At a recent event in Aberdeen, Sir Ian Wood urged the oil and gas sector to diversify now to avoid North East Scotland becoming an oil and gas ‘Museum’.
He was speaking at the Annual Meeting of Opportunity North East (ONE), on the 27 March and offered the North East of Scotland a choice between a ‘Museum’ scenario of stagnation and decline, or a ‘Renaissance’ scenario of diversification of the region’s oil and gas focused economy into other sectors.
The event, ‘Towards Regional Economic Renaissance’, was an excellent example of the good work that Opportunity North East is doing, gathering input on diversification opportunities and engaging a wide range of stakeholders to precipitate a different future. With funding from the Wood family foundation and leadership from Jennifer Craw, ONE is supporting regional activity in Tourism, Food & Drink, Life Sciences and Oil & Gas. ONE will invest up to £5 million plus matched funding in the next year in projects to strengthen and diversify the economy of North East Scotland.
Sir Ian gave the oil and gas community a stark warning; “the good times are over, it will never be the same again”. With the long-term decline in North Sea production and hence spend, the oil and gas supply chain will have to look elsewhere for growth opportunities. In addition, future trends, such as the transition to low carbon and away from fossil fuels will have a significant and unpredictable impact on the global oil and gas sector.
Whilst there will remain a significant ongoing long term North Sea oil and gas sector, businesses must now look at diversification opportunities to build a long term sustainable strategy. Such clear communication of the stark choices facing the region is unusual, especially from such an influential industry leader.
Though the problem of the oil and gas downturn is not unique to the North East of Scotland, the region is particularly hard hit, given the focus in the area on oil and gas. Singular focus is a strength during boom times but is a weakness when times are challenging. The sector has tended to be insular and not well connected in its use or sharing of technologies, assets or services with other sectors. As a side effect, other sectors are reluctant to engage with oil and gas businesses, and these are relationships which must be re-established.
The growth in low carbon sectors provides a huge opportunity for oil and gas supply chain businesses to diversify. Particularly, opportunities exist in offshore wind, carbon capture and storage, wave and tidal, hydrogen and low carbon heat sectors. The nature of the opportunities, and the challenge of accessing them, varies across sectors and clearly depends on the differentiators of specific businesses.
Offshore wind is providing opportunities in areas such as site preparation, cable procurement and installation, foundations, installation support, and operations and maintenance. Around 40% of total windfarm cost is operations and maintenance, providing considerable opportunity for offshore oil and gas skills. Newer technology, like floating offshore wind farms, are in the early stages of development and are likely to be a high growth international market, in which oil and gas capability can be applied.
Whilst at an earlier stage of maturity or with less clear markets, early mover opportunities exist in many other low carbon sectors. Aberdeen already has a leading position on Hydrogen, which will play a critical role of the future energy mix, yet few oil and gas businesses have grasped the opportunity it presents. Carbon Capture and Storage (CCS), the collection of CO2 from major emissions sources, is a direct analogue of oil and gas involving offshore pipelines, facilities and wells. Whilst CCS activity in the UK is progressing more slowly than many would like, international opportunities are emerging. The CCS sector has the potential to be worth £6.5bn to the UK economy by 2030.
Oil and gas decommissioning, sometimes considered a part of the existing oil and gas sector, is best considered as a distinct sector with new and high growth activity to be addressed in a distinct manner. The commercial drivers for decommissioning are fundamentally different to standard exploration and production activity. Looking at it as a new sector provides the opportunity to consider new technologies, opportunities from other sectors and new business models. Other early diversification opportunities also exist in Nuclear and Water sectors
In a study for Scottish Enterprise, the scale of oil and gas diversification opportunities in 24 alternative sectors was considered. Although the 24 sectors examined all present opportunities for oil and gas supply chain diversification, the opportunities presented by certain diversification pathways vary depending upon the specific nature of each organisation’s business. A chart of relative market size available to oil and gas supply chain diversification is outlined below.
Diversification challenges for supply chain businesses
Due to the nature of the oil and gas supply chain, diversification can be a challenge. In the past when oil prices were high, the sector could support a high growth supply chain and diversification was not a strategic priority. More recently, under much lower oil prices, the focus has been on survival and short term revenue opportunities. Investment in long term strategic diversification is more challenging. Those companies doing well in alternative markets looked outside the oil and gas sector when the market was still buoyant.
Being relatively insular, the oil and gas sector supply chain is not always aware of developments and opportunities in other sectors. Also, other sectors are reluctant to engage the oil and gas supply chain, due to concerns over pricing and commitment. These are challenges which individual businesses must overcome to penetrate new markets. A range of strategic and business model options can be employed to enable successful diversification.
Many of the main oil and gas institutions and oil and gas operators are (rightly) focused on matters of oil and gas, such as Maximising Economic Recovery (MER), specific project developments and international oil and gas opportunities. Whilst these are all valid and important aspects, there is a risk the oil and gas supply chain read these signals as expecting a recovery to ‘how things used to be’. With the decline in North Sea oil and gas and the transition to a low carbon economy, the UK oil and gas sector will not return to its former glory.
Ensuring the oil and gas supply chain get the message that diversification is not optional, but is key to its long-term future as well as that of the North East of Scotland. The clarity of this message from Sir Ian Wood is very much welcomed.