vital that the UKCS remains as competitive as possible to unlock new opportunities, it is also important to ensure that a healthy balance is achieved between cost control and ensuring the sustainability of companies within the supply chain. The ability to access a strong and well-resourced supply base is crucial in meeting long- term demand from operators and to ensure that overall cost pressures are controlled. The UK market needs to be seen to present a good long-term business opportunity for supply chain companies which allows them to be able make an appropriate return on their investment. Loss of supply chain capacity will ultimately lead to lower levels of innovation and a tighter market with a more volatile cost base. In recent years, as the industry has seen lower investment levels, reduced contract rates and a drive to improve efficiency, the revenues of the UK supply chain have fallen by around one-third, from almost £40 billion in 2014 to £27 billion in 2017 (based on the latest available data). 23 Alongside this, supply chain companies have seen lower margins; in some cases these have even become negative (i.e. contract rates are below levels of operating expenditure). Data provided by Rystad Energy show that the revenue and margin reductions have been greater in the UK when compared to a global benchmark. Some asset-intensive sectors (such as drilling and aviation), also need to take into account capital costs on top of operating expenses. These trends have had a negative impact on the sentiment of investors. Figure 17 overleaf outlines the indexed share price of a number of companies which form a representative share of the different sectors of the UK supply chain. Although there are variations within and across sectors, the average share price of these companies is around 40 per cent lower than it was in 2014 and amongst the lowest levels of the last five years. This reinforces that confidence in the market remains fragile, reflecting the ongoing challenges that supply chain companies continue to face.

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23 EY OFS Report www.ey.com/uk/en/industries/oil---gas/ey-review-of-the-uk-oilfield-services-industry-january-2019

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