Northern Lights A strategic vision of Aberdeen as a world-class energy capital
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www.pwc.co.uk/scotland
Northern Lights
A strategic vision
of Aberdeen as
a world-class
energy capital
November 2011
2 Northern Lights – A strategic vision of Aberdeen as a world-class energy capital
Contents
Introduction page 4
Executive summary page 6
New frontiers and technical innovation page 10
Complementary effects of emerging sectors page 14
Fiscal regime to support E&P investment page 20
Talent management page 24
Mid-tier OFS and independents need access to capital page 28
Public sector ambition page 32
Contacts page 36
3
Introduction
Aberdeen has reached a crossroads.
Business as usual, and the possibility of
a managed decline. Or all stakeholders
collaborating to grasp the many
opportunities within reach?
4 Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
Our aim Our approach
We seek to foster keen and open We have gathered data, analysis,
debate amongst all stakeholders on opinion and comment from many
how best to achieve the sustainable sources. The content, views and
prosperity desired for Aberdeen. recommendations contained in the
document are based on the following:
PwC has a long-term commitment to the
city and this document expresses our • Interviews with senior industry
views on the key influencing factors and players and stakeholders such as
suggestions to ensure a successful future executive members of International
for the city and the industry. Oil Companies (IOCs), independents,
oilfield service companies,
We outline the vital facts and the impact industry and educational bodies, and
of the current position in the North Sea, local government;
future projections and the development • Desktop research on key industry
of the industry. We explore the various discussion papers and data sources;
opportunities and describe some of and
the steps that we believe are necessary • The views of local PwC partners
for sustainable development. and staff involved in day-to-day
interactions with the industry and its
key stakeholders.
We have created a central hypothesis,
for each key strategic focal point,
which we then explore in detail.
We would like to thank all those
who have given their valuable time
and views which have contributed to the
development of our strategic vision.
“PwC” refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom), which is a member firm of
PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. 5
Executive summary
Factors which will define Aberdeen’s future as an international energy centre of excellence
Technical innovation Fiscal regime
Reserves remaining to support E&P
in basin Independents
Development
Complementary of the
Potential to lead in
effect of industry
decommissioning
emerging sectors
Now
sec ure
Ab erd een fut ure
O&G activity in Aberdeen
Trigger 1 Large OFS
IOCs leave basin retaining Talent
local HQ management
Aberdeen as
a centre of
excellence
Trigger 2
Mid-tier OFS
Large OFS leave basin Public sector
with access to
ambition
capital
Stand-alone
economic cluster
Triggers Opportunities Timescale unknown Future
The diagram above illustrates our However, real and positive actions must
view of the factors which will define be taken now, and continuously over the
the future of the energy industry next 10-40 years, to secure this prize or
in Aberdeen. the opportunities will slip away.
Up one path is the remarkable golden Given the current turmoil in financial
prize of Aberdeen as one of the global markets, the threat of a sovereign debt
energy capitals of the next 40 years. If default triggering another banking
we head down the other path, whilst calamity is real. The potential impact
this may continue to bring some success, of a freeze in liquidity and further
the future prosperity of Aberdeen is recession on energy demand, oil
much less certain. prices and currency values must not
be ignored. Energy, however, is an
All stakeholders have a vested interest international business and Europe is
in delivering excellence. The city is well only one part of this equation.
placed to achieve its ambitious goal
of becoming an international energy The recommendations highlighted in
centre of excellence given its 40 year this document are focused on the factors
track record in oil and gas, existing over which key stakeholders are able
infrastructure and history of nurturing to exercise their influence to ensure
talent and new technology. that Aberdeen is best placed to weather
the storm and emerge strongly as
an international energy centre
of excellence.
6 Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
The size of the prize The city and the industry should focus Fiscal certainty
The numbers are compelling: on publicising and ‘talking up’ the The recent increase in the
opportunities for growth and thereby supplementary charge has jolted the
• 12 – 24 billion boe1 remaining for dispelling the perception of managed industry’s confidence in the stability
extraction from the UK Continental volume decline. of the UK’s fiscal environment and will
Shelf (UKCS); impact the majors’ decisions on the
• Exploiting the West of Shetland Government also needs to view the global allocation of capital spend.
(WoS) fields alone could generate up UKCS as an opportunity for investment
to $600 billion 2 in new revenues in as opposed to a cash cow. The Government has also made
the next 40 years; welcome changes to tax legislation to
• The fledgling decommissioning To realise the potential left in the UKCS make the UK more attractive. In order to
market is estimated at $31 billion 3 industry players must take the lead and maximise investment in the UKCS, and
for the UKCS alone; and continue to invest. IOCs have a large therefore revenues and tax take for the
• £75 billion is also estimated to role to play and will lay the foundations industry and Government respectively,
be spent on offshore wind farm for further technological development fiscal stability and further incentives are
construction by 20204. which will benefit companies of all sizes. needed such as:
Collaboration and leadership Realising renewable and • Tax relief which will ensure the
There are a number of interrelated decommissioning opportunities commercial viability of smaller or
factors which will determine The renewable energy and marginal fields;
Aberdeen’s future: decommissioning markets offer huge • Reduced PRT rates; and
potential for Aberdeen. However, they • Decommissioning – the government
• Securing the future must begin should not be viewed as replacement for must provide certainty in relation
today with the creation of a declining oil and gas revenues but as a to the tax deductibility of
definitive strategy embraced by source of growth over and above these. decommissioning costs when they
all stakeholders; are incurred.
• Bold, decisive and proactive Service companies have many of the
leadership is also essential; and skills and capabilities required for
• Greater collaboration between construction of offshore wind farms,
stakeholders in industry, public, tidal/wave technology and carbon
private and education sectors capture, as well as the decommissioning
is required. of old infrastructure. Yet only a few
appear to have really focused on how
Investment to maximise they will secure their part of this prize.
revenues from UKCS
Despite production decline and fiscal These opportunities and revenues will
uncertainty over the last 10 years, not fall to Aberdeen by right. They
oil prices have multiplied and there will have to be fought for and won.
is plenty of life left in the UKCS. With investment, leadership and a
The industry remains upbeat about focus on how current expertise can be
the prospects for West of Shetland, leveraged to take advantage of these
incremental field developments and opportunities, the city can become a
extending the life of mature fields. centre of excellence in these areas.
1 Source: Oil & Gas UK 2011 Economic Report
2 Source: Based upon available reserves of 6 billion boe
(University of Aberdeen Long Term Prospects for Activity in the UK Continental Shelf) at an average price per barrel of $100
3 Source: Oil & Gas UK 2011 Economic Report
4 Source: http://www.guardian.co.uk (£75bn for UK’s biggest offshore wind programme signals new era for renewables, Alok Jha,
8th January 2010)
7Aberdeen needs to be a Funding is available – The public sector can drive
global talent magnet – establish but it’s not easy money collaboration and reap rewards
an Energy Academy Lenders and the industry are still Standards of living in Aberdeen are
There is a dearth of young talent recovering after the 2008/09 financial generally high. Further improvements
with appropriate skills, particularly crisis and the consequential drop in to the city and its infrastructure are
in management and engineering, North Sea activity levels. The strong necessary in order to attract more
which is a pressing issue for many. fundamentals of the sector mean that business and talent to the area.
Long term investment in scholarships, oil and gas remains one of the most
apprenticeships and graduate attractive industries for new investment. A number of infrastructure and civic
programmes is needed to stop the trend projects are in the pipeline but face
of wage escalation. Although funding is available, controls barriers such as finance, planning
over lending and investment hurdle and objections.
Industry must understand the needs rates have strengthened.
and aspirations of the next generation of Aberdeen can improve its image,
potential recruits – career development, Investors must be careful to ensure desirability and business effectiveness
brand, image, mobility – and engage their investment criteria do not which will help to secure the city’s
with them early. become unrealistic and thereby future as an energy centre of excellence.
stifle the next generation of Aberdeen-
An Aberdeen Energy Academy could based companies. A long term strategic plan is needed.
take the lead in creating tailored Here the public sector has a clear role to
curricula that appeal to the next Companies, on the other hand, must play in showing leadership and helping
generation whilst serving the needs of be aware that accessing capital is not a to balance the competing views and
the industry. The benefits of a structured right. They must demonstrate financial interests of various stakeholders.
and consistent approach to collaboration discipline and develop opportunities for
can be seen in other countries. investors, who potentially have difficult How the city and stakeholders go about
choices to make with less funds. this is open to debate. Our view is
Increasing the local supply of labour that leadership is essential to embrace
with the right skillsets will attract Strategic mergers and acquisitions change and take ownership for realising
and retain more industry players and (M&A) matching pre production assets Aberdeen’s potential.
enhance the reputation of the city. to cash flows to fund development
would unlock opportunities in the
Such an academy will not succeed in upstream and OFS sector.
isolation. Aberdeen and the industry
needs to find its voice and market itself The success of secondary buy-outs in the
better through proactive engagement next 18 months will also be important
with the government and press in to the continuing attractiveness
order to attract the most talented of the of the sector to generalist private
next generation. equity investors.
As well as impacting on investment
decisions, the lack of clarity in
relation to the tax deductibility of
decommissioning costs has also
impacted M&A activity, particularly in
terms of independents taking ownership
of North Sea assets.
8 Northern Lights - A strategic vision of Aberdeen as a world-class energy capital“Aberdeen has been a destination for global investment for many years and I
want to see that continue for decades to come. There is still massive opportunity
in the North Sea .” 5
David Cameron, UK Prime Minister.
5 Source: www.pressandjournal.co.uk
9New frontiers and technical innovation
Goal: Maximise reserves recovery
Hypothesis Why retaining operations
Contrary to the view that North Sea in the UKCS is important to the
production is in terminal decline, the city’s future
outlook for the oil and gas industry in Aberdeen established itself as the
Aberdeen is positive. There are a wealth UK’s oil and gas centre on the back of
of exciting opportunities that will the industry’s operations in the North
enable Aberdeen to continue prospering Sea. However, some question whether
whether through utilising new technology ongoing oil and gas operations are
to extend the life of existing fields, necessary for the city to continue to
developing incremental reserves or flourish as an industry hub.
developing green field sites.
In our view, continued oil and gas
production from the UKCS is critical for
the city’s reputation in the industry:
• Retaining UKCS production helps
to keep the industry physically
‘anchored’ in the area;
Long Term Prospects for Activity in the UKCS
• Ongoing exploration and production
Aberdeen University’s Alex Kemp recently conducted research looking at three
(E&P) and service operations
different oil and gas pricing scenarios and the impact on the UKCS. In his view, the
maintain the city’s place at
mid case long term price scenario of $70 bbbl and 50p therm represents the most
the forefront of technological
realistic outlook for the industry.
developments as they deal with
geological challenges and harsh
In this scenario there is a predicted upturn in production in the later half of this
North Sea conditions; and
decade from new exploration and incremental finds, with the West of Shetland
• More effective people development is
having a growing influence and contribution to production. With stable and
facilitated by having specialist skills
sustained prices, production in smaller and less economic fields becomes viable
in the city.
and there is likely to be enhanced spending on exploration. The research predicts
a spike in investment for the next 4 to 5 years in order to realise the higher level of
production, with investment levels ranging between £6 to £8 billion.
Under this scenario reserves are predicted to be around 20 billion boe, with
incrementals accounting for 5.7 billion boe and new exploration of 3.5 billion boe.
The research concludes that to realise the reserves potential, investments require
to be screened based on the predicted pricing levels and a consistently high level of
project design, development and completion is required.
Source: http://www.abn.ac.uk
10 Northern Lights - A strategic vision of Aberdeen as a world-class energy capitalIn order to maximise reserves Nonetheless, there is consensus among IOCs have an important role
recovery, companies must leading industry players in Aberdeen to play in maximising the
continue to invest that 12 billion boe is a conservative opportunity of new developments
Compared to last year, Oil & Gas UK view – they believe that the industry including West of Shetland
forecasts a 12% increase in oil and gas can continue to boom. This optimism WoS is predicted to grow from a 5%
reserves recovery in the period from is supported by hard evidence: BP, share of total oil and gas production in
2011-2050 including: along with its partners ConocoPhillips, 2010 to 25% by 202015. BP, Shell, Total,
Chevron and Shell, has recently Chevron and Marathon have already
• 6 billion boe from existing and announced the £4.5 billion extension proved there is a willingness to invest
sanctioned investment; of the WoS Clair field11 in addition in the area. We believe this trend must
• 3.1 billion boe from development of to the recently announced £3billion continue with the IOCs leading the
new fields; and redevelopment of Schiehallion & Loyal way. WoS offers both high risks and
• 2.6 billion boe from incremental fields12 , Apache Corporation has agreed high rewards to the majors. However,
investment in existing fields6. to acquire ExxonMobil’s North Sea as a result of the lack of infrastructure
assets for $1.75billion13 and Premier and difficulties in obtaining and
The most significant increase in total Oil is to pay $340million for Encore14 interpreting seismic data, significant
reserves relates to West of Shetland to expand its interest in Catcher, one of investment is needed before other
(WoS) with proven, probable and the largest UK offshore discoveries of independent oil and gas companies can
possible reserves up 31%7 compared to recent years. commence operations.
prior year business plans.
The level of investment means oilfield
Long-term activity forecasts for UKCS service companies will be able to
reserves recovery vary widely, ranging take risks on the development of
between 12 billion boe and 24 billion new technology. By oilfield services
boe8 depending on the level of new companies pushing the innovation
investment. Recovery of Oil & Gas boundaries for the IOCs, independents
UK’s reserves estimate would require will be able to enter WoS at a later date
investment of £70 billion9 across the using the technology already in place.
next four decades whereas releasing This approach ensures that they will
reserves potential at the upper end of not have to bear the initial technology
the scale would require investment investment cost.
approaching £150 billion10.
Looking beyond the UKCS, the majors
continue to expand their activities in
the Arctic Circle. Given its location
and the extent of local expertise,
Aberdeen has an opportunity to become
a hub for companies developing Arctic
E&P operations.
6 Source: Oil & Gas UK Activity Report 2011
7 Source: Oil & Gas UK Activity Report 2011
8 Source: Oil & Gas UK 2011 Economic Report
9 Source: Oil & Gas UK Activity Report 2011
10 Source: University of Aberdeen Long Term Prospects for Activity in the UK Continental Shelf
11 Source: http://www.bp.com (£4.5 Billion Clair Ridge Project Receives Approval for Development, BP Press Office, 13th October 2011)
12 Source: http://www.scotsman.com (BP invests £3bn in Oil fields west of Shetland, 13th July 2011)
13 Source: http://www.bloomberg.com (Apache to Acquire Exxon North Sea Assets for $1.75 Billion, Brian Swint and Edward Klump,
21st September 2011)
14 Source: http://www.ft.com (Premier to buy North Sea explorer EnCore, Michael Kavanagh, 5th October 2011)
15 Source: University of Aberdeen Long Term Prospects for Activity in the UK Continental Shelf
11Technical innovation and
Oil giants BP, ConocoPhillips, Chevron and Shell incremental developments can
help maintain production levels
announce £4.5bn investment in Clair field, west With the infrastructure in place and the
of Shetland. maturing production profile of North
During October 2011, BP and its co-venturers announced Sea fields, incremental developments
in and around existing fields present
that approval had been received from the UK Government a significant opportunity to sustain
to proceed with the second phase of development of the investment in the UKCS. Many mature
giant Clair field. The new development will have the and/or incremental developments
may not meet the investment appraisal
capability to produce an estimated 640 million barrels of benchmarks of the IOCs when
oil and will provide a hub for future expansion, subject competing for capital investment on
to further appraisal. Peak production is expected to be a global basis. However, the North
Sea continues to evolve with the next
up to 120,000 barrels of oil per day. The Clair extension generation of independent oil companies
is planned to come on stream in 2016 and to extend taking up the challenge of maximizing
production from the greater Clair area to 2050. In addition North Sea oil and gas production.
to the 600 people already working on the project, it will Oil & Gas UK predicts that incremental
provide hundreds of UK engineering, drilling and oilfield investment could deliver an additional
services jobs over the field’s life. 2.6 billion boe16 over time with other
research suggesting this could be as
high as 5.7 billion boe17. While the
Source: www.bp.com marginal cost/benefit model is key
to the successful extraction of these
reserves, the benefits of operating in
an established environment can ensure
that the marginal benefits outweigh
the costs:
• Ease of access to existing
“Although it began over 40 years ago, the story of the infrastructure;
• Higher than global average
North Sea oil industry has a long way yet to run. BP exploration success rate;
has produced some five billion barrels of oil and gas • Well-established supply chain and
close proximity to skilled workforce;
equivalent so far from the region and we believe we have • Located close to developed high oil
the potential for over three billion more.” and gas demand markets; and
• Availability of infrastructure
and processing terminals in
Bob Dudley, BP. the area mean that even small
Source: www.heraldscotland.com fields can be brought into
commercial development.
16 Source: Oil & Gas UK Activity Report, 2011
17 University of Aberdeen Long Term Prospects for Activity in the UK Continental Shelf
12 Northern Lights - A strategic vision of Aberdeen as a world-class energy capitalAs Ithaca has proved (see below), Conclusion
there is potential to revitalise ageing Despite production decline over
infrastructure and reap the rewards. recent years, the industry remains
Sustaining such investments will be upbeat about its prospects. There is
critical to the longevity of the UKCS. plenty of life left in the UKCS, whether
in West of Shetland, incremental
The life expectancy of North Sea oil and field developments or extending
gas has been debated for over 20 years. the life of mature field through
However, technological development technological advances.
has prolonged production and will
continue to do so. IT developments, The city and the industry should
seismic acquisition and interpretation focus on publicising opportunities for
technology and enhanced oil recovery growth and replace the perception of
(EOR) techniques have, and continue, managed decline.
to make rapid advances.
To realise the potential left in the
Two of the largest discoveries in the UKCS industry players must continue
North Sea in the last 10 years – Buzzard to invest. IOCs have a large role to play
and Catcher – have arisen in what and can lay the foundations for further
was viewed by many to be the largely technological development which will
depleted Central North Sea sector. benefit companies of all sizes.
Similarly, Xcite’s “most-likely” (P50)
reserves estimate for their 160mmboe
Bentley discovery18 is considered to have
significant upside potential through the
application of EOR techniques used to
enhance production of heavy oil.
The benefits of technology are
unquestionable. The challenge is
how Aberdeen ensures that it is a
“We are talking about exciting new opportunities
technological hub; attracting and in West of Shetland and an increase in North Sea
retaining the R&D functions of global
industry players, continuing to train
investment and production, not a decline.”
and develop some of the most creative
minds in the industry and fostering Brian Wilkie, Total.
the development of equipment and
technology that will continue to move
the industry forward.
Companies such as Ithaca and Apache breathe new life into fieldmature fields.
In late 2008, Ithaca Energy assumed operatorship of the Beatrice field from Talisman
Energy for £10million.
Ithaca’s motivation for the deal was to enable a tie-back of it’s Jacky discovery
northwest of Beatrice. Reinstating production of the Beatrice Bravo platform and an
ongoing programme of well workovers has yielded incremental production gains. As
a result, monthly average production through Beatrice platform has reached levels
not seen since 1994. Apache have also achieved similar success with the Forties field.
Source: www.ithacaenergy.com
18 Source: http://www.xcite-energy.com (Bentley Upgrade to Reserves Status, 10th May 2011)
13Complementary effect of emerging sectors –
Goal: Aberdeen leading in renewable energy
and decommissioning
Hypothesis Renewables today and beyond19
Renewable energy will complement, Scotland has a huge amount of
not replace, oil and gas in Aberdeen. renewable energy potential to tap into
Opportunities and revenues will not but relatively small domestic demand.
fall to Aberdeen by right but with focus, Previous studies have identified that
vision and strategic planning Aberdeen Scotland has sufficient renewable
can become the global centre for energy resources to provide 75% of
decommissioning and a world leader in the UK’s electricity needs. Estimates
clean energy. also suggest that Scotland has 25% of
Europe’s onshore wind resource, 10% of
Diversification of energy sources wave resource and significant potential
The experience and skillsets gained for tidal stream and offshore wind
through North Sea operations need to capacity. It is clear that the potential is
be harnessed and exploited as we move first class and that Scotland could have
towards cleaner sources of energy. The a strategic role in delivering Europe’s
UK and Europe currently lead the way renewable ambitions. Aberdeen has an
for offshore wind technology but this opportunity to lead the way20.
is a global opportunity. By transferring
the engineering capability and the
experiences working in the harsh 2010 Scottish Renewable Energy
conditions of the North Sea, Aberdeen Generation Capacity (GW)
can establish itself as a world leader for
renewable energy. Biomass – 0.3
Waste – 0.1
Hydro – 1.4
“Scotland is blessed with abundant natural energy
sources, particularly in our seas, where Scotland is Wind – 2.8
estimated to have a quarter of Europe’s potential
wind and tidal energy capacity and a tenth of its
wave resource.”
Alex Salmond, Scotland’s First Minister.
19 Chart source: Scottish Renewables
20 Based on the Scottish Government’s estimate that Scotland has the potential for an installed capacity for 60GW (i.e. before capacity
factor constraints)
14 Northern Lights - A strategic vision of Aberdeen as a world-class energy capitalOver the next decade Scotland’s The build period for offshore wind
renewable sector is set to grow farms is expected to be in the region of
significantly with a particular focus 10-15 years. Initial capital expenditure
onshore and offshore wind and marine on design and installation will be high.
energy. The government’s current The oil and gas industry has a number of
target is that 100% of Scotland’s gross transferable skills, for example in cable
electricity consumption should be laying and offshore connection, as well
supplied by renewables by 202021. To as in relation to ongoing operation and
achieve this goal, billions of pounds maintenance.
must be spent on improving energy
infrastructure and developing carbon Despite the opportunity, few appear
storage technologies making renewable to have fully focused on how they will
energy a viable replacement for fossil secure their part of the renewable
fuels in the long term. energy prize; few have created divisions
that are focused on the sector. These
Industry view on renewables opportunities will not fall to Aberdeen
The potential of renewable energy by right, they will have to be fought
in Aberdeen is keenly debated. Some for and won, and the industry needs to
industry experts view it as a golden move quickly before the rest of the world
opportunity while others are pessimistic catches up.
about its potential to grow and its
capacity to generate revenue. Aberdeen has a huge opportunity to
nurture experts and graduates who
Oil and gas fields and the related view renewables as a more attractive
infrastructure creates thousands of jobs a career than one in finite resources.
in Aberdeen and huge revenues, with With a combination of fresh talent and
the UK’s supply chain generating a transferable skills, Aberdeen can create
turnover in excess of £16 billion per the expertise and supply chain required
annum 22 . While it is expected that to sustain renewable energy as a viable
the renewables sector will require a industry to complement oil and gas for
smaller supply chain there is still plenty the long term.
of opportunity.
“The renewable energy industry could still centre itself
anywhere – Aberdeen needs to grab the prize. There is
no co-ordinated industry approach to attract renewables
to Aberdeen.”
Jonathan Roger, Centrica.
21 Source: http://scotland.gov.uk (Renewables Policy)
22 Source: Oil & Gas UK 2011 Economic Report
15UKCS projected cumulative decommissioning costs 2008-2040
35.0
30.0 2005/6
Decommissioning Spend (£bn)
2006/7
25.0 2007/8
2008/9
20.0
2009/10
15.0 2010/11
10.0
5.0
0.0
2008 2013 2018 2023 2028 2033 2038
The only inevitability in oil and
gas – decommissioning 23
The UKCS faces an enormous challenge
to sustain the productive life of
existing infrastructure and postpone
decommissioning. Although some fields
now have production profiles beyond
2040, there are a considerable number
of decommissioning projects due to get
underway in the next decade.
Many fields have been able to postpone
their decommissioning dates over recent
years thanks to advances in technology.
However, the trend has slowed
recently. It is anticipated that 37% of
the estimated £31 billion cost will be
spent by 2020, with 144 fields due to
commence decommissioning24.
We view decommissioning as another
great opportunity for Aberdeen to
lead. The North Sea will be one of the
first harsh offshore basins to undergo
significant decommissioning and there
is an opportunity to build vital skillsets,
which can be exported to other parts of
the world.
Decommissioning should not be seen as
a negative but as an opportunity to lead
the way.
23 Chart source: Oil & Gas UK Activity Survey 2011
24 Source: Oil & Gas UK 2011 Economic Report and 2011 Activity Survey
16 Northern Lights - A strategic vision of Aberdeen as a world-class energy capitalDecommissioning landscape
in the UKCS PSN awarded Brent decommissioning project.
Generally, North Sea operators had
an economic incentive to push back
In July 2010 PSN signed a contract with Shell worth
decommissioning and extend the life nearly $200 million for dismantling work on the Brent
of fields. However, a lack of certainty field. The contract award was for decommissioning
over tax relief on decommissioning costs
and the need for letters of credit is tying
services on the Brent Delta platform topsides. PSN
up capital which could otherwise be will provide services including integrity management;
reinvested in the UKCS and could lead to module, process and utility separation; safe shutdown;
earlier decommissioning of some fields.
hydrocarbon cleaning; disconnections and preparation
The market continues to be volatile – for removal of the topsides. Offshore work is expected to
25% 25 decrease since the peak of $146 begin in late 2011 as part of the initial stages of platform
a barrel in 2008.26 A decline in prices
from current levels will make certain
decommissioning.
fields uneconomical.
Peter Brown, UK Managing Director of PSN at the
Surprisingly, despite the size of the
market and the large projects which
time said “We are confident the contract will provide
are looming, investors and oilfield a significant number of new job opportunities in the
service companies seem to have been decommissioning services sector. It will also position
slow to exploit the huge potential
rewards. Presently, there are six fields
Aberdeen as a global centre of excellence for offshore
due to cease production and commence decommissioning.”
decommissioning in the next 18
months, and therefore the investment
Source: www.woodgroup-psn.com
opportunity exists now to become a key
player in this market. A recent example
of the size and potential of the market
can be seen with PSN’s award of the
Shell Brent decommissioning contract.
25 Based on crude oil price of $106 a barrel at 30 September 2011
26 Source: www.energybulletin.net (Peak Oil and Worldwide Economic Recession Soften Oil Prices: Lull Before the Storm, James Leigh,
3rd October 2008)
17Aberdeen as a decommissioning centre of excellence?
Strengths Opportunities
• Key skillsets in construction • UKCS market worth $31 billion; 27
and engineering; • Create a niche which can be
• Equipment and infrastructure exported internationally;
exists to dismantle and bring • Key part to play in Aberdeen as
platforms onshore; an international energy centre of
• Experience of dealing with excellence; and
environmental issues on the • Attract more investment into the
UKCS; and city and infrastructure.
• Innovative, entrepreneurial spirit.
Weaknesses Threats
• A need for more focus and • Infrastructure still required
investment from local industry by independents to develop
to grab hold of opportunity; mature fields;
• Bad image – seen as death • Competition from other mature
of the industry rather than basins, e.g. Houston with shallow
opportunity to lead global water Gulf of Mexico;
decommissioning; and • Cheaper alternatives – seen
• Difficult to attract talent. by some as low skilled, labour
intensive projects with no money
to be made; and
• Who is going to pay for it?
27 Source: Oil & Gas UK 2011 Economic Report
18 Northern Lights – A strategic vision of Aberdeen as a world-class energy capitalConclusion
The renewable energy and
decommissioning markets offer
further potential for Aberdeen and
should be viewed as a source of growth
alongside oil and gas revenues as
opposed to a replacement.
Many of the skills and capabilities
required for construction of offshore
wind farms, tidal /wave technology
and carbon capture as well as the
decommissioning of old infrastructure
lie with local oil field service companies.
Few appear to have fully focused on
how they will secure their part of this
prize; few have created a division that is
focused on these emerging sectors.
These opportunities and revenues
will not fall to Aberdeen by right, they
will have to be fought for and won.
With investment, leadership and a
focus on how current expertise can be
leveraged to take advantage of these
opportunities, the city can become a
centre of excellence in these areas.
“Aberdeen is recognised throughout the oil
and gas world for its expertise in and subsea
technological innovation.”
Jeff Corray, ITS.
19Fiscal regime to support E&P investment
Goal: Tax certainty is very important for
ongoing UKCS investment
Hypothesis March 2011 tax increases
The UK Government demonstrated jolted confidence
leadership by lowering taxes to make Tax rates in the UK sector of the North
the UK a more attractive location for Sea range from 62% to 81% depending
companies. Higher taxes for oil and gas on the age of the oil or gas field28. Cash
operations do not necessarily make the tax rates are generally higher as a
North Sea unattractive, but appropriate result of anticipated reliefs for future
incentives, dialogue and certainty decommissioning costs. However, many
are required to exploit resources and reliefs are restricted, including relief
retain skills before and during the for financing costs, which could lead to
development of the decommissioning and eye-watering effective rates of 65%+ for
renewable industries. newer fields and 85%+ for more mature
fields29. Total tax revenue from UK oil
and gas production was £9.3 billion in
201030 with an anticipated increase of £2
billion 31 as a result of the increase in the
Supplementary Charge to 32% in March.
Is this third tax increase since 2003 a
step too far?
Current production from existing
facilities should not be unduly affected
whilst the net of tax economics remain
favourable. However investment
decisions around projects could be
impacted. The vessels sitting unutilised
in Aberdeen Harbour throughout 2011
may be a barometer of the impact on
exploration and development activity
as the economics of new projects are re-
examined and reassessed.
High oil prices meant that the industry
absorbed the tax increases in 2003
and 2006. High market prices remain
and the Government would argue
that current tax rates represent a fair
economic rent for the licences.
28 Source: https://www.og.decc.gov.uk
29 Source: https://www.og.decc.gov.uk
30 Source: Oil & Gas UK Activity Survey 2011
31 Source: http://www.hmrc.gov.uk
20 Northern Lights - A strategic vision of Aberdeen as a world-class energy capitalComparison of Oil and Gas Tax Rates
90
80
70
60
50
40
30
20
10
0
ay
k
et
s
et
nd
ar
dg
dg
w
m
rla
or
bu
bu
en
N
he
e-
D
st
et
pr
po
N
K
K
U
U
Marginal Government Take (%)
Source: Morgan Stanley Research; Wood Mackenzie
The recent increase in the
More certainty and incentives are
Supplementary Charge has impacted
needed to promote investment
the UK’s relative competitiveness on
When commitments are made to explore
the global stage. IOCs will of course
and develop a field, the investment
take this into account when allocating
profile can span up to a decade or more;
resources across capital projects
participants therefore need a degree of
globally. The restrictions on tax relief
certainty over their cash flows. The UK
for financing costs contribute to the
Government has recognised the issue
difficulties faced by independent
by introducing and extending ‘field
entities. When large IOCs reduce their
allowances’ and by committing to no
future investment in UK projects,
further industry tax increases during
the question arises as to whether the
the life of the current Parliament.
independents can fill the void?
The UK Government also needs to
embark on a dialogue with the industry
with a view to rebuilding confidence in
the UK regime. We recommend:
• Tax relief to ensure
commercial viability of smaller
or marginal fields;
• A competitive corporate and
personal tax regime for UK
headquartered companies;
• Clarity on the restriction
of decommissioning relief; and
• Reduced PRT rates to provide an
incentive to invest.
21Clarity on decommissioning relief A more significant potential impact
The link between the tax regime and on decommissioning is that a future
the timetable for decommissioning Government may reduce or eliminate
has dominated tax policy debates over tax deductions for decommissioning
many years. expenditure when it is incurred. This
lack of clarity has stifled M&A activity,
The longer term implications of the impacted investment and tied up capital
recent tax changes on decommissioning unnecessarily in requiring guarantees
are less clear; whether existing fields for decommissioning costs to be made
are decommissioned earlier and on a gross basis without assuming
existing infrastructure lost will be a any tax relief.
function of many factors including
oil price, future tax rates and tax One solution would be for the
relief for decommissioning costs. The Government and each licence holder
impact of increased taxes on these to enter into a contract where the state
investment decisions will influence agrees to pay any difference between
when an asset is decommissioned. This the tax deduction for decommissioning
too will impact on decisions around set out in the contract (which would
exploration and development of new reflect the tax rate at the time of
fields, as many new smaller fields might the contract) and the tax deduction
be dependent on being able to tie into available when decommissioning
existing infrastructure rather than actually occurs. The intention would
utilising alternatives such as floating be to “lock in” the deductions available
production vessels. and provide certainty to current licence
holders and possible future entrants.
“Certainty on the availability of decommissioning reliefs
coupled with a clear and predictable fiscal regime could
be a game changer for North Sea developments.”
Malcolm Webb, Oil & Gas UK.
22 Northern Lights - A strategic vision of Aberdeen as a world-class energy capitalBroader UK Tax changes – Conclusion
making the UK more attractive The impact of fiscal policy has
The Government has stated its objective consequences both for the long term
of the UK being “open for business”, health of the North Sea as well as
with the aim that more companies the future of the renewable and
maintain or establish their worldwide decommissioning industries.
headquarters in the UK.
In order to maximise investment in the
With this in mind, the Government UKCS we believe that fiscal certainty
outlined it’s intention in the 2011 Budget and a more coherent and competitive
for the UK to have the lowest corporate fiscal system is needed.
tax rate in the G7, although this does
not apply to oil and gas exploration and The current regime taxes on the basis
production profits. They have also set that oil and gas profits are super profits
out a number of other measures. These that can endure very high marginal
include a move towards a territorial rates. As the basin continues to mature,
principle, with taxation only on a many of the future projects will be more
company’s profits earned in the UK, challenging and riskier and will not
proposed reforms to the Controlled result in super profits.
Foreign Companies Regime and changes
to the taxation of intellectual property. The tax regime needs to adapt to reflect
the underlying economics particularly
This makes it far more attractive for in relation to smaller or marginal fields.
companies to base global headquarters A reduction in PRT rates would provide
or regional headquarters in the UK and an incentive to invest particularly for
to invest in exporting to new overseas older fields.
markets, a key goal in promoting growth
for UK plc. The Government must provide clarity
in relation to the tax deductibility of
This, together with the Aberdeen decommissioning costs when they are
skill base, gives the city a tremendous incurred, possibly through contracts for
opportunity to attract and retain energy differences with the state.
companies and HQ offices.
“Fiscal certainty is key to long term multi-million pound
investments with high execution risk.”
Jonathan Roger, Centrica.
23Talent management
Goal: think career, think energy, think Aberdeen
Hypothesis Effective talent management
If Aberdeen is to secure its long term is a must
future as a global energy player it must Over 50% of respondents to OPITO’s
emerge victorious in the war for talent. recent Labour Market Intelligence
Industry and academia must collaborate Survey identified talent as the
to a greater extent. An Aberdeen Energy number one challenge facing their
Academy responsible for overseeing a company. This is consistent with the
structured and consistent approach to PwC global survey of CEOs in which
creating, marketing and funding tailored 66% of respondents fear they won’t
courses for tomorrow would appeal to the have the right talent to compete
next generation and serve the needs of effectively as recovery takes hold32 .
the industry.
Skills shortages lead to wage inflation
as employers are forced to pay a short
term premium to deliver the business
plan today using contractors, instead
of developing their own talent over the
longer term.
The industry model of using ‘one man’
service companies means that people
do not always get the development to
move to the next level. It is argued that,
this has created a cynical workforce
which has little loyalty, allegiance or
long term commitment.
Why managing talent is
so important
As well as addressing short term skills
shortages, managing talent effectively,
and thereby increasing the supply of
labour with the right skillsets, could lead
to a virtuous circle of attracting more
industry players to the area, a greater
culture of innovation and development
and an enhanced reputation for the city.
32 Source: Oil & Gas UK UKCS Workforce Demographics Report
24 Northern Lights - A strategic vision of Aberdeen as a world-class energy capitalDemographic challenges and Oil and Gas Employment Trend 1998-2010 33
skill shortages
Recent research by Cogent estimated 450,000
the total UK workforce employed in 400,000
the oil and gas industry at 260,000 for
350,000
2010, of which approximately 50,000
are offshore. Others suggest that the 300,000
industry supports 440,000 jobs34, most
250,000
based in Scotland.
200,000
Industry observers have historically 150,000
pointed to an ageing workforce as a
key concern for the sector. However, 100,000
the average age across the sector is 50,000
4035 which is consistent with UK and
global averages. 0
8
99
00
08
09
20 1
02
03
04
20 5
06
07
10
0
9
0
20
20
20
19
19
20
20
20
20
20
The industry requires a higher 20
Induced Employment Impact
proportion of skilled employees, such Total Indirect Employment
as engineers and managers, than other Direct Employment
sectors. OPITO’s research indicates
that these are the roles which are most
difficult to fill.
Most Difficult-to-fill Vacancies 36
Industry also reports mis-match
between the qualifications gained in Admin. And Secretarial
education and the technical, industry
specific and softer skills required to Other
operate effectively in the industry. IT Support
Professional Scientists
The issue appears to be more than
simply a numbers game and, as such, Crafts people
our view is that focusing only on Technicians
boosting the number of younger recruits
will not solve the problem on its own. Project Support
Commercial and Marketing
Ops and Production
Managerial
Engineer
0 10 20 30 40 50
% of Respondents
Very difficult
Quite difficult
33 Chart source: Experian/ONS
34 Source: Oil & Gas UK 2011 Economic Report
35 Source: Experian/ONS
36 Chart source: OPITO – Labour Market Intelligence Survey
25Aberdeen and the industry are Establishment of an
losing the battle for talent Aberdeen Energy Academy –
Competition for limited talent is fierce. collaboration between industry
Clean energy sectors and demand from and educational bodies
other oil and gas regions will attract A more structured programme of
an increasingly mobile local talent academia and industry consultation
pool. Careers in financial services and will deliver the talent that the industry
other professional services are even requires. In our view, an Aberdeen
attracting technical talent away from Energy Academy could nuture new
the industry. But this is not just about talent focused in the right areas.
emerging territories or other industries.
Houston and Perth, with their advanced Such an academy would promote oil
infrastructure and educational and gas in the UK and beyond as an
development, have continued to be a attractive career option and Aberdeen
choice for young oil and gas engineers. as the best place to receive specialist
So Aberdeen should learn from education through:
their success.
• Tailored curricula matching
A new generation of individuals qualifications to future roles based
– the Millennial generation – is on industry needs;
entering the workforce. They have • Practical work experience
different expectations in selecting the through scholarships and summer
organisations they work for and have a placements; and
strong interest in development through • A channel to retain talent in
coaching, training and mobility37. the local economy through the
effective marketing of courses and
Domestic and international students careers in Aberdeen both in the UK
need to be attracted and equipped with and overseas.
the right skills. Investment for the long
term in scholarship, apprenticeship With UK unemployment amongst 16-24
and graduate programs is needed or year olds approaching 1 million 38 and
the trend of wage escalation to attract ongoing concerns in relation to the
ageing talent will continue. financial burdens placed on students,
young talent needs a visible and
direct link to future careers. There are
excellent examples of collaboration
between industry and universities.
“There is a real need for industry and education to Several local companies such as
Talisman and Wood Group provide
collaborate ever more closely – on a deeper and more university scholarships39. The industry
consistent basis – to achieve more effective development together should follow this lead and
develop a coordinated approach.
of skills as well as propagate the research and
development that will prolong the life of the basin.”
Professor Stephen Logan, University of Aberdeen.
37 Source: PwC Managing tomorrow’s people: The future of work to 2020
38 Source: http://www.telegraph.co.uk (Youth employment hits record, Harry Wallop, 16th February 2011)
39 Source: www.talismanscholarship and www.rgu.ac.uk
26 Northern Lights - A strategic vision of Aberdeen as a world-class energy capitalA number of overseas locations have Conclusion
also embraced collaboration between Industry must understand the needs
industry and education, for instance, and aspirations of the next generation of
Houston and Singapore. Silicon Valley potential recruits – career development,
has harnessed the potential of world brand, image, mobility – and engage
class universities Stanford and Berkeley with them early.
creating a virtuous circle of commercial
and academic advancement. Investment for the long term in
scholarships, apprenticeships and
However, many interrelated factors are graduate programmes is needed or
at play. An Academy will not solve the the trend of wage escalation to attract
industry’s skills shortage in isolation. ageing talent will continue. In our view,
The city’s physical amenities and an Aberdeen Energy Academy which is
infrastructure – its image and reputation responsible for creating, marketing and,
– are as important to career choice as to an extent, funding tailored courses
the educational infrastructure. The would attract career-minded members
final section of this document explores of the next generation and serve the
the factors impacting Aberdeen’s needs of local industry.
desirability as a place to live and work as
well as the role the public sector has to
play in influencing these factors.
27Mid-tier OFS and independents
need access to capital
Goal: Billion dollar opportunities for smart
funders and ambitious independents
Hypothesis Fundraising has been challenging
In an uncertain world, the dream ticket for independents since the
is matching entrepreneurial independent financial crisis
producers with funders willing to provide Oil and gas independents are
access to capital. The growth aspirations discovering new oil, offering attractive
of Aberdeen service companies need investment opportunities. In 2010,
funders who will provide support through capital investment in the North Sea,
industry cycles. rose more than expected, to £6bn40.
However, in the current economic
climate, higher risk independents are
finding it difficult to obtain adequate
Xcite Energy recieve funding to develop Bentley. capital investment.
In April 2009, Xcite Energy released a cautiously optimistic
report quoting the Bentley field as “one of the largest Independents require considerable
capital to get development and
proven, but undeveloped fields in the North Sea.” At this production programmes underway
time, the CEO expected a rush of interest from industry and however, once funding is secured, these
financial partners alike. projects can often be very lucrative
for the investor. Correspondingly,
the higher risk associated with these
In August that year, the company generated £2.1m companies means exploration activity
through the placing of 10 million shares. Over the is often better financed by equity
rather than debt. Recent high profile
following year, the company secured £60m from YA failures have shown the danger of
Global Master SPV – a fund managed by Yorkville excessive gearing.
Advisors. This allowed Xcite to perform a well flow test in
Selling shares on a public market such
the field which reaped excellent results. as AIM should be considered as a source
of finance, but not entered into lightly
Xcite are now in a position to commence production and as the volatility of share prices will be
linked to the most recent successful,
are awaiting feedback for their first stage production or unsuccessful, well. There may be
programme from DECC. The field is estimated to be 690 opportunity for a new style of funder to
million barrels in volume and, since April 2009, Xcite’s emerge who is willing to provide equity
type funding into specific projects. For
share price has grown 1200%. Xcite is an example of a the right investment, the returns profile
successful start-up and shows that investment in small will still be very attractive.
North Sea independents can offer opportunity to create
significant value.
Source: http://www.xcite-energy.com
40 Source: Oil and Gas UK Activity Survey 2011
28 Northern Lights - A strategic vision of Aberdeen as a world-class energy capitalThrough the 2008-09 downturn, Views differ on the current There is a divergence of opinions
mid-tier oilfield services companies availability of capital between investors and investees over
were required to adjust their cost base Access to capital is a significant limiting the general availability of capital.
and funding structure to match lower factor for the oil and gas industry – Funding is available but controls over
volumes of activity in the industry. For current macroeconomic uncertainty is lending and investment hurdle rates
the majority, the debt markets were impacting on investors risk appetite. have strengthened. Companies must be
closed and others found that the cheap The investment criteria for both equity aware that the world’s financial order
debt that they could previously access, and debt funders has tightened leading has changed and that accessing capital
was re-priced by lenders to reflect a to a perceived shortage of finance. should not be easy and that they must
higher risk environment. demonstrate financial discipline as well
This view is typical of many but as attractive investment opportunities
Care and maintenance was the order the sector remains one of the most to compete for new investment.
of the day as profits were retained to attractive to funders in the UK and there Meanwhile, investment criteria must
support ailing balance sheets. Many is evidence of companies obtaining not become unrealistic thereby stifling
companies that had over geared found capital for expansion. Independents the next generation of Aberdeen –
themselves with the conundrum of such as Xcite have successfully raised based companies.
a healthy profit and loss account but new money and banks are reporting
unhealthy balance sheet. For the many increased levels of investment in the
companies that made it through the sector. Anecdotally, banks are all
downturn, and there were surprisingly reporting healthy levels of investments,
few failures, it is evident that discipline a recent example being Barclays
over cost control and cash management Corporate’s announcement of £782
has moved up management teams’ million in new funding for the sector
agendas. The low failure rate is this year, 26% up on the prior year41.
testament to disciplined management Appetite for investment and lending into
teams and their funders. the sector across the UK and overseas
banking sector and private equity is
As activity levels in the industry have strong with many having dedicated
begun to grow and order books rebuilt, sector teams that understand and can
working capital constraints remain in add value to corporates looking towards
the industry. Service companies that international expansion.
have stretched their banking facilities
and cash management will now find The re-pricing of debt encourages
that they lack the ability to expand and companies to use organic cash flows
take advantage of the growing market. to grow, rather than take on more
Funding will remain an issue for the expensive funding. Banks report that
foreseeable future. this re-pricing was necessary for the
banks to repair their own balance sheets
and reflect capital availability and risk.
However, some methods used by the
banks to effect the increased debt costs,
such as covenant resets, has clearly left a
bad taste for many.
“Companies across the supply chain need capital
to exploit the opportunities around the world, but
are simply not getting the support they need from
the banks.”
Neil Gordon, Subsea UK.
41 Source: http://www.barclayscorporate.com
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