Supply Chain Emerges from the Downturn

By Quintin Milne

The Supply Chain is an area of the Oil & Gas Industry which takes more time to recover from downturns because it depends on upstream operators’ capital investment and drilling decisions.

The most recent downturn has left the UK supply chain with revenues and profit margins diminished and cash flows stretched. After the 2014-2015 oil price crash, the subsequent downturn, and now the recovery, a “new reality” across the UK Continental Shelf has emerged, Oil & Gas UK said in its recently published Business Outlook 2019.

Part of the UK supply chain continues to face challenges in the ‘new oil order’.

According to Oil & Gas UK, the path forward is increased collaboration between contractors, new contracting models, and new ways of working to unlock more projects for the world-class UK supply chain.

“This will be crucial to meeting the aims of Vision 2035 — to add a new generation of productive life to the basin and to double the opportunity for the supply chain through exports and diversification,” the industry association noted in its 2019 business outlook.

The outlook within the UK supply chain has improved this year, both in terms of business sentiment and expectations for future revenues.

“It is now crucial that this optimism translates to reality,” Oil & Gas UK said.

Contractor companies have shown improved sentiment in recent months as capital commitments by E&P companies have increased and operational expenditures appear to have stabilised, the association notes.

According to the OGUK Contractors Sentiment Survey, 62 percent of member companies have an improved outlook for 2019 compared to 2018, while just 12 percent reported increased pessimism.

“However, this improved sentiment must be kept in perspective with industry only just beginning to emerge from one of its most difficult periods. With many areas of the supply chain still experiencing significant financial stress, further effort will be required to turn this increased optimism into sustainability,” the association’s report said.

Total revenues of the UK supply chain dropped to £27 billion in 2017 from just under £40 billion in 2014, reflecting the reduction of investments and costs from the exploration and production companies amid the oil price downturn.

In 2017, the rate of revenue decline slowed as E&P operators started to increase activity levels. Total turnover of the supply chain is seen to have stabilised last year. Moreover, there are signs that this year will see an overall stabilisation in revenues and potential improvement in revenues for the first time since 2014, when the increased oil and gas activity starts to trickle down the supply chain, OGUK reckons.

“Around two-thirds of respondents to OGUK’s Contractor Sentiment Survey indicated that they expect revenue to increase this year. However, it must be recognised that some sectors, especially those which are asset intensive such as aviation and drilling rigs, remain under severe pressure and, in some cases, unsustainable positions as a result of reductions during the downturn,” the association noted.

In terms of employment, a survey of OGUK member companies showed that nearly half of supply chain companies expect to see some increase in employee numbers this year, while just 10 percent plan to further cut jobs.

Going forward, the keys to a sustainable and profitable UK supply chain are increased exports, diversification, and closer collaboration and cooperation. Contractors focused on oil and gas should see the rising trend of investment in renewable energy as an opportunity to diversify and tap into new revenue streams, OGUK says.

“Increasing the opportunity for the UK-based supply chain from export activity and diversification is a core aim of industry’s Vision 2035 — with the ambition to double the opportunity for supply chain companies,” the association notes.

Collaboration is high on the agenda for the UK supply chain, and the industry recognises that collaboration needs to be sustainable and that a focus on cost cuts only is not the sustainable answer for the future, according to the fourth annual UKCS upstream supply chain collaboration survey 2018 from Deloitte and Oil & Gas UK published in December 2018.

More than 90 percent of respondents in the survey recognise that collaboration is an integral part to their business performance, but some companies continue to find collaboration difficult to achieve in practice.

“The main reasons why attempts at collaboration fail remain consistent with previous years: they centre on misaligned expectations, commercial terms benefiting one party more than the other, and a general lack of trust,” the survey found.

In conclusion, Deloitte and OGUK said:

“While understandable perhaps, reversion to old ways of working would put at risk the progress made over the last three years. The industry should try to ensure that the transformation to collaboration it has embarked upon is encouraged and continued.”