Oil and Gas Survey : 28th Survey : May 2018

Fraser of Allander Institute, Aberdeen & Grampian Chamber of Commerce; (2018) Oil and Gas Survey : 28th Survey : May 2018. University of Strathclyde, Glasgow.

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While structural change, focused on cost reduction and operational efficiency, has had an impact on financial performance, the steady rise in the price of crude has resulted in some major operators recently reporting higher earnings, with the results for Q2 2018 promising to unveil even stronger cash flows for the upstream oil and gas sector. With crude now at a four-year high, results for Q2 2018 promise to unveil even stronger cash flows for the upstream oil and gas sector. However, there has been a continued backdrop of restrained investment and so the oil market is noticeably tighter and increasingly vulnerable to geopolitical events such as the change in US position on Iran. Rising prices combined with reserve replacement considerations will, we believe, undoubtedly lead to an increased level of final investment decisions; whether or not investment levels will be strong enough to meet strong global demand growth and potential supply disruptions is yet to be seen. The level of energy demand remained a very important concern for more than three quarters of contractors who responded to the survey. However, firms are telling us that whilst commodity prices remain an important factor that may constrain their activities, the extent to which it might hinder growth has lessened significantly. Perhaps a sign that firms now consider themselves to be suitably agile in terms of their business structure to manage fluctuating commodity prices? The industry generally continues to be more positive. Recovery in market sentiment is steady but there remain challenges in terms of skills shortages and cash flow particularly for SMEs. It is concerning that the survey is telling us that lengthy payment terms continue to be a problem for these companies, creating liquidity issues and potentially hindering growth. Against a back-drop of the UK’s Payment Practices and Performance Reporting (‘PPPR’) regulations and Oil & Gas UK’s Supply Chain Code of Practice, we need to see a significant shift in culture towards paying to faster terms if the sector as a whole is to flourish. As confidence returns to the sector, the lessons learned from the last four years need to be front of mind and innovative thinking needs to remain at the fore. A return to the traditional way of thinking towards exploration and production (E&P) activity will not deliver the long term benefits the industry needs and changes in behaviours and culture of the industry are crucial for securing the sector’s future vitality