This is the first edition of the Deloitte Outlook for oilfield services. The forward-looking report is based on in-depth interviews with 12 executives of oilfield services companies. Its purpose is to obtain companies’ views of their current business environment and where they think the market is heading, both in the short and long term.

1. Cautious optimism
Outlook for oilfield services
March 2014

2. Outlook for oilfield services Cautious optimism 2
Where are we now?
1. Positive factor: Short and long-term crude oil prices consistently above $80/barrel
• Long-term expectations of hydrocarbon prices drive the level of
oil and gas (O&G) operator capital spending.
• This, in turn, determines their need for oilfield services.
• Based on cost curve analysis, most industry specialists argue
that the market balance currently is somewhere between $80
and $100 per barrel.
• If crude oil prices were to drop below $80 per barrel, or where
the marginal cost of producing a barrel of oil becomes too
high for a sustained period, operators would look to reduce
production and delay or abandon planned projects.
Rebased to 100
Source: DataStream
01/01/2007
01/07/2007
01/01/2008
01/07/2008
01/01/2009
01/07/2009
01/01/2010
01/07/2010
01/01/2011
01/07/2011
01/01/2012
01/07/2012
01/01/2013
01/07/2013
01/01/2014
Figure 1. Philadelphia Stock Exchange oil services index (OSX) relative to West Texas
Intermediate (WTI) and the New York Stock Exchange All Shares index (NYSE ALL)
0
50
100
150
200
250
OSX WTI NYSE ALL

3. Outlook for oilfield services Cautious optimism 3
Where are we now?
2. Positive factor: Robust future demand for oil and gas continues to drive spending on
oilfield services
• As Figure 2 shows, demand for hydrocarbons is expected to
increase.
• In the UK, Department of Energy and Climate Change
projections show that OG will continue to make up over 70
per cent of the UK’s primary energy mix to 2030.
• An increasing portion of projects will be located in greater
depths and in new geological, geographical and technical
frontiers. These will drive demand for specialist equipment
and skills.
• At the same time, the OG industry faces the rapid decline of
mature assets.
Million tonnes of oil equivalent
Source: BP Energy Outlook to 2035
Figure 2. Global energy consumption by fuel
Renewables Hydroelectricity Nuclear Coal Natural Gas Oil
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
203520302025202020152012

4. Outlook for oilfield services Cautious optimism 4
Where are we now?
3. Positive factor: A customer with a growing appetite – the continued rise of the
National Oil Company
• Customer base is slowly shifting from International Oil
Companies (IOCs) to National Oil Companies (NOCs).
• NOCs are growing in size, number and influence: NOCs and
their host governments today control some 80 per cent of the
world’s proven and probable oil reserves.
• NOCs are the biggest spenders in terms of capital expenditure:
The ‘Barclays Supermajors’ list shows that of the 15 OG
operators that spend over $15 billion globally, eight are NOCs.
Their capital spending is expected to grow faster internationally
in 2014 than that of the IOCs during the same period.
• NOCs also present a challenge: IOCs and most independent
operators are European or North American and share common
cultures, and technical and engineering skills with oilfield
services (OFS) companies. Most NOCs have widely differing
technical expertise and strategic objectives. Some NOCs have
also become more active in developing assets or investing in
research and development.

5. Outlook for oilfield services Cautious optimism 5
Where are we now?
4. Positive factor: The impact of the unconventional revolution continues although at a
slower pace
• The shale revolution is ‘dislodging’ part of the OG supply
chain. It also has implications for the downstream and
midstream sectors, it is helping revive the US petrochemicals
industry and is paving the way for the renaissance of the US
manufacturing sector.
• Shale is changing the way many OG and OFS companies think
about their asset portfolios. Investments in Canadian oil sands
now look less attractive.
• Many OFS companies benefited from early stage involvement in
US shale gas developments. However, a number of interviewees
now believe that the shale gas boom has passed its peak and
are not reallocating resources with the same magnitude that
they once did.
$ per thousand cubic feet Number of rigs
Source: US Energy Information Administration and Baker Hughes North America Rotary Rig Count
Archive, US Monthly averages by state
Figure 3. US natural gas industrial price and US monthly average rig count
0
2
4
6
8
10
12
14
US natural gas industrial price – $ per thousand cubic feet (LHS)
US monthly average rig count (RHS)
Jan
2001
Jan
2002
Jan
2003
Jan
2004
Jan
2005
Jan
2006
Jan
2007
Jan
2008
Jan
2009
Jan
2010
Jan
2011
Jan
2013
Jan
2012
0
500
1,000
1,500
2,000
2,500

6. Outlook for oilfield services Cautious optimism 6
Where are we now?
5. Positive factor: Financing
• Most of the top global and mid-tier companies interviewed
indicated that access to funding has not been a significant issue.
Therefore, these companies are focusing on getting the best
deal from the wide range of financial products on offer.
• Smaller companies more often turned to private equity rather
than sourcing funding from banks or the financial market. This,
also, was available for most companies Deloitte interviewed.
• In general, investors seem to be interested in the OFS sector.
This is because they can access the OG sector without being
exposed to the volatility that smaller OG exploration and
production companies face.

7. Outlook for oilfield services Cautious optimism 7
Where are we now?
6. Challenge: OG operator focus on cost control
• Figure 4 shows a steady increase in project costs.
• Cost rises are due to majors having to move to challenging and
politically riskier parts of the world, higher employment costs,
increasing project complexity and shareholders expectations of
dividend payments.
• The combination of these factors forces OG operators to cut
capital and operating expenditure. A number of oil majors have
all recently announced that they will reduce capital spending in
2014, compared with 2013.
• The shift in OG companies’ attitudes towards cost reduction
provides OFS companies with a new focus.
Source: Bernstein Energy, Financial Times and DataStream
Figure 4. Brent crude oil price ($ per barrel) and marginal cost of production
($ per barrel)
0
20
40
60
80
100
120
201220112010200920082007200620052004200320022001
Brent Current Month FOB $/bbl Crude Oil WTI Cushing $/bbl
Marginal cost of oil production $/bbl

8. Outlook for oilfield services Cautious optimism 8
Where are we now?
7. Challenge: Talent shortages to continue
• Skilled talent shortages is one of the most often cited factors
that has a negative impact on an OFS company’s performance.
• Companies are concerned that once engineers with 20-30 years’
experience retire, a gap will develop for staff with experience
in leading large and complex projects. This age group is also
important for training the next generation of engineers.
• Companies are spending more on recruitment and training,
have established training programmes and aim to set up
apprenticeship programmes. Some are recruiting from regions
with lower salary expectations, others are looking at sectors
such as manufacturing or the military.
Percentage of total membership
Source: Society of Petroleum Engineers
Figure 5. Society of Petroleum Engineers membership by age range
0%
5%
10%
15%
20%
25%
65+60-6455-5950-5445-4940-4435-3930-3425-2920-2420
1997 2012

9. Outlook for oilfield services Cautious optimism 9
Where are we now?
8. Challenge: Oil Gas industry’s cautious attitude to innovation
• There is an increasing need for innovative technologies
to reduce the cost of developing resources and increase
production from declining fields.
• But companies are becoming more risk averse as projects are
getting more complex and capital intensive. Shareholders also
support this and are cautious of the potential short-term cost
increases associated with the introduction of new technologies.
• The OG industry is slower than other sectors to adopt new
technologies. The UKCS is considered particularly slow in this
respect, or as one respondent aptly put it: “The UK rushes to be
second”.
• While the UK industry and research councils promote deployment
of existing technology and development of new ones, this activity
has to be more centrally coordinated, focused and accelerated.
There is a need for more collaboration between OG operators,
OFS companies, academia and the regulator.

10. Outlook for oilfield services Cautious optimism 10
Where are we now?
9. Challenge: Regulatory environment
• Regulatory certainty: A must. Most OFS interviewees
commented on the importance of a stable, predictable
regulatory framework and tax regime. Some argued that
recent tax changes made the UK system more complicated
and are eroding the industry’s trust in the regulator.
• Health and safety regulations: A positive differentiator?
Companies believe that strict Health, Safety and Environmental
(HSE) regulations are both necessary and useful for the sector.
Some interviewees felt that being able to navigate complex
HSE regulatory systems should be viewed as a competitive
advantage.
• Increasing local content requirements. International OFS
companies interviewed believe that increasing pressure from
governments to employ a larger proportion of their workforce
locally can significantly reduce the attractiveness of projects
where a skilled workforce is not readily available

11. Outlook for oilfield services Cautious optimism 11
What is next?
9. Challenge: Regulatory environment
OFS companies
have mixed views
of US shale
opportunities.
Some have taken
advantage of the
shale boom, but
they all highlighted
that the
competition is
intense. More
opportunities
could exist in
the downstream,
midstream and
petrochemicals
sectors.
Many consider
the Middle East
politically risky,
while Brazil’s
complex
regulatory
system deters
others.
While many OFS companies have
been successful in Russia, China
and India, some consider these
countries as low priority due to
high barriers to entry, political risks
and transparency issues.
The mature markets of the UK and
Norwegian Continental Shelves, including
oil fields west of the Shetland Islands,
still provide substantial opportunities.
OFS companies
are interested in
deepwater in
Nigeria, Angola
and Gabon in
West Africa,
Zambia,
Mozambique and
Tanzania in East
Africa and the
Falkland Islands.
Southeast Asia,
particularly Malaysian
and Indonesian
deepwater are
considered attractive.
Key:
Attractive market
Mixed views
“Not a priority” market
Figure 6. World map of opportunities

12. Outlook for oilfield services Cautious optimism 12
What is next?
Mergers and acquisitions: Further consolidation on the cards
• All interviewees expect that the strong MA activity in the
OFS sector will continue in the near future.
• The main driver behind acquisitions continues to be vertical
integration.
• The second most popular driver interviewees mentioned was
access to new international markets.
• Interviewees noted a new trend of small companies being
acquired for their attractive pipeline of orders.
• The US unconventional shale boom has resulted in a surge in
the number of small companies offering services. Many believe
that there are too many companies now in the sector and this
could lead to consolidation in the near future.
• The recent profit warnings among both small and mid-tier
companies were mostly due to lost or postponed contracts.
These had a negative impact on share prices and could
accelerate the speed of MA activity in 2014.

13. Outlook for oilfield services Cautious optimism 13
What is next?
Limiting factors in the short and long term
Short-term limiting factors
• Deteriorating market conditions
• Political risk
• Complex regulatory environment
• Brand credibility
• Competition from Southeast Asian countries
• Acceptability of technology
• Technological breakthroughs
• ‘Black swan’-like events
Long-term limiting factors
• Lack of a route to customers
• Lack of a regulatory framework to develop shale resources
• Demand side efficiencies

14. Outlook for oilfield services Cautious optimism 14
Looking further ahead
What will the OFS sector of the future look like?
• More of the same
• More technology and automation
• More efficiency
• More risks taken
• More new forms of collaboration and ownership

15. Outlook for oilfield services Cautious optimism 15
Looking further ahead
What will the successful company of the future look like?
• Global... yet local
• Diversified… yet focused on core functions
• A good global citizen and a good employer

16. Outlook for oilfield services Cautious optimism 16
Looking further ahead
Long-term opportunities
• Deepwater
• Decommissioning
• Frontier regions
• Arctic
• Unconventional resources worldwide

17. Outlook for oilfield services Cautious optimism 17
Contacts
Julian Small
UK Leader – Energy Resources
Global Leader – Oil Gas Tax
020 7007 1853
jsmall@deloitte.co.uk
David Paterson
UK Sector Leader – Oil Gas
020 7007 0879
djpaterson@deloitte.co.uk
Jon Hughes
Partner – Corporate Finance
020 7007 1980
johughes@deloitte.co.uk
Derek Henderson
Managing Partner – Aberdeen
01224 847344
dehenderson@deloitte.co.uk
Graeme Sheils
Partner – Audit
01224 847706
gsheils@deloitte.co.uk
Shaun Reynolds
Director – Corporate Finance
01224 847319
shreynolds@deloitte.co.uk
Author
Netti Farkas
Manager – Insight
020 7303 8927
nfarkas@deloitte.co.uk

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