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SMEs – the future of UK offshore oil & gas?

The UK oil and gas industry needs to undergo radical change to assure its long term survival.

Opportunities

The cost of oil and gas operations on the UK Continental Shelf (UKCS) has more than doubled over the last five years. No other basin in the world has seen such rapid cost inflation. The UKCS is now the most expensive province in which to operate, so that UK oil and gas fields were among the first to become unprofitable as the oil price fell (Oil and Gas UKBBC). Even the current recovery in oil price to $40/bbl does not cover the unit operating cost for 15% of companies in the UKCS, and would only bring back 20% of 2015’s 1.48 billion boe decline in unsanctioned UKCS reserves (Oil and Gas UK).

The UKCS no longer looks like an attractive investment proposition.

The UK oil & gas industry has strategic importance for the UK’s energy security and long-term economic outlook.

The UKCS continues to satisfy just over 50% of the UK’s oil and gas demand. Oil and Gas UK estimate that the UKCS currently supports around 375,000 jobs, most of which are highly skilled and well paid. The supply chain in the UK generated over £39 billion of sales in 2013, including over £16 billion of export of goods and services, with similar figures estimated for 2014.

The UK Government is committed to supporting the oil and gas industry in the form of the Oil and Gas Association which engages with the oil industry to drive down costs, improve efficiencies and to maximise economic recovery of the UK’s offshore oil and gas reserves. Under the Petroleum Act 1998 (as amended by the Infrastructure Act 2015) the Secretary of State has a duty to set out strategy for “maximising the economic recovery of UK petroleum”. The first Maximising Economic Recovery (MER) UK draft strategy is currently under parliamentary review prior to its adoption in April 16. The MER UK strategy has obligations that will be binding on all relevant parties, these include an emphasis on the adoption of new and emerging technologies and on collaborative approaches.

The Government and the UK oil and gas industry run a joint programme – PILOT – focused on the long-term future and full economic recovery of the UKCS. Current working groups are:

  • Access to infrastructure
  • Access to capital
  • Increased/enhanced oil recovery
  • Technology
  • Exploration

The North Sea oil & gas industry is driving for change

The immediate response to the oil price crash has been short-term cost cutting, and not just in the North Sea. Wood Mackenzie‘s survey of 44 oil and gas exploration and production companies shows an average reduction of 25% in global worldwide capital budgets from 2014 and 2015. Much of this cost reduction has been done by transferring pressure to the supply chain in the form of rate cuts and contract re-negotiations. As a result many suppliers have seen their profit margins collapse – with a number of large suppliers experiencing negative margins.

This is not a sustainable way forward.

According to Oil and Gas UK, genuine industry transformation can only be achieved through true co-operation and a cultural change in the shape of collaborative working between operators, major contractors and small to medium sized enterprises (SMEs – staff headcount of <250 and an annual turnover of ?€ 50m according to EU definition). Unions, governments, regulators and trade associations also play a part. However they claim that such a transformation may take between 12 months and three years to achieve:

UKCS transformation

As the first step on this journey, Oil & Gas UK’s Efficiency Task Force (ETF) was formally launched in September 2015 with a focus on:

  • Business Process
  • Standardisation
  • Co-operation, Culture and Behaviours

The Scottish Oil & Gas Industry Leadership Group’s (SOGIL) Strategy 2016-2020 identifies the following Strategic Priority Areas:

  • Supply Chain – Domestic
  • Supply Chain – International
  • Innovation
  • Invest in Success
  • New Opportunities
  • People and Skills

SMEs are key to the transformation of UKCS

“The challenge of seeing beyond traditional methods and finding ways to share innovative working practices with the rest of the industry is great and will require a very different approach from all players.” Oil & Gas UK

“A transformational process is required within the supply chain – this will encourage the whole supply chain to introduce innovations that transform the way that the industry as a whole does business. It will create an entrepreneurial dynamic within the supply chain. It is vital that ‘entrepreneurial disruption’ takes place to drive innovation, reduce cost and increase value.” Scottish Enterprise

SMEs are perfectly placed to meet these behavioural and organisational challenges and can provide:

  • Knowledge, creativity, innovation & challenge – access to wide variety of industry experience, including expert knowledge-base residing in semi-retired constituency, not tied to one corporate way of doing things, small high performing teams

  • New technology – funding from the UK Government (Innovate UK) and oil & gas operators (e.g. Shell Game Changer) supports SMEs in bringing new ideas to market

  • Collaborative problem solving – ETF case studies show the impact of clients engaging with SMEs to solve problems that overlap both organisations

  • Flexibility and efficiency – low overheads, access to large resource pool allows quick response to requests, no scope too small, SMEs can handle “portfolio” of small projects

These features are attractive enough to make even the largest oil companies wonder whether SMEs might offer a more capital effective way of executing small pieces of work. New more agile execution models may allow for work-scopes to move from an SME to a major oilfield service provider or vice versa at different points in the project life-cycle, dependent on who is best placed to execute the work. The figure below shows the strategic area that SMEs could occupy:

Opportunities for SMEs in UKCS

 

SMEs – Risks & Opportunities

EY have warned that many of the small and medium sized enterprises that help oil and gas companies run their North Sea operations will face a struggle for survival this year. Consolidation in this environment will be inevitable and up to one third of the 1500 UK registered oilfield services companies may disappear from the market. KPMG predict that companies from the United States will take this opportunity to snap-up North Sea expertise.

SMEs focused solely on the North Sea are experiencing significantly greater declines than the top 100 global oilfield services companies. While they may have a key role to play in the new oil and gas landscape, survival is the first priority. The UK Government and UK oil & gas producers need to step up and play their parts to safeguard the innovative and entrepreneurial supply chain that is OGIL’s and Oil and Gas UK’s vision for the future.

But beyond simply surviving, opportunities exist for SMEs to start playing a part in the industry transformation, and re- positioning themselves to claim their new strategic area:

  • Cost reduction: value programmes, focus on critical activities, use of technology including IT, risk management, long term strategic planning for lower oil price

  • Create a core set of standardised or modularised products

  • Collaborate with clients and competitors – develop novel business models

  • Challenge client practices and standards – can the same objectives be met at lower cost?

The North Sea should take inspiration from the wider SME community. At the start of 2015 Entrepreneurial Spark, a business incubator scheme, reported an 86% survival rate in its first three years. Here’s part of the speech from their 2015 awards dinner:

“Here’s to the crazy ones, the misfits, the rebels, the ones who see things differently. They’re not fond of rules.

You can quote them, disagree with them, glorify or vilify them. But the only thing you can’t do is ignore them, because they change things.

And while some may seem them as the crazy ones, we see genius – because the ones who are crazy enough to think that they can change the world are the ones who do”.