International drilling and exploration
The success of oil and gas is owed to the North Sea since the 1970s, the UK is home to a network of businesses providing support to this industry. The sector is internationally recognised and many of these businesses have considerable overseas sales. As such, international exploration and production activity is an important factor in the financial performance of the support services firms based in the UK.
Investment cuts in the oil industry are accelerating and there has been a sharp fall in the number of active drilling rigs around the world. Many operators may continue to produce oil at a loss rather than stopping due to the complexities of resuming production or interdependencies. Instead, the supply response to lower oil prices is heavily centred on investment and future production. Individual wells and the investments associated with them are relatively small so spending is more easily scaled compared with other forms of production, given that many producers are highly leveraged and capital has become increasingly difficult to raise.
With the cuts to capital expenditure and general climate of cost cutting, service providers are coming under increasing pressure from two fronts. Firstly, the cancelling of drilling rigs and associated field projects means sales have shrunk and productive assets and staff sit idle, generating costs but not revenue. Secondly, oil companies have increasingly placed pressure on equipment and service providers to reduce their prices.