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  1. 1. Northern Lights A strategic vision of Aberdeen as a world-class energy capitalNovember 2011
  2. 2. 2 Northern Lights – A strategic vision of Aberdeen as a world-class energy capital
  3. 3. ContentsIntroduction page 4Executive summary page 6New frontiers and technical innovation page 10Complementary effects of emerging sectors page 14Fiscal regime to support E&P investment page 20Talent management page 24Mid-tier OFS and independents need access to capital page 28Public sector ambition page 32Contacts page 36 3
  4. 4. 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
  5. 5. 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 ofPricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. 5
  6. 6. Executive summaryFactors 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
  7. 7. The size of the prize The city and the industry should focus Fiscal certaintyThe 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 theThere are a number of interrelated decommissioning opportunities commercial viability of smaller orfactors 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 a replacement must provide certainty in relation today with the creation of a for declining oil and gas revenues but as to the tax deductibility of definitive strategy embraced by a 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 howInvestment to maximise they will secure their part of this prize.revenues from UKCSDespite production decline and fiscal These opportunities and revenues willuncertainty over the last 10 years, not fall to Aberdeen by right. Theyoil prices have multiplied and there will have to be fought for and plenty of life left in the UKCS. With investment, leadership and aThe industry remains upbeat about focus on how current expertise can bethe prospects for West of Shetland, leveraged to take advantage of theseincremental field developments and opportunities, the city can become aextending the life of mature fields. centre of excellence in these areas.1 Source: Oil & Gas UK 2011 Economic Report2 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 $1003 Source: Oil & Gas UK 2011 Economic Report4 Source: (£75bn for UK’s biggest offshore wind programme signals new era for renewables, Alok Jha, 8th January 2010) 7
  8. 8. Aberdeen needs to be a Funding is available – The public sector can driveglobal talent magnet – establish but it’s not easy money collaboration and reap rewardsan Energy Academy Lenders and the industry are still Standards of living in Aberdeen areThere is a dearth of young talent recovering after the 2008/09 financial generally high. Further improvementswith appropriate skills, particularly crisis and the consequential drop in to the city and its infrastructure arein management and engineering, North Sea activity levels. The strong necessary in order to attract morewhich 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 mostapprenticeships and graduate attractive industries for new investment. A number of infrastructure and civicprogrammes is needed to stop the trend projects are in the pipeline but faceof 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 effectivenessbrand, image, mobility – and engage their investment criteria do not which will help to secure the city’swith 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 tocurricula that appeal to the next Companies, on the other hand, must play in showing leadership and helpinggeneration whilst serving the needs of be aware that accessing capital is not a to balance the competing views andthe industry. The benefits of a structured right. They must demonstrate financial interests of various stakeholders.and consistent approach to collaboration discipline and develop opportunities forcan 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 isIncreasing the local supply of labour that leadership is essential to embracewith the right skillsets will attract Strategic mergers and acquisitions change and take ownership for realisingand 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 theSuch an academy will not succeed in upstream and OFS sector.isolation. Aberdeen and the industryneeds to find its voice and market itself The success of secondary buy-outs in thebetter through proactive engagement next 18 months will also be importantwith the government and press in to the continuing attractivenessorder to attract the most talented of the of the sector to generalist privatenext 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
  9. 9. “Aberdeen has been a destination for global investment for many years and Iwant to see that continue for decades to come. There is still massive opportunityin the North Sea .” 5David Cameron, UK Prime Minister.5 Source: 9
  10. 10. New frontiers and technical innovationGoal: 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 productionAberdeen University’s Alex Kemp recently conducted research looking at three (E&P) and service operationsdifferent oil and gas pricing scenarios and the impact on the UKCS. In his view, the maintain the city’s place atmid case long term price scenario of $70 bbbl and 50p therm represents the most the forefront of technologicalrealistic outlook for the industry. developments as they deal with geological challenges and harshIn this scenario there is a predicted upturn in production in the later half of this North Sea conditions; anddecade from new exploration and incremental finds, with the West of Shetland • More effective people development ishaving a growing influence and contribution to production. With stable and facilitated by having specialist skillssustained 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 predictsa spike in investment for the next 4 to 5 years in order to realise the higher level ofproduction, with investment levels ranging between £6 to £8 billion.Under this scenario reserves are predicted to be around 20 billion boe, withincrementals accounting for 5.7 billion boe and new exploration of 3.5 billion boe.The research concludes that to realise the reserves potential, investments requireto be screened based on the predicted pricing levels and a consistently high level ofproject design, development and completion is required.Source: Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
  11. 11. In order to maximise reserves Nonetheless, there is consensus among IOCs have an important rolerecovery, companies must leading industry players in Aberdeen to play in maximising thecontinue to invest that 12 billion boe is a conservative opportunity of new developmentsCompared to last year, Oil & Gas UK view – they believe that the industry including West of Shetlandforecasts 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 in2011-2050 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 andThe most significant increase in total Oil is to pay $340million for Encore14 interpreting seismic data, significantreserves 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 canpossible reserves up 31%7 compared to recent years. commence operations.prior year business plans. The level of investment means oilfieldLong-term activity forecasts for UKCS service companies will be able toreserves recovery vary widely, ranging take risks on the development ofbetween 12 billion boe and 24 billion new technology. By oilfield servicesboe8 depending on the level of new companies pushing the innovationinvestment. Recovery of Oil & Gas boundaries for the IOCs, independentsUK’s reserves estimate would require will be able to enter WoS at a later dateinvestment of £70 billion9 across the using the technology already in four decades whereas releasing This approach ensures that they willreserves potential at the upper end of not have to bear the initial technologythe 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 20117 Source: Oil & Gas UK Activity Report 20118 Source: Oil & Gas UK 2011 Economic Report9 Source: Oil & Gas UK Activity Report 201110 Source: University of Aberdeen Long Term Prospects for Activity in the UK Continental Shelf11 Source: (£4.5 Billion Clair Ridge Project Receives Approval for Development, BP Press Office, 13th October 2011)12 Source: (BP invests £3bn in Oil fields west of Shetland, 13th July 2011)13 Source: (Apache to Acquire Exxon North Sea Assets for $1.75 Billion, Brian Swint and Edward Klump, 21st September 2011)14 Source: (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 11
  12. 12. Technical 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: 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 averageNorth 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 oilthe potential for over three billion more.” and gas demand markets; and • Availability of infrastructure and processing terminals inBob Dudley, BP. the area mean that even smallSource: fields can be brought into commercial development.16 Source: Oil & Gas UK Activity Report, 201117 University of Aberdeen Long Term Prospects for Activity in the UK Continental Shelf12 Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
  13. 13. As Ithaca has proved (see below), Conclusionthere is potential to revitalise ageing Despite production decline overinfrastructure and reap the rewards. recent years, the industry remainsSustaining such investments will be upbeat about its prospects. There iscritical to the longevity of the UKCS. plenty of life left in the UKCS, whether in West of Shetland, incrementalThe life expectancy of North Sea oil and field developments or extendinggas has been debated for over 20 years. the life of mature field throughHowever, technological development technological advances.has prolonged production and willcontinue to do so. IT developments, The city and the industry shouldseismic acquisition and interpretation focus on publicising opportunities fortechnology and enhanced oil recovery growth and replace the perception of(EOR) techniques have, and continue, managed make rapid advances. To realise the potential left in theTwo of the largest discoveries in the UKCS industry players must continueNorth Sea in the last 10 years – Buzzard to invest. IOCs have a large role to playand Catcher – have arisen in what and can lay the foundations for furtherwas viewed by many to be the largely technological development which willdepleted Central North Sea sector. benefit companies of all sizes.Similarly, Xcite’s “most-likely” (P50)reserves estimate for their 160mmboeBentley discovery18 is considered to havesignificant upside potential through theapplication of EOR techniques used toenhance production of heavy oil.The benefits of technology areunquestionable. The challenge ishow Aberdeen ensures that it is a “We are talking about exciting new opportunitiestechnological hub; attracting and in West of Shetland and an increase in North Searetaining the R&D functions of globalindustry players, continuing to train investment and production, not a decline.”and develop some of the most creativeminds in the industry and fostering Brian Wilkie, Total.the development of equipment andtechnology that will continue to movethe industry forward. Companies such as Ithaca and Apache breathe new life into mature 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.com18 Source: (Bentley Upgrade to Reserves Status, 10th May 2011) 13
  14. 14. Complementary effect of emerging sectors –Goal: Aberdeen leading in renewable energyand 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 of 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 energysources, particularly in our seas, where Scotland is Wind – 2.8estimated to have a quarter of Europe’s potentialwind and tidal energy capacity and a tenth of itswave resource.”Alex Salmond, Scotland’s First Minister.19 Chart source: Scottish Renewables20 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 capital
  15. 15. Over the next decade Scotland’s The build period for offshore windrenewable sector is set to grow farms is expected to be in the region ofsignificantly with a particular focus on 10-15 years. Initial capital expenditureonshore and offshore wind and marine on design and installation will be The government’s current The oil and gas industry has a number oftarget is that 100% of Scotland’s gross transferable skills, for example in cableelectricity consumption should be laying and offshore connection, as wellsupplied by renewables by 202021. To as in relation to ongoing operation andachieve this goal, billions of pounds maintenance.must be spent on improving energyinfrastructure and developing carbon Despite the opportunity, few appearstorage technologies making renewable to have fully focused on how they willenergy a viable replacement for fossil secure their part of the renewablefuels in the long term. energy prize; few have created divisions that are focused on the sector. TheseIndustry view on renewables opportunities will not fall to AberdeenThe potential of renewable energy by right, they will have to be foughtin Aberdeen is keenly debated. Some for and won, and the industry needs toindustry experts view it as a golden move quickly before the rest of the worldopportunity while others are pessimistic catches up.about its potential to grow and itscapacity to generate revenue. Aberdeen has a huge opportunity to nurture experts and graduates whoOil and gas fields and the related view renewables as a more attractiveinfrastructure creates thousands of jobs career than one in finite Aberdeen and huge revenues, with With a combination of fresh talent andthe UK’s supply chain generating a transferable skills, Aberdeen can createturnover in excess of £16 billion per the expertise and supply chain requiredannum 22 . While it is expected that to sustain renewable energy as a viablethe renewables sector will require a industry to complement oil and gas forsmaller 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: (Renewables Policy)22 Source: Oil & Gas UK 2011 Economic Report 15
  16. 16. UKCS 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 201124 Source: Oil & Gas UK 2011 Economic Report and 2011 Activity Survey16 Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
  17. 17. Decommissioning landscapein the UKCS PSN awarded Brent decommissioning project.Generally, North Sea operators hadan economic incentive to push back In July 2010 PSN signed a contract with Shell worthdecommissioning and extend the life nearly $200 million for dismantling work on the Brentof fields. However, a lack of certainty field. The contract award was for decommissioningover tax relief on decommissioning costsand the need for letters of credit is tying services on the Brent Delta platform topsides. PSNup 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 preparationThe market continues to be volatile – for removal of the topsides. Offshore work is expected to25% 25 decrease since the peak of $146 begin in late 2011 as part of the initial stages of platforma barrel in 2008.26 A decline in pricesfrom current levels will make certain decommissioning.fields uneconomical. Peter Brown, UK Managing Director of PSN at theSurprisingly, despite the size of themarket and the large projects which time said “We are confident the contract will provideare looming, investors and oilfield a significant number of new job opportunities in theservice companies seem to have been decommissioning services sector. It will also positionslow to exploit the huge potentialrewards. Presently, there are six fields Aberdeen as a global centre of excellence for offshoredue to cease production and commence decommissioning.”decommissioning in the next 18months, and therefore the investment Source: www.woodgroup-psn.comopportunity exists now to become a keyplayer in this market. A recent exampleof the size and potential of the marketcan be seen with PSN’s award of theShell Brent decommissioning contract.25 Based on crude oil price of $106 a barrel at 30 September 201126 Source: (Peak Oil and Worldwide Economic Recession Soften Oil Prices: Lull Before the Storm, James Leigh, 3rd October 2008) 17
  18. 18. Aberdeen as a decommissioning centre of excellence? Strengths Opportunities • ey skillsets in construction K • UKCS market worth $31 billion; 27 and engineering; • Create a niche which can be • quipment and infrastructure E exported internationally; exists to dismantle and bring • Key part to play in Aberdeen as platforms onshore; an international energy centre of • xperience of dealing with E excellence; and environmental issues on the • Attract more investment into the UKCS; and city and infrastructure. • nnovative, entrepreneurial spirit. I Weaknesses Threats • need for more focus and A • 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 Report18 Northern Lights – A strategic vision of Aberdeen as a world-class energy capital
  19. 19. ConclusionThe renewable energy anddecommissioning markets offerfurther potential for Aberdeen andshould be viewed as a source of growthalongside oil and gas revenues asopposed to a replacement.Many of the skills and capabilitiesrequired for construction of offshorewind farms, tidal /wave technologyand carbon capture as well as thedecommissioning of old infrastructurelie with local oil field service companies.Few appear to have fully focused onhow they will secure their part of thisprize; few have created a division that isfocused on these emerging sectors.These opportunities and revenueswill not fall to Aberdeen by right, theywill have to be fought for and won.With investment, leadership and afocus on how current expertise can beleveraged to take advantage of theseopportunities, the city can become acentre of excellence in these areas. “Aberdeen is recognised throughout the oil and gas world for its expertise in subsea technological innovation.” Jeff Corray, ITS. 19
  20. 20. Fiscal regime to support E&P investmentGoal: Tax certainty is very important forongoing 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: Source: Source: Oil & Gas UK Activity Survey 201131 Source: Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
  21. 21. Comparison of Oil and Gas Tax Rates908070605040302010 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 MackenzieThe recent increase in the More certainty and incentives areSupplementary Charge has impacted needed to promote investmentthe UK’s relative competitiveness on When commitments are made to explorethe global stage. IOCs will of course and develop a field, the investmenttake this into account when allocating profile can span up to a decade or more;resources across capital projects participants therefore need a degree ofglobally. The restrictions on tax relief certainty over their cash flows. The UKfor financing costs contribute to the Government has recognised the issuedifficulties faced by independent by introducing and extending ‘fieldentities. When large IOCs reduce their allowances’ and by committing to nofuture investment in UK projects, further industry tax increases duringthe 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. 21
  22. 22. Clarity 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 reliefscoupled with a clear and predictable fiscal regime couldbe 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 capital
  23. 23. Broader UK tax changes – Conclusionmaking the UK more attractive The impact of fiscal policy hasThe Government has stated its objective consequences both for the long termof the UK being “open for business”, health of the North Sea as well aswith the aim that more companies the future of the renewable andmaintain or establish their worldwide decommissioning industries.headquarters in the UK. In order to maximise investment in theWith this in mind, the Government UKCS we believe that fiscal certaintyoutlined it’s intention in the 2011 Budget and a more coherent and competitivefor the UK to have the lowest corporate fiscal system is rate in the G7, although this doesnot apply to oil and gas exploration and The current regime taxes on the basisproduction profits. They have also set that oil and gas profits are super profitsout a number of other measures. These that can endure very high marginalinclude 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 morecompany’s profits earned in the UK, challenging and riskier and will notproposed reforms to the Controlled result in super profits.Foreign Companies Regime and changesto the taxation of intellectual property. The tax regime needs to adapt to reflect the underlying economics particularlyThis makes it far more attractive for in relation to smaller or marginal fields.companies to base global headquarters A reduction in PRT rates would provideor regional headquarters in the UK and an incentive to invest particularly forto invest in exporting to new overseas older, a key goal in promoting growthfor UK plc. The Government must provide clarity in relation to the tax deductibility ofThis, together with the Aberdeen decommissioning costs when they areskill base, gives the city a tremendous incurred, possibly through contracts foropportunity to attract and retain energy differences with the state.companies and HQ offices.“Fiscal certainty is key to long term multi-million poundinvestments with high execution risk.”Jonathan Roger, Centrica. 23
  24. 24. Talent managementGoal: 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 Report24 Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
  25. 25. Demographic challenges and Oil and Gas Employment Trend 1998-2010 33skill shortagesRecent research by Cogent estimated 450,000the total UK workforce employed in 400,000the oil and gas industry at 260,000 for 350,0002010, of which approximately 50,000are offshore. Others suggest that the 300,000industry supports 440,000 jobs34, most 250,000based in Scotland. 200,000Industry observers have historically 150,000pointed to an ageing workforce as akey concern for the sector. However, 100,000the average age across the sector is 50,0004035 which is consistent with UK andglobal averages. 0 8 99 00 08 09 20 1 02 03 04 05 06 07 10 0 9 20 20 20 19 19 20 20 20 20 20 20 20The industry requires a higher Induced Employment Impactproportion of skilled employees, such Total Indirect Employmentas engineers and managers, than other Direct Employmentsectors. OPITO’s research indicatesthat these are the roles which are mostdifficult to fill. Most Difficult-to-fill Vacancies 36Industry also reports mis-matchbetween the qualifications gained in Admin. and Secretarialeducation and the technical, industryspecific and softer skills required to Otheroperate effectively in the industry. IT Support Professional ScientistsThe issue appears to be more thansimply a numbers game and, as such, Crafts peopleour view is that focusing only on Techniciansboosting the number of younger recruitswill 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 difficult33 Chart source: Experian/ONS34 Source: Oil & Gas UK 2011 Economic Report35 Source: Experian/ONS36 Chart source: OPITO – Labour Market Intelligence Survey 25
  26. 26. Aberdeen 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 providecollaborate ever more closely – on a deeper and more university scholarships39. The industryconsistent basis – to achieve more effective development together should follow this lead and develop a coordinated approach.of skills as well as propagate the research anddevelopment 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 202038 Source: (Youth employment hits record, Harry Wallop, 16th February 2011)39 Source: www.talismanscholarship and Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
  27. 27. A number of overseas locations have Conclusionalso embraced collaboration between Industry must understand the needsindustry and education, for instance, and aspirations of the next generation ofHouston and Singapore. Silicon Valley potential recruits – career development,has harnessed the potential of world brand, image, mobility – and engageclass universities Stanford and Berkeley with them early.creating a virtuous circle of commercialand academic advancement. Investment for the long term in scholarships, apprenticeships andHowever, many interrelated factors are graduate programmes is needed orat play. An Academy will not solve the the trend of wage escalation to attractindustry’s skills shortage in isolation. ageing talent will continue. In our view,The city’s physical amenities and an Aberdeen Energy Academy which isinfrastructure – its image and reputation responsible for creating, marketing and,– are as important to career choice as to an extent, funding tailored coursesthe educational infrastructure. The would attract career-minded membersfinal section of this document explores of the next generation and serve thethe factors impacting Aberdeen’s needs of local industry.desirability as a place to live and work aswell as the role the public sector has toplay in influencing these factors. 27