Economic Report 2016 - Oil & Gas UK

6.1 Overview

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Although the fall in price and turbulence in the upstream sector began in mid-2014, the impact on the supply chain is being felt most sharply this year as existing contracts expire and future orders are scarce.

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Figure 34 below reveals an estimated overall reduction in revenue across the supply chain of 10 per cent in 2015, with a further fall of 21 per cent forecast this year, taking the market to below £30 billion for the first time since 2010.

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Figure 34: UK Supply Chain Financials by Sub-Sector

Currency £ million Reservoirs

2011

2012

2013

2014

2015E

2016E

2017E

4

1,092 6,360

1,219 7,298

1,355 7,776

1,244 8,020

878

643

680

Wells

5,937

3,764

4,389

Facilities

10,089

11,475

13,125

13,135

14,100

10,709

10,905

Marine and Subsea Support and Services

5

8,420

8,993

10,275

10,991

9,500

8,424

7,125

5,578

6,297

7,254

7,554

6,462

5,639

5,722

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Total

31,539

35,282

39,785

40,944

36,877

29,179 (21%) 2,209

28,822

% Change

12%

13%

3%

(10%) 3,312

(1%)

EBITDA EBITDA margin

2,870

3,534

4,065

4,196

2,190

9%

10%

10%

10%

9%

8%

8%

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Source: EY

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Further analysis by sub-sector reveals that certain areas of the supply chain have been impacted more quickly and severely than others. Areas exposed to significant falls in capital expenditure and exploration activity, namely reservoirs, wells, and marine and subsea, have seen revenues and profits erode at a greater rate. However, the facilities segment and some support and services companies were bolstered by the UKCS’ strong production performance in 2015. Indeed, facilities is the only sub-sector of the supply chain estimated to have experienced year-on-year growth in 2015 in terms of revenue, albeit with significant margin decline. This performance is dominated, however, by large international companies and so may not be reflective of the state of smaller UK-focused companies. Small and mid-sized companies will likely have been impacted by the downturn to a greater extent due to less diversity in their revenue streams and customer base, as well as a more limited ability to reduce costs. The indicated reduction in this area of the supply chain in 2016 appears more broadly consistent with the market. Excluding revenue from the facilities segment, the UK supply chain contracted by as much as 18 per cent in 2015. Figure 34 also highlights the sharp drop in EBITDA during 2015, which, unlike revenue, has been experienced across all segments of the supply chain. Non-essential expenditure and capital projects on the UKCS have frequently been cancelled or delayed amid significant pricing pressure, with reduced activity levels and the costs of reorganisation

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