Oil and gas survey gives healthy assessment of industry

Jun 27, 2001 02:00 AM

The latest oil and gas survey conducted by The Royal Bank of Scotland gives a healthy assessment of the industry and says that the results are the most positive it has so far recorded. That is good news for booming Aberdeen, which relies heavily on the sector while being aware that pinning its fortunes on the one sector, however big, is unwise and that is why it is making determined moves to widen the size of its local economic platform.
But oil and gas will be the name of the Aberdeen game for many years to come and this Royal Bank report is sweet music to Aberdonians and the North East. The report says that business volumes are rising, prices earned for goods and services are up, margins appear to have stabilised and are expected to rise and there is evidence of extensive export activity.
The only cause for concern is that costs seem to be rising, placing the industry's cost reduction targets at risk. The report says it is clear that the service sector has begun to benefit from the operators' increased investment, with 69 % of firms reporting an increase in business volumes compared with 12 months ago and only 12 % reporting a fall. Nearly 40 % of firms have experienced an increase in the prices they have secured for their goods and services compared with 12 months ago, with 13 % seeing a fall.

The report says: "There is considerable optimism about the prospects for the remainder of the year and for 2002. In all, 74 % of respondents expect business volumes in the UK Continental Shelf (UKCS) to rise in 2001 compared with 2000. Only 9 % expect a fall, and 61 % of firms expect an increase in UKCS business volumes in 2002, with only 8 % expecting a fall. Optimism is not confined to prospects for the UKCS -- 74 % expect volumes in overseas markets to increase in 2001 over 2000 and 64 % expect an increase in volumes in 2002 over 2001."
The report says that prospects in overseas markets are particularly encouraging given the long-standing concerns about the ability of the industry in Scotland to diversify into export markets. It was clear, the report goes on, that exporting is now commonplace in the service industry, with 71 % of firms exporting to other oil provinces.
The UKCS, says the report, is a high cost province and the industry's target is to reduce production costs to $ 8 a barrel by next year -- compared with around $ 12 in 1998. Last year respondents to the survey said that achieving a cost reduction of this scale would be very difficult and the same message was given this year.

Considerable efforts were required if the $ 8 per barrel target is to be achieved. Almost half of the companies -- 46 % -- reported that costs had increased over the past 12 months, with the average cost increase being 8 %. The average increase this year is expected to be 7 % and despite higher volumes only 22 % of firms report that margins increased during the past 12 months while 22 % say they have fallen. However, 39 % think that margins will increase over the next 12 months and only 9 % thinkthey will fall.
The report continues: "The results of this survey are by far the most optimistic in the three years in which the exercise has been undertaken. Following two exceptionally difficult years it is now clear that the service sector is beginning to benefit from higher investment spending by the operators."
"In addition to the increase in volumes and margins that have been either delivered or are expected there is encouragement from exporting activity. For too long there was a concern that the service sector had made few inroads into overseas markets. There may be opportunities to develop markets further, but past concerns have been allayed. "The greatest cause for concern is the evidence of rising costs. With high oil prices and a marked increase in investment, higher costs do not pose an immediate threat to the competitiveness of the UKCS."
"However, renewed efforts will be required to achieve the ambitious -- but necessary -- targets for cost reduction if the UKCS is to continue to attract investment in the long run."

Expanding on the report, Tony Wood, of the Royal Bank's business economics unit, warned that while things are much more positive than they have been for the past two years, the North Sea continues to face a number of challenges. One was that its costs of production and relative maturity compared to other locations meant that investment tended to be reduced sooner and started later.
New field discoveries tended to be small and much of the current investment was going into existing fields. Much of this investment was being focused on sub-sea technologies rather than fixed-platform infrastructure -- and this tended to be less labour intensive than traditional forms of development -- and service and supply firms continued to be under considerable pressure through the conservative pricing assumptions of operators.
Wood said that while some of that might sound negative, the UK continued to have a number of competitive advantages which will encourage further investmentin the North Sea -- providing that oil prices remain above the costs of production. These included the strength of the service and supply sector -- particularly in Aberdeen -- the fact that the North Sea is well known and has been widely surveyed, the fact that there is an existing platform and pipeline structure in place, allowing remote field development -- and the fact that the UK is politically and fiscally stable.

Alec Carstairs, head of corporate finance with Ernst & Young in Scotland and Northern Ireland, said that as major oil companies increasingly invest elsewhere, Aberdeen will remain a leading light in the energy sector only if it can hold on to its position as a centre of excellence with global reach.
There was a real opportunity to create a hotbed of applied technology for the sector, comprising not the ephemeral dotcoms but sustainable businesses with real value. Carstairs added: "As a mature province, with little hope of significant expansion, it is essential to start adopting a different model for doing business in the sector. The oil service market is currently dominated by the 'big four' of Halliburton, Schlumberger, Baker Hughes and Weatherford. Traditionally, they have boasted large research and development departments, each competing to develop the most efficient and cost-effective solutions to drilling and exploration challenges."
"However, a change in this strategy is gradually emerging. Spurred on by the fact that large research and development departments are difficult to manage these majors are now willing to pay a premium to acquire competitive advantage. "The acquisition of Petroline, PES and, more recently, the Orwell Group, have underscored that trend."
"Each has been sold at top prices because of their potential. The indications are that there will be many more companies in the North East who will be going down that same route."
"Advances in technology are essential and Aberdeen is among the best placed to exploit this opportunity."
"It is vital that it acts now if it is not to lose its hard-won advantage."

Source: The Scotsman Online
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