UK Contractors Seek Slice of the Cake

Rising oil prices have restored some missing confidence needed to take final investment decisions offshore, and so the services industry is wondering when some of this income will filter down to them.

At a breakfast briefing hosted by law firm White & Case, the upstream industry group Oil & Gas UK which represents both producers and contractors said that free cash flow this year could total £10bn ($13bn), the highest since 2010. Production, at 1.7mn barrels of oil equivalent/day, is expected to rise further as more projects come on stream this year, extending the four-year run of yearly gains that ended a 15-year steady decline in output.

Thanks to technological advances and rigorous cost cutting and collaboration with the services industry, companies are now more profitable than they were when oil was $120/barrel, said OGUK economist Mike Tholen. And many service companies have adapted by diversifying into working with producers of other forms of energy such as renewables, or finding markets overseas.

But operators remain only cautiously optimistic and are only committing to projects with a breakeven of $40-$50/barrel, or about two thirds of the oil price, OGUK said: their focus is still on capital and cost discipline. They are paying down debt, returning cash to shareholders and recovering after completing takeovers. As a result, service companies are wondering when their fortunes will also start to improve. "A competitive basin needs a supply chain," OGUK said, describing the sector as "squeezed."

There have been offshore strikes at several production sites this year, indicative of the contractors' sentiment that it is time to share the benefits. Some companies have been bidding for contracts at a loss in order to keep assets in circulation.

Speaking for the majors, the head of Shell UK Sinead Lynch did not promise any immediate bonanza and acknowledged that the Offshore Contractors Association had issues. Having an engaged workforce was important, she said. The Anglo-Dutch major is now conducting a 'holistic' review of its offshore operations and would announce its findings in the coming months, she said.

There would be money flowing back in upstream, as the company has taken several final investment decisions (FIDs) this year – Penguins and Fram – that were not in the 2017 business plan; but the FIDs had been enabled by reworking terms with the supply chain and partners and the fiscal framework. She said that of the several other FIDs that Shell is considering, at least one more would be taken this year, but did not tell NGW which.

At the start of this year, consultancy Rystad Energy forecast that three times as many FIDs would be taken in the UK North Sea in 2018, compared with the previous 24 month-period.