Oilfield companies must adopt 'new mindset' amid shift to renewables - EY report

Oil companies must accelerate the adoption of a “new mindset” amid the transition to green energy and expectations of a further decrease in production in 2021, according to a new report.

Publishing its latest UK Energy Services overview, professional services giant EY said the gradual recovery in the UK’s oilfield services sector, which began in 2018, had been set back by the events of the past year.

A crunch Opec meeting in March 2020 triggered a drop in oil price which was immediately exacerbated by the demand slump resulting from the Covid-19 pandemic. The plummeting oil price led to many companies focusing on cutting costs and improving efficiencies, the review noted.

While 2019 was characterised by a number of new fields coming into production, the events of 2020 resulted in the deferral of development projects.

Industry experts at EY are forecasting a further decrease in production in 2021 due to a combination of lower levels of investment, project delays as a result of the pandemic and the smaller scale of developments given the maturity of the basin.

However, with the vaccine programme roll-out and international economic growth re-emerging, oil prices have staged something of a recovery, which may lead to an upturn in investment spend, EY added.

The report shows the industry’s future will be shaped by diversification and decarbonisation, with a move to reduce emissions providing opportunities in wind, carbon capture, utilisation and storage (CCUS) and hydrogen.

Environmental, social and governance themes are increasingly at the forefront for shareholders and investors, meaning energy companies must have a clear strategy on decarbonisation and reshaping their businesses for the future.

EY noted that a “digital transition” was also accelerating, with a change in mindset and operational model needed to reap the full benefits.

Derek Leith, EY’s global oil and gas tax leader, said: “Last year, we were cautiously optimistic that 2020 would be a stronger year for oilfield services [OFS]: 2018 had seen the first increase in revenues for UK OFS in three years, and the general sentiment was that trend would continue with an opportunity for margin improvement in 2020. It’s a salient lesson that unexpected events can radically derail expectations.

“2019 capital investment in the UKCS [UK continental shelf] was almost £5.5 billion, in line with 2017 and 2018. However, as a result of reduced capital budgets in response to the pandemic, a number of key projects deferred and a lower oil price, 2020 was 33 per cent lower.

“The expected increase in final investment decisions (FID), with up to ten projects anticipating approval, did not materialise after a number of major projects were pushed back.

“However, with capital expenditure expected to grow modestly in 2021, the oil price recovering with demand growing, vaccine roll-out programmes and global economies emerging from lockdowns, the stage is being set for a broader industry recovery.”

Celine Delacroix, EY’s global energy services and equipment leader, said: “I’m a strong believer that the industry must address environmental, social and governance aspects head on. That means investing in, developing, and using all available technologies to meet these responsibilities and address investor and customer concerns. It’s technology that will continue to unlock the industry.”

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