How talks are mending UK's oil and gas industry

The UK oil and gas industry is riding the crest of a wave due in no small part to a recent entente cordiale with the government.

Neil Kirkbride says a more grown-up approach between government and industry is working
Neil Kirkbride says a more grown-up approach between government and industry is working

The UK oil and gas industry is riding the crest of a wave due in no small part to a recent entente cordiale with the government. Peter McCusker reports.

NORTH East engineering boss Neil Kirkbride expects to see revenues for the group of companies he runs hit £160m this year.

Newcastle-based British Engines has recorded a 50% sales increase in the last two years and foresees further strong growth to £200m within five years.

Kirkbride, who also sits on the board of industry body Oil and Gas UK, is not alone. A recent survey of company’s operating in the subsea oil and gas sector found every single one expected strong growth this year.

With the oil price remaining at around $100 a barrel, many new fields have been brought on stream worldwide in recent years.

But the last 18 months has also seen renewed interest in the North Sea, brought about by a government change of heart.

The coalition’s renewed warmth towards the sector reached its apogee earlier this month when it launched the UK Oil and Gas Industrial Strategy.

This strategy will be shaped and driven by a new Oil and Gas Industry Council, which is co-chaired by BIS (Department for Business, Innovation and Skills), DECC (Department of Energy and Climate Change), and a leading member of the oil and gas industry.

The UK Oil and Gas Industrial Strategy is one of 11 the government is launching and can be seen as a benchmark for a shift in the nation’s structural tectonic plates from financial services to high-value manufacturing.

In 2007, prior to the recession, the financial services sector contributed two-fifths of UK plc’s corporation tax revenues so it’s hardly surprising that the oil and gas strategy was one of the first to be announced – the sector contributes one quarter of corporation tax revenues.

Kirkbride says relationships between government and the industry had hit rock bottom following a £10bn tax raid on the industry in the 2011 Budget.

He said: “This appalling decision came totally out of the blue and made the North Sea projects economically unviable.

“But within nine months, after talks between the industry and the government, a number of new allowances were introduced and now we have a really buoyant market. The North Sea is an attractive basin once more.”

Relations between government and the oil and gas industry following the tax hiatus have gone from exchanging icy stares, to formal meetings, exchanges of pleasantries and on to cosy fireside chats.

Kirkbride said: “There has been some good work done by the Treasury, DECC and Oil and Gas UK. You could call them grow-up conversations, conversations about creating the right environment to stimulate activity in the basin.

“The UK has to be capable of competing for international companies’ investment. If we make it unattractive here operators will simply move elsewhere. We have to be able to compete internationally for resources and capital.

“I think you could say the industry and government has reached a maturity of understanding. They now understand what encourages investment and are targeting the right behaviour and measures.”

This entente cordiale has been welcomed by the industry. Malcolm Webb, Oil & Gas UK’s chief executive said: “The strategy fosters strong and meaningful collaboration between the government and industry and will help to focus efforts on addressing particular areas such as skills, technology and exports.”

George Rafferty, chief executive of Durham-based industry body the NOF Energy (formerly the Northern Offshore Federation), said: “The strategy brings into clear focus the importance of the oil and gas industry to the UK economy and also to our future energy requirements.

“For too long the sector has been seen as a sunset industry, but there are considerable future prospects that will maintain oil and gas as the dominant energy resource.”

Energy and climate change secretary Edward Davey said: “Even as we move to a low carbon economy, oil and gas will remain an integral part of the UK energy mix for decades to come.

“The UK’s oil and gas industry is a vital strategic resource that helps fulfil our energy needs and insulates us from volatile global markets. By partnering with industry to support oil and gas investment offshore and onshore, the coalition government aims to boost growth and enhance the UK’s energy security.”

Earlier this year Oil and Gas UK reported North Sea investment is set to increase by £4bn from 2011’s figures to around £13.5bn this year.

It expects production volumes of 1.5 million barrels a day this year and 2 million barrels a day by 2017, and by the end of the decade an extra £100bn will be spent in the North Sea.

The renewed activity is reversing a decade of decline with production levels well off the peak of four billion barrels at the start of the millennium. And it was as North Sea production started to decline that companies such as British Engines, and in particular its subsidiary Bel Valves, began looking overseas.

While there are no figures for the whole of the UK work by the Scottish Government shows just how much exporting boosts the sector.

Scottish Enterprise data shows Scottish companies exporting to over 100 different countries, with international activity rising from £1.8bn in 2000 to £7.5bn in 2010.

The majority of sales were in services to USA, Canada, Angola, Norway and Australia, and Brazil. Kirkbride says the exporting profile for the rest of the UK will be similar.

Bel Valves, whose products are made to order and can vary in price range from £20,000 to £500,000 per valve, is now active in every global oil and gas province, with offices in almost 50 locations worldwide.

He added: “The work we undertook in the 70s, 80 and 90s in the United Kingdom Continental Shelf acted as a springboard for Bel Valves to grow internationally.”

As the first main offshore oil and gas province the technologies developed by UK companies are world leading. The North East will benefit with the recent announcement of the creation of the Neptune National Centre for Subsea and Offshore Engineering in Wallsend.

The Government is looking at a second centre of excellence in Aberdeen and wants to develop the work of the UK’s Industry Technology Facilitator.

This is a not-for-profit organisation, owned by 31 major global operators and service companies, which stimulates joint innovation projects.

Across the North Sea in Norway its industry is dominated by partially state-owned Statoil and supported by a $700billion sovereign wealth fund. In recent years it has invested in new technologies, including the creation of a number of centres of excellence.

Kirkbride acknowledged this threat: “In some areas, such as seabed processing technology, Norway is now leading the way.”

The structure of Norway’s industry and generous exploration tax allowances have allowed it to take greater technological risks.

The new strategy will want to address what is known as the ‘race to be second’.

“Drilling programmes cost many millions of pounds and there is a belief in the industry that many operators and their suppliers do not want to be the first ones to try out new technology due to the potential costs involved.

“There may be just too much at stake in such a high risk and high cost environment,” said Kirkbride.

A further focus of the strategy is supporting the supply chain with the aim of awarding fabrication contracts to UK yards.

Kirkbride said: “The government seems to be encouraging a stronger engagement right across the supply chain involving the majors, the likes of BP and ExxonMobil and strong local players like ourselves.”

In the North East there is said to be up to 3,000 companies feeding into the oil and gas industry, employing some 65,000 people. In the UK the industry employs over 400,000.

The government says it will map out the entire UK supply chain, identifying strengths and weaknesses and use this as a basis for supporting the industry going forward. It aims to have the work completed by the end of the year.

Salaries in the sector are some of the highest in the UK as companies have tended to bid up the price of labour instead of investing the time in training entry level employees.

Recent figures showed annual wages in the UK oil and gas sector rose by 7% to almost £60,000 last year, at a time when national pay rates were flat.

Last week the government lifted restrictions on domestic firms recruiting skilled electrical and mechanical engineers from overseas to ease the recruitment strain.

Kirkbride acknowledges this is a major issue and welcomed moves in the Adonis North East Economic Review to put apprenticeship, skills and training at the top of the agenda.

British Engines currently has 55 youngsters passing through its apprentice school and takes in 25 new starters every year. Some of those starting at British Engines this year may still be making valves for the North Sea by the time they reach retirement.

Prime Minister David Cameron recounts being taught the UK’s North Sea oil supplies would be exhausted by the turn of the Millennium – his Eton teachers were about 50 years out. The UK Oil and Gas Industrial strategy plans “to create an environment to maintain recoveries out to 2050 and beyond”.

With production issues in the North Sea touted as the principal factor behind the UK’s negative GDP growth in the last quarter of 2012, the improving relationship between the industry and government is good news for the country.

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