10 minute read 17 Mar 2021
Oil rig platform in the river near the mountain

How the accelerating energy transition will shape the industry’s future

Authors
Derek Leith

EY Global Oil & Gas Tax Leader

Advisor, commentator, speaker, believer, aspiring bassist and an avid Aberdeen Football Club fan.

Celine Delacroix

EY Global Oilfield Services Leader

Global Energy Sector executive. Diversity and inclusion advocate. Mother and wife.

10 minute read 17 Mar 2021

The 10th EY annual review of the UK oilfield services industry focuses on the energy transition and the opportunities it presents.

In brief
  • The future oil price will largely be impacted by recovery from the COVID-19 pandemic, adoption of renewable energy and the impact of decarbonisation.
  • The global and UK energy sector was impacted by the pandemic in 2020 but there are signs of recovery following the vaccine roll-out.
  • The oilfield services sector has opportunities to diversify and address lower carbon emissions, as well as focusing on digitalisation and attracting talent.

Welcome to the UK energy services overview (pdf), incorporating the 10th EY annual review of the UK oilfield services (OFS) industry. This year marks a significant change, with our previous reports focused on the oilfield services industry, however going forward the underlying EY analysis will be expanded to review the wider energy services sector. Energy transition themes have been fairly prominent in our commentary for the past couple of years, but the energy transition is gathering momentum and it is important we recognise the opportunity that exists in the wider energy services sector.

In this report, EY professionals review the 2019 trading performance of UK registered companies in the oilfield services marketplace and discuss the performance both in the UK and internationally in 2020 and predicted future performance of the industry. This report also explores the turnover, Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), exports and employee trends of five component subsectors: Reservoirs, Wells, Facilities, Marine and Subsea and Support and Services. The key highlights from the report show the turnover growth in 2019, with a rise to £28bn and an increase in exports, from 44% in 2018 to 46% in 2019.

UK oilfield services companies’ turnover

£28bn

total turnover in 2019

UK oilfield services companies’ exports turnover

46%

total turnover in 2019 (up 2% from 2018)

The four key themes are:

1. Challenging market but the recovery cycle has begun

In 2020, OFS companies had to deal with the impact of both a global pandemic and a sharp oil price decline, at a time when many were still dealing with liquidity and balance sheet issues and struggling to deploy their assets in oversupplied markets. Faced with a sharp decrease in their customer capex spend, a significant part of their focus has been on cutting costs, increasing operational efficiencies and maximising operating leverage. With capex spend expected to grow modestly in 2021, the oil price recovering and demand growing as the vaccine rollout programmes continue and the UK and other economies emerge from lockdowns, the stage is being set for a broader industry recovery in 2021 and beyond. Two months into the year, it is encouraging to see signs of this recovery emerging, with acceleration expected in H2 2021 and 2022 and beyond.

2. Focus on survival and getting fit for the future

The restructuring of the industry is unfolding and 2021 will continue to see significant cost reduction measures and rationalisation of capacity, through asset retirements, bankruptcies and consolidation. Challenging market conditions, debt and equity investors have forced greater capital discipline on operators and contractors. This is expected to continue in 2021, with companies focused on lowering their debt levels, reducing their asset intensity and remaining highly focused on returns and free cash flow generation.

3. Energy transition is more prevalent than ever

The pandemic has accelerated the allocation of capital towards sustainable companies and the energy transition of OFS companies. Environmental, social and governance (ESG) themes are increasingly at the forefront for shareholders and investors. It’s shaping the investment strategies of the oil and gas majors declaring net zero ambition and of the OFS industry which are also starting to embrace energy transition. The transition is being achieved by either following their traditional oil and gas customers or by creating their own growth avenues, depending on their skills and expertise.

The UK presents many growth opportunities related to the energy transition. With significant capital flowing into renewables, as the recent BP and Total bid for part of the UK Offshore Wind Package demonstrates,traditional OFS companies are already embracing the transition and growing their addressable markets beyond oil and gas. This shift will only accelerate in the years to come as opportunities in wind, carbon capture, utilisation and storage (CCUS) and hydrogen continue to grow.

4. Digital transition is accelerating

Globally, the adoption of digitalisation, big data and automation have increased in 2020, a trend which will continue. The benefits of digital are not only internal reduction of operating costs but also the offer of new revenue opportunities, bringing digital solutions to customers. While digital spend is accelerating, most companies have yet to reap the benefits from their digital initiatives. The UK energy sector, which is strong in the technical aspects of digital, still falls behind other sectors. A change in mindset and operational model is needed to ensure businesses work together to share ideas and combine expertise to deliver the transformational change needed.

What is certain is that, like in previous oil and gas cycles, digital technologies will drive the starting upcycle and allow the industry to reinvent itself and successfully transition from one of the worst downturns in history.

To explore all the key findings and to drill down into the data:

Red-oil-rig-platform-on-calm-blue-sea
(Chapter breaker)
1

Chapter 1

Opportunities exist in the wider energy services sector

There are reasons to be optimistic for the future, with decarbonisation and the energy transition set to make more of an impact.

Most were cautiously optimistic 2020 would be a stronger year for OFS. EY analysis recorded that 2018 had seen the first increase in revenues for UK OFS in three years, and the general sentiment was that trend would continue with an opportunity to see some margin improvement in 2020. It’s a salient lesson that no matter how well-informed you may be, unexpected events can radically derail projections. Within a matter of weeks at the beginning of 2020, the very public spat within 'OPEC plus' resulted in the abandonment of the supply-side discipline that had underpinned the oil price recovery following the collapse in late 2014. That quickly led to a cliff edge reduction in price, culminating in the much reported negative WTI oil price in the mid-year, and some instances of negative realised prices in the UKCS. Of course, the abandoning of supply-side discipline was accompanied by an unparallelled slump in demand because of the COVID-19 pandemic, which exacerbated the imbalance between supply and demand.

Almost 12 months after the fateful 'OPEC plus' meeting there are reasons to be optimistic. The Brent oil price is trending towards US$70 bbl; deferred maintenance from 2020 should largely take place in 2021; the Oil and Gas Authority (OGA) will expect to see developments sanctioned, more activity on plugging and abandonment (in light of the number of suspended wells); and there will be more emerging opportunities in relation to decarbonisation and the energy transition. However, the oil price is susceptible to global confidence in the post-COVID-19 pandemic economic recovery, and to understanding what the long-term impact of the pandemic may be on certain sectors. For example, aviation accounts for around seven million barrels of daily oil demand and it looks like that demand may be extremely slow to recover.

Speed of renewable energy adoption and the impact of decarbonisation is another factor on existing oilfield operations. The hosting of the 2021 United Nations Climate Change Conference (COP26) in Glasgow is focusing the minds of both UK and Scottish Governments and there has been a plethora of papers issued by both governments in relation to pathways to net zero. The UK Government’s approach is informed by the Climate Change Committee and its analysis.

The Sixth Carbon Budget recognises the significant role that oil and gas will play in the energy mix as we move to net zero.

In fact, the identified total demand for oil and gas between now and 2050 is very close to the total recoverable reserves from the UKCS, which means it ought to be possible, provided offshore production is decarbonised in line with industry targets, to gain the economic benefit of exploiting the UK’s remaining fossil fuel resources, while moving as quickly as possible to renewable energy. Decarbonisation of offshore production requires government support, but the benefits are the retention of security of supply, the preservation of the skilled offshore workforce and supply chain, and the creation of a pathway for that OFS skill base, innovation and entrepreneurial spirit to be pivoted to green energy.

River flowing to sea
(Chapter breaker)
2

Chapter 2

The UK oil and gas industry can commit to positive change

Energy services companies have the potential to demonstrate the delivery of low carbon solutions, with new employment opportunities.

2021 presents the UK oil and gas industry with an exciting opportunity to demonstrate its commitment to positive change as our world-class supply chain applies its expertise to deliver secure and affordable energy while driving lower carbon solutions.

Oil & Gas UK (OGUK) is championing the vital role the sector will play as the engine of technology and innovation in a diverse energy future. Achieving this goal is a huge challenge, when the pandemic and the collapse in commodity prices have majorly impacted some parts of the supply chain, including the drilling community but it’s one we can deliver.

Last year, OGUK together with industry, governments and the OGA developed a three-stage framework to help protect the industry, stimulate activity to aid the sector’s recovery, and embrace new opportunities through an accelerated transition to net zero.

Amidst the challenges faced by energy services companies, many businesses have successfully developed innovative ways of working collaboratively to deliver value to both clients and their suppliers. Real practical solutions developed in 2020 include OGUK’s Optimising UKCS Resources initiative which aims to provide suppliers with a consolidated view of future North Sea work plans; and driving improvements in invoice payment performance, underpinned by OGUK’s Supply Chain Principles. OGUK also re-energised the SME forum to support small to medium enterprises, a particularly fragile segment of our energy services community.

Our workforce has the talent, expertise and skills to strengthen the sector’s resilience and unlock further activity on the UK Continental Shelf.
Katy Heidenreich
OGUK Supply Chain & Operations Director

Energy services companies will be key to delivering the low carbon solutions of the future including CCUS, hydrogen and decarbonisation projects with huge potential for our expertise to be exported around the world.

A stable and supportive regulatory regime which aligns with governments’ new green ambitions is important and it is vital our sector’s regulatory and licensing regime remains globally competitive and that sustained investment is encouraged within a net zero context. The UK Government’s Energy White Paper highlights the critical role our industry plays in maintaining energy security in the UK and commits to the transformative North Sea Transition deal.

The deal will be essential to accelerating investment in the sector and creating employment opportunities in new technologies while reducing emissions from production. For our supply chain, this means we can make the best use of our homegrown talent, protect consumer affordability and support energy communities to adapt and thrive to capture new opportunities ahead.

Man talking with a person while seeing a big screen
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3

Chapter 3

Diversification, decarbonisation and digitalisation

There’s a positive outlook for the energy sector with future growth opportunities, but only if it addresses both investor and customer concerns.

In many ways, last year was transformational for the OFS sector. Global exploration and production (E&P) spend fell by a quarter, forcing OFS companies to adapt, reposition their portfolios in a shrinking market, and accelerate their digital journeys.

The COVID-19 pandemic has forced us to confront the global threat of climate change, shifting investor behaviour and the reallocation of capital towards sustainable companies.
Celine Delacroix
EY Global Oilfield Services Leader

The sector’s outlook appears more promising for 2021, already fuelled by higher oil prices (Brent at US$68/bbl at the time of writing), the COVID-19 vaccine rollout, and consequent growth in global oil demand. But the industry is still in crisis. With too many companies and assets competing in a shrinking market, businesses carrying too much debt on their balance sheets, and fewer interested capital providers, this crisis is unlikely to pass for some time.

What might the sector’s future hold to transition from this crisis?

Diversification is inevitable for upstream operators and contractors. Together with decarbonisation, diversification presents a great opportunity for OFS companies to:

  • Expand their addressable markets
  • Gain exposure to end markets — anticipated to experience structural growth
  • Redefine investor perceptions.

The industry must address ESG aspects head-on. That means investing in, developing, and using, all available technologies to meet these responsibilities and address investor and customer concerns. It’s technology that will continue to unlock the industry. This digital journey is unfolding across the industry at different speeds. For many, digitalisation delivered a meaningful bottom-line impact to their 2020 financial results — by leveraging it to lower internal cost structures and improve efficiencies. Others are embracing it as a key differentiator, offering another revenue stream. Whether secured through partnerships, joint ventures or alliances, what’s certain is that digitalisation is a growth opportunity for the sector and a solution to many of its challenges. Alongside diversification and decarbonisation, digital will play a key role in bolstering industry morale following these challenging times, and in attracting much needed new talent.

The full breadth of OFS has so much to offer. As companies reinvent themselves, it is time they also rearticulate their purpose — reminding people how they benefit all their stakeholders and society. While great challenges remain, those that embrace these challenges and seek to build long-term value, will help deliver sustainable returns, attract new capital, and build a brighter and more prosperous future for the industry and the world.

Petroleum platfrom in the dark ocean
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4

Chapter 4

The UK remains a great location for energy services

There are immediate challenges and opportunities, whether oilfield services companies continue to focus on oil and gas or move to low carbon energy.

Following the modest growth in 2018 and 2019, we entered 2020 hoping the momentum behind the recovery would continue to build. However, the continued legacy from the downturn in 2014, with OFS companies facing significant cost and margin pressures and many remaining over-leveraged, left limited room for manoeuvre when the COVID-19 pandemic and the oil price decline hit in early 2020. Further cost savings are likely to require more significant structural reform or consolidation and the need to preserve cash has impeded the ability to invest in new services or products, cleantech and digital.

Yet, not to underestimate these immediate challenges, the UK remains a great location to build a world-leading energy services business and sector. Oil and gas will continue to be a critical part of the energy mix both in the UK and globally.

As well as providing traditional services and products, UK companies can lead the way in helping their customers implement digital, reduce carbon emissions and develop carbon capture and hydrogen technologies.
Stuart White
Strategy and Transactions Director, Ernst & Young LLP

UK companies can pave the way in ensuring their offshore wind capabilities goes from strength to strength and represents an opportunity for UK companies to develop offerings locally that can then be internationalised. Many of the competencies, skills and talent honed serving the offshore industries can be transferred into adjacent industrial sectors.

For traditional OFS businesses there is not a one size fits all strategy. For those seeking to lower their concentration in oil and gas, they face the challenge of developing capabilities and credibility in low carbon or other end markets. For those choosing to continue to focus on oil and gas, they face the challenge of articulating a compelling proposition to attract investors and talent to an industry perceived as exposed to increasingly severe downturns, generating low returns over the cycle and with significant ESG concerns. Clear messaging on the importance of oil and gas to the energy mix, the strength of exports, success in international markets and the contribution to developing and adopting new technologies all have an important role to play.

Summary

2020 and the COVID-19 pandemic played a huge role in impacting the energy industry, as it reduced the oil price and led to many companies focusing on improving efficiencies. 2021 shows signs of recovery, following the COVID-19 vaccine rollout and increased demand.

The industry’s future will be shaped by diversification and decarbonisation, with a move to reduce emissions as we see growing opportunities in wind, carbon capture, utilisation and storage. A digital transition is also accelerating, with a change in mindset and operational model needed to reap the full benefits.

To explore the key findings and drill down into the data, read the full report here.

About this article

Authors
Derek Leith

EY Global Oil & Gas Tax Leader

Advisor, commentator, speaker, believer, aspiring bassist and an avid Aberdeen Football Club fan.

Celine Delacroix

EY Global Oilfield Services Leader

Global Energy Sector executive. Diversity and inclusion advocate. Mother and wife.