Insolvency climbs among oil services firms

THE number of UK oil and gas services firms becoming insolvent has risen 55% in the last year to 28, up from 18 year-on-year.

This compares to just six in 2013, reported accounting firm Moore Stephens, which said the increase is “an almost inevitable result” of the cancellation of new oil and gas projects in the wake of the decline in oil prices. A study by Wood Mackenzie published last week reported that since the crash 68 major new oil and gas projects worth up to US$380bn have been shelved around the world.

“UK oil and gas service companies frequently work on a global basis but unfortunately projects are being cancelled across all parts of the energy sector, from LNG in Australia to fracking in the Appalachians,” says Jeremy Willmont, head of restructuring and insolvency at Moore Stephens.

“Banks have begun to reduce new lending to the sector due to the weakening fundamentals of some oil and gas service companies. We would also expect more oil and gas service companies to breach their covenants on their existing loans leading to more insolvencies in the next year” he added.

Oil prices have been hit by a combination of oversupply, a cooling in demand and a strong US dollar. The price for benchmark Brent Crude is hovering around US$31/bbl – a low point last seen in 2004, and an 80% approximate decrease from the US$145/bbl peak in 2008.

Companies in the oil sector have been forced to slash expenditure including reducing headcounts. Last week oil services major Schlumberger announced it had cut 10,000 jobs on top of the 20,000 announced in November 2014. Earlier this month BP announced it was cutting 4,000 jobs in its upstream business, including 600 from its North Sea operations. As a mature, high-cost region, the North Sea has been particularly hard hit by the drop in prices.

Meanwhile, a survey of 921 senior industry executives, published today by DNV GL, has found that 65% in upstream would cut operational spending in 2016.

“In this current environment, we will definitely see a drop in exploration as capex costs are cut,” said Pål Rasmussen, secretary general of the International Gas Union (IGU). “But we are also seeing an increased focus on cost reduction in operations.

“These two facts are likely to mean that we will see a scaling back of industry activity over the coming 12 months. This is unfortunate, as these periods also provide opportunities for creativity,” she added.
Koheila Molazemi, service area leader for risk management advisory at DNV GL, is concerned that there are already early signs that cost cutting is impacting safety.

This echoes a survey of 139 readers by The Chemical Engineer this month in which 15% reported that cost-cutting following the drop in oil prices is affecting the safety of operations.

“We can’t lose sight of the requirement to make sure assets continue to operate safely,” said Molazemi.

“Any of these cost savings that these companies are considering would be dwarfed by the costs associated with a major accident. I would encourage the industry to take a step back and ensure that the cuts that they are making at the moment are sustainable.”