Oil price collapse will hurt North East offshore sector but companies are prepared

North East Offshore firms braced for difficult times, but know that industry will recover

Petrol pump
Petrol pump

The first reported North East casualty of the oil price fall was drilling expert Archer, which recently said it was closing its Blyth office with the loss of 70 jobs.

This week subsea specialists Flexlife said it was considering the future of its Tyneside office, which had employed over 20 people at its peak.

With the oil price in freefall there will no doubt be others, and the shape and nature of the region’s offshore industry looks set to irrevocably change over the coming months and years.

Nevertheless, many senior North East industry figures are doing their best to manage this latest cyclical downturn, whilst not losing sight of the opportunities it presents to position themselves for the inevitable upturn that will follow.

Robin Allan, chairman of the independent explorers’ association Brindex and a Premier Oil executive, recently said the price drop made it “almost impossible to make money” and warned of a collapse in the industry.

One senior North East offshore industry executive echoed these sentiments when he said: “What we are witnessing is a really serious threat to the UK offshore industry.”

Right now contracts which businesses had previously thought were in the bag are being shelved, and many are being asked to take up 20% of the costs out on contracts already won.

Jobs and salaries are being cut, with businesses advisors EY expecting a 35,000 reduction in headcount, although it said 12,000 new people will be needed to replenish retirements. Oil major ConocoPhillips recently said it was cutting 230 out of 1,650 UK jobs.

Bryan Bunn, managing director of Wynyard-based engineering consultants Nortech, says operators are deferring new capital expenditure while those that are already committed are going ahead, but with some cost reductions.

This will have an impact on turnover, but margins should remain unaffected if the cost cuts are implemented across the board.

He said: “This is a cyclical industry, this is the third downturn I have experienced and the same things are happening.

“Companies that are cash rich can play a long game and maybe look at potential acquisitions, while the weaker companies may be looking for a merger partner.

“The knock-on effect of the oil price fall for the North Sea is that the supply chain has to fundamentally change the way it operates.

“In Aberdeen this rebalancing is already taking place. Cost has become too high and operators and contractors are imposing reductions of up to 20%.

“It helps that we are based here in the North East as we are not part of the Aberdeen high-cost problem. We are the right size, flexible and responsive.”

Last year was a record one for operational expenditure as operators sweat their assets.

Mr Bunn said: “The improvements that ‘would be nice to have’ are being shelved, those being driven by HSE (Health and Safety Executive) will go-ahead and maintenance will have to be done, but there will be efforts to minimise the spend.”

Nortech also operates in the petrochemical sector and this is on the way up, as its commodity costs (mainly oil and gas) fall.

He added: “There is still a lot of oil and gas out there but the North Sea is now a mature market and we’re seeing restructuring and improvements in the way it is being delivered.

“The market may take a while to rebalance and find a new level at which it can operate. When that happens, it will be game on once more. We’re expecting a tough 2015, but would expect to see things pick up at the end of the year.”

One senior North East industry figure, who chose to remain unnamed in order to speak candidly, said he expected to see job losses and some ‘dramatic’ changes in the regional supply chain as a result of the upheaval.

“The profit margin in the industry is something like 5 to 15%, perhaps 20% for some, but with the selling price dropping by 50% it’s not hard to work out that the sums don’t add up anymore. If the price continues to bump along at this level then for many the sums become unsustainable.

“We will see some companies going bust, but for those that survive they will have a pick of a pool of skilled people and these have been in short supply. This could have a dramatic impact on the supply chain.”

Andrew Esson, managing director of subsea supplier Quick Hydraulics of North Shields, said the stress being caused by the oil price fall was beginning to impact business.

He gave an example of a major order which had reached the point of being signed off, but was shelved at the last minute pending a recovery.

He said: “Other customers are saying the falling oil price will drive a step change in the industry. Some have been told they need to deliver a 20% reduction in contractor services which can have a knock-on effect to the North East supply chain

“If there are any further falls, to say $20 a barrel, then that would have major impacts on their investment decisions, and that will have major impacts on companies like ourselves.”

He says some of the manufacturers are busy, with some saying they have four years of orders on the books.

“In the last few years as the market has overheated, and with skilled labour in short supply, a bottleneck developed in the industry and unless these orders are cancelled this work will help some companies.

“Projects are still going on where the money has been allocated, and operational expenditure will still be needed to secure the reserves and make sure assets are performing.

“While there are concerns over some of these with the oil down to less than $50 dollars a barrel, there is a time lag and the price may have returned to a higher level when they come on stream.”

Esson, who was in Aberdeen this week with three days of meetings with new potential clients, recalls when oil slumped to $20 dollars a barrel in 1980s and how it led to renewed efforts to work harder and make the most of all opportunities

“Many businesses refocused their efforts and continued to grow despite the upheaval,” He said. “The industry won’t shut down over night there are still some excellent opportunities in the oil and gas industry, more so than in some of the energy sectors such as nuclear and offshore wind.”

Paul Charlton is chief executive office of Hexham-based PDL Solutions, an offshore engineering design and analysis consultancy. He is also chairman of Durham-based supply chain representative body NOF Energy.

He said: “Anyone who thinks the softening oil price will not affect North East supply chain companies is mistaken. All of the operators are looking at all of their investments.”

“Companies have to be cognisant of the impact this will have on new developments, as well as being aware that those that have already passed the final investment decision phase are also going through a fundamental review process. No-one will be immune from this.”

George Rafferty, chief executive of NOF Energy, said: “Our members are keeping a watching brief on the current oil price; however they are very much focussed on the long-term future of the offshore sector.

“The sector will recover and innovative and flexible supply chain companies, including those in the North East, which are experienced at operating within a fluctuating industry, have the ability to deliver agile and innovative services that can meet the future scale and requirements of the UKCS.”

Offshore industry veteran Tony Trapp, founder and managing director of Northumberland-based Osbit Power, has witnessed many of the ups and down of the industry at first hand.

He summed up the mood of the North East industry as one of looking to brighter times over the horizon, whilst steeling itself for the immediate fight that lies ahead.

He said: “The North East offshore industry has made very impressive progress over the past five years with major investments being made in people, facilities and businesses.

“While the low oil price will benefit most parts of the economy and add to UK prosperity in general, those businesses actively involved in offshore energy markets will be under great pressure to reduce cost and become more competitive.

“Contracts are being delayed and projects postponed. Businesses will aim to reduce costs and overheads and consolidate. But past experience is that a more vibrant and competitive industry emerges from these periods of uncertainty.

“Some businesses, and some people will suffer in the process, but many new opportunities will emerge. Just look at the progress that has been made in the North East region over the past five years since the last oil price crash. The same thing can happen again.”

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