THE OIL & GAS UK INDEX

Oil & Gas UK
I N D E X
December 2009

THE OIL & GAS UK INDEX
1 Summary
The Oil & Gas UK Index
The Oil & Gas UK Index is a new quarterly index which measures changes in activity and business
confidence across the UK offshore oil and gas industry. It canvasses the views of 1750 companies
in oil and gas exploration and production as well as those providing services and equipment in the
supply chain.
Nine economic indicators are used to compile sub‐indices, covering investment, revenues/ sales,
operation/ running costs, manpower and day rates, expenditure in research and development,
employment and training as well as general business confidence and activity. These indices are
aggregated to provide an overall measure of industry confidence, with a higher rating indicating a
positive outlook and a lower rating giving a more negative standpoint (the index is on a 100 point
scale with 50 being neutral).
Oil & Gas UK carried out its surveys at the end of each of the first three quarters in 2009 and the
results are now considered sufficiently mature to launch the index externally. The surveys will
continue to be published on a quarterly basis and over time it is hoped the index will become a
useful forecasting tool for the sector.
Conclusions
• The Oil & Gas UK Index for Q3 2009 measured 50; up four points from Q1 2009. This indicates
a marginal improvement in business confidence across the year as the oil price lifted from $33
per barrel in January to the current price of around $70 per barrel and as access to financial
markets eased.
• However, the overall ranking of 50 points at the end of Q3 suggests that business confidence in
the upstream sector is still to recover to that seen some two to three years ago. Despite
higher oil prices, wholesale gas prices are still depressed and coupled with continued
uncertainty about the pace of economic recovery, the industry remains cautious in its overall
business outlook.
• On average, confidence amongst exploration and production (E&P) companies appears to be
more positive than businesses in the supply chain. Confidence in the E&P sector gained 10
basis points across the year to reach 63 in Q3 2009, while across the supply chain it rose from
41 to 47. Within the E&P sector, it would seem that the independent production companies
are more optimistic than the major, integrated companies, with the former reporting more
positive outlooks on overall business confidence, investment, activity growth and business
revenues.
• These first signs of revival in the business confidence felt by E&P companies are yet to work
their way through to the offshore oil and gas supply chain which is still largely experiencing
weak or even declining activity. There is uncertainty on the investment outlook which Oil &
Gas UK observes may yet improve as we go into 2010 but this will depend on a range of factors
including broader movement of costs, outlook for commodity prices and the general business
environment.
‐ 1 ‐

• The drilling and well services and marine and subsea services sectors appear to have been hit
hardest by the prevailing economic climate. Business confidence in these segments of the
industry was on average 11 basis points below the industry average throughout the year. By
Q3, the drilling and well services index was 12 points below the index average and the marine
and subsea index was 13 points below.
• On employment, it would appear that many supply chain companies are still feeling the impact
of reduced activity and postponement of investment. However, we believe the whole industry
is intent on retaining its skilled workforce and is apparently only resorting to job cuts where no
other solution is possible.
• Overall, the pressure to reduce costs and raise competitiveness is still working its way through
the province. E&P companies acted early in response to the changes in the oil price and are
now gaining confidence on the delivery of the programmes put in place. Drilling and well
services, marine and subsea services are still working to drive their costs down in their
businesses to restore competitiveness.
2 Introduction
In these challenged economic times it is important that the UK focuses on the health of the key
sectors of its economy which can act as a barometer for recovery. To aide this, Oil & Gas UK, the
representative organisation for the UK offshore oil and gas industry, has developed a quarterly
index to gain a better insight into the health of the offshore oil and gas sector and to track how
each of its diverse segments of activity is performing.
The Oil & Gas UK Index is compiled from the results of surveys which are distributed to 1750
companies across the UK at the end of each quarter. The response rate was good with 350
companies replying which represents close to 40% of the annual turnover of the entire sector.
Respondents are asked to comment on their anticipated activity in each of nine economic
indicators: investment, revenues/ sales, operation/ running costs, manpower and day rates,
expenditure in research and development, employment and training and to provide feedback on
general business confidence and activity levels.
These indices are aggregated to provide an overall measure of industry confidence, with higher
index rankings (above 50, which is neutral on the 100 point scale) indicating a positive outlook and
lower rankings (below 50) giving a more negative standpoint.
2.1 Industry Overview and Segmentation
For the purposes of the Oil & Gas UK Index, the UK’s upstream oil and gas industry has been
segmented into its various constituent parts:
Exploration and production (E&P) companies, split by size:‐
(i) Majors (large, integrated oil and gas companies)
(ii) Independents (large, medium and small E&P companies, utilities, and exploration
companies)
‐ 2 ‐

Oil and gas supply chain split by business segment, focusing in on the following:‐
(i) Drilling and well services – refers to the drilling operation and completions. It employs
personnel in the design of the drilling campaigns and on offshore rigs undertaking the
drilling, evaluation and completion processes.
(ii) Facilities engineering, operations and maintenance – relates to platforms/topside design,
fabrication, construction, maintenance and operations, plant design and manufacture.
(iii) Marine and subsea – this sector includes floating production facilities, SURF (Subsea
Production Systems, Umbilicals, Riser, Flow lines) together with pipeline and marine
contractors.
(iv) General support services – this sector covers a wide range of companies including logistic
and transportation, the supply of HSE equipment and consultancy, training across all areas
of the oil and gas industry, specialist finance, insurance and legal and catering services.
2.2 Survey Questions
The Oil & Gas UK Index is created from the results of a survey which is sent out to senior supply
chain managers or senior purchasing personnel in 1750 companies across the UK. These
companies represent all the segments of the UK upstream oil and gas business, as defined in
Section 2.1.
Respondents are asked to answer nine key questions focusing on their UK business and consider
for each question whether their expectations will be lower, the same or higher in the following
quarter compared to the current quarter.
The nine questions address:‐
(i) Business confidence and optimism
(ii) Business activity and levels (volume of work)
(iii) Business revenue/sales
(iv) Investment
(v) Operating and running costs
(vi) Manpower and day rates
(vii) R&D spend
(viii) Employment
(ix) Training
2.3 Ranking Methodology
Each question is ranked 1‐3. The rank given to the question depends on the influence it is
considered to have on business growth and confidence. The response to the question, whether it
is a negative, neutral or positive outlook for the next quarter is then rated 0, 1, or 2.
Firstly, an index for each survey response is calculated. This is done by multiplying the rank for
each question by the rating for the response given. Then all nine calculations (one for each
question) are added up. Finally, to give a value between 0 and 100, the sum is multiplied by a
constant.
‐ 3 ‐

To calculate the overall indices, the companies that have responded are given a ranking of 1‐5
depending on company turnover. The company index is then multiplied by the company rank. The
sum of these calculations is then divided by the sum of the company ranks. The indices are
therefore weighted averages.
3 Business Environment
The global recession coupled with the freeze in financial markets as the banking crisis deepened in
2008 and early 2009 dealt the UK offshore oil and gas industry a double blow. Oil prices fell
dramatically in the latter half of 2008 from almost $150 barrels of oil equivalent (boe) to just over
$30boe (figure 1), while access to debt and equity financing on reasonable terms dried up.
Exploration activity on the UK continental shelf dropped 57 per cent in January to September
2009, compared with the same period in 2008. Development projects were put on hold as E&P
companies reappraised their business models and looked for cost savings in light of the lower
commodity prices and increasing competition for investment funds from overseas. The
Government introduced a field allowance in its April 2009 Budget, targeting a limited number of
new field developments (small fields, heavy oil and high pressure high temperature (HPHT)
projects). While this was a step in the right direction, its impact on new investment was minimal.
Brent Spot Price ($/bbl)
160
140
120
100
80
60
40
20
0
Brent Oil Price vs UK Gas Price
Brent Oil
UK Gas
160
140
120
100
80
60
40
20
0
Day Ahead NBP Gas Price ($/boe)
4 Oil & Gas UK Index Indicators
Figure 1:‐ Daily Brent Oil Price and Daily UK Gas Price 2008‐2009
The following section provides an overview of the index and responses by quarter and industry
segmentation.
Oil & Gas UK Index
Quarter E&P Companies Supply Chain Industry
Companies
Q1 2009 53 41 46
Q2 2009 59 48 49
Q3 2009 63 47 50
Figure 2:‐ Oil & Gas UK Index
‐ 4 ‐

Industry E&P Supply Chain Companies
70
60
Index
50
40
30
20
Q1 Q2 Q3
Figure 3:‐ Oil & Gas UK index over the three quarters
Oil & Gas UK Index by Segment Q1 Q2 Q3
E&P Companies
Majors 48 56 57
Independents 57 61 67
Supply Chain Companies
Drilling & Well Services 35 45 38
Facilities Engineering, Operations &
Maintenance
44 49 50
Marine & Subsea 30 42 37
Support Services 43 49 49
Figure 4:‐ Oil & Gas UK Index by Segment
Majors
Independents
70
60
Index
50
40
30
20
Q1 Q2 Q3
Figure 5:‐ Oil & Gas UK E&P Company Index over the three quarters
‐ 5 ‐

Wells Marine & Subsea Facilities Support Services
70
60
Index
50
40
30
20
Q1 Q2 Q3
Figure 6:‐ Oil & Gas UK Supply Chain Company Index over the three quarters
Companies were asked to state whether they felt the business outlook for the next quarter would
be better, worse or the same as the current quarter for a range of economic indicators. Their
responses were used to compile sub‐indices which were then aggregated to provide the overall
measure of industry confidence seen in the above figures. The following table summarises the
general direction of the individual indicator responses, where the plus sign signifies a positive
outlook, a minus sign indicates a negative outlook and the equal sign means no change.
‐ 6 ‐

Swing in sentiment by sector
Indicator 2009 Q1 Q2 Q3
Business
Confidence
Activity Levels
Business Revenue
Investment
Operation and
Running Costs
Manpower and
Day Rates
R&D Spend
Employment
Spend on
Training
Overall - ≈ +
E&P - + +
SC - - ≈
Overall - ≈ ≈
E&P - + +
SC - - -
Overall - ≈ ≈
E&P - + +
SC - - -
Overall - - -
E&P + - +
SC - - -
Overall - - -
E&P - - -
SC - - -
Overall - - -
E&P - - -
SC - - -
Overall - - -
E&P - - +
SC - - -
Overall - - ≈
E&P - ≈ +
SC - - -
Overall - - -
E&P - - +
SC - - -
key: - Lower
≈ Neutral
+ Higher
E&P E&P Companies
SC Supply Chain
Figure 7:‐ Swing in sentiment by sector
‐ 7 ‐