Activity Survey 2015

ACTIVITY SURVEY 2015

7. Supply Chain Perspective Thousands of businesses across the UK provide goods and services to the exploration and production (E&P) companies operating offshore, which has enabled the extraction of more than 43 billion barrels of oil and gas over the last five decades. These companies provide highly skilled, well-paid employment for hundreds of thousands of people across the UK and rely on a stable home market to provide a foundation for their international businesses. As a measure of its success, the UK supply chain achieved a turnover of more than £35 billion in 2012, 40 per cent of which was in the export of goods and services around the world, accessing a global energy market. This is an achievement the UK should be proud of. Over the last four years, rapid growth in expenditure on the UKCS has placed considerable demand-side pressures on the supply chain. This has been exacerbated as the recent record investment comes after a prolonged period of much lower expenditure over the last decade, when previous tax increases had deterred much needed investment in the UKCS and reduced the productive capacity of the supply chain. In the last year, awareness of cost pressures became more widespread and has resulted in the introduction of cost reduction initiatives outlined in section 6.6. Lower oil prices have now sharply reduced production revenues and both operators and their supply chain have had to adjust quickly to the new market conditions. The supply chain will inevitably have to reappraise its UK business and, in many cases, seek to accommodate lower domestic demand as well as downward pressure on costs. This may encourage many in the supply chain to place a greater priority on their export markets to provide some protection against a declining local market. In what is inevitably a cyclical business, given the volatility in oil and gas prices, fiscal and regulatory stability on the UKCS are as important for the wider supply chain as for the E&P companies. The ability to sustain investment on the UKCS throughout the cycle is crucial and has at times been made harder by the impact of policy changes by successive governments. If spending on the UKCS declines over the coming years, as is currently anticipated, there will be consequences for the wider supply chain and it is inevitable that many companies will migrate overseas in search of new markets, diminishing the value of their contribution to the UK economy.

page 50