THE fall in UK oil prices continued to impact the sector in 2016 with turnover falling by 15.5 per cent, according to a new review.

EY’s review of the UK oilfield services industry warns that the sector’s approach to recovery in 2018 could prove critical for long-term success.

For the second consecutive year the sector reported a decline in turnover, from £35.7 billion in 2015 to £30.2bn (-15.5 per cent) in 2016, with reductions across each of the supply chain categories (Facilities, Marine and Subsea, Reservoirs, Support and Services and Wells) the report reveals.

The majority of the UK oil companies experienced a difficult 2016 with less than two per cent achieving growth in excess of £10 million. However, there were companies that experienced growth as a result of acquisitions, growth in overseas activity or diversifying into other sectors.

The EBITDA margin for the oil sector fell by 0.8 per cent as cost saving initiatives, such as headcount reduction failed to offset the impact of the low oil price environment.

Derek Leith, EY partner and head of oil and gas tax, said: “Industry leaders have taken action to make operations as lean and efficient as possible which has helped them ride out this downturn. However, cost cutting and headcount reduction cannot continue indefinitely. A shift towards greater innovation in systems, processes and technologies could help drive operational costs down further while also enabling the sector to respond to an increase in activity which appears to be on the horizon.

“The industry is entering a more positive environment where oil price is rising and production is increasing as a result of both improved efficiencies and new fields coming on line but this cannot give license for old habits to creep back in. Long term success for the UK oilfield services sector will rely not only on the continued application of greater efficiencies but an active commitment to a sustainable future for the industry.”

During the downturn, operators have been managing declining rates by improving production efficiency, rather than investing in standalone projects. New extraction techniques requiring relatively low upfront capital costs can make a reasonably effective impact on stabilising production levels. While this works in the short term, a continued lack of investment in new projects is not sustainable in the longer term, the report says.

Derek Leith continued: “The UK Continental Shelf [UKCS] remains attractive for investment but the competition for scarce capital is increasingly intense.

“One of the greatest assets of the UKCS is the extensive infrastructure which makes extraction potentially more appealing than in younger, less expensive basins around the world. There were only two new field approvals in 2016, compared to ten in 2013 and more investment is needed urgently in order to maximise economic recovery and keep the UKCS internationally competitive.”

The lower oil price has impacted the oil and gas industry globally with a contraction of activity leading to fierce competition for capital.

As the UKCS is a mature region, with high operating costs and fewer development projects than in recent years, the need for UK oil companies to diversify their operations by sector or geographically through exports will become ever more pressing, according to the report.