UK Oil and Gas Survey Shows UKCS Focus, More Overseas Growth

Although short-term prospects for the UK Continental Shelf (UKCS) still remain strong, the survey clearly charts the fact that both operators and contractors are now seeing growth opportunities in international markets with over 65% of contractors reporting business expansion in new overseas markets. The survey draws on responses from Oil and Gas operators and contractors employing over 35,000 in the UK and 220,000 in the international oil sector.

Geoff Runcie, Chamber Chief Executive explained: "The oil and gas surveys over the last two and a half years have shown an increasing trend towards both operators and contractors internationalizing their operations. With 65% of contractors developing new markets, this trend clearly continues. Whilst this is good news for Aberdeen City and Shire as it provides opportunities to export expertise and technology, we need continued investment at home in exploration levels and both our offshore and onshore infrastructure to ensure the longevity of our indigenous oil and gas industry.

"Additionally, 87% of operators and contractors acknowledge working at or above optimum level, stretching physical, human and financial resources. Perhaps the most encouraging aspect is the number of respondents having gained new business outside their traditional areas of work.

"We cannot stop major organisations internationalizing their operations. The challenge is to make any decision to shift their emphasis from the UKCS less appealing by making continued investment in the region as attractive as possible.

"It is crucial that the UK Government recognizes the supporting role it can play by introducing long-term fiscal and legislative policies to protect the competitive position of the UKCS against the relative attractiveness of foreign market opportunities."

Summary of key survey findings:

• A sense of consolidation of previous increased activity coupled with continued but slower rates of growth expected over the next year
• Rising trends in employment were reported by both operators and contractors, and these upward trends are expected to continue through 2007 for a net of respondents. Over 40% of contractors reported working above planned hours over the past four months and more than a quarter anticipated working above planned hours in 2007.
• Rising trends in the number of UKCS framework based agreements were reported by 34% and rising trends in new contracts by 36% of contractors
• Between 2004 and 2006 the survey results suggest a declining emphasis on cost reduction, risk sharing and penalty clauses in contracts, and a trend towards longer agreements. Continued emphasis on safety and environmental issues was noted but with little change seen in the last three years.
• Increased opportunities in North and West Africa with new frontiers like Russia and Australia assuming greater importance.

Graeme Sheils, Oil & Gas Partner at Deloitte in Aberdeen said: "This is an extremely positive survey, the already high activity levels are continuing to increase, albeit at a slower rate. One of the key findings, which is welcome and positive news for the whole supply chain, is the changing attitude in contractual arrangements. Between 2004 and 2006 the trend is towards longer agreements between operators and contractors with less emphasis on cost reduction, risk sharing and penalty clauses. The move to more collaborative and partnering style relationships will impact positively down the supply chain and bodes well for the longer term. The strong order books and opportunities that exist are also resulting in a high level of M&A activity and volume of institutional money looking to invest in the sector is very encouraging.

"As a note of caution, we must be on guard against complacency over cost. The UKCS is a high-cost province and this is being exacerbated by the shortage of people and equipment forcing prices up. If we are to ensure a long-term future for the North Sea in the face of stiff international competition we must be cost-conscious and continue to develop new technology and ways of working to keep cost down."

David Frost, Director General of British Chambers of Commerce said: "The Oil and Gas sector is a shining example of how UK businesses are at the forefront of the global economy. That so many are diversifying into emerging markets is an indicator of the high confidence levels of many firms.

"It is troubling, however, that short-term taxation policies may reduce the attractiveness of further exploration work in the existing North Sea oil fields. Easing the long-term tax burden on those seeking to find new reserves will encourage continued investment in the North Sea."

Chris Strang, Director, Well Services Contractors Association, said:

"The Well Services Contractors Association (WSCA) welcomes the findings of the 7th Oil and Gas survey. These confirm the experience of our members that activity levels on the UKCS remain high despite the decline in the oil price from the $75/bbl high to the current $55/bbl. However, it is extremely important to remember that the UK depends on oil and gas for 75% of its total energy requirement and this is likely to increase in the short term. It is therefore crucial for the UK that as much as possible of this demand is met from UKCS production. This will require a stable fiscal environment which recognizes its increasing maturity for the UKCS to remain globally competitive."

Bill Murray, Chief Executive, Offshore Contractors Association, said:

"While we recognise that the production profile of the UKCS will decline in coming years, this will be very gradual leaving plenty of scope for future investment by oil and gas contractors and companies. Although companies are understandably looking to the international market, we are confident that the North Sea will continue to offer a sustainable future for many decades to come and we actively encourage skilled workers in other industries to retrain for a rewarding career in the energy sector."

Michael Salter, Chief Operating Officer, Abbot Group said:

"This is a very positive survey providing very clear indications of the buoyancy of the Oil and Gas sector. It is particularly pleasing to see that there is now some better balance in contractual relationships, and that there is no relaxation in attitudes to Safety and Environmental issue. This is particularly rewarding as there is clearly recognition that these issues have a positive impact on business. The fact that such a high proportion of respondents have indicated further overseas development is a very good indicator not only for Scotland but also for the rest of the UK.

"However, a note of caution should creep in here. Measures should be taken to ensure that the UK continues to be a good place to invest in and that a good level of investment in the UK is encouraged. Even in buoyant markets investment resources are finite. With excellent opportunities presenting themselves abroad, this may not be at the expense of the UK such that investment migrates away from our own back yard."

Background information

• The latest UKOOA Economic Report 2006 showed that in 2004, the oil and gas industry contributed 13% of the gross value added (GVA) of all UK production and manufacturing industries.
• Investment and expenditure through the supply chain also made valuable impact, adding a further £12billion in GVA to the UK economy.
• The oil and gas industry is a vital contributor to the UK economy, creating more wealth than any other production or manufacturing industry.

Aberdeen and Grampian Chamber of Commerce is North East Scotland's leading private-sector, member-focused, business organization. The Chamber represents more than 1200 businesses with 86,000 employees covering all industry sectors and ranging in size from sole traders to multi-national corporations. The Chamber works at local, national and international level to provide a comprehensive portfolio of business services, support and advocacy.