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Dutch oilfield services analysis 2016

2 | Dutch oilfield service analysis 2016

3Dutch oilfield service analysis 2016 |

Contents

Introduction 5

Summary 6

Dutch oilfield services industry: 2015 vs. 2014 comparison 10

The Rotterdam region – the largest oilfield services hub in the Netherlands 12

The Dutch oil field services industry supply chain by category 15• Reservoir and seismic: continued overcapacity in the seismic survey fleet 16• Exploration and production drilling: decreased drilling on the DCS 18• Engineering, procurement and construction: many projects reached completion in 2015 20• Operations: a stabilizing market in 2015 22

Comparison with the Norwegian and UK oilfield services sectors 24

Activity going forward 28

Challenges and opportunities for the Dutch oilfield services industry 33

Methodology 36

Abbreviations 37

Appendices 37• Oil and gas in the Netherlands 38• Mature exploration and production sector 40• About EY 41• Thought leadership 42• Contacts 43


MethodologyA company is defined as a Dutch OFS company if:• At least 50% of its activities is deemed to be related

to the oil and gas sector• It is a Dutch-registered company

Accounting information is publicly available from the Dutch Chamber of Commerce, obtained from the REACH database1. The companies’ registered business addresses have been used to reflect their geographic location. The number of companies included in the analysis varies somewhat, due to variation in availability of financial information.

We have used the stand-alone financial statements for each legal entity in our analysis. As a result, large corporations have been analyzed as a series of individual companies and not as a consolidated group, where possible, to get a more detailed demographic view of location and activities across the supply chain. The implication is that intercompany transactions are not eliminated when financial figures are aggregated.

CategorizationEach company in the OFS portfolio has been reviewed individually, and an assessment has been made of its position in the value and supply chain.

The value chain has the following categories:• Reservoir and seismic (RS)• Exploration and production drilling (drilling)• Engineering, procurement and construction (EPC)• Operations (OPS)

EY conducts regular analysis of the various North Sea oilfield services segments. The report has been developed and expanded each year in line with the growth of the industry it seeks to cover. In addition, EY also issues annual reports covering the UK- and Norwegian-based OFS industries.

We have analyzed annual financial information published by the companies in our sample from 2011 to 2015. As such, the analysis does not reflect any recent developments in the industry.

However, to complement this research, we also take a moment to look ahead and discuss opportunities and challenges facing the industry now and in the future.

Please note that the completeness of our data depends on the financial information disclosed in companies’ annual accounts submitted to the Dutch Chamber of Commerce. Our sample of companies includes those we deemed to be relevant. The number of companies included in our analysis varies from year to year, due to availability of financial information. This means that 2014 figures mentioned in our 2015 report might deviate from the 2014 figures mentioned in this year’s report, on an aggregated level (although not on a company-by-company level).

We hope you find the report useful and we welcome any feedback you may have.

Introduction

Welcome to the 2016 version of the Dutch oilfield services (OFS) industry analysis. In this report, we quantify the size of this diverse industry and analyze the dynamics across it.

1 European Regulation (No 1907/2006) concerning chemicals and their safe use. Registration, evaluation, authorisation and restriction of chemicals.


Summary

The data available for 2015 shows us an overall decrease of 5% in revenues generated by the Dutch OFS industry compared with 2014, dropping to a total of €24.7b. The continued low oil price had a negative effect on the Dutch OFS industry in 2015. Compared with 2014, revenues

decreased in the RS segment, drilling segment and the EPC segment. The OPS segment, however, showed an increase in revenues (being at the end of the industry cycle). The overall decrease in revenues explains why less people were employed in the Dutch OFS industry than in 2014. Despite all this, the OFS industry remains an important factor in the Dutch economy with a strong heritage and an excellent reputation across the globe.

The continued low oil price had a negative effect on the Dutch OFS industry in 2015. Compared with 2014, revenues decreased in the RS segment, the drilling segment and the EPC segment. This is not surprising, considering the overall state of the industry. The OPS segment, however, showed a slight increase in revenues (being at the end of the industry cycle). The overall decrease in revenues explains why less people were employed in the Dutch OFS industry than in 2014. Despite all this, the OFS industry remains an important factor in the Dutch economy with a strong heritage, future potential, and an excellent reputation across the globe.

Reservoir and seismicThis segment saw a decrease of 11% to €3.1b

in 2015. Exploration spending, which the RS segment heavily relies upon, sharply decreased in 2015. New, long-term potential on the Dutch Continental Shelf (DCS) is

expected to come from shale gas, tight gas and exploring at greater depths. Cost-intensive projects had low interest in 2015 due to the low oil price.

Operations This segment shows positive results in 2015, a 2% increase in revenue compared with 2014,

totaling €8.2b. Since this segment is at the end of the cycle, it is the last to show the adverse effect of the oil price remaining low, with order books providing work during the

course of 2015. Our data, however, does appear to show stabilized margins in absolute terms in 2015, indicating a decrease in relative profitability.

Engineering, procurement and constructionThis segment is the largest in terms of revenue, dropping to €11.8b in 2015, a decrease of 7% compared with 2014. Companies in this segment peaked in 2014, with projects sanctioned before the dramatic drop in oil prices having

been largely developed and many reaching completion in 2015.

Exploration and production drillingThis segment shows a slight decrease, down from €1.625b in 2014 to €1.617b in 2015. Drilling on the DCS, which is one of the most cost-intensive production areas worldwide, was limited in 2015. This can be attributed to the mature nature ofthe North Sea.


Recent developmentsAlmost three years after the sharp decline in oil prices, oil prices are still less than half of what they were in June 2014. Initial expectations, of Wood Mackenzie and others,2 of a significant price improvement in the second half of 2016 did not materialize, and prospects of short-term price recovery are still to be seen.

The continuing downturn in 2015 was fueled by OPEC’s crude production hitting record rates as Kuwait and the United Arab Emirates (UAE) hit their highest output ever, Iraq increasing its supplies and post-sanction Iran ramping up its production. Part of this increased supply was caused by reductions of non-OPEC countries. In addition, global oil demand growth is slowing at a faster pace than initially predicted, mainly due to economic decelerations in China and India and an economic slowdown in Russia and Europe.

OPEC’s recent decision to cut oil production, combined with the cut of non-OPEC countries, could help to bridge the gap between supply and demand. The impact of this decision on the oil price remains dependent on multiple macroeconomic developments, such as the new political reality in the US and the supply of shale oil and gas. Due to its quick ramp-up ability and, presumably, the need to service debt, US shale oil and gas may show rapid growth in response to increasing oil prices.

The industry’s first response to the price decline were quick wins. First, capital expenditure (capex) cuts, followed by operational expenditures (opex) reductions, including flexible non-core job cuts. This was in anticipation of a quick recovery in oil prices. Today’s reality is that oil prices may remain low for the short and mid-term, forcing the industry to take more drastic measures or even transform the current business by making fundamental changes in the operating and business model.

Long-term outlookThe oil and gas industry responded to the downfall of the oil price by cutting capex, and the oil majors are expected to keep a tight rein on capital spend going forward. Cost reductions have been achieved by contractors and suppliers through downsizing, simplification and project design optimization, building in less flexibility and creating more standardized solutions. This has been made possible by the increased focus on easier and smaller projects with faster and higher returns. The OFS industry is likely to continue to face this low capex environment, forcing incumbents to look for alternative and sustainable operational cost improvements. These may well include fundamental changes in the operating and business model, innovative (digital) technology and greater collaboration with the industry.

TrendsOne trend that can be seen in the OFS industry is collaboration and consolidation, combining engineering and project management capabilities with complimentary technology, manufacturing and service capabilities. So far, these collaborations and consolidations have saved costs through improved front-end engineering and design, such as subsea field architecture, and through project management efficiencies. It is expected that these efforts to reduce costs in the industry will stimulate investment activity.

Digital transformation reduces costs by making existing equipment smart (reducing the costly labor component), and through advances in wireless connectivity, the possibility of handling large amounts of data and ways of sharing it easily. Other innovations can be seen in non-digital solutions such as the application of new and cheaper materials. New solutions are impacted by the strict health, safety and environmental protocols of brownfield projects, a large part of the success of innovations is therefore expected from greenfield projects.

2 Quarterly perspective on oilfield services and equipment. August 2015. Wood Mackenzie.


Over the past few years, we have seen an increased focus on high-potential areas and assets within portfolios. Running costs of not utilizing assets are high, and many OFS companies have exhausted their options to cut expenses as a way to avoid selling or dismantling assets. During the coming years, we expect a trend of increased divestment and dismantling of assets. This will reduce the flexibility of the industry to upscale when the market recovers.

A positive outcome of the low oil price environment for the OFS industry could be the increased acquisition appetite of private equity (PE) firms in upstream assets. These acquisitions can provide short-term and long-term financial solutions across the oil and gas sector. This could potentially increase the activity of Dutch OFS companies, as these investments may extend the life of North Sea assets.

New growth marketsA growth market that is increasingly being targeted by international oil companies is offshore wind; this has great potential to stimulate the development of this market. Offshore wind offers opportunities for the OFS industry to divert their offshore experience and assets to new projects, increasing utilization and revenues.

Decommissioning is still considered to be a growth market, with many mature platforms on the DCS having either stopped production due

to the low oil price or have come of age. However, other than the decommissioning of the Yme platform we have not seen many larger decommissioning projects so far.

As the total costs of decommissioning are higher than expected, governments around the North Sea have started to think of ways to spur decommissioning. Different approaches, ranging from tax breaks to grants, clearly indicate that decommissioning will have a high priority the coming years, creating opportunities for the OFS industry.

OptimismA continually growing demand for oil, due to population growth and energy needs of growing economies, offers a reason to be optimistic about the future market for the OFS industry. Illustrated by a recent modest oil price recovery, with indications that growth is back on the agenda. At the publication of this report, there is a bit more visibility on new projects. Shell indicated that some of the most recent deep sea and shale projects should be economically feasible at oil prices of US$45 and US$40 per barrel respectively – a clear sign that the industry is adapting to the new reality.

2017 will still be a difficult year for the Dutch OFS industry, but structural changes to business models and other ways of reducing costs and improving efficiency ensure the industry is ready for an extended period of low oil prices.


Challenges and opportunitiesFor OFS companies to operate in a sustained low oil price environment, several challenges and opportunities can be identified.

Opportunities

• Offshore wind farms are a crucial part of sustainable energy policies. The construction and operation of these farms are similar to activities already deployed by the OFS industry. Dutch OFS companies can implement their current product and service offerings to accommodate the offshore wind industry.

• The Dutch OFS industry can take a leading role in decommissioning activities on the DCS; the Rotterdam area especially, with its resources and infrastructure, has the opportunity to become Europe’s leading hub for decommissioning oil platforms.

• Reducing costs and increasing efficiency have resulted in innovative technologies throughout the sector: digital innovations, such as drones, IT data management and Internet of things technology, and physical, like new materials for pipelines. The Dutch OFS industry

has great potential to implement new, innovative technologies, leveraging its strong heritage and the entrepreneurial and innovative spirit of hundreds of smaller OFS companies.

• Strategic collaboration agreements and mergers between OFS companies and operators illustrate a fundamental shift in the operating model. Operators and suppliers are working together as one integrated or aligned team to reduce costs and gain efficiencies.

Challenges

• Continued reduction of the workforce will result in talent loss, as engineers and designers become part of the reduction. This could have severe consequences in the long term, as availability of highly qualified experts could become scarce in the event of an oil price recovery.

• An international footprint is needed for Dutch OFS companies to secure revenue going forward. The reduction of DCS production sites triggers the need for an international order portfolio, which most of the larger OFS companies have already accomplished.


Dutch oilfield services industry: 2015 vs. 2014 comparison

Revenues down from 2014Revenues generated in the OFS sector decreased by 5% compared with 2014, reaching a total of €27.4b. Decreasing revenues were experienced in the RS segment (down 11%), followed by EPC (down 7%) and the drilling segment (down 1%). Despite revenues showing a 2% increase in the OPS segment, profitability experienced significant downward pressure.

The RS segment, being at the forefront of the OFS sector, was adversely impacted by the continuing downward trend in oil prices and subsequent capex cuts. The other segments, positioned further down the value chain, were less affected.

A reduction of approximately 5,600 employees in 2015The number of people directly employed by the OFS sector decreased by 7% in 2015, compared with a 5% growth in 2014. During 2015, the industry employed approximately 78,000 people on average. The reduction in people directly employed is in line with the downward trend in revenues.

Note to readers Our quantitative research into the OFS sector is primarily based on annual accounts that have been made publicly available. Companies are only included in our analysis if they have published their 2015 annual accounts. Our 2015 analysis might exclude some companies that – at the time of writing this report – had not yet published their 2015 annual accounts. Additionally, our selection of companies is not static. Some companies might no longer be included and others might have been added. As a consequence, 2014 figures stated in this year’s OFS report might deviate from 2014 figures stated in the 2015 OFS report.

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Total assets increased by 5%Total assets deployed in the OFS sector increased by 5%, compared with 2014, reaching a total of €38.1b. The growth in total assets was primarily driven by growth in current assets in the EPC and OPS segments, which could indicate increasing inventory and stretched payment terms of debtors. Total assets deployed by the RS segment showed a decrease during the course of 2015.

Please note that despite data on total assets being abundantly available, data availability on asset breakdowns is rather limited. As such, we feel that further analysis on assets per segment is currently not feasible.

Distribution of companiesOur sample comprises more than 300 companies. In terms of the number of companies, the EPC and OPS segments are by far the largest in line with their relative positions in 2014.

Viewpoint

“The significance of the OFS industry to the Dutch economy is underpinned by the €24.7 billion revenue it achieved in 2015 and the 78,000 people it employed during that year. Based on the continuing lower oil price and continued capex cuts during 2016, we expect declining revenues across the entire Dutch OFS industry in 2016 compared with 2015.

The new price environment has emphasized the importance of agility across the OFS industry. During 2016, Dutch OFS companies increased their focus on alternative uses of their assets in offshore wind and decommissioning activities. With the outlook for 2017 still uncertain, we expect companies to focus on gaining efficiencies through adopting new technologies, creating growth through innovative business models and driving down operating costs through restructuring efforts.

Although job cuts are necessary from a cash preserving perspective, downsizing the workforce across the industry could potentially have severe consequences in the long term, as availability of highly qualified oil and gas experts could be scarce in the event of a recovery in the oil price.

Given its strong heritage, leading knowledge position, and innovative and flexible character, we expect the Dutch OFS industry will continue to play an important role in the oil and gas industry. The OFS industry could leverage this position by joining forces within the supply chain to act, where needed, as a cluster in order to enhance the integrated service offering toward clients.”

René CoenradiePartnerTransaction Advisory ServiceThe Netherlands

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The Rotterdam region – the largest oilfield services hub in the Netherlands

The sample for our analysis consists of legal entities located across the Netherlands. The Dutch OFS industry is mainly found in three clusters in the western part of the Netherlands:

• Rotterdam cluster• Amsterdam and IJmuiden cluster• Den Helder cluster

Besides its significant presence in these clusters, the Dutch OFS industry provides employment opportunities and contributes to infrastructure across the whole country.

Rotterdam is the largest and most important cluster in the Netherlands. The city harbors several of the largest OFS companies active in the Netherland – such as SBM Offshore and Boskalis – for two reasons. First, the Port of Rotterdam provides an access point for the offshore industry. Second, the Rotterdam region also encompasses a wide array of storage, refining and transport assets for the oil and gas sector. The refineries of integrated oil and gas companies are situated in the Port of Rotterdam and surrounded by the oil storage infrastructure, which means that Rotterdam harbors a large part of the downstream oil and gas infrastructure.

Over the next few decades more than 470 platforms, 5,000 wells and 10,000km of pipelines will have to be removed from the North Sea. This wave of decommissioning in the North Sea will be a major

job creator. Rotterdam can play a big role in this development as it is located relatively close to the infrastructure to be decommissioned, has a large port to receive the platforms, is surrounded by heavily industrialized areas and has a broad transportation infrastructure. This potential for Rotterdam to play a key role within the decommissioning development is supported by the recent plans of the Port of Rotterdam Authority to allocate part of the Maasvlakte 2 to the dismantling of offshore facilities. Maasvlakte 2 was also the location where the final part of the Pioneering Spirit, the world’s largest construction vessel for the installation and removal of oil and gas platforms and pipelines, was built.

In the province of North Holland, a cluster of firms is situated around the Port of Den Helder. This port serves as an important supply base for the offshore oil and gas sector given its close proximity to the DCS. Many fields are serviced from this supply base because of the port’s infrastructure and because it offers the shortest sailing times to many offshore platforms. Another strong cluster of OFS companies is situated around the Amsterdam and IJmuiden area.

A significant number of companies are located elsewhere in the country, illustrating the importance of the OFS industry to the Netherlands as a whole. For example, North Brabant, with its active cluster of family businesses.


The Dutch oil field services industry supply chain by category

• Reservoir and seismic: continued overcapacity in the seismic survey fleet

• Exploration and production drilling: decreased drilling on the DCS

• Engineering, procurement and construction: many projects reached completion in 2015

• Operations: a stabilizing market in 2015


About the segmentThe RS segment includes Dutch legal entities that operate the vessels and equipment used for seismic surveys, and companies that analyze and interpret the geophysical and petrophysical data acquired by these surveys.

While new fields are still being discovered on the DCS, the long-term potential in the North Sea mainly relates to the exploration of new play – such as shale gas and tight oil – and exploring at increasing depths. Given the continued decline in oil price during 2015, appetite for such projects remained limited.

Since the market for the RS segment in the Netherlands is relatively small, companies need to be operating across the globe to keep the order books filled. This leads to a few small companies in this segment and some large companies, of which Fugro is the dominant one.

During 2015, there was continued overcapacity in the seismic survey fleet, driving down prices. RS companies have therefore been under pressure for an extended period, propelling various operational and financial restructuring initiatives. Several companies have reduced their fleet and headcount in 2015.

Although costs were reduced, the decline in revenues predominantly resulted in low to negative profitability.

Reservoir and seismic: continued overcapacity in the seismic survey fleet

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Reservoir and seismic Drilling segment Engineering, Procurement and Construction Operations


Segment highlights• Reported revenues were €3.1b, a decrease of 11% compared with

2014. Seismic activity also showed a decrease.

• The total number of employees in 2015 was approximately 17,300, which is a decrease of 7% compared with 2014.

• The companies in the RS segment were faced with high costs and low returns even before the oil price started to decline in the second half of 2014, which made value creation challenging. According to Wood Mackenzie,3 in the low oil price environment, exploration spend decreased sharply during 2015, with average budget cuts of 30% across the industry. However, as the industry adjusted to this new price environment, exploration costs started to fall, offsetting the impact of lower exploration spend. Exploration costs are anticipated to decrease further, which may give rise to increased exploration and drilling activity in high-impact plays.

• Companies in the RS segment have divested or cold stacked their vessels and decreased the workforce to reduce their cost base. These initiatives were predominantly driven by a strongly declining backlog. Besides divestments and cold stacking, companies also implemented sale and leaseback mechanisms to free up cash flow while retaining operational capacity.

• Although the segment was characterized by negative profitability in 2015, the relative amount of losses appears to have decreased. This might be an indicator that companies are aligning their cost base to their topline.

• With easy-to-reach reserves believed to be depleting, new reserves will be needed. These new reserves are predominantly located in more challenging areas such as deepwater, requiring new seismic acquisition to find new spots to drill. These challenging areas, however, remained economically unfeasible to explore at 2015 oil price levels.

• The market outlook for RS is expected to remain challenging despite a modest oil price recovery in 2016. Since the peak in 2014, global exploration spend has decreased by around 50%, negatively impacting seismic survey demand. Global exploration spending is not expected to recover to the levels of recent years until after 2020, according to Wood Mackenzie.4 When and how a recovery takes place will mainly depend on the comfort offshore operators will get from cost levels, and their focus on declining rates and reserve replacement ratios.

3 Exploration costs set to fall 33% by 2016, March 2015. 4 Global oil and gas exploration likely to return to profitability in 2017, December 2016.


About the segmentDrilling is a multifaceted segment of the OFS industry. It includes Dutch companies that own or operate drilling rigs, as well as the more traditional oilfield service companies that deliver products and services to these rigs. Internationally, the more traditional OFS segment is being dominated by multinationals such as Schlumberger and Halliburton.

Companies in this segment typically provide a wide range of services, including cementing, stimulation, intervention, completion, field and reservoir modeling, drilling, evaluation, coiled tubing services, production optimization, subsea solutions, well testing, well monitoring, and pipeline integrity.

The segment is a mature market from a Dutch perspective. Notwithstanding available reserves today, the potential for the drilling segment on the DCS going forward is declining. Drilling activities will remain rather limited, with just a few Dutch-based companies involved. In our subsample, we see the larger OFS companies, such as Schlumberger, Halliburton and Baker Hughes (remaining separate), and Weatherford, supplying all the required resources for this segment. Our sample also contains niche companies providing services to the larger companies. Continued low oil prices and diminishing reserves pushed the industry toward further optimization, potentially allowing innovative companies in certain niches to obtain a foothold in this segment. Considering the low-reserves fields and oil price dynamics, we currently do not see much room for additional dominant companies on the DCS going forward.

Exploration and Production Drilling: decreased drilling on the DCS

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Reservoir and seismic Drilling segment Engineering, procurement and construction Operations


Segment highlights• Revenues reported in 2015 were €1.6b, which is comparable with

2014’s revenues of €1.6b.

• The number of employees increased from around 1,400 FTE in 2014 to 1,450 FTE in 2015, an increase of 3.5%.

• The amount of exploration, appraisals and production drillings on the DCS decreased. In 2015, 23 drillings were performed,5 compared with 24 in 2014.

• Companies in this segment were facing a decrease in backlog due to the oil price level and pressure on margins. As the DCS is one of the most cost-intensive oil production areas worldwide, continued focus on cost control is likely. Contract rates will likely remain low, primarily driven by an oversupply in rigs.

• Innovation was challenging to accomplish as cost management appeared to be the key factor in winning tenders in this capital-intensive segment. Ongoing restructuring programs, consolidation and further fleet reductions are anticipated.

• Analysts’ consensus estimates indicate a strong decrease of new contract rig costs, the well-related costs have also dropped significantly.

5 Delfstoffen en aardwarmte in Nederland 2015.


About the segmentThe EPC segment comprises Dutch legal entities involved in EPC of production platforms, vessels (e.g., floating production, storage and offloading units (FPSOs) and accommodation platforms) or equipment and components. In terms of revenue, this is the largest segment of the OFS market.

Traditionally, Dutch contractors have a good reputation and strong track record in EPC, thanks to their high standards of quality, innovation and safety. The segment is a global market and Dutch contractors have been involved in many oil, gas and offshore wind energy projects all over the world. Dutch engineering firms are recognized worldwide, designing numerous mobile offshore units, drillship or jack-up drilling rigs, FPSOs and offshore support vessels.

Firms in the EPC segment peaked in 2014 in terms of revenue, reaching the end of the cycle. Although the segment is in the process of reducing its overall investments, this is mostly related to capex. Ongoing projects have largely been developed and many projects reached completion during 2015, leading to a reduction in revenues and low order books.

Engineering, procurement and construction: many projects reached completion in 2015

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Segment highlights• ► ►► Revenues reported in 2015 were €11.8b, which is a decrease of

7% compared with 2014. Our sample indicates that in relative terms, margins were negatively affected as well.

• ► ►► Most revenues in this segment were reported by large international companies that also generate sales on an international basis.

• ► ►► Headcount decreased by 12%, from 32,400 in 2014 to 28,700 in 2015. Companies widened their focus to areas such as offshore wind and renewable energy where their employees can readily deploy their skillset, allowing them to retain revenues and personnel to a certain extent.

• ► ►► Total assets showed a modest increase from 2014 to 2015, primarily driven by an increase in working capital, indicating stretching of payment terms by the debtors of EPC companies.

• ► ►► The overall drop in oil price resulted in price pressure from contractors and increased competition from companies typically operating in other segments of the industry. Firms were increasingly focused on cost reduction. This is illustrated by the Upstream Capital Cost Index (UCCI), which measures the cost of equipment, facilities and personnel used in the construction of onshore, offshore, pipeline and liquefied natural gas (LNG) projects. Furthermore, companies typically operating in other segments stepped into the EPC segment and participated in tenders, driving down prices.

• ► ►► As opposed to new builds, smaller modifications and regular maintenance projects will likely see recovery first, as companies have delayed maintenance where and when possible.

• ► ►► Crucial for the EPC segment is the number of new projects. Due to continued oil price pressure many companies postponed or canceled investments. The absence of large projects has adversely impacted the outlook of the segment. The present oversupply of equipment will dampen the effects of an oil price recovery on the number and pricing of new builds.

• ► ►► The 2015 industry situation also resulted in collaboration and consolidation, highlighted by the recent mergers of FMC-Technip, Schlumberger-Cameron and GE-Baker, and alliances between Saipem and Aker Solutions. Most of these collaborations focus on cost savings through improved front-end engineering and design and overall project management efficiencies.

5 Source: IHS Energy.

The Upstream Capital Cost Index (UCCI)5


About the segmentThe OPS segment includes entities that support oil companies and operators with production modification, maintenance and inspection, but also provide logistical services such as helicopter transport and onshore bases.

Many Dutch operators faced a stabilizing market in 2015, as this segment is at the end of the cycle, and is affected by lower demand at a somewhat later stage.

Going forward, the OPS segment will be negatively impacted by low oil prices, by the reduction in work contracted and, particularly, by less profitable terms and conditions. Also, contract periods will likely be shorter with less security of future work. This will lead to lower utilization rates of contractors’ assets (e.g., vessels and equipment) and inevitably to oversupply, forcing contractors to redirect vessels and equipment to serve other sectors or divest parts of their fleet.

Operations: a stabilizing market in 2015

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Segment highlights• ► ►Revenues reported in 2015 were €8,2b, which is an increase of 2%

compared with 2014. Revenues in the OPS segment have been steadily increasing for five consecutive years, showing a compound annual growth rate (CAGR) of 13%.

• ► ►In terms of profitability, our analysis is not conclusive and somewhat limited in nature. Our data, however, appears to indicate that, over the course of 2015, in absolute terms, margins stabilized, indicating a decrease in relative profitability.

• ► ►The total number of employees in 2015 was approximately 30,600, which is a slight decrease of 2% compared with 2014.

• ► ►The low oil price resulted in a decrease in backlog and pressure on the margins in this segment. This resulted in several companies implementing headcount reduction initiatives. Personnel laid off shifted toward closely related industries such as offshore wind, which is currently regarded as a safe haven within the industry. However, not all equipment and vessels are suited for offshore wind activities.

• ► ►In addition, companies in the OPS segment may shift toward decommissioning projects in the near future. These companies might focus on well-plugging OPS, removal of fixed installations and subsea well structures and pipelines. This, however, is dependent on the gradual improvements in oil recovery techniques, potentially postponing decommissioning, as wells may remain economically feasible to keep in operation.

• ► ►Going forward, we expect a further decline in day rates and consequently lower fleet utilization and even more layups of more generic offshore vessels.


Comparison with the Norwegian and UK oilfield services sectors

Summary of results

Turnover by basin

2011–2015 revenue trends

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* The exchange rate used to convert the UK data is £ 0.7 per €** The exchange rate used to convert the Norwegian data is NOK 9.3 per €

(All data for 2015 in € billion unless stated otherwise) UK* Norway** The Netherlands

Number of companies*** 565 630 326

Number of employees 134,575 92,999 78,000

Turnover (in euros) 48.2 42.5 24.7

Turnover decline 2014 to 2015 (12%) (13%) (5 %)

Exports as a percentage of turnover (estimated) 40% 35% n/a

EBITDA 3.2 3.4 Not available

EBITDA margin 9% 11% Not available


• As the UKCS is a mature basin, production had been declining annually between 2005 to 2013, at an average annual rate of 10%. As a result of significant development investment in recent years, this trend was reversed in 2014, with growth of 14% achieved in 2015 and further growth forecast in 2016 and 2017, before plateauing in 2018 and declining again from 2019 onward. The growth in 2015 was a result of increased activity in Elgin Franklin following the shut down in 2012 and new fields coming onstream (e.g., Golden Eagle and Kinnoull). The growth forecast in 2016 and 2017 is from further new fields that are expected to come onstream (e.g., the Greater Laggan Area, Cygnus and the Kraken Area) and Schiehallion production being expected to recommence in 2017, following completion of the Quad 204 redevelopment project.

• Norwegian production increased by 5% in 2015, reaching 1,450 mmboe. Oil production increased by 3.5%, driven equally by new development wells on existing fields and new fields, with four fields coming onstream in 2015, contributing 27 mmboe of additional production. Gas sales grew by 8%, driven by increased export demand. Looking ahead, the outlook for NCS production is positive as, although the large mature fields such as Ekofisk, Troll and Åsgard have passed their peak production, they still have many years of production left. In addition, several promising development projects and discoveries are expected to contribute additional resources over the coming years. At the end of 2015, there were four approved development projects on the NCS, including the giant Johan Sverdrup field that is forecast to commence production in 2019.

• Dutch onshore and offshore reserves and resources are still large, but characterized by a declining long-term production outlook. Over recent years, a number of producers have sold part of their upstream production assets in the North Sea. Chevron sold its oil and gas fields to Petrogas, and Wintershall North Sea sold 50% of its shares to Gazprom in return for a stake in the gas reserves of Siberia. Another trend in the upstream segment is the increased number of production platforms being out of service in the Dutch North Sea, driven by their maturity. Around 33% of the 180 production platforms in the Dutch part of the North Sea are out of service, compared with 20% in 2015 and 5% to 10% three years ago. A total of 142 fields are expected to cease production in the next 5 years, compared with130 fields that ceased during the last 10 years.

Historical and forecast production


• Investment in the UKCS has more than doubled since 2010 due to a number of large projects being sanctioned and new field allowances encouraging investment in projects that would otherwise have been unattractive. 2014 saw the highest levels of investment in over 30 years at US$22 billion (including fields under development e.g., Kraken, Greater Laggan Area, Mariner and Golden Eagle and upgrades to existing fields). However, capex declined in 2015 as the expenditure on a number of these projects halved as they reached the latter stages of development and there were no significant new projects sanctioned to compensate. It is forecast to decline from 2016 onward (with the exception of 2022 due to the Rosebank development) as operators continue to manage their capex budgets in response to the new lower oil price and the competition that the UKCS faces for capital from other geographies intensifies.

• After reaching record high levels in 2013, investment in the NCS declined in 2014 and 2015. The investment spike in 2013 was the result of stable field development activity, combined with several large simultaneous upgrades to current fields, primarily Troll and Åsgard. During the next few years, the most significant project on the NCS will be the development of Johan Sverdrup, with the total value of the first stage of construction estimated to be around NOK 100 billion (US$12 billion). The completion of topsides such as Martin Linge and Ivar Åasen will also require additional investment for a number of years. However, beyond 2020, the majority of existing or planned developments are lower cost subsea and FPSO solutions and, as a result, investment levels are expected to decrease after 2021.

• The increased focus on capex reductions, mainly driven by the significant decrease in oil prices, has led to significant reductions in capex levels in the DCS in 2015 and this is expected to continue in 2016. Capex in the DCS decreased by 40% in 2015 to US$611 million and is expected to decline to US$283 million in 2016. As well as the impact of the decrease in oil prices, there have been an increased number of production platform closures on the DCS that has also contributed to the decline in capex. More than 100 out of 180 production sites on the DCS are more than 20 years old, and a number have reached the end of their expected lives. Consequently, future expenditure may be more heavily weighted toward decommissioning activity rather than new developments.

Historical and forecast capex


Viewpoint from EY UK

“During 2015, the UK OFS sector experienced 12% turnover decline as demand, both in the UKCS and globally, weakened and companies experienced intense pricing competition. Although a further decline is expected in 2016, UK OFS companies have entered 2017 with optimism that the worst is behind them and with more self-confidence having ridden the storm of a sub US$30 oil price.

The unstable oil price has created an environment that forces companies to strive for greater efficiencies and compels them to search for more innovative approaches and the UKCS has started to see the benefit of a step change in performance management. Operating costs per barrel have been significantly reduced by 45% in just two years, and we have seen the first growth in production this century. Yet, it remains to be seen how much of the savings are cycle-dependent rather than embedded, and whether much of the focus has been overly short term and tactical.

Success for UK OFS companies will depend on responding flexibly to an ever-changing marketplace, whether it be volatile activity levels, customers’ changing operating models and contract structures, or the advancement of digital and other technologies. The challenge for the industry in the UK is to remain relevant and continue to innovate, while maintaining rigorous cost control.”

Viewpoint from EY Norway

“Although revenues for the Norwegian OFS industry decreased by 12.6% in 2015 and continued to decline in 2016, the industry is still Norway’s largest and the outlook is more positive now than it was a year ago. We expect Norwegian OFS activity to hit bottom in 2017, before increasing gradually toward 2020.

The reduced OFS activity level affected all segments of the OFS industry. Cost-saving programs gained momentum in 2014 and continued into 2016-17, as we observed a net jobs reduction of 18,000 employees in 2015 alone. Restructuring activity remained high, especially within asset–heavy segments.

However, the challenges OFS companies have experienced have also brought positive side effects, as the industry has been able to come up with innovative solutions to reduce cost levels. A critical challenge for OFS companies going forward will be to maintain cost levels at the new, lower rate.

As we go into 2017, we remind ourselves that previous downturns for the OFS sector have resulted in a stronger Norwegian OFS industry and the emergence of breakthrough innovations and technology. While we expect restructurings and layoffs to continue into 2017, we strongly believe the Norwegian OFS companies and technology will be attractive and crucial to secure global energy supply in the future.”

Derek LeithPartnerInternational Tax ServicesUnited Kingdom

Espen Norheim PartnerTransaction Advisory ServicesNorway


Activity going forward

The new world of low oil pricesAlmost three years after the sharp decline in oil prices, they are still less than half of what they were in June 2014. Initial expectations, of Wood Mackenzie7 and others, of a significant price improvement in the second half of 2016 or early 2017 did not materialize, and prospects of short-term price recovery are still to be seen.

The continuing downturn has been fueled by OPEC’s crude production hitting record rates as Kuwait and the UAE hit their highest output ever, Iraq increasing its supplies and the post-sanction ramp-up of Iran reaching a production of over 3.64mb/d. Part of this increased supply was offset by reductions of non-OPEC countries due to output declines in the US, Russia, Kazakhstan and the North Sea. In addition, global oil demand growth is slowing at a faster pace than initially predicted, mainly due to economic decelerations in China and India and an economic slowdown in Russia and Europe.

OPEC´s recent decision to cut oil production by 1.2 mb/d, combined with the support of non-OPEC countries cutting an additional 0.6 mb/d, could help to breach the gap between supply and demand (partly). The impact of this decision on the oil price remains dependent on multiple macroeconomic developments, such as the new political reality in the US and the supply of shale oil and gas. Due to its quick ramp-up ability, US shale oil may show rapid growth in response to increasing oil prices.

The industry’s first response to the price decline were quick wins, such as capex cuts and flexible non-core job cuts. This is in anticipation of a quick recovery in oil prices. Today’s reality is that oil prices may remain low for the short and mid-term, forcing the industry to take more drastic measures or even transform the current business by making fundamental changes to the operating and business model.

7 Quarterly Perspective on Oil Field Services and Equipment, August 2015.


Capex remains lowSince the downfall of the oil price, capex has been drastically cut by the oil and gas industry. According to Wood Mackenzie, capex in the Netherlands has dropped by around 72% over the period 2014 to 2016, compared with 42% and 48% for Norway and the UK respectively.

Due to a continuing low oil price it is expected oil majors will try to keep a tight rein on capital spend. This is supported by Chevron’s recent statement to cut capex in 2017 by another 15% compared with 2016. BP’s chief financial officer said the oil major’s capex will remain stable at US$15bn to US$17bn, which is a reduction of about 15% with respect to forecasted capex. Shell said their spending will fall again in 2017 to about US$25bn, which is a more than 40% spending reduction compared with the combined investment of Shell and BG Group two years ago.

Part of the reduction in capex stems from a drop in the cost of doing business. The latest Rystad Energy Analysis shows almost half of the cost reductions have been achieved through downsizing, simplification and project design. Key in the reduction of project breakeven prices has been less built-in flexibility, more standardized solutions, project recycling and an increased focus on project design optimization. The analysis predicts a breakeven price reduction for non-sanctioned offshore developments between 15-30%. More efficient (re-)use of existing infrastructure is another way the industry is reducing capex. Shell recently announced the re-use of an existing platform to exploit a new oil field in the Gulf of Mexico, reducing project costs by c.50%. On a side note, currency depreciations have a negative impact on the total dollar spend. According to Wood Mackenzie,8 a large part of the 40% reduction in investment in dollar terms, anticipated over the next two years, is due to depreciation of the Russian ruble.

The question remains whether the level of planned capital investment is sufficient to sustain the necessary production growth in the long run, to keep up with the growing demand for oil. According to the International Energy Agency (IEA), insufficient investments are being made in drilling and exploration to absorb future deficits. The IEA said the oil and gas industry may be on the verge of a pork cycle and predicts the oil price to increase drastically in a few years due to oil supply shortage.

Sustainable operational cost improvementsThe low oil price has put huge pressure on upstream operators to reduce the cost price of production. This has, to a large extent, been imposed on the OFS industry. According to Boston Consulting Group (BCG), the OFS industry accounts for 20% to 50% of the operating costs and as much as 95% of capital expenses of upstream operators. OFS companies made quick wins to reduce opex, such as cutting the flexible non-core workforce, and putting downward pressure on vessels, equipment and labor rates, to survive the highly competitive bidding rounds for tenders. However, these short-term cost-saving strategies are losing relevance as they are not sustainable in the long run. The OFS industry has come to believe that more are required to survive. These structural cost improvements should include fundamental changes in operating and business models, innovative (digital) technology and greater collaboration with the upstream industry.

Job cuts hitting the core of the businessWorldwide job losses in the oil and gas industry have topped 350,000, according to analyses by Houston based Graves & Co. made public May last year. The largest portion of job cuts can be seen in the services sector (c.43%), followed by exploration and production (c.23%) and drilling (c.15%). Two examples of these global job cuts are Haliburton having reduced its workforce by about 33,000 jobs since late 2014, and Shell that has targeted up to 12,500 layoffs in 2016.

A large portion of the layoffs initially impacted the flexible non-core workforce. However, the need for further layoffs is forcing companies to also cut jobs in their core business. Dutch offshore company Heerema Fabrication Group recently announced a reduction in its workforce more than 60%, including engineers and shipyard employees. This type of reorganization hits the core of every business and challenges the industry to rethink their current operating and business model. The talent loss also poses a more existential challenge for the industry, and may limit the ability for future rescaling when the market picks up again.

8 Oil industry to cut US$1 trillion in spending after price slump, June 2016.


Continuing supply chain pressure pushes greater collaboration and project standardizationCost price pressure impacts all cycles of the supply chain. Upstream operators continue to put pressure on their contractors through efficiency programs by renegotiating contracts. Furthermore, competitive tenders force contractors and suppliers to bid against minimal or sometimes negative margins. Contractors have responded by reassessing project design approach. This has been facilitated by upstream operators moving away from complex arctic or deep-sea drilling projects and turning increasingly toward easier and smaller projects with faster and higher returns.

In addition, upstream operators are seeking greater alignment with the supply chain across the entire asset life cycle. Increased collaboration – through the combination of technologies, products and services from different parts of the value chain – is achieved through multiproject framework contracts or vertical integration. Similar trends can be seen between OFS companies, as they use collaboration and consolidation to combine engineering and project management capabilities with complementary technology, manufacturing and service capabilities.

An example of this consolidation is the merger between Schlumberger and Cameron in April 2016, which had a rational to drive system performance through a closer integration of the surface and subsurface components, of both drilling and production systems. Another example is the recent merger between Technip and FMC Technologies into TechnipFMC. By combining their complementary capabilities they created a leading company in subsea, surface, and onshore and offshore on the basis of technology and innovation. New alliances have also been formed, such as the one between Saipem and Aker Solutions. So far, these collaborations and consolidations have been centered on realization of cost savings; for example, through improved front-end engineering and design and by project management efficiencies.

It is expected that the many efforts undertaken by the industry over the past few years to reduce costs and increase efficiency will stimulate investment activity. Wood Mackenzie9 predicts the number of new investment decisions in 2017 to increase compared with 2016, with total capex remaining more than 40% below the 2014 level.

Technological innovation and digital drive sustainable cost reductionsMany OFS companies are focusing more on digital initiatives in 2017. By leveraging the power of digital technology, current business models can be transformed to deliver real, sustained value to the bottom line. The merger in October 2016 between General Electric Oil & Gas (GE O&G) and Baker Hughes, is a clear example of the desire of OFS companies to develop and utilize a synergistic technology portfolio to achieve a competitive advantage. The digital transformation of the oil and gas industry is mainly driven by the cost reductions of turning existing equipment smart, advances in wireless connectivity and by the possibility of handling large amounts of data.

In addition, the industry is also seeing more non-digital technological initiatives entering the market. This trend can especially be seen in smaller companies. In the past, the high oil price created few incentives to implement cost-reducing technologies, as the industry was focused more on increasing production. The current environment is forcing the industry to become creative and look for ways to reduce costs. An example of a Dutch company offering an innovative way to reduce costs is Airborne Oil & Gas. This company produces pipelines from a composite with a high-tech plastic as a lighter, stainless and cheaper alternative to steel pipelines. Another example is a virtual platform set up between the oil majors to exchange spare parts. This initiative helps to reduce costs and lead times of ordering new products.

The current need for cost reductions in the oil and gas industry may seem to create an optimal environment for these new technological innovations to be successful. Nevertheless, they may still be challenging to implement in brownfield projects due to the many health, safety and environmental protocols, which create incentives for conservatism. It is therefore expected that these technologies have a higher chance of success in greenfield projects.

9 UK North Sea Deommissioning: Challenges in the current price environment, April 2016.


Structural portfolio changes to optimize cost structureUpstream operators have worked intensively on optimizing their portfolios as a method of reducing costs and increasing efficiencies. Short-term solutions often include increased focus on areas and assets with the highest potential within the portfolio, while putting on hold lower performing projects or those with a higher risk-return proposition.

As a result, global offshore rig utilization dropped from 78% in 2015 to 60% in 2016. Similar trends have been witnessed in the OFS industry. Nevertheless, running costs of not utilizing assets are high, and many companies have exhausted their options of cutting expenses as a way of avoiding selling or dismantling assets. It is expected that this will increasingly lead to companies, who initially were reluctant to sell (parts of) their business, to divest or dismantle assets. The trend of divesting or dismantling assets reduces the flexibility of the industry to upscale in case of future market recovery, which contributes to oil price volatility often seen in a pork cycle.

A narrowing bid-ask spread is expected to spur M&A activity due to the acceptance of a low oil price reality. This potential for M&A activities has

already been acknowledged by several PE firms. In today’s low oil price environment, PE firms are well-positioned to provide short-term and long-term financial solutions across the oil and gas sector. Over 2016, several PE-backed companies acquired North Sea assets; for example, the purchase of OMV’s UK North Sea assets by Siccar Point Energy. More recently, Shell agreed to sell its UK North Sea assets to private equity-backed Chrysaor. PE funds are aiming to raise more money to invest in North Sea assets, as large oil groups contemplate divesting non-core aging assets with high costs and falling output. The increased acquisition appetite from PE firms could potentially give rise to the activity of Dutch OFS companies, as these investments maximize efforts to support economic recovery of the North Sea and extend the life of these assets.

New growth markets still in the early stage of developmentA growth market increasingly being targeted by operators is offshore wind. Only recently, Shell – together with a consortium – was awarded the concession to build the 700 MW Borssele III and IV Wind farms. Another example is Statoil, which in April 2016 joined with E.ON AG to develop an offshore wind farm off the coast of Germany.

Given the vast offshore experience and the significant capital and execution power of these companies, their entrance has great potential to stimulate the development of this market. The increasing investments of operators in offshore wind offers ample opportunities for the OFS industry to divert their offshore experience and assets to new projects, increasing utilization and revenue. However, not all assets can be diverted from the oil and gas industry to offshore wind. Due to size limitations, certain vessels in the offshore oil and gas industry are not suitable for use in the offshore wind business. Increased capital investments in fleet expansion or modifications of existing assets can be expected to support the growing offshore wind industry.

DecommissioningDecommissioning is still considered a largely untapped growth market. Many platforms in the North Sea are mature, and a lack of production due to the low oil prices could give rise to decommissioning activity. According to Wood Mackenzie10 total market spend in decommissioning until 2030 will be over US$90 billion (£72.4 billion) in the UK alone, with yearly expenditures largely surpassing the yearly development spend. Nevertheless, only £3.7 billion has been spent to date. Due to the high costs of decommissioning, many platform owners often choose to extend the lifetime of their platforms and accept the running costs. However, underestimation of running costs may have others deciding to decommission after all. The question remains, who will pay for it? Even though a provision for decommissioning is often included in the balance sheet, many companies lack the cash for it. This is reinforced by the need for cash to sustain dividend payments. Nevertheless, decommissioning costs are decreasing due to low day rates of offshore vessels and potential for collaboration to decommission multiple fields simultaneously. It is to be seen whether this trend is sufficient to increase activities in the decommissioning market.

10 UK North Sea Decommissioning: Challenges in the current price environment, April 2016.


Meanwhile, as total costs of decommissioning are higher than initially expected, the governments around the North Sea have started to think about ways to stimulate this market. In the UK, a new tax regime allows oil companies operating on the UKCS to bill a significant portion of their decommissioning costs as tax refunds. In the Netherlands, a collaboration between EBN, Nogepa and IRO presented Masterplan Decommissioning and Re-use to the Ministry of Economic Affairs on 30 November 2016. This master plan aims to lay out the steps for an industry-wide effective approach to decommissioning in the coming two decades. According to the master plan, current estimates of the costs of decommissioning Dutch oil and gas infrastructure amount to c.€6.7 billion. The Dutch state is expected to contribute roughly 70% of this amount through EBN, reducing national gas income. In Norway, a Grant system is used in which the state’s share of decommissioning costs is paid directly to the relevant licensees at the time of decommissioning. These different policy approaches clearly indicate decommissioning will have a high priority in the coming years. Nevertheless, no common understanding has yet been reached on how best to approach this challenge. The relevant question will therefore not be whether or not the market for decommissioning will emerge, but rather who will pay for it.

Room for optimism Looking forward, both the industry and macroeconomic trends offer reasons for future confidence. According to the IEA, demand for oil continues to increase by 1.3 mb/d in 2017, driven partly by the global population growth and the increasing energy use in major economies like China and India. In its Outlook for Energy report 2016, ExxonMobile predicts a 25% growth of the global energy demand by 2040. Around US$750 billion a year of investments will be needed to support this growth of which c.85% is required to maintain current levels of supply. Given the current backdrop of capital investments, the oil price will become more volatile when the market is not able to meet the growing demand.

In short, the Dutch oil and gas sector continues to face the consequences of low oil prices. We expect 2017 to be another difficult year for the industry, which is expected to focus on structurally reducing costs and improving efficiencies by altering its current ways of working and combining capabilities and technologies through consolidation and collaboration.


Diversification toward offshore wind• ► ►The continued low oil price has emphasized the importance of agility

across the OFS industry. During 2016, Dutch OFS companies increased their focus on alternative use of their assets in offshore wind activities, as one of the main alternative sources for fleet usage. This was also reflected in portfolio driven M&A throughout the industry in 2016. For example Boskalis and Van Oord acquired the offshore wind activities of VolkerWessels and Bilfinger Marine & Offshore Systems respectively.

• ► ►The Dutch offshore wind industry is a developing market compared with the oil and gas industry. Increased standardization and protocols across the industry could enhance opportunities for Dutch OFS companies to implement product and service offerings in the offshore wind activities.

• ► ►There is an overlap between both industries – a portion of the ships, cables and engineering activities are similar – but offshore wind activities have a stronger dependency on governmental policy. Wind energy relies on subsidies. For example, the Dutch Government incentive scheme for offshore wind runs until 2023. What happens next is still uncertain. Furthermore, offshore wind projects are more geared toward cost efficiencies compared with the oil and gas industry before the oil price drop.

• ► ►As part of the SER Energy deal, five new wind farms off the coast of North Holland, South Holland and Borssele will be constructed up to 2023. Over the course of 2016, the tenders of the first two offshore wind farms off the coast of Borssele were won by Dong and Blauwwind II c.v., a consortium of Eneco, Diamond Generation Europe, Shell and Van Oord. Fierce price competition in the public tender process is expected to continue up to 2019, partly driven by the continued focus of OFS companies on offshore wind activities.

• ► ►The development of large offshore wind farms is increasing where oil and gas production on the DCS is declining. Offshore infrastructures, pipelines and empty gas fields in the North Sea could be redeveloped

for the use of renewable energy. TNO, Energie Beheer Netherlands (EBN), Shell and Siemens are investigating the merits of integrating oil and gas and renewable infrastructure. One thought is to introduce a connection between wind farms and oil and gas installations. Recycling assets on the DCS could partly offset the decline of activity of Dutch OFS companies on the DCS and could give rise to a showcase for the industry, stimulating export of knowledge in recycling of oil and gas infrastructure assets.

Downsizing the workforce changing core of business• ► ►The Dutch OFS industry has seen many job cuts announced in 2016,

due to cancellation and deferral of projects and orders and low order book intake. For example, Dutch offshore company Heerema Fabrication Group, announced to a reduction of its workforce by over 60%, including engineers and shipyard employees. The forced loss of workforce at the core of the business challenges the industry to rethink its current operating and business model.

• ► ►Today, reducing costs is imperative. However, significant loss of workforce challenges some companies to maintain their product and service offerings – and potential to secure revenues – as company specific knowledge and capacity outflows may be difficult to recover when opportunities arise. As knowledge-driven OFS companies have found their value through knowledge creation and innovation activities, a talent loss of “creative class” workers (i.e., scientists, engineers and designers) throughout the industry, could have severe consequences in the long term, as availability of highly qualified oil and gas experts could be scarce in the event of a recovery of the oil price going forward.

• ► ►We continue to see evidence of a shift from manufacturing to knowledge-intensive activities across the Dutch OFS industry. Manufacturing-focused companies tend to outsource their workforce to Eastern Europe and Asia or to change their business model toward knowledge-driven service offerings. An example of this trend is IHC, having adapted its strategy by further boosting knowledge-intensive activities.

Challenges and opportunities for the Dutch oilfield services industry


Increasing decommissioning activity going forward• ► ►Major decommissioning projects are expected going forward. More than

100 out of 180 production sites on the DCS are more than 20 years old and some have reached the end of their expected lifetime. The Dutch Mining Act states that non-operating installations – currently around 33% of the total 180 fixed topside installations on the DCS – should be removed in a timely manner. Under this Act, the Dutch Minister of Economic Affairs has a mandate to impose a deadline for operators to dismantle their installations. However, according to EBN, the Dutch Minister of Economic Affairs has never made use of this mandate. Over the past few decades, it took on average 4 years for decommissioning activities to commence upon the closure of a fixed topside installation on the DSC, but this has increased to 12 years.

• ► ►Oil and gas companies recognize liabilities on their balance sheets for decommissioning costs but the cash may not necessarily be available. In recent years, decommissioning has been postponed through rebuilds and modifications for most, as major oil companies are seeking ways to preserve cash and decommissioning yields no economic gain. However, the appetite for oil majors to postpone decommissioning seems to be decreasing as the operating costs of these mature sites tend to be higher than anticipated. This is partly due to the costs of securing health and safety requirements.

• ► ►Some Dutch OFS companies have already anticipated increasing decommissioning activities. For example, Allseas’ installation and decommissioning vessel Pioneering Spirit commenced operations in August 2016 with the removal of the Yme topsides in the North Sea in August 2016, and will begin removing the topside of the Brent Delta platform as part of the decommissioning of the Brent oil and gas field in the UK North Sea in 2017.

• ► ►The Dutch OFS industry can take a leading role in developing decommissioning activities. The Rotterdam area in particular provides strong opportunities with the presence of the Maasvlakte 2 to become northwestern Europe’s leading hub for decommissioning oil platforms, which should give rise to additional decommissioning activities beyond the DCS.

Increased adoption of digital and innovations • ► ►The focus on cost savings has led to an increased awareness for

innovative technologies throughout the sector. Oil majors are determined to preserve dividends and increasingly look for new technologies to keep infrastructure up to date. This allows them to compete and grow in case of a market recovery. Also digital is more on the agenda today. Statoil, Shell and Chevron are experimenting with drones, IT data management and internet of things technology to reduce costs and gain efficiencies. According to Oxford Economics, IoE adoption by the oil and gas industry has the potential to increase global GDP by up to 0.8 % — or USUS$816b — by 2025. The Dutch OFS industry has great potential to implement new, innovative technologies, leveraging its strong heritage and the entrepreneurial and innovative spirit of hundreds of smaller OFS companies. For example, innovations to operate rigs could strengthen the economic viability of small and previously stranded fields on the DCS, giving rise to more service activities for the Dutch industry.

• ► ►Although oil majors have clear incentives to implement new technologies from a cost-saving perspective, Dutch innovative OFS companies may be challenged by industry conservatism for implementing innovations given its preferences for proven technologies and focus on health and safety regulations. Entrenched technologies and procedures in brownfield projects pose challenges for OFS companies innovating in the oil and


gas industry, as new products face implementation risks and have to fit within systems that make up the rest of the infrastructure. Focus on greenfield projects could provide opportunities for these OFS companies to establish their technologies as the cornerstones for the industry and could give rise to a showcase for the Dutch OFS industry, stimulating export of knowledge.

Need for an international footprint to counter lower drilling activity on the DCS • ► ►Dutch offshore reserves and resources are still large but have a declining

long-term production outlook. Over recent years, more production platforms have been put out of service on the Dutch North Sea. This is due to the maturity of the production platforms. Around 33% of the 180 production platforms in the Dutch part of the North Sea are out of service compared with 20% in 2015 and 5% to 10% three years ago. A total of 142 fields are expected to cease production in the next five years, compared with roughly 130 fields that ceased between 1996 and 2015.

• ► ►In view of the expected reduction of DCS production sites, increased focus of Dutch OFS companies on their international footprint is imperative to secure revenues going forward. Some OFS companies have already established a global presence, while others still have to respond to the need for an international footprint. The increased appraisal and drilling activity in Iraq and Iran, for example Shell’s production expansion in the Majoon field, may offer opportunities for a number of Dutch OFS companies.

Joining forces in the supply chain►• ► ►Over the last 30 years, the oil industry has faced several downturns,

forcing it to adjust by focusing primarily on short-term mitigation of cost burdens. During these downturns, the oil and gas industry was

forced to react and started its own consolidation wave, mostly driven by the belief that bigger is better and that economies of scale would lead to greater efficiencies.

• ► ►Two-and-a-half years after the oil price crash it became clear that the cost efficient development of increasingly complex hydrocarbon resources will not become reality without fundamental changes in operating model, innovative technology and greater collaboration with the upstream industry. The recent collaboration agreements between some OFS companies and operators illustrate this fundamental shift, illustrating how operators and suppliers might be able to work together on oil and gas developments as one integrated or aligned team.

• ► ►Some recent larger mergers also illustrate this trend by providing examples of vertical integration through the combination of technologies, products and services from different parts of the value chain, and through the combination of engineering and project management capabilities with technology, manufacturing and services capabilities. Key drivers of consolidation were the creation of a broader portfolio of solutions and technologies, the ability to innovate and the reduction of costs for the ultimate benefit of customers.

• ► ►Given its strong heritage, leading knowledge position and innovative character the Dutch OFS industry could leverage its position, by joining forces within the supply chain and acting as a cluster to enhance the integrated service offering to clients.


A company is included as a Dutch OFS company if:• At least 50% of its activities is deemed to be related to

the oil and gas sector.• It is a legal entity registered in the Netherlands.

Industry segmentsWe have distinguished four segments within the Dutch OFS industry for the purposes of our analysis:• RS• drilling• EPC• OPS

The stand-alone financial statements of each legal entity have been analyzed (when available) to capture financial and non-financial information. Large corporations have therefore not been analyzed as a group (unless stand-alone financial statements were unavailable) but rather as the sum of their stand-alone legal entities. We have taken this approach to show a more detailed view, when possible, with regard to location and activities across the industry. Intercompany transactions are therefore not eliminated when aggregating financial figures. Each company has been linked to one geographic region only, on the basis of the company’s business address.

Companies have also been linked to a single segment of the OFS industry, based on each company’s assumed main activity in the sector. Companies will most likely have activities in several geographic regions and industry segments; however, this is not accounted for in the analysis. In addition, not all financial and non-financial information will relate to the Dutch

Methodologyactivities; for instance, each company’s total headcount disclosed in the annual reports is usually a worldwide figure of FTEs.

Please note that the completeness of our data depends on the financial information disclosed in companies’ annual accounts submitted to the Dutch Chamber of Commerce. In this respect, we have not been able to retrieve financial information in full for all of the companies in our sample because:

• Dutch-registered legal entities are not obligated by law to publish full profit and loss statements and balance sheets below certain thresholds.

• Dutch-registered legal entities part of a group do not in all cases publish (stand-alone) financial information. Most often, the parent companies disclose this information on a consolidated level.

This limits the financial analysis of the individual companies and our ability to derive segment-specific trends. However, we did take guidance from listed or large companies that publish comprehensive annual reports, including management summaries. Due of the limitations described, numbers used for our analysis are likely to be understated rather than overstated.

In addition, our selection of companies is not static. This means that 2014 figures mentioned in our 2015 report might deviate from the 2014 figures mentioned in this year’s report, on an aggregated level (although not on a company-by-company level). We put the most emphasis on trend analysis and encourage the readers of this report to interpret our report with this perspective.

• ► ►Friesland• Drenthe• Flevoland• Gelderland• Groningen• Limburg

• North Brabant• North Holland• Overijssel• South Holland• Utrecht• Zeeland


Appendices• Oil and gas in the Netherlands

• Mature exploration and production sector

• About EY• Contacts

Abbreviations m Millionb Billionmmboe Million barrels of oil equivalentcapex Capital expendituresDCS Dutch Continental ShelfE&P Exploration and productionEPC Engineering, procurement and constructionFTE Full-time equivalentOECD Organization for Economic Co-operation and Development SER Sociaal Economische RaadOFS Oilfield servicesSFP Small Fields Policy

LocationThe regions used in the analysis have been chosen to reflect and illustrate the main clusters of OFS companies in the Netherlands.

The regions are:


The majority of Dutch reserves relate to onshore accumulations. In total, 48 proven oil accumulations were found in the Netherlands, of which 12 fields were in production as of 1 January 2016. Total oil reserves amounted to 34.7 million Sm³ as of 1 January 2015, of which 12.4 million were classified as contingent. This is a decline compared to the reserve estimation as of 1 January 2014 (47m Sm³), which is caused by a downward adjustment of contingent reserves caused by the lower oil price outlook.

Gas production in the Netherlands mainly stems from onshore fields. To stimulate the development of smaller offshore gas fields, the Dutch Government introduced the Small Fields Policy (SFP) in 1974. This measure was aimed at preserving the giant Slochteren field, located in the north of the Netherlands. Since the introduction of the SFP, dozens of new gas fields have been found and developed.

As of 1 January 2015, total gas reserves amounted to 864 billion Nm³, of which 65 billion was classified as contingent reserves that are estimated to be commercially viable. The majority of the estimated reserves relate to the Groningen field (671b Nm³). The development of the gas reserves over time illustrates that there have been no major discoveries in the last 10 years.

Over the past few years, a sophisticated gas industry has developed in the Netherlands. The network of extensive cross-border pipelines allow the Netherlands to play a key role in the natural gas market.

Oil and gas in the Netherlands

Mill

ion

Sm3

Mill

ion

Sm3

Offshore

Rijswijk & Botlek onshore Offshore

Onshore

Schoonenbeek onshore

Oil production onshore and offshore, 2000 - 15

Source: ”Delfstoffen en aardwarmte in Nederland jaarverslag 2015,” Ministry of Economic Affairs.

Note: oil production is quoted in million standard cubic meters, based on a temperature of 15°C and 101.325 kPa.

Source: “Delfstoffen en aardwarmte in Nederland jaarverslag 2015,” Ministry of Economic Affairs.

Note: gas production is quoted in million normal cubic meters, based on a temperature of 0°C and 101.325 kPa.

Gas production onshore and offshore, 2000 – 15


Source: Ministry of Economic Affairs – Delfstoffen en aardwarmte in Nederland 2016.

Gas and oilfields in the Netherlands (1 January 2016)

Oil and gas in the NetherlandsSituation at 1 January 2016


Volume development and remaining reserves

Mature exploration and production sector

Mill

ion

Sm3

Billi

on N

m3

Cumulative production onshore

Reserve offshoreReserve onshore

Cumulative production offshore

Cumulative production onshore

Reserve offshoreReserve onshore

Cumulative production offshore

Development of gas reserves

Development of oil reserves

Source: ”Delfstoffen en aardwarmte in Nederland jaarverslag 2015,” Ministry of Economic Affairs.

Note 1: oil is quoted in million standard cubic meters, based on a temperature of 15°C and 101.325 kPa.

Note 2: reserves as of 1 January of year depicted.

Source: “Delfstoffen en aardwarmte in Nederland jaarverslag 2015,” Ministry of Economic AffairsAffairs.

Note: gas production is quoted in million normal cubic meters, based on a temperature of 0°C and 101.325 kPa.

Seis

mic

act

ivity

in K

M2

num

ber o

f dril

lings

Series 2DOnshore 2D

Offshore 3DOnshore 3D

Onshore appraisal

Offshore explorationOnshore exploration

Offshore appraisal


Seismic activity


Drilling activity

Global Oil & Gas Centers

Satellite Centers


EY Global Oil & Gas Centers

Europe, Middle East, India and Africa5,200 professionals

Americas3,600 professionals

Asia-Pacific and Japan1,500 professionals

A highly integrated international network of oil and gas professionals.

Scale• 200 professionals in the Netherlands working in the oil and gas sector

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Oil and gas skills• EY has been advising the oil and gas sector for more than 100 years.

• EY ranks first among all organizations in providing external audit services to public companies (including oil and gas companies) in the Fortune 1000.

• Our capabilities are focused around energy centers of excellence and include: • Transaction advisory • Assurance • Advisory • Tax

About EY


EY Global Oil & Gas Centers keep you updated with monthly thought leadership publications, exploring the latest developments within the sector. Our deep industry knowledge can help you anticipate trends, manage regulatory changes, drive down costs and compete more effectively.

Why it’s time to invest in digital oilLeveraging the power of digital technology totransform business operations can help deliver real,sustained value to the bottom line.

Capitalizing on opportunities: private equity investment in oil and gasAs companies struggle with dropping oil prices, private equity firms look at the oil and gas sector with renewed interest as the industry continues to transform.

Developing a culture of employee development and on-the-job coachingThis Global oil and gas tax guide summarizes the oil and gas corporate tax regimes in 74 countries and also provides a directory of EY Oil & Gas tax contacts.

Review of the UK oilfield services industry 2016EY’s sixth annual review of the UK oilfield services (OFS) industry. We review the 2015 trading performance of UK registered companies in this hugely diverse oilfield services marketplace and discuss the impact the changing oil market has hadon their performance in both the UK and internationally.

Driving operational performance in oil and gasAs boom and bust cycles rattle the oil and gas industry, operational excellence programs can help companies capitalize in a more profitable way.

Oil & Gas Capital Confidence BarometerOur 15th Capital Confidence Barometer characterizes the oil and gas M&A market as one where executives continue to remain positive about acquisitions, but are equally aware of challenges in concluding a deal.

The Norwegian oilfield services analysis 2016A report covering the in-depth study of the situation and development of the oilfield service industry in Norway based on actual performance. We quantify the size and development of this diverse industry and analyze the dynamics across the value chain.

Thought leadership


AssuranceJeff SluijterPartnerMobile: +31 6 2125 2650Email: [email protected]

TaxCyrille Prevaes PartnerMobile: +31 6 2125 1179Email: [email protected]

Transaction Advisory ServicesRené CoenradiePartnerMobile: +31 6 2125 1453Email: [email protected]

Transaction Advisory ServicesGuillaume Petit Senior ManagerMobile: +31 6 2908 3290Email: [email protected]

AdvisoryWoutervan GelderenPartnerMobile: +31 6 2125 2858Email: [email protected]

Transaction Advisory Services Dolf Bruins Slot PartnerMobile: +31 6 212 52 502Email: [email protected]

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How EY’s Global Oil & Gas sector can help your businessThe oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil & Gas sector supports a global network of more than 10,000 oil and gas professionals with extensive experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oil field subsectors. The sector team works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively.

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