Next year we mark a significant milestone in the UK’s oil and gas industry, the 50th anniversary of our first commercial discovery on the UK Continental Shelf (UKCS) – the West Sole field.
Since then, in what Oil & Gas UK (OGUK) has described as ‘one of the country’s great industrial stories’, more than 43 billion barrels of oil and gas have been delivered offshore UK. This was only possible thanks to a combination of engineering and entrepreneurial flair shown by our predecessors – a rich heritage we should be proud of.
While we have achieved much, there are still up to 20 billion barrels of recoverable resources remaining and we cannot miss the opportunity to maximise this value without maintaining a sustainable and competitive UK-based supply chain and service sector.
As the operator community supplies the capital, funding and expertise to explore and develop fields, the service sector provides most of the high-end technology and skills to deliver this. In fact recent estimates suggest that our supply chain supports approximately 80% of the UK’s oil and gas jobs, generating significant value for the country’s economy.
However, a combination of sustained low oil prices and uncertainty, coupled with our high cost base, have impacted on investment in the UKCS. OGUK has estimated capital investment (capex) in the UK’s offshore industry fell to about £9billion in 2016 from a record of £14.8billion in 2014, while revenues across the supply chain were expected to fall by about 21%, taking total market revenues below £30 billion for the first time since 2010.
For us to reverse this trend, we must continue to focus on and deliver significant cost and efficiency changes without resorting to industry ‘stereotype’. To quote the recent OGUK and Deloitte Upstream Supply Chain Collaboration Survey, the industry must avoid “doing what they always do when oil prices fall: they delay or cancel projects, reduce head count and ask their suppliers to cut their prices and hope that the oil prices will soon recover”.
Simply put, we need to create an entrepreneurial environment, where creativity and commerce co-exist. However, at the moment, quite the opposite is true. We are still too focused on cost and risk reduction, when we should be taking bold steps today that ensure we build a sustainable UK and global business for tomorrow. And this requires true transformational change and different thinking.
Thanks to the Wood Report, the Government is engaging with the industry as it realises the value of delivering a ‘maximising economic recovery UK’ (MER UK) strategy. However we must work hard to maintain our position at the forefront of the Government’s agenda, building upon the additional economic and fiscal support delivered to date. We must continue to ‘self-help’. We need to ensure all Government agencies see this as an industry worth fighting for and not one that will revert back to its old ways of boom and bust.
This includes working together for the benefit of the whole: putting self-interest to one side and working with trade associations and key stakeholders to deliver a stronger service sector which can compete globally. Over the last 18 months we have come together to reduce the cost of lifting oil by an average of 40% but there is more to do. The MER UK supply chain, exports and skills board, along with all the key stakeholders, is working hard to influence and promote a more joined up approach and set a compelling credible vision for the industry. The prize is clear. Despite income from exporting goods and services growing, the UK supply chain provides less than half the supply, service and support needs of the UKCS and less than 4% of the global market. The big opportunity now, is to displace non domestic competition and earn an increased percentage of both.
While there is a widespread recognition that the ‘easy oil’ has already been exploited, if the UK service sector is enabled to build on its global competitiveness and attract investment, additional turnover of £200billion could be generated over 20 years – but we must act on it.
At the heart of this is our commitment to innovation and new technology, which will stimulate more creativity and efficiency. We must overcome our aversion to risk in being ‘the first’ to trial new solutions and regain our pioneering spirit from the past. This will mean a wholesale cultural change for some companies, however the Oil and Gas Technology Centre (OGTC) will be ideally positioned to support organisations in developing and/or deploying new products – a key tool in the catalyst for change.
Successful change will be dependent upon a strong and sustained partnership between the service and operator communities, based on problem-solving, functional specifications rather than task-based prescriptive work orders. I have personally seen increased examples of this take place in the past 12 months, but it will take longer time and continued effort. It’s important that we deliver a long-term step change in our approach if we are to stimulate the innovation needed to deliver the potential of the UK service sector and indeed MER UK.
This leads me to my final point. We must take a longer-term approach to growth, rather than short-term solutions that fit the ‘bottom line’. This has to be instigated at the most senior executive level, and include clear leadership and direction that recognises we must change the way we work. If we are to deliver this in a meaningful way, we also need a strong workforce engagement plan that solicits the views of those that implement these changes, while considering learnings from out with our industry.
Other industries such as the automotive and aviation sectors have experienced downturns in the past and responded effectively to them through a range of similar creative measures, including increased standardisation and commoditisation of components alongside a greater end-user focus. They provided a compelling argument for investment and have succeeded – just as we can.
But the service sector cannot do this alone and we are lobbying harder than ever before to secure additional government support at UK and Scottish levels. Despite increased airtime in Westminster and significant investment from the recent Aberdeen ‘City Deal’, the Chancellor of the Exchequer’s Autumn Statement didn’t go far enough to support our MER UK plan for driving investment. Equally the Scottish Government has recently been accused of spending more time on its independence agenda than on key matters much closer to home.
With 330,000 jobs at stake, perhaps we need a long-term champion at government level. A leader fully immersed in its specific requirements and challenges, who will work with the industry and Treasury to promote the sector, to help the wider public understand its importance to the economy and attract much needed investment.
Yes, the North Sea has been one of our greatest success stories, but that story is far from over. In fact we are embarking on merely the latest chapter, one requiring new thinking and approaches from all of us, to ensure we maximise and realise the considerable potential that this constantly evolving region still has to offer.
Neil Sims is vice-president and director of Expro North Sea