Over the last five decades the UK oil and gas industry has had to continually reinvent itself – as it has faced a range of challenges, from oil price shocks to the tragedy of Piper Alpha and the global recession of recent years.
Even before the dramatic drop in the price of oil, the industry was already putting in place the measures to reshape itself for the decades ahead – and I believe businesses in the Highlands and Islands are as well placed as any to weather the downturn, and in many cases prosper.
Our industry’s future was the subject of a series of proposals laid down last February in a report by industry veteran Sir Ian Wood, The UKCS (UK continental shelf) Maximising Recovery Review, which was commissioned by the UK Government.
The report was a blueprint for maximising the level of petroleum that can be extracted from the North Sea. Its recommendations included setting up a new oil and gas regulator, closer collaboration between government and industry, developing fields in groups rather than individually to maximise their value and investing to prolong the life of existing infrastructure.
Progress on the Wood Review’s recommendations has full industry backing and is well underway. The new regulator, the Aberdeen-based Oil and Gas Authority, will come into force in April this year and one of its early objectives will be a wholesale review of the tax regime for the sector, which will encompass “everything from tax rates to tax allowances”, according to Treasury Chief Secretary Danny Alexander. Getting the necessary legislative processes in place to empower the regulator will inevitably take time, and given the need for urgency, this is causing some concern to the industry.
Recent events have accelerated the already good engagement between industry and government – with all parties now shoulder to the wheel to do everything they can to help the industry weather the current storm. And as always we in Highlands and Islands Enterprise (HIE) continue to maintain a close relationship with all businesses in our area to ensure companies are securing all the support they require.
As the Wood Review highlighted, there is broad recognition of the importance of the overall UK fiscal regime. The Scottish Government has just produced a report – Oil and Gas Discussion Paper – Challenges, Opportunities, and Future Policy – to stimulate debate on the overall taxation, investment and tax credit environment and how changes could support exploration and the development of new fields in the decades ahead.
At the same time the Oil and Gas Industry Leadership Group, co-chaired by Scottish Energy Minister Fergus Ewing and industry leader Melfort Campbell, is with urgency re-examining its strategy in close coordination with industry leaders. To my mind, nobody knows the industry better than those involved at the sharp end – and this close government-industry engagement will ensure the public sector is able to respond as effectively as possible.
Ever since the industry’s inception, Highland and Islands Enterprise has delivered what is required to foster business growth, from early (and continuing) investment in port infrastructure to supporting growth companies and tailored skills and business development programmes, and the present situation is no different.
We are currently engaging with companies across our area to develop a clear picture of today’s needs and concerns and will continue to help businesses across our area with direct support from our area teams – including initiatives such as our International Business for Hire programme which helps firms develop and grow their international market.
At a practical level, the main areas where all businesses and the industry at large must focus are cost reduction, collaboration and innovation, according to Sidney Johnston, Vice President of Innovation & Strategy at Spex Innovation and chairman of trade body Energy North.
“Major oil companies cannot control the price of oil – but the one thing they can control is cost,” Sidney says. “This can put Highland businesses in a strong position.”
Last year Energy North helped establish an Oil and Gas Task Force, chaired by Fergus Ewing, with a clear remit to grow the amount and value of oil and gas business in areas outwith the constrained area in and around Aberdeen in order to support the growth and success of the oil and gas industry and its supply chain.
“The Highlands and Islands offer a lot to an industry which is looking to operate in a different way,” Sidney says. “The cost of land, homes, offices and labour are all much lower – and a high quality of life means businesses can retain staff much better.
“A lot of the significant oil and gas investments are and will take place off the coasts of the Highlands and Islands. Energy North, its members, HIE and the task force have all put a lot of effort into engaging with the companies investing in these projects and this has created a positive two-way dialogue and bodes well for the future,” Sidney continues.
“We are keen to show oil and gas businesses and decision-makers based in Aberdeen that distance to market is not a major issue. We recently hosted a Cromarty Firth showcase, specifically designed to give oil executives the chance to visit a world-class port at Invergordon and the facilities at Nigg, both with 24 hour access. It was a tremendous success.
“Away from the major ports, the supply chain in the Highlands works one or two tiers down from the multinational oil companies, and there are definite opportunities for highly skilled firms with energetic staff to compete, innovate and emerge strongly from the current downturn,” Sidney concludes.
Our experience at HIE shows that this type of decentralised business can indeed thrive. There are already numerous firms, including for instance Hydrasun, Ocean Kinetics and EFC Group, which have shown it is possible –and indeed desirable – to establish activities outside Aberdeen.
There is no doubt these are challenging times and that those companies that fail to continuously improve will, themselves, fail. But the establishment of the Oil and Gas Authority and a commitment to examine the long-term fiscal and regulatory regime will help bolster the pipeline of exploration and new fields in the decades ahead; whilst new approaches to innovation and cost reduction will help today’s industry be better placed to capitalise on the upturn when it comes.
I firmly believe there are opportunities for businesses across the Highlands and Islands to contribute to this unfolding story, and HIE will continue to support the industry and individual businesses where it can.