EY Review of the UK Oilfield Services Industry 2012

7/30/2019 EY Review of the UK Oilfield Services Industry 2012

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Review of the UKoilfield servicesindustry 2012


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Contents1. Foreword Oil & Gas UK 3

2. Introduction 4

3. Summary 6

4. The UK oilfield services value chain: 10

Value chain overview

Reservoir/seismic

Exploration and production drilling Engineering, fabrication and installation

Operations (production and maintenance)

5. Comparison with the Norwegian OFS sector 24

6. Methodology 27

7. About Ernst & Young 28

8. Thought leadership 29

9. Contacts 30


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Confidential all rights reserved Ernst & Young LLP 2013

This second annual review of the UKs oilfield services sector highlights theenormous economic value of the technology and expertise fostered byBritains oil and gas industry, alongside oil and gas production itself. Iapplaud Ernst & Youngs continuing commitment to raising awareness of themajor contribution made by oil and gas supply chain companies to the UKeconomy.

Spread throughout the country, this is a sector which encompassesthousands of firms working both on and offshore, together comprising a corecomponent of the British engineering and manufacturing base. The 440,000people employed in high skilled jobs are involved in a wide range of activitiesincluding seismic surveying, exploration and production drilling, engineering,fabrication and installation and maintenance.

At the forefront of new ways of developing oil and gas in the UK, these firmshave developed a worldwide reputation for innovation and their goods andservices are in increasing demand around the world. The UK trade balance isboosted by 6 billion a year as a result.

The latest figures published by Ernst & Young reflect a services sector inrobust health, with supply chain revenue increasing by 17% in 2011.

Over the past two years, the Government, through positive engagement withthe industry, has been working to encourage maximum recovery of the UKsoil and gas. This is now beginning to bear fruit. In 2012, investment in newprojects rose to over 11 billion and no less than 30 new offshoredevelopments were approved; around another 30 development projects arein the pipeline for approval in 2013.

Along with the Governments new long term approach and its developmentof an individual strategy for the sector, investor confidence is returning and167 new production licences were awarded last year. All this interest andinvestment bodes well for the supply chain and hence for UK employment,tax revenues, energy security and balance of trade.

Malcolm WebbChief ExecutiveOil & Gas UK

Foreword Oil & Gas UK

3


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Overview

The global oilfield services (OFS) market is highlyfragmented with many companies specializing in arelatively niche subsegment of the market, althoughmany of the larger players operate across the valuechain.

The UK OFS sector is already a global leader and hasthe potential to deliver even more high-skilled UK

jobs and greater export opportunities.

While there is no doubt the days of easy oil areover, the global demand for oil and gas remainshigh. UK-based OFS companies are continuing toenable the recovery of this scarce resource fromdeeper and more challenging basins.

Future opportunities include an increase in oil andgas demand from emerging economies, thecontinued transition for UK companies to becomeglobal suppliers and global best in class, as well asa move into both renewable and unconventionalenergy sectors.

We consider the main threats to the industry to bemore macro in nature, including reduction inemerging country demand for oil and gas,unexpected taxation changes, a dramatic fall incommodity prices and risk of premature expansionin markets where the supply chain is not reliableand/or subcontractors do not perform as expected.Shorter-term concerns for many companies includethe availability and affordability of personnel, whilelonger-term concerns include attracting talentedworkers to the industry and retaining them.

For the purpose of our analysis, we havecategorized the UK OFS industry into four valuechain segments:

1. Reservoir/seismic

2. Exploration and production drilling

3. Engineering, fabrication and installation

4. Operations (production and maintenance)

This year, in conjunction with Oil & Gas UK, we alsosurveyed some 150 members of its supply chainforum to obtain views on current industry issues andopportunities. The upbeat responses, discussed later

in this report, are supportive of our findings.

Highlights

Despite the recession in the UK, the OFS segmentcontinues to go from strength to strength and isoutperforming most other parts of the UK industrialsector. The future is also bright, with manycompanies having record order books and increasingprofitability.

Many global OFS organizations are making Aberdeentheir global center of excellence for their subseatechnology businesses, which is a testament to the40 or so years of pioneering effort by the UKelement of this worldwide industry.

The future of many UK North Sea mature assets willlie in the hands of smaller independents as majorsand larger independents will look to transition assetsto fund other global developments.

Decommissioning has yet to play a significant role inthe UK North Sea, partly because of the worldleading technologies and expertise being bothdeveloped and implemented by UK OFS players of allsizes, helping to extend the economic life of thebasin.

As we predicted in last years review, financialsupport for renewable energy projects continues tobe scaled back or deferred. With continuing medium-term fiscal austerity measures across Europe, therenewable energy sector will continue to be alonger-term opportunity for OFS companies.

As the financial analysis within this review is basedon publicly available financial statements, we do notyet have 2012 data. However, we are confident thatthe 2012 data set will show continued growth fromthe success story already demonstrated by the UKOFS industry within this report.

Introduction

4Review of the UK oilfield services industry 2012

Welcome to Ernst & Youngs second annualreview of the UK oilfield services sector. In thisreport we review the 2011 trading performanceof UK registered companies in the hugelydiverse oilfield services marketplace andhighlight their potential for continued successboth in the UK and globally.

Ally RuleTransaction Advisory Services


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Summary

The UK OFS sector has delivered yet another year ofphenomenal growth, driven by increased activity inthe UK North Sea and continued internationalizationof the sectors world-leading skill set andcapabilities.

Our survey includes only those UK-registeredcompanies that have filed accounts at CompaniesHouse and have annual revenues in excess of10 million (390 in total). In addition to these 390companies, we have identified another 720

companies involved in the sector but with annualrevenues of less than 10 million.

Composition of UK OFS companies with 2011revenues of greater than 10 million

Of the total revenue earned by those 390companies with revenues of more than 10 million,some 70% is attributable to 73 organizations withrevenues in excess of 100 million (19% ofcompanies by number).

The largest UK OFS companies generally provide awide range of services across the value chain,thereby offering integrated solutions to customers.

Ordinarily, the smaller the company, the morenarrowly it focuses on providing specific productsand services.

The UK North Sea has continued its revival despiteunexpected changes in the UKs tax regime in 2011and concerns over future decommissioningliabilities. In December 2012, after almost two yearsof engagement and collaboration between the oiland gas industry and the UK Government, thestatutory framework was agreed, allowing the UKGovernment to sign contracts with companiesworking in the UK and on the UK Continental Shelf(UKCS) to provide assurance on the tax relief they

will receive when decommissioning assets.

Statoils recent investment decision to develop theMariner oil field development in the UK North Sea, aproject that entails investments of more thanUS$7 billion, is the largest new offshoredevelopment in the UK North Sea in more than adecade and demonstrates continued belief and

significant opportunities in the basin.

Significant recent UKCS transactions such asTAQAs acquisition of a number of BPs centralNorth Sea fields and Talisman EnergysUS$1.5 billion North Sea transaction with Sinopec,demonstrate an appetite to invest in the continuedextended life of the UK North Sea.

Margin reductions observed in the Norwegian OFSsector in 2011 are not as evident in the UK OFSsector, which is primarily a result of the UK having agreater proportion of its revenues derived fromoverseas than the more domestic Norwegiancustomer base.

A UK industry delivering revenue growth of 17%


Revenue banding( million)

No. ofcompanies

2011Revenue

( million)Revenuegrowth*

25 206 2,876 21%

> 25 to 50 69 2,347 15%

> 50 to 100 42 2,850 28%

> 100 to 250 51 7,587 12%

> 250 22 11,184 13%

Total 390 26,844 17%

*2011 revenue growth based on revenue banding positionin 2010

Currency: million 2008 2009 2010 2011

Employees (No.) 88,570 87,169 86,769 92,673

Revenue

Reservoir/seismic 632 804 779 1,032

Exploration andproduction drilling

5,586 5,444 5,784 6,021

Engineering,fabrication andinstallation

8,573 8,547 8,945 11,272

Operations(production andmaintenance)

6,745 7,142 7,487 8,519

Revenue 21,537 21,938 22,994 26,844

Revenue growth (%) n/a 1.9% 4.8% 16.7%

Gross profit 4,119 4,032 3,976 4,473

Gross margin 19.1% 18.4% 17.3% 16.7%

EBITDA 2,483 2,232 2,132 2,322

EBITDA margin 11.5% 10.2% 9.3% 8.7%

Pre-tax profit 2,041 1,616 1,358 1,729

Corporate tax 547 454 384 404

Effective tax rate 26.8% 28.1% 28.3% 23.4%

Total assets 21,301 1,085 23,062 29,073

Net assets 11,121 12,384 13,336 18,205


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UK OFS revenue trends compared withUKCS activity

OFS activity is driven to a large extent by upstreamoil and gas production and spending.

As depicted in the following two graphs, UKCSproduction and the number of wells drilled havefallen each year since 2008.

However, trends in UKCS production and wellsdrilled are not followed by trends in UK OFSrevenues, primarily as a result of UK OFS companiesoperating on a global basis:

In the new policies scenario in its World EnergyOutlook 2012, the International Energy Agency(IEA) anticipates that global energy demand willincrease by more than one-third over the period to2035, or around 1.2% per annum, with China, Indiaand the Middle East accounting for 60% of theincrease.

Oil production, net of processing gains, is projectedto increase from 84 million barrels per day (mb/d) in2011 to some 97 mb/d by 2035, the increasecoming entirely from natural gas liquids andunconventional sources.

Furthermore, the IEA estimates crude oil output(excluding light tight oil) will fluctuate between65 mb/d and 69 mb/d, falling by 3 mb/d between2011 and 2035. Light tight oil is forecast toincrease to above 4 mb/d during this period, drivenby the United States and Canada.

The global energy map is being redrawn by theresurgence of oil and gas production in the UnitedStates and by the increase in unconventional gasproduction.

With upstream technologies unlocking light tight oiland shale gas resources in the United States, theIEA predicts that by around 2020, the United States

will overtake Saudi Arabia as the largest global gasproducer.

The era of access to relatively cheap oil is over. Newsupplies will cost more to develop, and thechallenges of matching energy demand and supplyare likely only to intensify.

Investment in large-scale oil and gas projects istherefore required to both limit and compensate fordecline rates. Enhanced oil recovery and investmentin new developments is required to replace existingproduction and satisfy expected demand growth.

Upcoming UK OFS trends will be influenced by:

Increasing project complexity

Oil price stability

Buoyant North Sea brownfield market

Recovering Gulf of Mexico activity

African and Brazilian offshore developmentevolution

United States shale gas progression


0.0

1.0

2.0

3.0

2008 2009 2010 2011

mb/d

UKCS production (mb/d)

0

100

200

300

2008 2009 2010 2011

UKCS wells drilled

Exploration Appraisal Development

50

60

70

80

90

100

110

120

130

2008 2009 2010 2011

UK OFS revenues, UKCS production and UKCSwells drilled, indexed to 100 in 2008

UK OFS revenue

UKCS production (mb/d)

UKCS wells drilled (exploration, appraisal anddevelopment)


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For UK OFS companies to be successful in the longterm, they need to continue to be recognized in theglobal marketplace, because this is where the mostsignificant growth will arise. We believe the mostsuccessful UK OFS companies in the near future willbe those that have:

Global geographic footprints and access togrowth markets

Relationships with national oil companies (NOCs)

Technologies that reduce cost, improveperformance or enhance access to hydrocarbons

Outstanding health and safety records World-leading risk monitoring and management

techniques

Provision of integrated solutions

Scale to deliver larger projects

Strong management teams with access to anexperienced and committed workforce

Unconventional extraction exposure

As opportunities in emerging markets grow, UK OFScompanies will face challenges relating to regulatoryrisks, including bribery and corruption. Wide-ranginglegislation such as the UK Bribery Act means that

companies risk intense scrutiny from enforcementagencies. The complexity of working and contractualrelationships with governments, joint venturepartners, suppliers and other contractors makecompliance with new anti-bribery and corruptionregulation challenging.

Many leading companies are undertaking thoroughreviews of their anti-bribery and corruption systemsand controls, especially in high-risk jurisdictions,recognizing that key factors relating to interactionswith government officials, procurement and third-party relationships can be identified and tackled in apragmatic, efficient manner.

Decommissioning

Although decommissioning will not be a majoractivity in the UKCS in the next 5 to 10 years, it willbecome more prevalent. It is forecast thatdecommissioning North Sea oil and gas facilities willcost between 30 billion and 35 billion in theperiod to 2040.

There are over 600 offshore oil and gas installationsin the North Sea, 470 of which are in UK waters. Inaddition, there are more than 10,000 kilometers ofpipelines offshore and around 5,000 wells. A largenumber of these structures have been producing oiland gas for 40 years and are coming to the end oftheir designed life-span.

Under current regulatory requirements, over 90% ofoffshore structures will need to be completelyremoved from their marine sites and brought toshore for reuse, recycling or other disposal means.The date for decommissioning each structure isimpacted by:

Long-term trends in oil and gas prices whichdetermine how long it remains economic to keepa field in operation

Long-term certainty on both fiscal and regulatory

regimes, which will influence the futureinvestment environment

Improved production and reservoir recoverymethods

Extending the use of the infrastructure, e.g., forsmaller satellite fields tied back into existingexport systems

Alternative use of the structures, e.g., for gasstorage or carbon sequestration

Over recent years, technical innovations, high oilprices and increased recovery techniques havemeant that decommissioning dates have generallybeen deferred.

Many of the future successful OFS companies will bethose with products and services that can be appliedto the decommissioning industry.


The UK OFS industry has once again proven it excels in the face of theincreased technological demands of global subsea development, harshoperating conditions and increasing worldwide competition. Consequently, itis in prime position to take on global energy demand growth.

Many companies have concentrated on top-line growth whereas now is alsothe time for increased supply chain efficiencies and cost control to drivemargin improvements.


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The UK oilfield services value chain


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The UK OFS sector is well positioned across the entire value chain to

provide competencies, as well as capacity, to support all facets of the oiland gas sectors planned activities.

In terms of employees and revenue, our UK OFS population is dominatedby the engineering, fabrication and installation segment and operations(production and maintenance) segment, reflecting the mature status ofthe North Sea basin, which has also allowed UK entities to lead globallythrough expertise developed over the last 40 years or so.

Average Brent crude prices of US$111 per barrel in 2011 (up from S$80in 2010) also contributed to success of the UK OFS sector in the year.

All segments within the OFS value chain demonstrated revenue growthbetween 2010 and 2011:

The UK OFS sector is wellpositioned across the value chain

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Currency: million(2011 data)

Reservoir/seismic

Explorationand

productiondrilling

Engineering,fabrication

andinstallation Operations Total

Companies withrevenue > 10million (No.)

26 51 179 134 390

Employees (No.) 4,058 18,993 31,514 38,108 92,673

Revenue 1,032 6,021 11,272 8,519 26,844

Gross profit 242 1,232 1,823 1,176 4,473

Gross margin 23.4% 20.5% 16.2% 13.8% 16.7%

EBITDA 121 512 1,134 555 2,322

EBITDA margin 11.8% 8.5% 10.1% 6.5% 8.7%

Pre-tax profit 82 311 933 403 1,729

Corporate tax 26 89 176 112 404

Effective tax rate 32.0% 28.6% 18.9% 27.9% 23.4%

Total assets 856 13,044 10,256 4,918 29,073

Net assets 605 9,677 5,532 2,390 18,205

0.0

0.5

1.0

1.5

2.0

2.5

Resevoir/seismic Exploration andproduction drilling

Engineering,fabrication and

installation

Operations(production andmaintenance)

b

2011 revenue increase ( billion)


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13

Attracting new talent to the OFS industry is key forcontinued growth

Review of the UK oilfield services industry 2012

Oil & Gas UK supply chain survey

Background

In conjunction with Oil & Gas UK, we surveyed 150 members of its supply chain forum for their views on a varietyof industry issues and opportunities. This is a snapshot of our findings.

Profile of respondents

Respondents were analyzed by value chain segment as follows:

9% - Reservoir/seismic

24% - Exploration and production drilling

40% - Engineering, fabrication and installation

27% - Operations

53%

13%

13%

9%

9%

3%

Sourcing suitably qualified personnel

Economic uncertainty

Other

No factors limiting growth

Supply chain issues

Availability of finance

What are the main factors limiting growth in your organization?

Over 75% of respondents envisage their workforce increasing over the next two years, with the average increase

being up to 10%. The respondents believe it is imperative to raise the industry profile to make it more visible andpositive. Attracting new talent to join the industry is deemed to be key, with apprenticeship programs andcommitment to training vital for the future of the industry. Other factors they see as limiting growth are economicuncertainty, rig capacity, competition and supply chain constraints.

53% of respondents view sourcing suitably qualified personnel as the main factor limiting growth intheir organization.


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22%

22%

22%

10%

9%

9%

6% UK

Middle East and Africa

South America

Asia Pacific

Norway

Other

North America

Nearly 60% of respondents believe changes to the fiscal terms for the industry will have the most impact. This is inrelation to fiscal changes that impact the operators and that have a knock-on effect in the oilfield services industry.A recent example is the Supplementary Tax Charge, which was introduced in the 2011 budget and resulted in anumber of large projects in the North Sea being delayed or cancelled. Respondents also see international localcontent requirements as having a major impact.

Which geographical area do you see as providing greatest growth opportunity in the nexttwo years?

Over 90% of respondents expect their UK revenues to increase in the next two years but this is dependent onstability in the sector, especially in relation to any tax legislation specifically targeting oil and gas companies. UKgrowth is likely to be focused in the West of Shetland and given the maturity of the basin, in brownfield activities. Inaddition to the UK, respondents see Middle East and Africa and South America as key markets for growth.

Review of the UK oilfield services industry 2012 14

Other

Health and safety regulations

Local content requirements

Environmental regulations

Fiscal terms for the industry

0% 10% 20% 30% 40% 50% 60% 70%

Responses from industry players mirror our confidence forthe future of the UK OFS industry.

59% of respondents believe fiscal terms will have the most impact on the oilfield services industry interms of potential regulatory change.

22% of respondents view the UK as being the geographical area providing the greatest growthopportunity in the next two years.

Which area of potential regulatory change will have the most impact upon the OilfieldServices Industry?


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We define the reservoir/seismic value chain as UK-registered companies whose services include:

Acquisition of seismic data

Data processing and interpretation

Data management

Software solutions/geological and geophysicalservices

Seismic equipment

Top five companies (2011 revenues)

1. PGS Exploration (UK) Ltd.

2. WesternGeco Ltd.

3. Gardline Marine Sciences Ltd.

4. CGGVeritas Services (UK) Ltd.

5. Fugro GeoConsulting Ltd.

The reservoir/seismic segment of the value chain isdominated by UK subsidiaries of larger overseasentities.

The seismic market was adversely impacted by theMacondo incident in April 2010, resulting in acessation of exploration activity in the Gulf ofMexico. This substantially reduced the number ofvessels working in the Gulf of Mexico, with WestAfrica and Europe absorbing most of the excesscapacity, thus reducing pricing pressure.

Continued high oil prices in 2011 and improvementsin technology, combined with increasing demandand more technically challenging reservoirs (both inidentification of new reserves and extraction ofexisting reserves) has added to a recovery in thissegment in 2011. This is reflected in increasedrevenues and also margins returning to pre-Macondo levels.

With the continued shift to drilling in deeper andharsher offshore environments, drilling costs haveunderstandably risen, thereby increasing thedemand for better seismic analysis to improve thechance of success.

Recovery from Macondo and continued high oilprices enhanced reservoir/seismic performance


Reservoir/Seismic

Exploration andproductiondrilling


Operations


Employees (No.) 2,972 3,535 3,786 4,058

Revenue 632 804 779 1,032

Revenue growth (%) n/a 27.2% (3.2%) 32.5%

Gross profit 238 211 143 242

Gross margin 37.6% 26.2% 18.4% 23.4%

EBITDA 141 115 57 121

EBITDA margin 22.2% 14.3% 7.3% 11.8%

Pre-tax profit 129 137 63 82



Total assets 599 944 898 856

Net assets 360 593 583 605

0

1

2

3

4

5

6

7

8

Up to5%

5% to10%

10% to15%

15% to20%

20% to25%

25% to30%

Over30%

No.

ofcompanies

2011 EBITDA % bandings

As oil and gas companies extend their search for newhydrocarbon resources into regions with deeper waters,harsher environments and more complex geologies, theneed for seismic activity will continue to increase.


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We define the exploration and production drilling valuechain as including UK-registered companies whoseservices encompass:

Rigs and drilling ships (contract drilling)

Drilling-related services: well planning, wirelinelogging, measurement while drilling (MWD), loggingwhile drilling (LWD), directional drilling, fishing,

casing, cementing, perforating, mud logging, drillstem testing (DST), coring, pressure pumping andwaste/chemical management

Drilling equipment: drill pipe, bits, downhole tools,fluids/mud, blowout preventers (BOPs)

Coiled tubing, completion strings, production tubing(mainly related to production drilling)


1. Schlumberger Oilfield UK Plc

2. Baker Hughes Ltd.

3. Cameron Ltd.

4. Halliburton Manufacturing & Services Ltd.

5. Transocean Drilling U.K. Ltd.

Exploration and Production Drilling 2011revenue analysis by company size

As can be seen from the table above, the mostsignificant growth arose in the 25m to 50m and50m to 100m revenue bandings. This was aresult of higher drilling activity, both overseas and inthe UK, and a number of acquisitions by ReservoirGroup during the year.

Although fewer wells were drilled, increased drillingactivity and higher spend resulted in explorationand production drilling revenue growth


Reservoir/seismic



Operations


Employees (No.) 17,460 17,391 17,447 18,993

Revenue 5,586 5,444 5,784 6,021

Revenue growth (%) n/a (2.5%) 6.2% 4.1%

Gross profit 1,373 1,347 1,313 1,232Gross margin 24.6% 24.7% 22.7% 20.5%

EBITDA 735 711 696 512

EBITDA margin 13.2% 13.1% 12.0% 8.5%




Total assets 8,315 8,073 9,251 13,044

Net assets 4,671 5,339 5,907 9,677


No. ofcompanies

2011revenue

( million)Revenuegrowth*

25 17 208 0%

> 25 to 50 12 405 12%

> 50 to 100 5 298 23%

> 100 to 250 9 1,317 4%> 250 8 3,793 2%

Total 51 6,021 4%


0

5

10

15

20

Up to5%

5% to10%

10% to15%

15% to20%

20% to25%

25% to30%

Over30%

No.

ofcompanies



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The trends in exploration and production drillingrevenues between 2010 and 2011 (an increase ofsome 4%) are reinforced by Oil & Gas UKs 2012Activity Survey report, in which it states for theUKCS in 2011:

A 31% increase in average barrel of oil equivalent(boe) operating costs.

An increase in capex of some 2.5 billion to 8billion.

121 development wells (including sidetracks)were drilled (130 in 2010). Despite the reduced

number of development wells, the number ofdrilling days increased by some 30%, suggestingmore challenging targets were being drilled.

1.4 billion was spent on drilling 43 explorationand appraisal wells (62 wells and 1.1 billion in2010).

Continued pricing pressure from customers andincreasing supply chain costs continued in 2011,resulting in lower margins.

The higher effective tax rate in 2010 was primarily aresult of two larger entities having a greater level ofnon-trading write-offs that were not tax-deductible.

The more positive demand outlook is leading toincreased confidence over the future level ofcommodity prices. The price of Brent crudeaveraged US$111 per barrel in 2011, some 39%higher than in 2010.

Current oil prices encourage increased investment,particularly in exploration, which remains the keyinfluencing swing factor in operators budgets.

A substantial majority of oil and gas companiesprojects, including those in the UK North Sea, wouldbe commercial at oil prices far lower than currentcommodity price levels.

Worldwide upstream oil and gas spending isexpected to increase by around 10% on averagethrough 2012.

Oil & Gas UK estimated UKCS expenditure (capexand opex) to have increased by 4.6 billion to 21.3billion in 2012.


Unless there is a major structural shift in the outlook forcommodity prices, exploration and production drillingactivity levels should be sustained, subject to sufficient rigavailability in the UKCS.


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We define the engineering, fabrication and installationvalue chain as including UK-registered companieswhose services encompass:

Engineering solutions, including front-endengineering and design (FEED)

Modules and constructions for rigs, fixed platformsand drilling ships

Equipment for rigs, fixed platforms and drilling ships Remotely operated vehicles (ROVs)

Pipelines

Wellheads

Barges

Although the majority of companies within this segmentalso operate across other aspects of the oilfield servicesvalue chain, we have included them within engineering,fabrication and installation as we consider this to betheir main area of business.


1. Technip UK Ltd.

2. Subsea 7 Ltd.

3. AMEC Group Ltd.

4. Saipem Ltd.

5. CB&I UK Ltd.

Engineering, fabrication and installation2011 revenue analysis by company size

Such is the buoyancy of this segment, all revenuebandings demonstrated significant growth ascompared to 2010.

Compared with other segments in the value chain,engineering, fabrication and installation has thegreatest proportion of companies with revenuesbetween 10m and 25m, highlighting the vibrantsubsea and engineering SME market in the UK.

Subsea developments continue to be a key driverof Engineering, Fabrication and Installation


Reservoir/seismic



Operations


Employees (No.) 31,671 30,235 30,718 31,514Revenue 8,573 8,547 8,945 11,272

Revenue growth (%) n/a (0.3%) 4.7% 26.0%

Gross profit 1,565 1,448 1,483 1,823

Gross margin 18.3% 16.9% 16.6% 16.2%

EBITDA 1,085 998 943 1,134

EBITDA margin 12.7% 11.7% 10.5% 10.1%




Total assets 8,518 8,326 8,795 10,256

Net assets 4,453 4,562 4,885 5,532


No. ofcompanies

2011 revenue( million)

Revenuegrowth*

25 103 1,420 32%

> 25 to 50 23 771 27%

> 50 to 100 25 1,682 26%

> 100 to 250 22 3,317 10%

> 250 6 4,082 31%

Total 179 11,272 26%

*2011 revenue growth based on revenue bandingposition in 2010

0

10

20

30

40

50

60

Up to5%

5% to10%

10% to15%

15% to20%

20% to25%

25% to30%

Over30%

No.

ofcompanies



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Around the world, the UK is widely regarded as thetechnological leader in subsea technology. The UKoffshore oil and gas industry has been utilizingsubsea technology for more than 30 years, and itsimportance in maximizing the recovery of theregions oil and gas continues to grow. It offerssignificant advantages over fixed productionplatforms and allows hydrocarbons to be extractedmore cost-effectively, particularly from morechallenging environments.

It is anticipated that two-thirds of all new fields inthe UK will be developed as subsea tiebacks to

existing infrastructure, and this will increasedemand for subsea goods, equipment and services.

The global success of UK subsea entities and therescheduling of postponed work programs followingMacondo fuelled growth of 26% in 2011, surpassingthe modest recovery in 2010.

Activity levels in shallow-water areas were sustainedby demand for subsea tiebacks in mature areas suchas the North Sea. As oil and gas fields matured in anumber of regions, demand continues to grow fortechnologies and solutions required for increased oiland gas recovery, satellite field developments andmaintenance, and modifications required to extend

the life-span of existing field infrastructure. Subsea developments are an attractive option for

accessing smaller deposits in mature markets, whichare near existing infrastructure. Tying back subseawells through seabed flowlines to existing platformsis a cost-effective way of exploiting smallerstranded fields in mature provinces.

UK North Sea production has been in decline for thelast 10 years, but the development of reserves westof Shetland should help slow the rate of depletion. InOctober 2011, BP and its partners Shell,ConocoPhillips and Chevron were grantedGovernment approval to proceed with the 4.5billion Clair Ridge project, the second phase ofdevelopment of the giant Clair field, west Shetland.

The companies are developing four new oil and gasprojects that together will involve a total investmentof almost 10 billion over the next five years. AMEChas been appointed by BP and its partners to deliver

the engineering and project management servicesfor the main platform design for Clair Ridge.

Growing confidence among oil and gas companieshas led to increased capital expenditure budgets,resulting in larger projects, that were previously onhold, now moving ahead.

Deepwater construction will be one of the fastest-growing segments of the global offshore industry inthe medium to longer term. Reserves in frontierareas are typically in deeper waters, with operationschallenged by the harsh climatic conditions andremoteness from market.


As we stated in last years review of the UK OFS industry, the global fundamentals ofsubsea technologies remain compelling, with the development of large, complexprojects, including Clair Ridge, requiring groundbreaking technologies.

The UKs globally recognized leadership in subsea programs explains why theengineering, fabrication and installation segment of the value chain shows the largestgrowth in 2011 when compared with 2010, a trend we also expect to continue in 2012.


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We define the operations (production andmaintenance), value chain as comprising UK-registeredcompanies whose services include:

Production of oil and gas

Flow, temperature and pressure metering

Logging

Coiled tubing

Artificial lift/pressure pumping

Production chemicals

Maintenance and modifications


1. Wood Group Engineering (North Sea) Ltd.

2. Petrofac Facilities Management Ltd.

3. Fircroft Engineering Services Ltd.

4. ASCO (UK) Ltd.

5. Cape Industrial Services Ltd.

Operations 2011 revenue analysis bycompany size

While all operations revenue banding categoriesdemonstrated good growth in 2011, the 50m to100m categorys growth of 36% was boosted bythe timing of new contract work in late 2010.

Operations revenue delivered a healthy increasefor a third consecutive year


Reservoir/seismic



Operations


Employees (No.) 36,467 36,008 34,818 38,108

Revenue 6,745 7,142 7,487 8,519

Revenue growth (%) n/a 5.9% 4.8% 13.8%

Gross profit 943 1,027 1,037 1,176

Gross margin 14.0% 14.4% 13.8% 13.8%

EBITDA 523 408 436 555

EBITDA margin 7.8% 5.7% 5.8% 6.5%




Total assets 3,868 3,743 4,119 4,918

Net assets 1,638 1,890 1,961 2,390


No. ofcompanies

2011 revenue( million)

Revenuegrowth*

25 69 996 10%

> 25 to 50 30 1,028 5%

> 50 to 100 11 786 36%

> 100 to 250 16 2,400 14%

> 250 8 3,309 9%

Total 134 8,519 14%


0

10

20

30

40

50

60

70

Up to5%

5% to10%

10% to15%

15% to20%

20% to25%

25% to30%

Over30%

No.

ofcompanies



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This segment of the value chain aims to ensure thesafe management and maintenance of assetsthrough the supply of highly trained personnel andestablished processes and procedures. Services canrange from the supply of manpower, to supervisionand performance management, through to thecomplete operational management of a customersasset.

Revenues are more dependent on opex-relatedactivity levels as opposed to capex. Given both theaging North Sea infrastructure and the global focuson increased quality and health and safety, this

segment of the value chain is likely to continue to beone of the stronger-performing segments.

Many of the major players in this segment havemedium-term visibility/security of future revenuesas they can operate under contracts that lastseveral years. Although contracted revenue gives aforecast of activity levels, profitability is dependenton successful project execution, especially for lump-sum contracts.

The aging North Sea infrastructure should translateinto a continued increase in the number ofbrownfield projects. The combination of this aginginfrastructure and the need to extend the productive

life of fields will necessitate substantialmodifications and upgrades of installations on theUKCS and Norwegian Continental Shelf (NCS).

Recent asset acquisitions by smaller exploration andproduction players from international oil companies(IOCs) are also good news for this segment of thevalue chain as asset lives are extended.

Beyond the North Sea, there are significantopportunities for OFS companies in countries wherethe IOCs have been frozen out or where there hasbeen a prolonged period of underinvestment in theoil and gas sector.

In the post-Macondo environment, OFS companieswith offerings related to asset integrity and a goodtrack record on safety will have a competitiveadvantage. This should be prevalent in preventingmanpower-based models becoming commoditized inthe face of increased competition from low-costproviders.

However, the international OFS companies may faceincreased competition from regional indigenousservice providers or, in some countries, be requiredto help develop local capability. In some cases, localcontent initiatives can present risks for OFScompanies related to the sometimes weakercapability of local providers compared withinternational subcontractors.


The combination of aging infrastructure and the need to extend the productivelife of fields will continue to necessitate substantial modifications andupgrades of installations on the North Sea.

Current oil and gas price levels are also motivating owners to keepinfrastructure operational longer.


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Comparison with the Norwegian OFS

sector


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Comparison of the UK and Norwegian OFS Sectors

Activity in oilfield services in the UK and Norway is increasing, with both the UK and Norway experiencing growthin all segments of the value chain from 2010 to 2011. The UK sector has experienced revenue growth of 25%since 2008, while revenue growth in the Norwegian sector has been 15%. In FY11, the Norwegian industrygenerated approximately 10 billion more revenue than the UK.

The different levels of maturity in the UKCS and the NCS are reflected in the revenues generated by the differentvalue chain segments, whereby the UK has a far larger operations (production and maintenance) presencereflecting the more mature status of the UKCS. Lower UK OFS margins, as compared with Norways, are drivenby the operations segment of the value chain reflecting the UKs aging infrastructure.

Norway has experienced a significant growth in exploration and production drilling due to a combination of highoil prices and the Governments introduction of the exploration expense tax refund and APA (Awards inPredefined Areas) in 2003 to 2005. However, in engineering, fabrication and installation, it has experienced asmall decline primarily due to the lack of growth in surface activities, although subsea activity has been

increasing throughout the period. The growth in this segment in the UK is due to both the local and globalsuccess of UK subsea entities.


UK Continental Shelf (UKCS) Norwegian Continental Shelf (NCS)

0%

5%

10%

15%

0

10

20

30

40

2008 2009 2010 2011

b

Revenue and EBITDA

Revenues EBITDA %

0%

5%

10%

15%

0

10

20

30

40

2008 2009 2010 2011

b

Revenue and EBITDA

Revenues EBITDA %

(All data for FY11 and in b unless stated otherwise) UK Norway*

Companies (No.) 390 420

Employees (No.) 92,673 86,600

Revenue 26.8 36.6

EBITDA 2.3 5.0

EBITDA margin 9 % 13%

*To ensure comparable data, revenues greater than NOK90m in 2011 are included above. The exchange rate used to convert the

Norwegian data is NOK9 per .

Norwegian OFS companies also delivered significantrevenue growth, with both the UKCS and NCShaving significant recoverable reserves remaining

02

4

6

8

10

12

14

16

18

Reservoir/seismic Exploration andproduction drilling


installation

Operations

b

Revenue

2008 2009 2010 2011

0

2

4

6

8

10

12

14

16

18

Reservoir/seismic Exploration andproduction drilling


installation

Operations

Revenue(b)

Revenue

2008 2009 2010 2011


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Comparison of the UK and Norwegian oil and gas production profiles

Over 52 billion of capital is forecast to be invested in the UKCS from 2013 to 2017. New discoveries over thelast decade are typically of 30 million boe or smaller, and tax changes allow more of this type of project to bedeveloped, which will be crucial for the longevity of the UKCS.

Investments on the NCS are predominantly the North Sea, but also include the Barents Sea and the NorwegianSea, with annual investments expected to increase from 19 billion in 2012 to 24 billion in 2017. Severaldiscoveries are to be developed in the coming years, including Johan Sverdrup where first oil is expected in 2018or 2019. The NCS is highly attractive for new players, and since 2000, more than 40 companies have enteredthe NCS as operators primarily due to the stable political and fiscal regimes and world-leading offshoretechnology.

The UKCS is a more mature basin. Between 2004 and 2010, the average annual decline in production was 7.5%while 2011 recorded the biggest year-over-year decline (19.2%). This decline stemmed from several factors,including an increase in shutdowns (planned and unplanned) and the supplementary charge increase, whichclosed fields and axed or delayed projects. UKCS production is forecast to increase from 2014 as a result of the

investment in projects approved in 2010 and 2011, the largest of which are West of Shetland. Estimates point to 20 billion barrels of recoverable oil still remaining in the North Sea west of Shetland and on

the UKCS, but drilling will depend on regulation and tax. Technical development in the next 10 years could extendthe life of North Sea fields into the 2040s.

For the NCS, total production peaked in 2004, and oil production has declined by 50% since peaking in 2000.However, increased gas production has offset much of the decline, and production levels are expected to remainstable toward 2017. The Barents Sea has just been opened up for petroleum activity, and discussions areongoing regarding other new areas for exploration activity in the Norwegian Sea. As such, we expect activity tocontinue in the NCS until at least the 2050s and potentially into the 2060s.


UK Continental Shelf (UKCS) Norwegian Continental Shelf (NCS)

UK Norway

Recoverable reserves - proven, probable and possible 19,900 mb 47,800 mb

Both UK and Norwegian OFS sectors are showing growth in the face ofdifficult market conditions across most of the industry sectors

throughout Europe. New discoveries, continued technicaldevelopments to extend the life of existing fields and global expansionare key for continued long-term growth in the sector.

0

200

400600

800

1,000

1,200

1,400

1,600

1,800

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013E

2016E

Millionsofbarrels

Production 1980-2016

Oil/Liquids Gas

0

200

400600

800

1,000

1,200

1,400

1,600

1,800

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013E

2016E

Millionsofbarrels

Production 1980-2016

Oil/Liquids Gas


28/32

The purpose of our analysis of the UK OFS sector has been to define,qualify and quantify a sector of significant importance for the UK NorthSea and the UK economy and to provide insight both to the industry itselfas well as to other relevant parties.

We have assigned each company to its segment of the OFS value chainbased on the companys main activity. Many companies do have activitiesacross the value chain, but this is not accounted for in our analysis.

Financial data in this report is based on publicly available information andhas been analyzed into 2008, 2009, 2010 and 2011 for financial year-

ends within each of these calendar years.

In our analysis, a company is defined as an OFS company if:

At least 50% of its turnover is generated in the oil and gas sector.

It is a UK-registered company.

Annual revenues exceed 10 million.

Methodology


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Thought leadership

Review of the UK oilfield services industry 2012

Ernst & Youngs Global Oil & Gas Centers keep you updated on the latest developments in the sector with monthlyissues of thought leadership, exploring the development and trends within the sector. The issues can be downloadedfrom our website, accessed through our mobile app (EY Insights) or obtained by contactingErnst & Young.

Global oil and gas transactions review 2012

In this report, we look back at some of themain trends in oil and gas deal activityover 2012 and explore the outlook fortransactions in the sector in 2013.

Good Petroleum (International) Limited -International GAAP Illustrative financialstatements

This publication contains an illustrativeset of consolidated financial statements,prepared in accordance with InternationalFinancial Reporting Standards (IFRS), forGood Petroleum (International) Limited.

Financial reporting briefs oil and gas

This edition provides timely remindersfor calendar year-end financial reportingand alerts you to some importantconsiderations for 2013, as well as thelatest FASB and IASB standard-settingdevelopments.

Dynamic dealmaking in oilfield services

We surveyed senior global corporate andprivate equity practitioners about thecurrent business environment for OFScompanies in order to understand theirbusiness strategies and objectivesagainst the backdrop of macro-

economic, regulatory and financinguncertainty.

Global oil and gas reserves study 2012

This report presents the worldwide andregional exploration and production (E&P)results for 75 companies for the five-yearperiod from 2007 through 2011.

Oil & Gas Eye

A quarterly update of our Oil & Gas EyeIndex and analysis of the performance ofthe AIM-listed oil and gas companies.

Cash in the barrel: working capitalmanagement in the oil and gas industry 2012

Our research findings suggest thatdespite 2012 success with workingcapital, companies continue to have hugeopportunities for improvement.

Oil and Gas NOC Monitor

A quarterly update of national oil

companies partnerships and alliances,privatization and consolidation andgovernment policy developments.

The DNA of the COO: an oil and gas sectorperspective

The oil and gas sector cut of a survey ofCOOs looking at the issues that theyface, how they feel about their roles andhow they interact with the rest of their

organization.

Managing bribery and corruption risks inthe oil and gas industry

In this publication, we discuss why

bribery and corruption are ongoingchallenges for the oil and gas sectorand outline practical considerationsfor companies looking to managecorruption risks.


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