32nd AGCC survey released, 2021 outlook remains low

Reduced activity levels, project cancellations and workforce cuts as a result of the coronavirus pandemic have slashed business confidence across the UK’s oil and gas sector, according to an industry report.

The 32nd Oil and Gas survey, conducted by Aberdeen & Grampian Chamber of Commerce in partnership with the Fraser of Allander Institute and KPMG UK, asked firms about the initial impact of COVID-19, how they expect activity to recover and how recent events have influenced industry views on future facing issues like the energy transition and the UK’s exit from the EU.

The findings, which cover the six months to October 2020, provide a stark illustration of the economic turmoil that has resulted from the COVID-19 pandemic with confidence across the industry now as low as during the global industry downturn in 2015.

Just 13% of contractors are working at or above optimum levels in the UK Continental Shelf compared to 47% a year ago, with 82% predicting a decrease in their revenue in 2020. A total of 23% of contractors report cancelling projects as a result of the coronavirus outbreak, with a further 34% putting activities on hold.

More than three quarters of businesses (78%) are less confident about activities going forward, while only 1% are more confident. This net balance of -76% compared to the +46% recorded a year ago and significantly below the 10 years average net balance of +15%. 58% of contractors expect the outlook to worsen in 2021, with licensees and operators reporting similarly low confidence levels both now and in the year ahead.

The challenges faced over the past year are also reflected in reduced levels of production and exploration related work. The net balance reported for production related activity has dropped significantly, falling from +43% in 2019 to -47% in this latest survey. When asked a year ago what contractors were expecting for 2020, a net balance of +46% had been anticipating an increase, however the results now indicate an expected decline over the next year.

While businesses typically report higher levels of optimism about their international activities, the latest results mark the lowest recorded levels of confidence in global markets in the history of this survey, the longest running report of its kind in the UK. Since the same period in 2019, optimism dropped across almost three-quarters of contractors (70%) with 48% forecasting a further decline in the year ahead.

The reduced levels of activity and confidence have also negatively impacted employment levels, with approximately half of contractors surveyed reporting a decline in their workforce, 22% of which report reductions which equate to more than 10% of their workforce. While the extent of the current reductions to the total workforce is not as severe as the levels reported in the 2016 downturn, around a fifth of surveyed firms said they expect to make further reductions in 2021.

The value of the Government’s COVID-19 support schemes is illustrated in the report, with over three-quarters of firms utilizing at least one of the schemes on offer, with particularly significant use of the furlough scheme. A total of 83% of contractors furloughed employees in 2020, affecting 35% of the workforce on average.

“From the significant oil price decline, which started earlier in the year, to a global pandemic, and localized lockdown in Aberdeen, the oil and gas industry has, once again, endured profound challenge and uncertainty,” said Martin Findlay, Senior Partner at KPMG in Aberdeen. “However, there is room for some optimism. The industry, unlike so many others, is incredibly resilient and frequently deals with instability and challenge.”

“Climate change and diversification – once seen as a threat to the industry – also offers new opportunities and our findings suggest the sector is starting to embrace change,” Mr Findlay added. “As technology and innovation improve, driving down the cost barrier and driving up the return on investment, we can expect to see further moves into new greener spaces as the industry goes through a slow, but steady transformation.”

The findings show an increase in the proportion of firms actively diversifying their operations out with oil and gas, rising to 49% in this survey compared to 25% reported a year ago. A total of 57% say they are considering accelerating their plans in response to the COVID-19 pandemic. Lack of experience and skills within organizations has now advanced from prior surveys to become the most frequently cited blocker by firms in the sector, with 49% of respondents highlighting it as an issue.

When asked how optimistic firms were about the long-term future of Aberdeen as an energy hub, almost a quarter (23%) report being not at all optimistic, compared to just 9% in 2019, with a further 27% reporting being only slightly optimistic.

“Over the course of this year we have seen drastic and unpredictable disruption to business globally due to COVID-19, combined with the collapse in oil and gas prices,” said Shane Taylor, Research and Policy Manager at Aberdeen & Grampian Chamber of Commerce. “Although government support has had clear value in supporting firms and jobs through this challenging period of suppressed demand, the only sustainable way to give businesses and workers clarity is a clear route to heightened levels of activity in the future.”

“The declining trend in the positive outlook for the future of the Aberdeen city region as an energy hub also emphasizes the need to see rapid progress in some of the key projects which will underpin the region’s ability to transition successfully, such as the Energy Transition Zone,” Mr Taylor added. “The Chamber has argued for specific funding for the sector and we’ve already seen the Scottish Government commit £62m towards an Energy Transition Fund focused primarily on projects within the northeast, which will support these ambitions.”

“As we look towards the future, we need to see meaningful progress on allocating this funding and bringing these key projects on stream. A clear way to achieve this progress would be the UK and Scottish Governments coming together with industry to finalize the terms of a place-focused North Sea Transition Deal, one which sets out a pathway to ensure that the oil and gas industry and the skills and talent in the communities that power it act as key contributors in the aim to reach net zero.”