KPMG warns that crude oil price collapse is now seeping through north-east supply chain sector

Crude oil prices slumped from $110-barrel this time last year to $50-barrel in December 2014, although have since recovered to about $60-barrel.
Crude oil prices slumped from $110-barrel this time last year to $50-barrel in December 2014, although have since recovered to about $60-barrel.

The next 6 to 12 months will be critical for N. Sea oilfield services companies of all sizes and other supply-chain businesses that dependent upon the performance of the oil and gas sector. 

According to KPMG accountants, the full impact of cost reduction measures and the deferral or cancellation of capital projects in the UKCS is yet to be fully felt.

But businesses that are heavily dependent on N. Sea operations, which are not sufficiently diversified across the life cycle, or which are highly leveraged are likely to be exposed.

Geoff Jacobs, Restructuring Director at KPMG, explained: “Whilst there have been relatively few UK insolvencies in the oil and gas sector since the oil price collapse at the end of 2014, there is increasing talk of distress in the market as the ripple effect of cost reduction spreads through the supply chain. 

“We are encountering increasing instances of companies experiencing stress and distress as a result of the oil price decline.

“A low oil price has serious implications for oil exploration and production companies, where we have witnessed the majority of redundancies so far, and creates a ripple effect right through the supply chain and beyond. 

“We are now really seeing the impact of the oil price decline extend down the supply chain affecting not only the immediately obvious oilfield services companies but also impacting businesses across Scotland not necessarily perceived as being within the oil and gas sector. 

“Businesses that supply into or are dependent upon the sector are beginning to suffer as activity levels decrease generating less revenue for many businesses across the North of Scotland.  

“Corporates and their stakeholders who have so far believed that their business can weather any storm should at the very least re-assess matters as early as possible to fully understand their key risks and, in particular, what counterparty risk the business has and properly plan for the downside scenarios as supplier and customer positions are regularly changing.” 

With major lenders now undertaking a second round of assessments of their exposure to potentially stressed businesses, taking a proactive approach to managing the challenging market conditions in the sector is particularly important.

Deeper and more sustainable methods for improving efficiency, streamlining operations and entities, reducing costs, improving cash and working capital processes and devising contingency plans should be considered.  

Jacobs added: “Businesses of all sizes are caught up in the on-going impact of the oil price collapse and will require a range of support to overcome the challenges that they are already experiencing or anticipate in the next six to 12 months. 

“We are currently working with a number of businesses of all sizes covering issues such as working capital management and contingency planning”.

Meanwhile, Petrofac – a major offshore services contractor – has secured contract renewals for some $400 million N. Sea operations and maintenance work

The largest of these awards is for the provision of operations and maintenance teams for CNR International across its North Sea assets – the three platforms in the Ninian complex; Murchison; and Tiffany – for the next five years.

Among others, in the East Irish Sea Petrofac has secured a two-year contract renewal from Eni, covering operations and maintenance services for the Douglas fixed platforms, Offshore Storage Installation and Point of Ayr terminal; and Duty Holder responsibility for the Irish Sea Pioneer operations support vessel.

Walter Thain, Managing Director, Petrofac Offshore Projects & Operations, said: “This package is great news for the business and for everyone involved.

“In the current climate, more than ever, it is vital that operators can have confidence in the supply chain to continue to generate value for them.

“This large-scale renewal – of contracts that we have held in some cases for more than a decade – is testament to our record of sustained operations delivery on behalf of customers right across the North Sea.”

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