Tough times ahead for UK's subsea sector

Published on Monday 9 November 2009 20:46

BRITAIN'S £5 billion subsea sector is facing an uncertain future in the face of falling oil production in the North Sea and delays in projects being given the go-ahead.

A report – compiled by industry experts Douglas Westwood and commissioned by Subsea UK – has revealed that the sector, which employs 40,000 people in the UK, is currently being cushioned from the impact of the recession by historical contracts and a backlog of work.

But the economic downturn has shaken confidence in the sector and there is growing uncertainty across the supply chain.

Set up to champion the subsea sector at home and abroad, Subsea UK represents more than 200 firms with revenues estimated at around 5bn a year.

The report reveals that an increasing number of drilling rigs are being stacked in sites such as the Cromarty Firth or being put in drydock, awaiting contracts.

The earnings of subsea equipment manufacturers are holding up as companies deliver backlog or historical contracts, but there are concerns of revenues being reduced due to project delays.

Subsea construction firms have laid off staff in a continued drive for "cost efficiencies" and integrated oil service companies are also suffering from project delays and decreased activity.

Commenting on the findings, Alistair Birnie, Subsea UK's chief executive, said: "Given the efforts to bring down costs in a mature basin such as the UK Continental Shelf, subsea developments are critical to sustaining production here and increasingly around the world.

"Indeed, 43 per cent of UK production is now accounted for by subsea wells and subsea goods and services are exported to the value of 2bn per year."

He continued: "Earnings per share across drilling contractors, equipment manufacturers, subsea construction and service companies are holding up better than expected, but this is largely due to historical contract awards and a backlog of work.

"The continuing delays on projects, a direct result of the downturn, and the impact of the North American slowdown, are hitting the sector hard.

"While tendering activity is higher, there is growing evidence of pressure on prices. There is potential for further day rate erosion in drilling, reductions in revenues and margins and subsequently employment across the sector."

But he stressed: "There are some positives that reflect the growing importance of internationalisation. Subsea companies who have been able to deliver services in addition to products, and value-adding activities that are relevant in the bad times as well as good, are proving to be winners.

"Those with a spread of work across the globe are maintaining their position. With the nature of oil and gas partnerships changing, companies who nurture relationships with national operating companies will continue to grow."

Malcolm Webb, chief executive of pan-industry trade body Oil & Gas UK, called for government action to help end the uncertainty facing the sector.

He said: "Having built on the wealth of subsea technology and expertise developed here over the last few decades of production, the UK is now considered a world leader in subsea engineering. The potential for major growth in exports exists, with global demand for these goods and services rising.

"However, the rooting of this high-performing industry in the UK is not guaranteed. If we are to anchor the subsea industry in this country and reap the rewards in terms of employment, exports and technology development for decades to come, we must ensure that the domestic activity is sustained.

"This requires action from both government on tax and regulation and industry on efficiency and cost control.

"While Oil & Gas UK fully recognises that the government is in a difficult position with regard to public finances now, and acknowledges there is very limited scope for reducing the overall tax burden on the oil and gas industry, when the country emerges from recession, the tax rate will need to be reduced to reflect the fundamentals of this mature basin."