Review of the UK oilfield services industry 2012

Contents
1. Foreword Oil & Gas UK 2. Introduction 3. Summary 4. The UK oilfield services value chain:

3 4 6 10

Value chain overview Reservoir/seismic Exploration and production drilling Engineering, fabrication and installation Operations (production and maintenance) 24 27 28 29 30

5. Comparison with the Norwegian OFS sector 6. Methodology 7. About Ernst & Young 8. Thought leadership 9. Contacts

Foreword Oil & Gas UK

This second annual review of the UKs oilfield services sector highlights the enormous economic value of the technology and expertise fostered by Britains oil and gas industry, alongside oil and gas production itself. I applaud Ernst & Youngs continuing commitment to raising awareness of the major contribution made by oil and gas supply chain companies to the UK economy. Spread throughout the country, this is a sector which encompasses thousands of firms working both on and offshore, together comprising a core component of the British engineering and manufacturing base. The 440,000 people employed in high skilled jobs are involved in a wide range of activities including seismic surveying, exploration and production drilling, engineering, fabrication and installation and maintenance. At the forefront of new ways of developing oil and gas in the UK, these firms have developed a worldwide reputation for innovation and their goods and services are in increasing demand around the world. The UK trade balance is boosted by 6 billion a year as a result. The latest figures published by Ernst & Young reflect a services sector in robust health, with supply chain revenue increasing by 17% in 2011. Over the past two years, the Government, through positive engagement with the industry, has been working to encourage maximum recovery of the UKs oil and gas. This is now beginning to bear fruit. In 2012, investment in new projects rose to over 11 billion and no less than 30 new offshore developments were approved; around another 30 development projects are in the pipeline for approval in 2013. Along with the Governments new long term approach and its development of an individual strategy for the sector, investor confidence is returning and 167 new production licences were awarded last year. All this interest and investment bodes well for the supply chain and hence for UK employment, tax revenues, energy security and balance of trade.

Malcolm Webb Chief Executive Oil & Gas UK

Confidential all rights reserved Ernst & Young LLP 2013

Introduction

Welcome to Ernst & Youngs second annual review of the UK oilfield services sector. In this report we review the 2011 trading performance of UK registered companies in the hugely diverse oilfield services marketplace and highlight their potential for continued success both in the UK and globally.

For the purpose of our analysis, we have categorized the UK OFS industry into four value chain segments: 1. 2. 3. 4. Reservoir/seismic Exploration and production drilling Engineering, fabrication and installation Operations (production and maintenance)

This year, in conjunction with Oil & Gas UK, we also surveyed some 150 members of its supply chain forum to obtain views on current industry issues and opportunities. The upbeat responses, discussed later in this report, are supportive of our findings.

Ally Rule Transaction Advisory Services

Highlights

Overview

The global oilfield services (OFS) market is highly fragmented with many companies specializing in a relatively niche subsegment of the market, although many of the larger players operate across the value chain. The UK OFS sector is already a global leader and has the potential to deliver even more high-skilled UK jobs and greater export opportunities. While there is no doubt the days of easy oil are over, the global demand for oil and gas remains high. UK-based OFS companies are continuing to enable the recovery of this scarce resource from deeper and more challenging basins. Future opportunities include an increase in oil and gas demand from emerging economies, the continued transition for UK companies to become global suppliers and global best in class, as well as a move into both renewable and unconventional energy sectors. We consider the main threats to the industry to be more macro in nature, including reduction in emerging country demand for oil and gas, unexpected taxation changes, a dramatic fall in commodity prices and risk of premature expansion in markets where the supply chain is not reliable and/or subcontractors do not perform as expected. Shorter-term concerns for many companies include the availability and affordability of personnel, while longer-term concerns include attracting talented workers to the industry and retaining them.

Despite the recession in the UK, the OFS segment continues to go from strength to strength and is outperforming most other parts of the UK industrial sector. The future is also bright, with many companies having record order books and increasing profitability. Many global OFS organizations are making Aberdeen their global center of excellence for their subsea technology businesses, which is a testament to the 40 or so years of pioneering effort by the UK element of this worldwide industry. The future of many UK North Sea mature assets will lie in the hands of smaller independents as majors and larger independents will look to transition assets to fund other global developments. Decommissioning has yet to play a significant role in the UK North Sea, partly because of the world leading technologies and expertise being both developed and implemented by UK OFS players of all sizes, helping to extend the economic life of the basin. As we predicted in last years review, financial support for renewable energy projects continues to be scaled back or deferred. With continuing mediumterm fiscal austerity measures across Europe, the renewable energy sector will continue to be a longer-term opportunity for OFS companies. As the financial analysis within this review is based on publicly available financial statements, we do not yet have 2012 data. However, we are confident that the 2012 data set will show continued growth from the success story already demonstrated by the UK OFS industry within this report.

Review of the UK oilfield services industry 2012

A UK industry delivering revenue growth of 17%

Summary

Currency: million Employees (No.) Revenue Reservoir/seismic Exploration and production drilling Engineering, fabrication and installation Operations (production and maintenance) Revenue Revenue growth (%) Revenue growth* 21% 15% 28% 12% 13% 17% Gross profit Gross margin EBITDA EBITDA margin Pre-tax profit Corporate tax Effective tax rate Total assets Net assets

2008 88,570

2009 87,169

2010 86,769

2011 92,673

The UK OFS sector has delivered yet another year of phenomenal growth, driven by increased activity in the UK North Sea and continued internationalization of the sectors world-leading skill set and capabilities. Our survey includes only those UK-registered companies that have filed accounts at Companies House and have annual revenues in excess of 10 million (390 in total). In addition to these 390 companies, we have identified another 720 companies involved in the sector but with annual revenues of less than 10 million.

632 5,586

804 5,444

779 5,784

1,032 6,021

8,573

8,547

8,945

11,272

6,745 21,537 n/a 4,119 19.1% 2,483 11.5% 2,041 547 26.8% 21,301 11,121

7,142 21,938 1.9% 4,032 18.4% 2,232 10.2% 1,616 454 28.1% 1,085 12,384

7,487 22,994 4.8% 3,976 17.3% 2,132 9.3% 1,358 384 28.3% 23,062 13,336

8,519 26,844 16.7% 4,473 16.7% 2,322 8.7% 1,729 404 23.4% 29,073 18,205

Composition of UK OFS companies with 2011 revenues of greater than 10 million

Revenue banding ( million) 25 > 25 to 50 > 50 to 100 > 100 to 250 > 250 Total No. of companies 206 69 42 51 22 390 2011 Revenue ( million) 2,876 2,347 2,850 7,587 11,184 26,844

*2011 revenue growth based on revenue banding position in 2010

Of the total revenue earned by those 390 companies with revenues of more than 10 million, some 70% is attributable to 73 organizations with revenues in excess of 100 million (19% of companies by number). The largest UK OFS companies generally provide a wide range of services across the value chain, thereby offering integrated solutions to customers. Ordinarily, the smaller the company, the more narrowly it focuses on providing specific products and services. The UK North Sea has continued its revival despite unexpected changes in the UKs tax regime in 2011 and concerns over future decommissioning liabilities. In December 2012, after almost two years of engagement and collaboration between the oil and gas industry and the UK Government, the statutory framework was agreed, allowing the UK Government to sign contracts with companies working in the UK and on the UK Continental Shelf (UKCS) to provide assurance on the tax relief they will receive when decommissioning assets.

Statoils recent investment decision to develop the Mariner oil field development in the UK North Sea, a project that entails investments of more than US$7 billion, is the largest new offshore development in the UK North Sea in more than a decade and demonstrates continued belief and significant opportunities in the basin. Significant recent UKCS transactions such as TAQAs acquisition of a number of BPs central North Sea fields and Talisman Energys US$1.5 billion North Sea transaction with Sinopec, demonstrate an appetite to invest in the continued extended life of the UK North Sea. Margin reductions observed in the Norwegian OFS sector in 2011 are not as evident in the UK OFS sector, which is primarily a result of the UK having a greater proportion of its revenues derived from overseas than the more domestic Norwegian customer base.

Review of the UK oilfield services industry 2012

Revenue increased 17% in 2011 as compared with 2010

Revenue 29 27 25 b 23 21 19 17 15 2010 2011

All segments of the UK OFS value chain demonstrated growth in 2011 as compared which 2010. This represents a compound annual growth rate (CAGR) of some 7.6% since 2008. The smallest segment of reservoir/seismic grew the most in percentage terms (33%), while engineering, fabrication and installation saw increased revenues of some 2.3 billion (up 26%), driven by global subsea activity.

An additional 6,000 employees in 2011

No. of employees 95 90 Thousands 85 80 75 70 65 60 2010 Margin 20% 2011

Although some 93,000 employees were recorded in 2011, an increase of some 6,000 over 2010, significantly more are employed in the UK OFS sector because our survey excludes:

Non-UK registered entities, even if they operate in the UK North Sea Individual contractors working in the UK OFS value chain Indirect companies/employees who are ultimately part of the UK OFS value chain, e.g., hospitality, professional advisors and infrastructure

Slight margin reductions

Although revenues grew by 17% in 2011, it is disappointing that gross margins didnt increase to reflect the improved economies of scale and higher average oil prices in 2011 as compared with 2010 (an increase of some US$31 per barrel). We attribute this to continued pricing pressure from customers, unrealized supply chain savings and salary increases in the marketplace as a result of increased global demand for the best talent. Overall average wage increases per employee between 2008 and 2011 showed a CAGR of 3.8%, and as can be seen from the graph to the right, all segments of the value chain have had increased wage costs since 2008 (analysis excludes the highest and lowest 10% of movements since 2008). As the availability for experienced skilled labor continues to be an issue for the UK, it is likely that labor costs will continue to increase in the short to medium term.

15% 10% 5% 2010 Gross margin 2011 EBITDA margin

Average employee wage growth 2008 to 2011 5% 4% 3% 2% 1% 0% CAGR 2008 to 2011 Reservoir/seismic Exploration and production drilling Engineering, fabrication and installation Operations (production and maintenance) 4.8% 2.9% 4.2% 3.7%

Review of the UK oilfield services industry 2012

UK OFS revenue trends compared with UKCS activity

OFS activity is driven to a large extent by upstream oil and gas production and spending. As depicted in the following two graphs, UKCS production and the number of wells drilled have fallen each year since 2008.
UKCS production (mb/d) 3.0

In the new policies scenario in its World Energy Outlook 2012, the International Energy Agency (IEA) anticipates that global energy demand will increase by more than one-third over the period to 2035, or around 1.2% per annum, with China, India and the Middle East accounting for 60% of the increase. Oil production, net of processing gains, is projected to increase from 84 million barrels per day (mb/d) in 2011 to some 97 mb/d by 2035, the increase coming entirely from natural gas liquids and unconventional sources. Furthermore, the IEA estimates crude oil output (excluding light tight oil) will fluctuate between 65 mb/d and 69 mb/d, falling by 3 mb/d between 2011 and 2035. Light tight oil is forecast to increase to above 4 mb/d during this period, driven by the United States and Canada. The global energy map is being redrawn by the resurgence of oil and gas production in the United States and by the increase in unconventional gas production. With upstream technologies unlocking light tight oil and shale gas resources in the United States, the IEA predicts that by around 2020, the United States will overtake Saudi Arabia as the largest global gas producer. The era of access to relatively cheap oil is over. New supplies will cost more to develop, and the challenges of matching energy demand and supply are likely only to intensify. Investment in large-scale oil and gas projects is therefore required to both limit and compensate for decline rates. Enhanced oil recovery and investment in new developments is required to replace existing production and satisfy expected demand growth. Upcoming UK OFS trends will be influenced by:

mb/d

2.0 1.0 0.0 2008 2009 2010 2011

UKCS wells drilled 300 200 100 0 2008 Exploration

2009 2010 2011 Appraisal Development

However, trends in UKCS production and wells drilled are not followed by trends in UK OFS revenues, primarily as a result of UK OFS companies operating on a global basis:
UK OFS revenues, UKCS production and UKCS wells drilled, indexed to 100 in 2008

130 120 110 100 90 80 70 60 50

Increasing project complexity Oil price stability Buoyant North Sea brownfield market Recovering Gulf of Mexico activity African and Brazilian offshore development evolution United States shale gas progression

2008

2009

2010

2011

UK OFS revenue UKCS production (mb/d) UKCS wells drilled (exploration, appraisal and development)
Review of the UK oilfield services industry 2012 8

For UK OFS companies to be successful in the long term, they need to continue to be recognized in the global marketplace, because this is where the most significant growth will arise. We believe the most successful UK OFS companies in the near future will be those that have:

Decommissioning

Global geographic footprints and access to growth markets Relationships with national oil companies (NOCs) Technologies that reduce cost, improve performance or enhance access to hydrocarbons Outstanding health and safety records World-leading risk monitoring and management techniques Provision of integrated solutions Scale to deliver larger projects Strong management teams with access to an experienced and committed workforce Unconventional extraction exposure

Although decommissioning will not be a major activity in the UKCS in the next 5 to 10 years, it will become more prevalent. It is forecast that decommissioning North Sea oil and gas facilities will cost between 30 billion and 35 billion in the period to 2040. There are over 600 offshore oil and gas installations in the North Sea, 470 of which are in UK waters. In addition, there are more than 10,000 kilometers of pipelines offshore and around 5,000 wells. A large number of these structures have been producing oil and gas for 40 years and are coming to the end of their designed life-span. Under current regulatory requirements, over 90% of offshore structures will need to be completely removed from their marine sites and brought to shore for reuse, recycling or other disposal means. The date for decommissioning each structure is impacted by:

As opportunities in emerging markets grow, UK OFS companies will face challenges relating to regulatory risks, including bribery and corruption. Wide-ranging legislation such as the UK Bribery Act means that companies risk intense scrutiny from enforcement agencies. The complexity of working and contractual relationships with governments, joint venture partners, suppliers and other contractors make compliance with new anti-bribery and corruption regulation challenging. Many leading companies are undertaking thorough reviews of their anti-bribery and corruption systems and controls, especially in high-risk jurisdictions, recognizing that key factors relating to interactions with government officials, procurement and thirdparty relationships can be identified and tackled in a pragmatic, efficient manner.

Long-term trends in oil and gas prices which determine how long it remains economic to keep a field in operation Long-term certainty on both fiscal and regulatory regimes, which will influence the future investment environment Improved production and reservoir recovery methods Extending the use of the infrastructure, e.g., for smaller satellite fields tied back into existing export systems Alternative use of the structures, e.g., for gas storage or carbon sequestration

Over recent years, technical innovations, high oil prices and increased recovery techniques have meant that decommissioning dates have generally been deferred. Many of the future successful OFS companies will be those with products and services that can be applied to the decommissioning industry.

The UK OFS industry has once again proven it excels in the face of the increased technological demands of global subsea development, harsh operating conditions and increasing worldwide competition. Consequently, it is in prime position to take on global energy demand growth. Many companies have concentrated on top-line growth whereas now is also the time for increased supply chain efficiencies and cost control to drive margin improvements.

Review of the UK oilfield services industry 2012

The UK oilfield services value chain

Review of the UK oilfield services industry 2012

11

The UK OFS sector is well positioned across the value chain

Currency: million Reservoir/ (2011 data) seismic Companies with revenue > 10 million (No.) Employees (No.) Revenue Gross profit Gross margin EBITDA EBITDA margin Pre-tax profit Corporate tax Effective tax rate Total assets Net assets 26 4,058 1,032 242 23.4% 121 11.8% 82 26 32.0% 856 605

Exploration and production drilling 51 18,993 6,021 1,232 20.5% 512 8.5% 311 89 28.6% 13,044 9,677

Engineering, fabrication and installation 179 31,514 11,272 1,823 16.2% 1,134 10.1% 933 176 18.9% 10,256 5,532

Operations 134

Total 390

38,108 92,673 8,519 26,844 1,176 13.8% 555 6.5% 403 112 27.9% 4,473 16.7% 2,322 8.7% 1,729 404 23.4%

4,918 29,073 2,390 18,205

The UK OFS sector is well positioned across the entire value chain to provide competencies, as well as capacity, to support all facets of the oil and gas sectors planned activities. In terms of employees and revenue, our UK OFS population is dominated by the engineering, fabrication and installation segment and operations (production and maintenance) segment, reflecting the mature status of the North Sea basin, which has also allowed UK entities to lead globally through expertise developed over the last 40 years or so. Average Brent crude prices of US$111 per barrel in 2011 (up from S$80 in 2010) also contributed to success of the UK OFS sector in the year. All segments within the OFS value chain demonstrated revenue growth between 2010 and 2011:
2011 revenue increase ( billion) 2.5 2.0 b 1.5 1.0 0.5 0.0
Resevoir/seismic Exploration and production drilling Engineering, fabrication and installation Operations (production and maintenance)

Confidential all rights reserved Ernst & Young LLP 2013

12

Attracting new talent to the OFS industry is key for continued growth

Oil & Gas UK supply chain survey

Background In conjunction with Oil & Gas UK, we surveyed 150 members of its supply chain forum for their views on a variety of industry issues and opportunities. This is a snapshot of our findings. Profile of respondents Respondents were analyzed by value chain segment as follows:

9% - Reservoir/seismic 24% - Exploration and production drilling 40% - Engineering, fabrication and installation 27% - Operations

What are the main factors limiting growth in your organization?

3% 9% 9% Sourcing suitably qualified personnel Economic uncertainty Other 13% 53% No factors limiting growth Supply chain issues 13% Availability of finance

53%

of respondents view sourcing suitably qualified personnel as the main factor limiting growth in their organization.

Over 75% of respondents envisage their workforce increasing over the next two years, with the average increase being up to 10%. The respondents believe it is imperative to raise the industry profile to make it more visible and positive. Attracting new talent to join the industry is deemed to be key, with apprenticeship programs and commitment to training vital for the future of the industry. Other factors they see as limiting growth are economic uncertainty, rig capacity, competition and supply chain constraints.

Review of the UK oilfield services industry 2012

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Which area of potential regulatory change will have the most impact upon the Oilfield Services Industry?
Fiscal terms for the industry Environmental regulations Local content requirements Health and safety regulations Other 0% 10% 20% 30% 40% 50% 60% 70%

59%

of respondents believe fiscal terms will have the most impact on the oilfield services industry in terms of potential regulatory change.

Nearly 60% of respondents believe changes to the fiscal terms for the industry will have the most impact. This is in relation to fiscal changes that impact the operators and that have a knock-on effect in the oilfield services industry. A recent example is the Supplementary Tax Charge, which was introduced in the 2011 budget and resulted in a number of large projects in the North Sea being delayed or cancelled. Respondents also see international local content requirements as having a major impact.

Which geographical area do you see as providing greatest growth opportunity in the next two years?
6% 9% 9% 10% 22% UK Middle East and Africa South America Asia Pacific 22% 22% Norway Other North America

22%

of respondents view the UK as being the geographical area providing the greatest growth opportunity in the next two years.

Over 90% of respondents expect their UK revenues to increase in the next two years but this is dependent on stability in the sector, especially in relation to any tax legislation specifically targeting oil and gas companies. UK growth is likely to be focused in the West of Shetland and given the maturity of the basin, in brownfield activities. In addition to the UK, respondents see Middle East and Africa and South America as key markets for growth.

Responses from industry players mirror our confidence for the future of the UK OFS industry.

Review of the UK oilfield services industry 2012

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Recovery from Macondo and continued high oil prices enhanced reservoir/seismic performance

Reservoir/ Seismic

Exploration and production drilling

Engineering, fabrication and installation

Operations

We define the reservoir/seismic value chain as UKregistered companies whose services include:

Top five companies (2011 revenues)

1. 2. 3. 4. 5.

Acquisition of seismic data Data processing and interpretation Data management Software solutions/geological and geophysical services Seismic equipment
2008 2,972 632 n/a 238 37.6% 141 22.2% 129 42 32.7% 599 360 2009 3,535 804 27.2% 211 26.2% 115 14.3% 137 19 14.2% 944 593 2010 3,786 779 (3.2%) 143 18.4% 57 7.3% 63 16 25.7% 898 583 2011 4,058 1,032 32.5% 242 23.4% 121 11.8% 82 26 32.0% 856 605

PGS Exploration (UK) Ltd. WesternGeco Ltd. Gardline Marine Sciences Ltd. CGGVeritas Services (UK) Ltd. Fugro GeoConsulting Ltd. The reservoir/seismic segment of the value chain is dominated by UK subsidiaries of larger overseas entities. The seismic market was adversely impacted by the Macondo incident in April 2010, resulting in a cessation of exploration activity in the Gulf of Mexico. This substantially reduced the number of vessels working in the Gulf of Mexico, with West Africa and Europe absorbing most of the excess capacity, thus reducing pricing pressure. Continued high oil prices in 2011 and improvements in technology, combined with increasing demand and more technically challenging reservoirs (both in identification of new reserves and extraction of existing reserves) has added to a recovery in this segment in 2011. This is reflected in increased revenues and also margins returning to preMacondo levels. With the continued shift to drilling in deeper and harsher offshore environments, drilling costs have understandably risen, thereby increasing the demand for better seismic analysis to improve the chance of success.

Currency: million Employees (No.) Revenue Revenue growth (%) Gross profit Gross margin EBITDA EBITDA margin Pre-tax profit Corporate tax Effective tax rate Total assets Net assets

2011 EBITDA % bandings 8 7 No. of companies 6 5 4 3 2 1 0

Up to 5% 5% to 10% 10% to 15% to 20% to 25% to 15% 20% 25% 30% Over 30%

As oil and gas companies extend their search for new hydrocarbon resources into regions with deeper waters, harsher environments and more complex geologies, the need for seismic activity will continue to increase.

Review of the UK oilfield services industry 2012

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Although fewer wells were drilled, increased drilling activity and higher spend resulted in exploration and production drilling revenue growth

Reservoir/ seismic

Exploration and production drilling

Engineering, fabrication and installation

Operations

We define the exploration and production drilling value chain as including UK-registered companies whose services encompass:

Top five companies (2011 revenues)

1. 2. 3. 4. 5. Schlumberger Oilfield UK Plc Baker Hughes Ltd. Cameron Ltd. Halliburton Manufacturing & Services Ltd. Transocean Drilling U.K. Ltd.

Rigs and drilling ships (contract drilling) Drilling-related services: well planning, wireline logging, measurement while drilling (MWD), logging while drilling (LWD), directional drilling, fishing, casing, cementing, perforating, mud logging, drill stem testing (DST), coring, pressure pumping and waste/chemical management Drilling equipment: drill pipe, bits, downhole tools, fluids/mud, blowout preventers (BOPs) Coiled tubing, completion strings, production tubing (mainly related to production drilling)
2008 2009 2010 2011 18,993 6,021 4.1% 1,232 20.5% 512 8.5% 311 89 28.6% 13,044 9,677 17,460 17,391 17,447 5,586 n/a 1,373 24.6% 735 13.2% 651 146 22.5% 8,315 4,671 5,444 (2.5%) 1,347 24.7% 711 13.1% 479 127 26.5% 8,073 5,339 5,784 6.2% 1,313 22.7% 696 12.0% 330 101 30.7% 9,251 5,907

Exploration and Production Drilling 2011 revenue analysis by company size

Revenue banding ( million) 25 > 25 to 50 > 50 to 100 > 100 to 250 > 250 Total No. of companies 17 12 5 9 8 51 2011 revenue ( million) 208 405 298 1,317 3,793 6,021 Revenue growth* 0% 12% 23% 4% 2% 4%

Currency: million Employees (No.) Revenue Revenue growth (%) Gross profit Gross margin EBITDA EBITDA margin Pre-tax profit Corporate tax Effective tax rate Total assets Net assets

*2011 revenue growth based on revenue banding position in 2010

As can be seen from the table above, the most significant growth arose in the 25m to 50m and 50m to 100m revenue bandings. This was a result of higher drilling activity, both overseas and in the UK, and a number of acquisitions by Reservoir Group during the year.

2011 EBITDA % bandings No. of companies 20 15 10 5 0

Up to 5% 5% to 10% to 15% to 20% to 25% to 10% 15% 20% 25% 30% Over 30%

Review of the UK oilfield services industry 2012

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The trends in exploration and production drilling revenues between 2010 and 2011 (an increase of some 4%) are reinforced by Oil & Gas UKs 2012 Activity Survey report, in which it states for the UKCS in 2011:

The higher effective tax rate in 2010 was primarily a result of two larger entities having a greater level of non-trading write-offs that were not tax-deductible. The more positive demand outlook is leading to increased confidence over the future level of commodity prices. The price of Brent crude averaged US$111 per barrel in 2011, some 39% higher than in 2010. Current oil prices encourage increased investment, particularly in exploration, which remains the key influencing swing factor in operators budgets. A substantial majority of oil and gas companies projects, including those in the UK North Sea, would be commercial at oil prices far lower than current commodity price levels. Worldwide upstream oil and gas spending is expected to increase by around 10% on average through 2012. Oil & Gas UK estimated UKCS expenditure (capex and opex) to have increased by 4.6 billion to 21.3 billion in 2012.

A 31% increase in average barrel of oil equivalent (boe) operating costs. An increase in capex of some 2.5 billion to 8 billion. 121 development wells (including sidetracks) were drilled (130 in 2010). Despite the reduced number of development wells, the number of drilling days increased by some 30%, suggesting more challenging targets were being drilled. 1.4 billion was spent on drilling 43 exploration and appraisal wells (62 wells and 1.1 billion in 2010).

Continued pricing pressure from customers and increasing supply chain costs continued in 2011, resulting in lower margins.

Unless there is a major structural shift in the outlook for commodity prices, exploration and production drilling activity levels should be sustained, subject to sufficient rig availability in the UKCS.

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Subsea developments continue to be a key driver of Engineering, Fabrication and Installation

Reservoir/ seismic

Exploration and production drilling

Engineering, fabrication and installation

Operations

We define the engineering, fabrication and installation value chain as including UK-registered companies whose services encompass:

Top five companies (2011 revenues)

1. 2. 3. 4. 5. Technip UK Ltd. Subsea 7 Ltd. AMEC Group Ltd. Saipem Ltd. CB&I UK Ltd.

Engineering solutions, including front-end engineering and design (FEED) Modules and constructions for rigs, fixed platforms and drilling ships Equipment for rigs, fixed platforms and drilling ships Remotely operated vehicles (ROVs) Pipelines Wellheads Barges

Engineering, fabrication and installation 2011 revenue analysis by company size

Revenue banding ( million) 25 > 25 to 50 > 50 to 100 > 100 to 250 > 250 Total No. of companies 103 23 25 22 6 179 2011 revenue ( million) 1,420 771 1,682 3,317 4,082 11,272 Revenue growth* 32% 27% 26% 10% 31% 26%

Although the majority of companies within this segment also operate across other aspects of the oilfield services value chain, we have included them within engineering, fabrication and installation as we consider this to be their main area of business.
Currency: million Employees (No.) Revenue Revenue growth (%) Gross profit Gross margin EBITDA EBITDA margin Pre-tax profit Corporate tax Effective tax rate Total assets Net assets 2008 2009 2010 2011 31,514 11,272 26.0% 1,823 16.2% 1,134 10.1% 933 176 18.9% 10,256 5,532

31,671 30,235 30,718 8,573 n/a 1,565 18.3% 1,085 12.7% 912 253 27.8% 8,518 4,453 8,547 (0.3%) 1,448 16.9% 998 11.7% 717 213 29.7% 8,326 4,562 8,945 4.7% 1,483 16.6% 943 10.5% 659 153 23.2% 8,795 4,885

*2011 revenue growth based on revenue banding position in 2010

Such is the buoyancy of this segment, all revenue bandings demonstrated significant growth as compared to 2010. Compared with other segments in the value chain, engineering, fabrication and installation has the greatest proportion of companies with revenues between 10m and 25m, highlighting the vibrant subsea and engineering SME market in the UK.

2011 EBITDA % bandings No. of companies 60 50 40 30 20 10 0

Up to 5% 5% to 10% to 15% to 20% to 25% to Over 10% 15% 20% 25% 30% 30%

Review of the UK oilfield services industry 2012

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Around the world, the UK is widely regarded as the technological leader in subsea technology. The UK offshore oil and gas industry has been utilizing subsea technology for more than 30 years, and its importance in maximizing the recovery of the regions oil and gas continues to grow. It offers significant advantages over fixed production platforms and allows hydrocarbons to be extracted more cost-effectively, particularly from more challenging environments. It is anticipated that two-thirds of all new fields in the UK will be developed as subsea tiebacks to existing infrastructure, and this will increase demand for subsea goods, equipment and services. The global success of UK subsea entities and the rescheduling of postponed work programs following Macondo fuelled growth of 26% in 2011, surpassing the modest recovery in 2010. Activity levels in shallow-water areas were sustained by demand for subsea tiebacks in mature areas such as the North Sea. As oil and gas fields matured in a number of regions, demand continues to grow for technologies and solutions required for increased oil and gas recovery, satellite field developments and maintenance, and modifications required to extend the life-span of existing field infrastructure. Subsea developments are an attractive option for accessing smaller deposits in mature markets, which are near existing infrastructure. Tying back subsea wells through seabed flowlines to existing platforms is a cost-effective way of exploiting smaller stranded fields in mature provinces.

UK North Sea production has been in decline for the last 10 years, but the development of reserves west of Shetland should help slow the rate of depletion. In October 2011, BP and its partners Shell, ConocoPhillips and Chevron were granted Government approval to proceed with the 4.5 billion Clair Ridge project, the second phase of development of the giant Clair field, west Shetland. The companies are developing four new oil and gas projects that together will involve a total investment of almost 10 billion over the next five years. AMEC has been appointed by BP and its partners to deliver the engineering and project management services for the main platform design for Clair Ridge. Growing confidence among oil and gas companies has led to increased capital expenditure budgets, resulting in larger projects, that were previously on hold, now moving ahead. Deepwater construction will be one of the fastestgrowing segments of the global offshore industry in the medium to longer term. Reserves in frontier areas are typically in deeper waters, with operations challenged by the harsh climatic conditions and remoteness from market.

As we stated in last years review of the UK OFS industry, the global fundamentals of subsea technologies remain compelling, with the development of large, complex projects, including Clair Ridge, requiring groundbreaking technologies. The UKs globally recognized leadership in subsea programs explains why the engineering, fabrication and installation segment of the value chain shows the largest growth in 2011 when compared with 2010, a trend we also expect to continue in 2012.

Review of the UK oilfield services industry 2012

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Operations revenue delivered a healthy increase for a third consecutive year

Reservoir/ seismic

Exploration and production drilling

Engineering, fabrication and installation

Operations

We define the operations (production and maintenance), value chain as comprising UK-registered companies whose services include:

Top five companies (2011 revenues)

1. 2. 3. 4. 5. Wood Group Engineering (North Sea) Ltd. Petrofac Facilities Management Ltd. Fircroft Engineering Services Ltd. ASCO (UK) Ltd. Cape Industrial Services Ltd.

Production of oil and gas Flow, temperature and pressure metering Logging Coiled tubing Artificial lift/pressure pumping Production chemicals Maintenance and modifications
2008 2009 2010 34,818 7,487 4.8% 1,037 13.8% 436 5.8% 306 114 37.3% 4,119 1,961 2011 38,108 8,519 13.8% 1,176 13.8% 555 6.5% 403 112 27.9% 4,918 2,390

Operations 2011 revenue analysis by company size

Revenue banding ( million) 25 > 25 to 50 > 50 to 100 > 100 to 250 > 250 Total No. of companies 69 30 11 16 8 134 2011 revenue ( million) 996 1,028 786 2,400 3,309 8,519 Revenue growth* 10% 5% 36% 14% 9% 14%

Currency: million Employees (No.) Revenue Revenue growth (%) Gross profit Gross margin EBITDA EBITDA margin Pre-tax profit Corporate tax Effective tax rate Total assets Net assets

36,467 36,008 6,745 n/a 943 14.0% 523 7.8% 349 105 30.1% 3,868 1,638 7,142 5.9% 1,027 14.4% 408 5.7% 283 95 33.4% 3,743 1,890

*2011 revenue growth based on revenue banding position in 2010

While all operations revenue banding categories demonstrated good growth in 2011, the 50m to 100m categorys growth of 36% was boosted by the timing of new contract work in late 2010.

2011 EBITDA % bandings 70 No. of companies 60 50 40 30 20 10 0

Up to 5% 5% to 10% to 15% to 20% to 25% to Over 10% 15% 20% 25% 30% 30%

Review of the UK oilfield services industry 2012

21

This segment of the value chain aims to ensure the safe management and maintenance of assets through the supply of highly trained personnel and established processes and procedures. Services can range from the supply of manpower, to supervision and performance management, through to the complete operational management of a customers asset. Revenues are more dependent on opex-related activity levels as opposed to capex. Given both the aging North Sea infrastructure and the global focus on increased quality and health and safety, this segment of the value chain is likely to continue to be one of the stronger-performing segments. Many of the major players in this segment have medium-term visibility/security of future revenues as they can operate under contracts that last several years. Although contracted revenue gives a forecast of activity levels, profitability is dependent on successful project execution, especially for lumpsum contracts. The aging North Sea infrastructure should translate into a continued increase in the number of brownfield projects. The combination of this aging infrastructure and the need to extend the productive life of fields will necessitate substantial modifications and upgrades of installations on the UKCS and Norwegian Continental Shelf (NCS).

Recent asset acquisitions by smaller exploration and production players from international oil companies (IOCs) are also good news for this segment of the value chain as asset lives are extended. Beyond the North Sea, there are significant opportunities for OFS companies in countries where the IOCs have been frozen out or where there has been a prolonged period of underinvestment in the oil and gas sector. In the post-Macondo environment, OFS companies with offerings related to asset integrity and a good track record on safety will have a competitive advantage. This should be prevalent in preventing manpower-based models becoming commoditized in the face of increased competition from low-cost providers. However, the international OFS companies may face increased competition from regional indigenous service providers or, in some countries, be required to help develop local capability. In some cases, local content initiatives can present risks for OFS companies related to the sometimes weaker capability of local providers compared with international subcontractors.

The combination of aging infrastructure and the need to extend the productive life of fields will continue to necessitate substantial modifications and upgrades of installations on the North Sea. Current oil and gas price levels are also motivating owners to keep infrastructure operational longer.

Review of the UK oilfield services industry 2012

22

Comparison with the Norwegian OFS sector

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Norwegian OFS companies also delivered significant revenue growth, with both the UKCS and NCS having significant recoverable reserves remaining
Comparison of the UK and Norwegian OFS Sectors
UK Continental Shelf (UKCS)
18 16 14 12 10 8 6 4 2 0 Revenue

Norwegian Continental Shelf (NCS)

18 16 14 12 10 8 6 4 2 0 Revenue

Reservoir/seismic

Exploration and production drilling

Engineering, fabrication and installation

Operations

Revenue (b)

Reservoir/seismic

Exploration and production drilling

Engineering, fabrication and installation

Operations

2008 40 30 b 20 10 0 2008

2009

2010

2011 40 30 b 20 10 0

2008 15% 10% 5% 0%

2009

2010

2011 15% 10% 5% 0%

Revenue and EBITDA

Revenue and EBITDA

2009 Revenues

2010

2011

2008

2009 Revenues UK 390 92,673 26.8 2.3 9%

2010

2011

EBITDA %

EBITDA % Norway* 420 86,600 36.6 5.0 13%

(All data for FY11 and in b unless stated otherwise) Companies (No.) Employees (No.) Revenue EBITDA EBITDA margin

*To ensure comparable data, revenues greater than NOK90m in 2011 are included above. The exchange rate used to convert the Norwegian data is NOK9 per .

Activity in oilfield services in the UK and Norway is increasing, with both the UK and Norway experiencing growth in all segments of the value chain from 2010 to 2011. The UK sector has experienced revenue growth of 25% since 2008, while revenue growth in the Norwegian sector has been 15%. In FY11, the Norwegian industry generated approximately 10 billion more revenue than the UK. The different levels of maturity in the UKCS and the NCS are reflected in the revenues generated by the different value chain segments, whereby the UK has a far larger operations (production and maintenance) presence reflecting the more mature status of the UKCS. Lower UK OFS margins, as compared with Norways, are driven by the operations segment of the value chain reflecting the UKs aging infrastructure. Norway has experienced a significant growth in exploration and production drilling due to a combination of high oil prices and the Governments introduction of the exploration expense tax refund and APA (Awards in Predefined Areas) in 2003 to 2005. However, in engineering, fabrication and installation, it has experienced a small decline primarily due to the lack of growth in surface activities, although subsea activity has been increasing throughout the period. The growth in this segment in the UK is due to both the local and global success of UK subsea entities.

Review of the UK oilfield services industry 2012

25

Comparison of the UK and Norwegian oil and gas production profiles

UK Continental Shelf (UKCS) 1,800 1,600 Millions of barrels Millions of barrels 1,400 1,200 1,000 800 600 400 200 0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 E 2016 E Production 1980-2016 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 E 2016 E
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Norwegian Continental Shelf (NCS) Production 1980-2016

Oil/Liquids

Gas

Oil/Liquids UK

Gas Norway 47,800 mb

Recoverable reserves - proven, probable and possible

19,900 mb

Over 52 billion of capital is forecast to be invested in the UKCS from 2013 to 2017. New discoveries over the last decade are typically of 30 million boe or smaller, and tax changes allow more of this type of project to be developed, which will be crucial for the longevity of the UKCS. Investments on the NCS are predominantly the North Sea, but also include the Barents Sea and the Norwegian Sea, with annual investments expected to increase from 19 billion in 2012 to 24 billion in 2017. Several discoveries are to be developed in the coming years, including Johan Sverdrup where first oil is expected in 2018 or 2019. The NCS is highly attractive for new players, and since 2000, more than 40 companies have entered the NCS as operators primarily due to the stable political and fiscal regimes and world-leading offshore technology. The UKCS is a more mature basin. Between 2004 and 2010, the average annual decline in production was 7.5% while 2011 recorded the biggest year-over-year decline (19.2%). This decline stemmed from several factors, including an increase in shutdowns (planned and unplanned) and the supplementary charge increase, which closed fields and axed or delayed projects. UKCS production is forecast to increase from 2014 as a result of the investment in projects approved in 2010 and 2011, the largest of which are West of Shetland. Estimates point to 20 billion barrels of recoverable oil still remaining in the North Sea west of Shetland and on the UKCS, but drilling will depend on regulation and tax. Technical development in the next 10 years could extend the life of North Sea fields into the 2040s. For the NCS, total production peaked in 2004, and oil production has declined by 50% since peaking in 2000. However, increased gas production has offset much of the decline, and production levels are expected to remain stable toward 2017. The Barents Sea has just been opened up for petroleum activity, and discussions are ongoing regarding other new areas for exploration activity in the Norwegian Sea. As such, we expect activity to continue in the NCS until at least the 2050s and potentially into the 2060s.

Both UK and Norwegian OFS sectors are showing growth in the face of difficult market conditions across most of the industry sectors throughout Europe. New discoveries, continued technical developments to extend the life of existing fields and global expansion are key for continued long-term growth in the sector.

Review of the UK oilfield services industry 2012

Methodology
The purpose of our analysis of the UK OFS sector has been to define, qualify and quantify a sector of significant importance for the UK North Sea and the UK economy and to provide insight both to the industry itself as well as to other relevant parties. We have assigned each company to its segment of the OFS value chain based on the companys main activity. Many companies do have activities across the value chain, but this is not accounted for in our analysis. Financial data in this report is based on publicly available information and has been analyzed into 2008, 2009, 2010 and 2011 for financial yearends within each of these calendar years. In our analysis, a company is defined as an OFS company if:

At least 50% of its turnover is generated in the oil and gas sector. It is a UK-registered company. Annual revenues exceed 10 million.

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Thought leadership

Ernst & Youngs Global Oil & Gas Centers keep you updated on the latest developments in the sector with monthly issues of thought leadership, exploring the development and trends within the sector. The issues can be downloaded from our website, accessed through our mobile app (EY Insights) or obtained by contacting Ernst & Young.

Global oil and gas transactions review 2012

In this report, we look back at some of the main trends in oil and gas deal activity over 2012 and explore the outlook for transactions in the sector in 2013.

Dynamic dealmaking in oilfield services

We surveyed senior global corporate and private equity practitioners about the current business environment for OFS companies in order to understand their business strategies and objectives against the backdrop of macroeconomic, regulatory and financing uncertainty.

Good Petroleum (International) Limited International GAAP Illustrative financial statements

This publication contains an illustrative set of consolidated financial statements, prepared in accordance with International Financial Reporting Standards (IFRS), for Good Petroleum (International) Limited.

Financial reporting briefs oil and gas

This edition provides timely reminders for calendar year-end financial reporting and alerts you to some important considerations for 2013, as well as the latest FASB and IASB standard-setting developments.

Global oil and gas reserves study 2012

This report presents the worldwide and regional exploration and production (E&P) results for 75 companies for the five-year period from 2007 through 2011.

Oil & Gas Eye

A quarterly update of our Oil & Gas Eye Index and analysis of the performance of the AIM-listed oil and gas companies.

Managing bribery and corruption risks in the oil and gas industry
In this publication, we discuss why bribery and corruption are ongoing challenges for the oil and gas sector and outline practical considerations for companies looking to manage corruption risks.

Oil and Gas NOC Monitor

A quarterly update of national oil companies partnerships and alliances, privatization and consolidation and government policy developments.

Cash in the barrel: working capital management in the oil and gas industry 2012
Our research findings suggest that despite 2012 success with working capital, companies continue to have huge opportunities for improvement.

The DNA of the COO: an oil and gas sector perspective

The oil and gas sector cut of a survey of COOs looking at the issues that they face, how they feel about their roles and how they interact with the rest of their organization.

Review of the UK oilfield services industry 2012

29

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Advisory
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