Group puts pressure on oil companies 'to think British first'

An 'ear-bashing' for Government ministers by a North East oil and gas industry veteran will help secure billions of pounds of offshore contracts for the UK, reports Peter McCusker

Adrian Don Enquest Producer, a 248m, 92,000tonne Floating Production Storage Offshore (FPSO) unit
Enquest Producer, a 248m, 92,000tonne Floating Production Storage Offshore (FPSO) unit

Despite the recent record surge in North Sea oil and gas investment much of the work has gone overseas.

Some estimate a further 18,000 UK jobs could have been secured if oil companies had placed contracts with UK fabricators in the last few years.

Leading industry figure Dennis Clark, chairman of the North East fabricator Offshore Group Newcastle (OGN), has for years petitioned the region’s MPs and ministers to address these issues, once describing the situation as “horrific”.

And it appears the Government has listened with Energy and Climate Change Secretary Ed Davey creating news of the cross-party oil and gas group late last year.

While the cross-party group cannot force oil companies to place orders in the UK, it is putting operators “under pressure” to do so, explained Mary Glindon, MP for North Tyneside.

Glindon, who sits on the group, believes its work is already paying dividends and says its creation was helped by the efforts of Clark.

“Dennis gave the ministers an ear-bashing as so much of the work was going overseas. Since we came into being we have spoken to BP, BG Group and EnQuest and following the conversations EnQuest awarded a new contract to OGN.”

The oil and gas industrial strategy, launched last year, is designed to strengthen relations between Government and industry and the cross-party group developed from this.

Glindon continued: “The first meeting was held in the DECC (Department of Energy and Climate Change) office in Aberdeen.

“We asked some of the operators why they were placing these orders overseas and what could be done to keep the work in the UK?

“They say they want to support UK industry, and our job is to try and capture them and turn that interest into contracts. They want to protect their reputations as companies.

“We have the skills in the UK and it makes commercial sense to connect to British industry, and not to be divorced from the islands where they are securing these contracts.

“We want an open dialogue, and to challenge the companies to try to develop a culture which will see them think British first.”

Its second meeting was at OGN’s offices at Hadrian Yard in Wallsend in March this year.

Glindon continued: “We are not a formal like a select committee, which demands answers; we adopt a softer, more psychological approach.”

The cross-party oil and gas group is led by former UK Energy Minister Charles Hendry. He told Journal Energy that it “matters to the Government where the jobs go”.

“The oil and gas industrial strategy is focused on ensuring there is UK content in the supply chain,” he said.

“Historically almost all UK platforms were built here and the industry employed over 10,000 people, by 2000 most had been mothballed or closed but from 2010 onwards there has been a renaissance.

“We have called in major companies and asked them why they have placed the contracts overseas? And there has been a tangible change in their attitude to using UK fabricators.”

A spokesperson for DECC said: “The cross-party oil and gas industry promotion group was established by Ed Davey to assist in the overall drive to maximise the income to UK plc from the overall value chain of North Sea oil and gas projects.

“This group has MPs from all the major political parties including SNP and the timing for set up coincides with the significant upturn in investment levels and new projects in the UKCS (United Kingdom Continental Shelf).

“During the decade 2000 to 2010 the average annual value of new projects approved by DECC was in the region of £1 billion to £2 billion. This shot up to £8 billion in 2012 and to £12 billion last year. The group has achieved considerable success in getting work into the UK, including the North East of England.”

Much of the fabrication work for the £20bn investment splurge in 2012 and 2013 ended up in Italy, Korea, Spain, Dubai and Holland.

The topsides for Statoil’s £7bn mariner’s oilfield on the UKCS, which comes on stream this year, went to Daewoo Shipbuilding & Marine Engineering in South Korea without UK yards getting a chance to bid for the work.

UK fabricators have found it difficult to compete with Asian yards as their governments are prepared to fund the projects on credit.

The state provides the project capital – which can be in excess of half-a billion pounds – and the operator pays it back once revenues start flowing from the field.

Clark also cited a recent report from Norway which he says ‘dispels the myth of cheaper fabrication in the Middle East and Far East’.

It shows that long execution times, high follow up and monitoring costs, along with increased risks of delay offset the lump sum tender pricing of production facilities.

Clark continued: “I have witnessed first-hand contracts placed overseas running more than 100% over budget along with heavy delays to delivery. Part of the problem lies in tendering processes that allow incomplete initial design information to be the basis of contract decisions.

“The lower tender prices that we frequently see from contractors in Asia and the Middle East regularly turn into higher final costs than might have been obtained closer to home.”

OGN is one of two major fabricators in the North East along with Heerema of Hartlepool. There are a further two in Scotland and a fifth in East Anglia – in the 1970s there were 41 yards in the UK.

Despite the on-going difficulties OGN is a successful business which began operating in Tyneside in 2010 after winning a £400m jacket and topside construction project for US oil and gas firm Apache.

Depending on contract volumes OGN can employ between 600 and 2,000 people in its facilities and hundreds more in the supply chain.

It is expected to complete work on a new jacket for Talisman Energy in the next few weeks. It has also secured work on the FPSO for EnQuest, and an 800 tonnes process module for ConocoPhillips, both in the North Sea.

Last month it announced a new contract award from Kvaerner for the Shell-operated Nyhamma onshore Gas Plant project in Norway, which will see it will fabricate 18 smaller units.

Earlier this year Clark wrote to Business Secretary Vince Cable, Energy Minister Michael Fallon and Ed Davey warning them, that UK fabricators face a “black hole” as high costs and uncertainty over fiscal breaks had delayed at least five major North Sea projects.

However new tax breaks on high pressure high temperature fields will see activity levels pick up later in the year and the awarding of contracts on these jobs will be a litmus test for the Government’s new strategy.

Glindon added: “With more contracts on the way then this will be the subject for discussion at the next meeting in July.

“Our job is the ensure that operators sit up and listen to what the UK fabricators and supply chain want, but there can be no promises to the fabricators.

“We have the skills in the UK and we need to use them. OGN is a great business employing hundreds of people and attracting young people to come into the industry. It’s great to see the river busy again.”

Clark added: “There is no doubt that the cross party group have made the operators think about UK content.

“Both Enquest Producer and Conoco Phillips Alder could have gone to mainland Europe but they came to Wallsend.

“If Mary feels she and her colleagues played a part in this then all I can say is ‘many thanks’.

“One thing strikes me however. If we did not have the skill and management capability then there is nothing to support.

“So that is my contribution to our region. I have spent 42 years supporting the oil and gas supply chain in the North East and it’s great to have the opportunity to work with others who share the same goal. Aberdeen has Sir Ian Wood as a champion I like to think in some small way I champion the skills and capability if the North East.”

North Sea operators 'need to work together'

OGN Chairman Denis Clark has supported the recommendations of the Wood Report which has called for the creation of a regulator with far-reaching powers to ensure the full potential of the North Sea oil and gas reserves are realised.

In Clark’s response to Sir Ian Wood’s findings which have been sent to the Energy and Climate Change secretary Ed Davey this week the industry veteran has called for immediate action.

As well as supporting the appointment of a powerful industry regulator Clark has gone further by calling for the creation of a new national oil company or petroleum directorate to replicate the success of the Norwegian industry.

To ensure the UK maximises recovery of the estimated 20 billion barrels left, the industry has to ditch the old exploration and recovery model and adopt a more collaborative approach, says Clark.

He wants to see the North Sea developed on a regional basis which will allow operators to develop collaborative recovery strategies and make the most of existing platforms and pipelines.

Clark wants the regulator to have powers of coercion and recommends this collaborative commitment is inserted into the licensing regime to ensure it is a success.

He wants to see more Government support for drilling and a root and branch review of the tax system which currently siphons off up to 80% of field revenues to the Treasury.

And he is calling for the regulator to have greater powers to ensure oil majors look to support the UK offshore industry supply chain when placing new contracts for the North Sea.

Dennis Clark
Dennis Clark
 

Clark said: “Sir Ian Wood’s report does an excellent job summarising the issues that currently confront the oil and gas industry on the UKCS.

“The Wood Report is a very effective catalyst in getting these matters back on the table so that Government and industry can address that vital matter of maximising economic recovery from the North Sea.

“For as long as I can recall DECC and its predecessors have been under-resourced in terms of meeting the needs of both the investors in the North Sea and Government.

“Therefore Sir Ian’s recommendation for an adequately funded regulator with far reaching powers makes absolute sense. The new regulator can be the foundation for the changes which are essential if we are to maximise the recovery of our UKCS assets.

“The new regulator must have teeth and the resources to exercise its power and authority. Perhaps we should look to the Norwegian Petroleum Directorate as a model for ideas. This was established over 40 years ago by the Norwegian government and has proved to be a huge success.

“We need a model for the new regulator which incorporates best practice in terms of corporate governance and includes industry participation at board level.

“Many of the concepts proposed by Sir Ian are sound in principle. An analysis of best practice in other oil producing countries is essential, and the focus should be on Norway, but we must ensure that we establish adequate and effective implementation strategies as a matter of urgency.

“The UKCS requires a new business model to exploit the remaining reserves in the North Sea. Sir Ian promotes the idea of regional hubs as a method to use existing infrastructure and maximise recovery as well as creating real opportunities for collaboration.

“A similar idea was considered several years ago in connection with the southern sector of the North Sea as it approached maturity. It is the right approach. It will reduce costs and promote collaboration among like-minded investors. However we should not underestimate the difficulty in achieving such arrangements including the legal complexities.

“Sir Ian puts great emphasis upon collaboration. In my experience the oil companies operating in the North Sea are not instinctively collaborative.

“So we will need some carefully thought-through strategies if we are to put Sir Ian’s exhortation into practice. This will inevitably involve Government participation – presumably via the new regulator.

“The lack of exploration is the industry’s main headache at the moment. We cannot afford to wait for the formation of the new regulator before addressing this matter. Promoting investment in exploration has to be our main priority.

“This requires immediate fiscal change or some other form of incentive to the investors as well as a more creative approach to data acquisition and distribution. We should take a look at the Norwegian model as their exploration record is very impressive.”

DECC is currently in the process of appointing consultants to secure a regulator. However one of the initial recommendations is that the regulator should be funded by the oil companies.

The cost is believed to be around £20 m a year and there is believed to be some resistance to this.

Clark added: “There has been some operator push-back, but we cannot continue with a model that is more suited to the 1980s.

“The industry needs to work together. We have to make this happen.”

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