Well Services Report 2014
WELL SERVICESCONTRACTORSREPORT2014 OIL&GASUK
WELL SERVICES CONTRACTORSREPORT 2014
WELL SERVICESCONTRACTORSREPORT2014
Contents
1. 2. 3. 4.
Foreword
5 6 7 8 8
Summaryof KeyFindings
Introduction Financial Data
4.1. 4.2.
GrossRevenue
EarningsBefore Interest, Tax, Depreciation andAmortisation (EBITDA)
9
4.3.
Capital Investment and NewTechnologySpend
10 11 11
5.
SectorResources
5.1. 5.2.
UKEmployees
GraduateEngineers, Technicians andApprentices
12 13
6. 7.
Operational Issues
UKGovernment/Industry Initiatives andOrganisations
14 15 15
8.
TheWell ServicesContractors Forum’sMission
8.1. 8.2.
GainingRecognition for Technology Promoting theAlignment ofObjectives withOperators, Suppliers andother Contractor Companies EncouragingEfficient Contracting Processes
16
8.3.
17 18 18 19
9.
TheFutureOutlook
9.1. 9.2.
DegreeofOptimism
Major Challenges andSuggestedActions
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WELL SERVICESCONTRACTORSREPORT2014
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1. Foreword
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Thankyou for taking thetime to read the 2014Oil&GasUKWell ServicesContractorsReport .Wehopeyoufind it both informativeand interesting.
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Thewell servicescontractor sector isof considerable importance to theUKoffshoreoil andgas industry,providing significant levelsof investment, revenueand jobs. This report, compiled froma surveyof themember companies inOil &Gas UK’sWell Services Contractors Forum, provides insight into the sector’s performance and confirms that well services contractors represent an important proportion of the £35 billion supply chain, as outlined by Oil&GasUKandEY in the report releasedon the UKUpstreamOil andGas SupplyChain–EconomicContribution inApril 2014. In 2013, thewell services contractor sector recorded gross revenue of $3.2 billion (£2.06 billion), which includes revenue from two additional companies compared to last year’s survey. A like-for-like comparison between the companieswhichparticipated in this year’s and last year’s report indicates amarginal decrease in gross revenue from 2012 to 2013 but reflects an overall strong performance since 2010. Meanwhile, capital investment in the sector in 2013 was the highest on record since 2008 at $212.5 million (£136 million), with spend on new technologies accounting for nearly27per cent of this total. Thesefigures havebeenachieveddespitea record low inexplorationdrillingactivityon theUKContinental Shelf (UKCS) over the past three years, demonstrating the breadth of services offered by well services companies. Respondents to the survey report strong demand for remediation, redevelopment and intervention support for existingwells. The sector also provides a significant level of employment, with over 15,000 jobs supported byUKwell services contractors in2013.Aparticularlyencouragingstatistic isthecontinued increase intherecruitmentofapprentices, which shows that the sector is committed to thedevelopment of newemployees. Levels of optimism among well services companies were high in 2013 and are expected to remain within the positive territory despite an expected decrease in 2014. Overall, there is a strong degree of confidence in the future of theUKwell services contractor sector given the high levels of activity on theUKCS and the belief that the Wood Review will result in operational improvements across the basin and an increase in exploration rates. However, there are challenges to be overcome, such as rising operating costs and difficulties in recruiting and retaining skilledpersonnel.
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JorgenBerg Chair ofOil&GasUK’s Well ServicesContractors Forum
OonaghWerngren OperationsDirector, Oil&GasUK
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WELL SERVICESCONTRACTORSREPORT2014
2. Summaryof KeyFindings
This report highlights the followingkeyfindingsobservedwithin theUKwell services contractor sector in2013:
•Gross revenue for the sectorwas $3.2billion in2013.
•The sector earningsbefore interest, tax, depreciationandamortisation (EBITDA)were$482million in2013, with theEBITDAmargindecreasing to15per cent from18.5per cent in2012. This reflects the increasing costs of operationson theUKContinental Shelf.
•A like-for-like comparisonwith2012 reveals that capital investment increasedby9.7per cent in2013, representing thehighest level of capital investment from the sector since2008.
•Over 15,000peopleareemployed in thewell services contractor sector.
•Seventy-fiveper cent ofwell services contractor firms reportedan increase indemand for theirwork in2013.
•Therearehigh levelsof optimism for the futureof theUKwell services contractor sector, although it is acknowledged that the industryas awhole is facinganumber of significant challenges, suchas increased operating costs anddifficulties in recruitingand retaining skilledpersonnel.
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3. Introduction This report aims toprovidean insight into theongoingperformanceof theUKwell services contractor sector and highlights the key issues facing these companies on theUKContinental Shelf (UKCS). Thefinancial information is fromservicesprovidedtooperators indrillingandmaintainingexploration,appraisal,developmentandproduction wells, anddoesnot include thatwhicharises from thedesign,manufactureand saleof drillingequipment. Thedata for this reporthavebeencollated from responses toaquestionnaire thatwasdistributed tomembersof Oil &GasUK’sWell Services Contractors Forum. This year, an additional two companies respondedwithdata for the report,which strengthens theoverall representationof contractorswithin thepublicationandcovers thevast majority of activity in thewell services contractor sector on theUKCS. The datawere collected during February andMarch2014 1 .
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The companies surveyed include:
AkerQserv Archer (UK) Ltd BakerHughes
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ExproNorthSea Ltd FMCTechnologies Ltd Franks International GEOil&Gas Halliburton ReadCasedHole Ltd SchlumbergerOilfieldServices
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The questionnaire results are illustrated in an aggregated form and, for comparison purposes, data are shown from theearliest availabledate. Not everymember of the forumprovideddata for eachquestion.
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Currencyfigures are inUSdollars andare inmoneyof theday.
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1 An EY report (commissioned by Oil &Gas UK) on the UK UpstreamOil and Gas Supply Chain – Economic Contribution is available to download at www.oilandgasuk.co.uk/knowledgecentre/economic-contribution.cfm. The section in this report onwell services contractors encompasses databeyond themembershipof Oil &GasUK’sWell Services Contractors Forum and includesfinancial informationarising from thedesign,manufactureand saleof drillingequipment.
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WELL SERVICESCONTRACTORSREPORT2014
4. Financial Data
Companieswere asked toprovidefinancial data relating to their activity on theUKCS. This informationdoes not include revenue from thedesign,manufactureand saleofwell equipment. 4.1. GrossRevenue TheUKwell servicescontractorsectorrecordedgrossrevenueof$3.2billion (£2.06billion) in2013.Thisrepresents a4.9per cent increase from2012when gross revenuewas at $3.05billion (£1.9billion); although, it is important tonote that this increase in revenue is the resultof twoadditional companiessubmittingfinancial data for thefirst time in this year’s report. When like-for-like financial information is compared, a 2.2 per cent decrease in gross revenue isobserved from2012 to2013. Figure 1 shows that the accuracy of gross revenue forecasting has significantly improved over the previous two years. The forecast gross revenue for the sector in 2013matches the actual reported figure. For this year, gross revenue is forecast tobe$3.3billion, aprojected increaseof 3.1per cent.
Figure1:UKWell ServicesContractor SectorGrossRevenue
GrossRevenue ($Billion)
GrossRevenue (£Billion)
Previous Year Forecast ($Billion)
Previous Year Forecast (£Billion)
WellsDrilled
3.5
400
3.0
350
2.5
300
2.0
250
1.5
GrossRevenue
200
1.0
150
0.5
Number ofWellsDrilledon theUKContinental Shelf
0.0
100
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014Forecast Source:Oil&GasUK Source:Oil&GasUK
The gross revenue of the sector has increased by 45.5 per cent over the period 2010 to 2013. This growth has beenachieveddespiteadecline in thenumber ofwellsdrilled for exploration, appraisal anddevelopment on the UKCS. The total numberofwellsdrilled, including side tracks, decreasedby6.3per cent from175 in2012 to164 in 2013,whilst since2010, the total number ofwellsdrilledon theUKCShasdecreasedby14.6per cent 2 .
2 Oil&GasUK’sActivity Survey2014 is available todownloadatwww.oilandgasuk.co.uk/forecasts.cfm
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This is an indicationof thediverseworkbeing carriedout bywell services companies. Theyhave reported strong demand from operators to develop existingwells through remediation and intervention techniques, effectively demonstrating that the strengthof the sector isnot tieddirectly todrillingactivityon theUKCS.
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4.2. EarningsBefore Interest, Tax, DepreciationandAmortisation (EBITDA) Earnings before interest, tax, depreciation and amortisation (EBITDA) are an indicator of the health of a business, reflecting the operating profit before adding back the specific non-cash items of depreciation and amortisation.EBITDA isnotaproxy forcashflow, sinceEBITDAdoesnotaccount formovements inworkingcapital (stock, debtors and creditors). In 2013, EBITDAwas $482million (£308.5million), representing a 14.1 per cent decrease on the 2012 figure of $561million (£350.2million). This is 21 per cent lower thanwas forecast, indicating that the decrease in EBITDA wasunexpected.
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The EBITDA margin, the ratio of EBITDA to gross revenue, has also decreased to 15 per cent in 2013 from 18.5per cent in2012. This reflects the increase inoperating costson theUKCS 3 .
Figure2: EarningsBefore Interest, Tax, DepreciationandAmortisation (EBITDA)
6
1,000
30%
EBITDA EBITDAPrevious Year Forecast EBITDAMargin
900
7
25%
800
700
20%
8
600
500
15%
$Million
9
400
EBITDAMargin
10%
300
200
5%
100
0%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014Forecast Source:Oil&GasUK Source:Oil&GasUK
3 Oil&GasUK’sActivity Survey2014 is available todownloadatwww.oilandgasuk.co.uk/forecasts.cfm
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WELL SERVICESCONTRACTORSREPORT2014
4.3. Capital Investment andNewTechnologySpend Capital investment by the UK well services contractor sector was at $212.5 million (£136 million) in 2013, a 14.2 per cent increase on the reported 2012 figure ($186million). This is the highest level of capital investment from the sector since 2008. Even excluding financial data from the additional companies participating in this year’s report, total capital investment increased by 9.7 per cent in 2013. This increase reflects the record levels of investment in 2013 of £14.4 billion ($22.5 billion) in new and brownfield developments on theUKCS 4 . Spend on new technology was at $57million (£36.5million) in 2013, accounting for 26.8 per cent of the total capital investment. Whilst still representing a significant proportion of capital investment, this figure signifies a decrease from 41.2 per cent in 2012 and couldbe the result of the challenges in encouraging the uptake of new technologies.
Theamount of capital investment is forecast todrop to$162million in2014.
Figure3: Total Capital Investment andSpendonNewTechnology
Total Capital Spend
NewTechnologySpend
Previous Year Forecast: Capital
Previous Year Forecast:NewTechnology
400
NewTechnologyasPercentageof Capital
70%
350
60%
300
50%
250
40%
200
$Million
30%
150
20%
100
NewTechnology asPercentageof Capital
10%
50
0
0%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source:Oil &GasUK
2014Forecast
Source:Oil&GasUK
4 Oil&GasUK’sActivity Survey2014 is available todownloadatwww.oilandgasuk.co.uk/forecasts.cfm
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5. SectorResources 5.1. UKEmployees
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In 2013, 15,339 people were employed in the UK well services contractor sector. Although this represents a 12.5 per cent increase from 2012 (13,635), this is due to the inclusion of employment data from two additional companies this year.
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Despitewell services companies citinga shortageof skilledpersonnel andhighattrition ratesasakeyoperational constraint, employment levelshave remained consistentlyhigh since2006.
Attrition rateswithin thewell services sector (the staff turnover) increased to 12 per cent in 2013; this is largely drivenbyemployeesmovingbetweenwell servicesfirms andnot necessarily leaving the sector.
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Well services companies report that international demand forUKemployees is high, demonstrating the strength of theUKworkforce.
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Figure4: Total Employmentwithin theUKWell ServicesContractor Sector
16,000
10%
Total Number ofUKEmployees Previous Year Forecast PercentageofUKEmployeesAgainstWorldwide
6
9%
14,000
8%
7
12,000
7%
10,000
6%
8
8,000
5%
4%
6,000
Number ofUKEmployees
3%
9
4,000
2%
PercentageofUKEmployeesAgainstWorldwide
2,000
1%
0
0%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014Forecast
Source:Oil &GasUK
Source:Oil&GasUK
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WELL SERVICESCONTRACTORSREPORT2014
5.2. GraduateEngineers, Technicians andApprentices The total number of technicians (1,846) and graduateengineers (1,315) employedwithin the sector has declined by17per cent and23per cent respectively, however, theoverall levels are in linewith the long-termaverage for the sector. Despite the overall decline, there was a 15.3 per cent increase in new graduate engineers recruited in 2013. There has also been a continued rise in the number of apprentices employed (244 in 2013) 5 , which is expected to increaseby a further 28.3per cent in2014. Thesefigures demonstrate that despite thedifficulties in retaining employees,well services companies are committed to recruitinganddevelopingnew staff.
Figure5:Number of Technicians, GraduateEngineersandApprentices
2,500
Total Number ofGraduateEngineers Total Number of Technicans Total Number of Apprentices Number ofNewGraduateEngineersRecruitedDuring theYear Number ofNewTechniciansRecruitedDuring theYear Number ofNewApprenticesRecruitedDuring theYear
2,000
1,500
1,000
Number of Employees
500
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014Forecast
Source:Oil &GasUK
Source:Oil&GasUK
5 Figures for recruitment of apprentices areonlyavailable from2012
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6. Operational Issues
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Respondents to the surveywereasked toprovidean insight into theoperational issues that they currently face.
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Seventy-five per cent of respondents reported an increased demand for their services in 2013, illustrating that there is a significant level of demand for such serviceson theUKCS.
Eighty-eight per cent of companies reported difficulties in attracting and retaining experienced staff, with 75 per cent of companies outlining that activity outside the UK is resulting in a shortage of personnel and equipment for activitieson theUKCS. However, relevant safety and environmental issues are largely not creating operational constraints. This shows that safety andenvironmental responsibilities areanacceptedaspect ofwell services contractors’ operations on theUKCS.
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Figure6:Operational Issues
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Is increasingactivityoutside theUK creatinga shortageof equipment andpersonnelwithin your organisation?
25%
75%
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Doyouexperienceoperational problems as a result of environmental constraints?
12%
88%
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Do safety requirements causeanydetrimental operational issues?
100%
8
Doyouhavedifficulties recruitingand retaining skilled staff?
12%
88%
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Was there increaseddemand for your services in2013 in comparison to2012?
25%
75%
2013Yes 2012Yes
2013No 2012No
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%100%
Percentageof Yes orNo
Source:Oil &GasUK
Source:Oil&GasUK
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WELL SERVICESCONTRACTORSREPORT2014
7. UKGovernment/Industry Initiatives andOrganisations Well servicescompanieswereaskedtoratethe importanceandeffectivenessofanumberofgovernment/industry initiatives and organisations, which have been established to encourage improved safety standards, drivemore efficient businesspractices and stimulate increased collaborationacross the industry.
Respondents identified the fourmost important initiatives and organisations as Step Change in Safety, Industry Mutual HoldHarmless (IMHH) Agreements,Oil&GasUKandValueContracting.
With regards to effectiveness, the highest rankedwere Step Change in Safety, Oil &Gas UK, IMHHAgreements and theSupplyChainCodeof Practice (SCCoP).
While a number of initiatives and organisations are deemed important, respondents ranked several as being largely ineffective, suggesting that increased effort is required to improve their success. Dialogue between the Well ServicesContractorsForumandanumberof thesebodies is inprogress toensure therequired improvements are implemented.
Figure7: ImportanceandEffectivenessofUKGovernment/Industry InitiativesandOrganisations
4.0
3.5
3.0
2.5
AverageRating
2.0
1=Poor 4=Good
1.5
1.0
2013 Importance
2013Effectiveness
Rating=Neutral
2012 Importance
2012Effectiveness
Source:Oil &GasUK
Source:Oil&GasUK
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8. TheWell ServicesContractors Forum’sMission
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TheWell ServicesContractors Forumhas four keyaims:
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•Gaining recognition for technology •Promoting thealignment of objectiveswithoperators, suppliers andother contractor companies •Challenging thebarriers tomaximise recoveryofUKCS reserves •Encouragingefficient contractingpractices
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Respondents to the surveywereaskedquestions surrounding thedeliveryof these four keyaims.
8.1. GainingRecognition for Technology
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Well services companies believe that in recent years there have been significant advances in technologies developedwithin the sector and industry support for thishas remainedstable.
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The rewards received for value-adding technologies is expected to increase in 2014, but despite this, the overall usageof existing technologies is expected todecline.
The survey also reveals that a number of companies believe that increased use of risk/reward contracts would enhance industry’s recognition of the benefits of developing and introducing new technologies. This includes a significant positive impact on aspects such as the recovery efficiency of hydrocarbons andmay lead totime and cost savings.
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Figure8: Recognitionof Technology
Good
Useof ExistingValue-‐AddingTechnologies Support forDevelopment ofNewTechnologies Reward forValue-‐AddingTechnologies
8
Fairly Good
9
Neutral
AverageRating
Fairly Poor
Poor
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source:Oil &GasUK
2014Forecast
Source:Oil&GasUK
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WELL SERVICESCONTRACTORSREPORT2014
8.2. Promoting the Alignment of Objectives with Operators, Suppliers and other Contractor Companies The survey shows that there is significant room for improvement in termsof alignment between thewell services contractors’ objectives and those of the operators and supplier companies. Further collaboration is required within the industry tomaximiseeconomic recoveryon theUKCS. Well services companies have reported improved alignment with other contractors within the supply chain, however, there is still scope for further improvements, specifically with regards to communication and sharing experiences andbest practices.
Figure9: Alignment ofObjectiveswithOperators, SuppliersandOther Contractors
Excellently Aligned
Alignment of Company/OperatorObjectives
Alignment of Company/SupplierObjectives
Well Aligned
Alignment of Company/Other ContractorObjectives
*newlyaddedquestion in the2013 survey
Aligned
Poorly Aligned
Not Aligned
Source:Oil &GasUK Source:Oil&GasUK
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8.3. EncouragingEfficient ContractingProcesses
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The well services contractor sector continues to consider IMHH Agreements and LOGIC Standard Contracts as being themost effective initiatives for promotingefficient contractingprocesses.
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In contrast, reasonable levels of liability, the reduction of bureaucracy, the use of risk/reward contracts and the well servicesmodel ITTare identifiedasbeingunderusedwithin the industry.
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The survey has revealed a generally improving trend in the use of these initiatives, but there is room for greater commitment to them inorder to improveefficiency, by simplifyingprocesses and reducing costs.
Figure10: Initiatives toEncourageEfficient ContractingPractices
4
Useof LOGICStandardContracts Useof IndustryMutual HoldHarmlessAgreements ReasonableLevelsof Liability Reductionof Bureaucracy EffectiveUseof Risk/RewardContracts UseofWell ServicesModel ITT
Good
5
6
Neutral
7
AverageRating
8
Poor
9
Source:Oil&GasUK
Source:Oil&GasUK
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WELL SERVICESCONTRACTORSREPORT2014
9. TheFutureOutlook 9.1. DegreeofOptimism
In2013,well servicescontractors reportedhigh levelsofoptimism for the future.Despiteanexpected reduction in overall levelsof optimism in2014, there remains a significant degreeof confidence in the sector. This reflects the high levels of activity on theUKCS and thebelief that the WoodReview 6 will result inoperational improvements across thebasinandwill stimulatean increase in the currently lowexploration rates. The forecast decrease in optimism in 2014 is in linewith the trend identifiedwithin the quarterly Oil &Gas UK Business Sentiment Index . This is largely being driven by high operating costs on theUKCS, a shortage of skilled personnel and the current low levelsof explorationdrilling.
Figure11:DegreeofOptimismabout theFutureof theUKWell ServicesContractor Sector
Very Optimistic
Optimismfor theFuture
Optimistic
Neutral
AverageRating
Pessimistic
Very Pessimistic
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source:Oil &GasUK
2014Forecast
Source:Oil&GasUK
6 TheWoodReview ‘UKCSMaximisingEconomicRecovery: Final Report’ is available todownloadat www.woodreview.co.uk
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9.2. Major Challenges andSuggestedActions
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Although there is optimism for the future, there are a number of challenges facing thewell services contractor sector and theUKoffshoreoil andgas industryas awhole.
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Increasingoperatingcostsareseenasakeychallenge.The Oil&GasUKActivitySurvey2014 7 revealsthatoperating expenditure on theUKCS increased by 15.5 per cent in 2013, with a further increase of 7.9 per cent forecast for 2014; a trendwhich isbelieved tobeunsustainable in the long term. The new consultation with HM Treasury on an ultra high pressure high temperature (uHPHT) tax allowance is welcomedby thewell services contractors,with theexpectation that thismeasurewill stimulatenew investment in uHPHT developments. It has also been suggested that tax benefits for the development of new technology wouldhavea significant benefit indrivingefficiencies throughout the industry. However, the announcement of the bareboat charter tax measure, which is expected to significantly increase operatingcostson theUKCS, isa factor that isdampeningoptimismwithin thesector. Thewell servicescompanies welcome the announcement in the 2014 Budget that theUKGovernment will conduct a full review of the fiscal regimeof theUKCS. The full implementationof the WoodReview 8 isalsoconsideredpivotal inensuring the futureof theUKCS. Anew, strongand fully resourced regulatorybodyhasbeenwelcomedby the sector, in thehope that thiswill encourage new investmenton theUKCS, stimulatedrillingactivityandenforcegreatercollaboration throughout the industry. It is also hoped that greater improvements in efficiency and opportunities for collaboration, in addition to alignmentof objectives throughout the industry, canbeachieved through improving theeffectivenessof industry initiatives andorganisations.
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7 Oil&GasUK’sActivity Survey2014 is available todownloadatwww.oilandgasuk.co.uk/forecasts.cfm 8 TheWoodReview ‘UKCSMaximisingEconomicRecovery: Final Report’ is available todownloadat www.woodreview.co.uk
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WELL SERVICESCONTRACTORSREPORT2014
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WELL SERVICESCONTRACTORSREPORT2014 OIL&GASUK
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ISBN1903004292 ©2014TheUKOil andGas IndustryAssociation Limited, tradingasOil&GasUK
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