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Oil and gas contractor prospects secured by record levels of North Sea investment

Oil and gas contractors have a strategically secure future “for decades to come” as a result of record levels of capital investment to develop new oil and gas fields in the UK Continental Shelf (UKCS). Capital investment in the North Sea is predicted to reach £13.5 billion during 2013, a rate of investment “not seen since the 1970s”.

This is according to Oil & Gas UK’s Economic Report 2013, which also highlights the potential of undiscovered reserves. These could create tens of thousands of new contracts and jobs throughout the supply chain to support exploration and production.

Oil & Gas UK’s chief executive Malcolm Webb says a refocus of government policy “has given investors the confidence to develop new fields and redevelop older fields, so we are now seeing the highest-ever investment”.

The result, Webb adds, is “heightening the business opportunities for the UK’s world-renowned supply chain and … boosting employment to 450,000 jobs across Britain”.

However despite the investment, production productivity in the North Sea has dropped sharply, which means falling oil prices may put the economic viability of some fields at risk, threatening premature shut down, decommissioning and lost contracts.

Investment in a smaller number of larger fields

Oil & Gas UK believes that capital investment during 2013 “is almost certain to be an all time record”. The focus has been on smaller numbers of larger projects, with 30% of capital investment during 2012 spent on only four fields.

This trend is expected to continue during 2013, when the high point of several field developments coincide. The demand for oil and gas contractor services is equally likely to be unprecedented as operators and supply chain companies compete for scarce skills.

The introduction of tax breaks during 2009 has increased investor confidence, and the impact of the Macondo well explosion in the Gulf of Mexico has led many operators to invest heavily in asset integrity to reduce the likelihood of production downtime.

Technology has also played a major role in enabling harder to extract reserves to become economically viable. However, the technology developed to extract these reserves is typically capital intensive, and requires expensive niche skills from contractors and workers to implement.

Reversing the decline in exploration and production

Oil and Gas UK predicts a reverse in the deep slump in exploration, the lowest for a decade during 2012, citing Department of Energy and Climate Change (DECC) data suggesting that there may be between six to 17 billion barrels of oil equivalent (boe) of ‘yet-to-find’ resources.

Despite impressive investment in new developments, the production efficiency of existing assets remains in worrying decline

Malcolm Webb, Oil & Gas UK

The surge in exploration activity, which will lead to a corresponding surge in oil and gas contractor demand, is expected during 2013 with 37 exploration wells and up to 20 appraisal wells forecast.

Production levels fell sharply during 2011 and 2012, in part as a result of the asset integrity work that should eventually lead to longer-lived and more reliable production. As Webb highlights, a combination of resumed production and new fields starting to produce will reverse the decline.

“We anticipate that 15 fields, with combined reserves of 470 million boe, will come onstream in 2013,” says Webb. “The Banff, Gryphon and Elgin fields are also coming back onstream, but over the year production is now forecast to fall to a range of 1.2 to 1.4 million boepd [barrels of oil equivalent per day].”

The threat of decreasing productivity

A fly in the ointment for contractors in the Economic Report is that North Sea productivity is falling rapidly. Webb explains: “Despite impressive investment in new developments, the production efficiency of existing assets remains in worrying decline.”

The falling productivity occurred during a period of high investment, high oil prices and record numbers of man-hours worked offshore. The concern is that if oil prices fall significantly, some fields will become uneconomical to run.

The result would be lost contracts and jobs, and cancelled investment into developing marginal fields that require expensive, capital intensive technology solutions to maximise production, with a knock-on impact on contracts and jobs in the supply chain.

But despite the threat of falling oil prices and the impact on productivity, Webb remains upbeat about the UKCS’s, and oil and gas contractors’, prospects: “The [oil and gas] industry is the UK’s largest industrial investor and contributor to gross value added.

“With 15 to 24 billion barrels of oil equivalent still remaining to be developed, the UKCS possesses great potential for contributing to economic growth for decades to come.”

Published: 27 August 2013

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