With a new wave of investment expected in the North Sea there are growing concerns the North East, and the rest of the UK, may miss out on contracts worth many hundreds of millions of pounds.
Despite the industry receiving numerous assurances that the Government will do all it can to ensure contracts for new North Sea oil rigs are placed with UK yards, a £70m contract for the Maersk Culzean gas project contract looks set to be placed overseas.
Industry reports suggest the contract for the wellhead jacket is being awarded to a continental company, with Maersk Oil telling The Journal last night an announcement is imminent.
The OGN Group, which currently employs 1,000 people and is based in the Hadrian yard on North Tyneside, had hoped to win the contract.
Dennis Clark, chairman of OGN, said: “The network is saying Maersk will award the Culzean jacket contract outside of the UK.
“The contract is worth circa £70m and would create approximately 1,000 British jobs. It is the first of a series of contracts that now look likely to go outside the UK.
“The long term consequences of this are extremely serious for British manufacturing, prosperity and employment.”
Mr Clark has been petitioning Government for over three years and had hoped the creation of new cross party oil and gas group last year would help secure more UK content on the new contracts being placed on the UKCS.
Mary Glindon, MP for North Tyneside, is a member of the cross party oil and gas group set up to pressure oil companies into awarding contracts to UK companies.
She said last night: “I am frustrated by the fact that the Government is happy to give oil and gas companies tax concessions but still does not seem able to secure jobs for British fabricators.
“I have been making the case directly to the Minister, for the first Maersk contract from the Culzean project, to come to the Tyne and I am waiting eagerly for a response.”
On September 15 Mr Clark wrote to Energy and Climate Change secretary Ed Davey warning that the Culzean contract was likely to be placed overseas.
A DECC spokesperson said: “In regards to the Maersk Culzean contract, we are unable to comment as DECC does not comment on commercial negotiations.
“However, the Government wants to work closely with fabrication yards to help ensure their offerings are competitive. To that end, DECC is jointly funding a study which looks at the cost competitiveness of offshore fabricators in the UK in comparison to the rest of the world.
“The aim is to develop an evidence-based tool that demonstrates how the UK is globally competitive in this field, which will be very valuable during discussions with operators with upcoming oil and gas projects.”
Maersk Oil told The Journal that it expected to be in a position to make an announcement on the contract award within days.
A spokesman said: “As yet, no contract has been awarded for the wellhead platform jacket for the Culzean project, therefore we could not comment on where an award would be placed.
“The tender process has been finalised and the decision to award will be made on the basis of achieving the best balance of cost competitiveness and technical capability.”
Over the coming months billions of pounds is expected to be spent on new North Sea facilities with the wave of investment being encouraged by Government tax breaks and the ending of the uncertainty caused by Scottish Independence vote.
Mr Clark has written a series of letters to Government ministers highlighting his concerns over its need to support UK fabricators (see panel).
Mrs Glindon added: “One of the things the oil and gas group hopes to achieve is to find a way to make it easier for our fabricators to get these contracts that is why we have been talking to both sectors.
“We want to see how barriers can be overcome and to find a way to get a level playing field for our fabricators to compete for oil and gas industry work.
“Our fabricators tell us they have the capacity to carry out the work, the Government needs to take this on board and demonstrate its confidence in the industry by putting more pressure on those gas and oil companies getting the biggest tax benefits.”
The Culzean project is located 145 miles east of Aberdeen and is one of the largest gas discoveries of recent years in the UK North Sea. It is an ultra-high pressure/high temperature field with a total investment expected to be in excess of £3bn.
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UK fabrication capacity
IN the 1970s and 1980s when the North Sea oil and gas industry was in full swing there were over 40 fabrication yards in the UK.
In the North East the three main rivers all had fabricators such as, Press Construction, Redpath, Whessoe, and Laing and the region made almost three-quarters of the North Sea’s structures.
But as the industry changed the way it operated and competition increased from overseas yards the number declined rapidly.
OGN brought fabrication back to Tyneside in 2010 with a £400m jacket and topside contract for US oil and company Apache. This created 2,000 jobs at OGN’s Hadrian Yard in Wallsend and a further estimated 5,000 jobs in the British supply chain.
The OGN Group is now one of only two major fabricators in the North East along with Heerema of Hartlepool. There are a further two yards in Scotland and fifth in East Anglia.
This has led to some concerns that the UK does not have the capacity to handle some of the major contracts, as expressed by Charles Hendry MP, the head of the cross party oil and gas group.
In a recent letter to Dennis Clark shown to The Journal, he said: “In many of the conversations I have had with operators on these issues it has been the perceived lack of UK capability which has been highlighted as the main blocker, especially when it comes to the super large structures.
“In reality there is no single yard in the UK who would have been able to bid a 20,000 tonne jacket or 30,000 tonne topside in its entirety.”
Likewise Energy and Climate Change Secretary Ed Davey told Mr Clark: “There remains a lack of UK capability at the top end of fabrication with the track record and financial capability to build the larger and more complex jackets and topsides which are perceived (and accepted by most members of the fabrication forum) to be beyond the capability of any single existing UK yard.
“To address this issue my officials are now working in conjunction with the fabricators forum to evaluate the feasibility of whether ‘an alliance contracting concept’ similar to the one used on the Aircraft Carrier project could be applied to offshore fabrication projects.”
The construction of Royal Navy’s two new aircraft carriers, HMS Queen Elizabeth and HMS Prince of Wales, is being undertaken by a consortium of British companies
However, in response Mr Clark informed the politicians: “An alliance approach would have many benefits and in particular address the issue of financial capability. I am sure that UK fabricators would welcome it.
“This idea is not new to the oil and gas fabrication sector and was used extensively in the past.
“However, the initiative lies with the customer - in this case the operators - not with the fabricators.
“So far I have not seen any evidence that the operators are prepared to adopt this model. Currently tenders are being issued on a lump sum basis accompanied by the traditional adversarial terms and conditions.”
Cross party oil and gas group
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.
In attempting to tackle this issue Energy and Climate Change Secretary Ed Davey created a new 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, said Mary Glindon, MP for North Tyneside.
The cross party oil and gas group is led by former UK Energy Minister Charles Hendry and 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.
“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 have placed the contracts overseas? And there has been a tangible change in their attitude to using UK fabricators,” he said.
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.
Mr Clark said contracts placed in the Middle East and Far East which he says tend to long execution times, high follow up and monitoring costs, along with increased risks of delay offset the lump sum tender pricing of production facilities.
He said: “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.”
The Government has appointed Norwegian consultants Rystad Energy to undertake a full cost analysis comparing the costs of UK fabrication with the rest of the world.
It hopes this will reinforce the case the UK can be competitive when all costs are taken into account.