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                Northern Lights
                A strategic vision
                of Aberdeen as
                a world-class
                energy capital


November 2011
2   Northern Lights – A strategic vision of Aberdeen as a world-class energy capital
Contents

Introduction                                           page 4
Executive summary                                      page 6
New frontiers and technical innovation                 page 10
Complementary effects of emerging sectors              page 14
Fiscal regime to support E&P investment                page 20
Talent management                                      page 24
Mid-tier OFS and independents need access to capital   page 28
Public sector ambition                                 page 32
Contacts                                               page 36




                                                                 3
Introduction




                                          Aberdeen has reached a crossroads.
                                          Business as usual, and the possibility of
                                          a managed decline. Or all stakeholders
                                          collaborating to grasp the many
                                          opportunities within reach?




4   Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
Our aim                                          Our approach
                                                We seek to foster keen and open                  We have gathered data, analysis,
                                                debate amongst all stakeholders on               opinion and comment from many
                                                how best to achieve the sustainable              sources. The content, views and
                                                prosperity desired for Aberdeen.                 recommendations contained in the
                                                                                                 document are based on the following:
                                                PwC has a long-term commitment to the
                                                city and this document expresses our             •	 Interviews with senior industry
                                                views on the key influencing factors and            players and stakeholders such as
                                                suggestions to ensure a successful future           executive members of International
                                                for the city and the industry.                      Oil Companies (IOCs), independents,
                                                                                                    oilfield service companies,
                                                We outline the vital facts and the impact           industry and educational bodies, and
                                                of the current position in the North Sea,           local government;
                                                future projections and the development           •	 Desktop research on key industry
                                                of the industry. We explore the various             discussion papers and data sources;
                                                opportunities and describe some of                  and
                                                the steps that we believe are necessary          •	 The views of local PwC partners
                                                for sustainable development.                        and staff involved in day-to-day
                                                                                                    interactions with the industry and its
                                                                                                    key stakeholders.

                                                                                                 We have created a central hypothesis,
                                                                                                 for each key strategic focal point,
                                                                                                 which we then explore in detail.

                                                                                                 We would like to thank all those
                                                                                                 who have given their valuable time
                                                                                                 and views which have contributed to the
                                                                                                 development of our strategic vision.




“PwC” refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom), which is a member firm of
PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.                                      5
Executive summary

Factors which will define Aberdeen’s future as an international energy centre of excellence

                                                                          Technical innovation                           Fiscal regime
                                                                          Reserves remaining                            to support E&P
                                                                                in basin                                 Independents
                                                                                                    Development
                                                                            Complementary               of the
                                                                                                                       Potential to lead in
                                                                               effect of              industry
                                                                                                                       decommissioning
                                                                           emerging sectors
                         Now
                                                                                                                                                   sec ure
                                                                                                                              Ab erd een fut ure
              O&G activity in Aberdeen




                                         Trigger 1                                                  Large OFS
                                         IOCs leave basin                                            retaining                                  Talent
                                                                                                     local HQ                                 management
                                                                                                                     Aberdeen as
                                                                                                                      a centre of
                                                                                                                      excellence
                                         Trigger 2
                                                                                                 Mid-tier OFS
                                         Large OFS leave basin                                                                                Public sector
                                                                                                 with access to
                                                                                                                                                ambition
                                                                                                     capital



                                                                                                                     Stand-alone
                                                                                                                   economic cluster




                                          Triggers   Opportunities                   Timescale unknown                                             Future


                                                            The diagram above illustrates our              However, real and positive actions must
                                                            view of the factors which will define          be taken now, and continuously over the
                                                            the future of the energy industry              next 10-40 years, to secure this prize or
                                                            in Aberdeen.                                   the opportunities will slip away.

                                                            Up one path is the remarkable golden           Given the current turmoil in financial
                                                            prize of Aberdeen as one of the global         markets, the threat of a sovereign debt
                                                            energy capitals of the next 40 years. If       default triggering another banking
                                                            we head down the other path, whilst            calamity is real. The potential impact
                                                            this may continue to bring some success,       of a freeze in liquidity and further
                                                            the future prosperity of Aberdeen is           recession on energy demand, oil
                                                            much less certain.                             prices and currency values must not
                                                                                                           be ignored. Energy, however, is an
                                                            All stakeholders have a vested interest        international business and Europe is
                                                            in delivering excellence. The city is well     only one part of this equation.
                                                            placed to achieve its ambitious goal
                                                            of becoming an international energy            The recommendations highlighted in
                                                            centre of excellence given its 40 year         this document are focused on the factors
                                                            track record in oil and gas, existing          over which key stakeholders are able
                                                            infrastructure and history of nurturing        to exercise their influence to ensure
                                                            talent and new technology.                     that Aberdeen is best placed to weather
                                                                                                           the storm and emerge strongly as
                                                                                                           an international energy centre
                                                                                                           of excellence.




6       Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
The size of the prize                          The city and the industry should focus         Fiscal certainty
The numbers are compelling:                    on publicising and ‘talking up’ the            The recent increase in the
                                               opportunities for growth and thereby           supplementary charge has jolted the
•	 12 – 24 billion boe1 remaining for          dispelling the perception of managed           industry’s confidence in the stability
   extraction from the UK Continental          volume decline.                                of the UK’s fiscal environment and will
   Shelf (UKCS);                                                                              impact the majors’ decisions on the
•	 Exploiting the West of Shetland             Government also needs to view the              global allocation of capital spend.
   (WoS) fields alone could generate up        UKCS as an opportunity for investment
   to $600 billion 2 in new revenues in        as opposed to a cash cow.                      The Government has also made
   the next 40 years;                                                                         welcome changes to tax legislation to
•	 The fledgling decommissioning               To realise the potential left in the UKCS      make the UK more attractive. In order to
   market is estimated at $31 billion 3        industry players must take the lead and        maximise investment in the UKCS, and
   for the UKCS alone; and                     continue to invest. IOCs have a large          therefore revenues and tax take for the
•	 £75 billion is also estimated to            role to play and will lay the foundations      industry and Government respectively,
   be spent on offshore wind farm              for further technological development          fiscal stability and further incentives are
   construction by 20204.                      which will benefit companies of all sizes.     needed such as:

Collaboration and leadership                   Realising renewable and                        •	 Tax relief which will ensure the
There are a number of interrelated             decommissioning opportunities                     commercial viability of smaller or
factors which will determine                   The renewable energy and                          marginal fields;
Aberdeen’s future:                             decommissioning markets offer huge             •	 Reduced PRT rates; and
                                               potential for Aberdeen. However, they          •	 Decommissioning – the government
•	 Securing the future must begin              should not be viewed as a replacement             must provide certainty in relation
   today with the creation of a                for declining oil and gas revenues but as         to the tax deductibility of
   definitive strategy embraced by             a source of growth over and above these.          decommissioning costs when they
   all stakeholders;                                                                             are incurred.
•	 Bold, decisive and proactive                Service companies have many of the
   leadership is also essential; and           skills and capabilities required for
•	 Greater collaboration between               construction of offshore wind farms,
   stakeholders in industry, public,           tidal/wave technology and carbon
   private and education sectors               capture, as well as the decommissioning
   is required.                                of old infrastructure. Yet only a few
                                               appear to have really focused on how
Investment to maximise                         they will secure their part of this prize.
revenues from UKCS
Despite production decline and fiscal          These opportunities and revenues will
uncertainty over the last 10 years,            not fall to Aberdeen by right. They
oil prices have multiplied and there           will have to be fought for and won.
is plenty of life left in the UKCS.            With investment, leadership and a
The industry remains upbeat about              focus on how current expertise can be
the prospects for West of Shetland,            leveraged to take advantage of these
incremental field developments and             opportunities, the city can become a
extending the life of mature fields.           centre of excellence in these areas.




1	 Source: Oil & Gas UK 2011 Economic Report
2	 Source: Based upon available reserves of 6 billion boe
   (University of Aberdeen Long Term Prospects for Activity in the UK Continental Shelf) at an average price per barrel of $100
3	 Source: Oil & Gas UK 2011 Economic Report
4	 Source: http://www.guardian.co.uk (£75bn for UK’s biggest offshore wind programme signals new era for renewables, Alok Jha,
   8th January 2010)


                                                                                                                                        7
Aberdeen needs to be a                           Funding is available –                       The public sector can drive
global talent magnet – establish                 but it’s not easy money                      collaboration and reap rewards
an Energy Academy                                Lenders and the industry are still           Standards of living in Aberdeen are
There is a dearth of young talent                recovering after the 2008/09 financial       generally high. Further improvements
with appropriate skills, particularly            crisis and the consequential drop in         to the city and its infrastructure are
in management and engineering,                   North Sea activity levels. The strong        necessary in order to attract more
which is a pressing issue for many.              fundamentals of the sector mean that         business and talent to the area.
Long term investment in scholarships,            oil and gas remains one of the most
apprenticeships and graduate                     attractive industries for new investment.    A number of infrastructure and civic
programmes is needed to stop the trend                                                        projects are in the pipeline but face
of wage escalation.                              Although funding is available, controls      barriers such as finance, planning
                                                 over lending and investment hurdle           and objections.
Industry must understand the needs               rates have strengthened.
and aspirations of the next generation of                                                     Aberdeen can improve its image,
potential recruits – career development,         Investors must be careful to ensure          desirability and business effectiveness
brand, image, mobility – and engage              their investment criteria do not             which will help to secure the city’s
with them early.                                 become unrealistic and thereby               future as an energy centre of excellence.
                                                 stifle the next generation of Aberdeen-
An Aberdeen Energy Academy could                 based companies.                             A long term strategic plan is needed.
take the lead in creating tailored                                                            Here the public sector has a clear role to
curricula that appeal to the next                Companies, on the other hand, must           play in showing leadership and helping
generation whilst serving the needs of           be aware that accessing capital is not a     to balance the competing views and
the industry. The benefits of a structured       right. They must demonstrate financial       interests of various stakeholders.
and consistent approach to collaboration         discipline and develop opportunities for
can be seen in other countries.                  investors, who potentially have difficult    How the city and stakeholders go about
                                                 choices to make with less funds.             this is open to debate. Our view is
Increasing the local supply of labour                                                         that leadership is essential to embrace
with the right skillsets will attract            Strategic mergers and acquisitions           change and take ownership for realising
and retain more industry players and             (M&A) matching pre production assets         Aberdeen’s potential.
enhance the reputation of the city.              to cash flows to fund development
                                                 would unlock opportunities in the
Such an academy will not succeed in              upstream and OFS sector.
isolation. Aberdeen and the industry
needs to find its voice and market itself        The success of secondary buy-outs in the
better through proactive engagement              next 18 months will also be important
with the government and press in                 to the continuing attractiveness
order to attract the most talented of the        of the sector to generalist private
next generation.                                 equity investors.

                                                 As well as impacting on investment
                                                 decisions, the lack of clarity in
                                                 relation to the tax deductibility of
                                                 decommissioning costs has also
                                                 impacted M&A activity, particularly in
                                                 terms of independents taking ownership
                                                 of North Sea assets.




8          Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
“Aberdeen has been a destination for global investment for many years and I
want to see that continue for decades to come. There is still massive opportunity
in the North Sea .”     5




David Cameron, UK Prime Minister.




5	 Source: www.pressandjournal.co.uk


                                                                                    9
New frontiers and technical innovation
Goal: Maximise reserves recovery
                                                  Hypothesis                                   Why retaining operations
                                                  Contrary to the view that North Sea          in the UKCS is important to the
                                                  production is in terminal decline, the       city’s future
                                                  outlook for the oil and gas industry in      Aberdeen established itself as the
                                                  Aberdeen is positive. There are a wealth     UK’s oil and gas centre on the back of
                                                  of exciting opportunities that will          the industry’s operations in the North
                                                  enable Aberdeen to continue prospering       Sea. However, some question whether
                                                  whether through utilising new technology     ongoing oil and gas operations are
                                                  to extend the life of existing fields,       necessary for the city to continue to
                                                  developing incremental reserves or           flourish as an industry hub.
                                                  developing green field sites.
                                                                                               In our view, continued oil and gas
                                                                                               production from the UKCS is critical for
                                                                                               the city’s reputation in the industry:

                                                                                               •	 Retaining UKCS production helps
                                                                                                  to keep the industry physically
                                                                                                  ‘anchored’ in the area;
Long Term Prospects for Activity in the UKCS
                                                                                               •	 Ongoing exploration and production
Aberdeen University’s Alex Kemp recently conducted research looking at three
                                                                                                  (E&P) and service operations
different oil and gas pricing scenarios and the impact on the UKCS. In his view, the
                                                                                                  maintain the city’s place at
mid case long term price scenario of $70 bbbl and 50p therm represents the most
                                                                                                  the forefront of technological
realistic outlook for the industry.
                                                                                                  developments as they deal with
                                                                                                  geological challenges and harsh
In this scenario there is a predicted upturn in production in the later half of this
                                                                                                  North Sea conditions; and
decade from new exploration and incremental finds, with the West of Shetland
                                                                                               •	 More effective people development is
having a growing influence and contribution to production. With stable and
                                                                                                  facilitated by having specialist skills
sustained prices, production in smaller and less economic fields becomes viable
                                                                                                  in the city.
and there is likely to be enhanced spending on exploration. The research predicts
a spike in investment for the next 4 to 5 years in order to realise the higher level of
production, with investment levels ranging between £6 to £8 billion.

Under this scenario reserves are predicted to be around 20 billion boe, with
incrementals accounting for 5.7 billion boe and new exploration of 3.5 billion boe.
The research concludes that to realise the reserves potential, investments require
to be screened based on the predicted pricing levels and a consistently high level of
project design, development and completion is required.

Source: http://www.abn.ac.uk




10          Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
In order to maximise reserves                   Nonetheless, there is consensus among           IOCs have an important role
recovery, companies must                        leading industry players in Aberdeen            to play in maximising the
continue to invest                              that 12 billion boe is a conservative           opportunity of new developments
Compared to last year, Oil & Gas UK             view – they believe that the industry           including West of Shetland
forecasts a 12% increase in oil and gas         can continue to boom. This optimism             WoS is predicted to grow from a 5%
reserves recovery in the period from            is supported by hard evidence: BP,              share of total oil and gas production in
2011-2050 including:                            along with its partners ConocoPhillips,         2010 to 25% by 202015. BP, Shell, Total,
                                                Chevron and Shell, has recently                 Chevron and Marathon have already
•	 6 billion boe from existing and              announced the £4.5 billion extension            proved there is a willingness to invest
   sanctioned investment;                       of the WoS Clair field11 in addition            in the area. We believe this trend must
•	 3.1 billion boe from development of          to the recently announced £3billion             continue with the IOCs leading the
   new fields; and                              redevelopment of Schiehallion & Loyal           way. WoS offers both high risks and
•	 2.6 billion boe from incremental             fields12 , Apache Corporation has agreed        high rewards to the majors. However,
   investment in existing fields6.              to acquire ExxonMobil’s North Sea               as a result of the lack of infrastructure
                                                assets for $1.75billion13 and Premier           and difficulties in obtaining and
The most significant increase in total          Oil is to pay $340million for Encore14          interpreting seismic data, significant
reserves relates to West of Shetland            to expand its interest in Catcher, one of       investment is needed before other
(WoS) with proven, probable and                 the largest UK offshore discoveries of          independent oil and gas companies can
possible reserves up 31%7 compared to           recent years.                                   commence operations.
prior year business plans.
                                                                                                The level of investment means oilfield
Long-term activity forecasts for UKCS                                                           service companies will be able to
reserves recovery vary widely, ranging                                                          take risks on the development of
between 12 billion boe and 24 billion                                                           new technology. By oilfield services
boe8 depending on the level of new                                                              companies pushing the innovation
investment. Recovery of Oil & Gas                                                               boundaries for the IOCs, independents
UK’s reserves estimate would require                                                            will be able to enter WoS at a later date
investment of £70 billion9 across the                                                           using the technology already in place.
next four decades whereas releasing                                                             This approach ensures that they will
reserves potential at the upper end of                                                          not have to bear the initial technology
the scale would require investment                                                              investment cost.
approaching £150 billion10.
                                                                                                Looking beyond the UKCS, the majors
                                                                                                continue to expand their activities in
                                                                                                the Arctic Circle. Given its location
                                                                                                and the extent of local expertise,
                                                                                                Aberdeen has an opportunity to become
                                                                                                a hub for companies developing Arctic
                                                                                                E&P operations.




6	  Source: Oil & Gas UK Activity Report 2011
7	  Source: Oil & Gas UK Activity Report 2011
8	  Source: Oil & Gas UK 2011 Economic Report
9	  Source: Oil & Gas UK Activity Report 2011
10	 Source: University of Aberdeen Long Term Prospects for Activity in the UK Continental Shelf
11	 Source: http://www.bp.com (£4.5 Billion Clair Ridge Project Receives Approval for Development, BP Press Office, 13th October 2011)
12	 Source: http://www.scotsman.com (BP invests £3bn in Oil fields west of Shetland, 13th July 2011)
13	 Source: http://www.bloomberg.com (Apache to Acquire Exxon North Sea Assets for $1.75 Billion, Brian Swint and Edward Klump,
    21st September 2011)
14	 Source: http://www.ft.com (Premier to buy North Sea explorer EnCore, Michael Kavanagh, 5th October 2011)
15	 Source: University of Aberdeen Long Term Prospects for Activity in the UK Continental Shelf


                                                                                                                                         11
Technical innovation and
     Oil giants BP, ConocoPhillips, Chevron and Shell                                          incremental developments can
                                                                                               help maintain production levels
     announce £4.5bn investment in Clair field, West                                           With the infrastructure in place and the
     of Shetland.                                                                              maturing production profile of North
     During October 2011, BP and its co-venturers announced                                    Sea fields, incremental developments
                                                                                               in and around existing fields present
     that approval had been received from the UK Government                                    a significant opportunity to sustain
     to proceed with the second phase of development of the                                    investment in the UKCS. Many mature
     giant Clair field. The new development will have the                                      and/or incremental developments
                                                                                               may not meet the investment appraisal
     capability to produce an estimated 640 million barrels of                                 benchmarks of the IOCs when
     oil and will provide a hub for future expansion, subject                                  competing for capital investment on
     to further appraisal. Peak production is expected to be                                   a global basis. However, the North
                                                                                               Sea continues to evolve with the next
     up to 120,000 barrels of oil per day. The Clair extension                                 generation of independent oil companies
     is planned to come on stream in 2016 and to extend                                        taking up the challenge of maximizing
     production from the greater Clair area to 2050. In addition                               North Sea oil and gas production.
     to the 600 people already working on the project, it will                                 Oil & Gas UK predicts that incremental
     provide hundreds of UK engineering, drilling and oilfield                                 investment could deliver an additional
     services jobs over the field’s life.                                                      2.6 billion boe16 over time with other
                                                                                               research suggesting this could be as
                                                                                               high as 5.7 billion boe17. While the
     Source: www.bp.com                                                                        marginal cost/benefit model is key
                                                                                               to the successful extraction of these
                                                                                               reserves, the benefits of operating in
                                                                                               an established environment can ensure
                                                                                               that the marginal benefits outweigh
                                                                                               the costs:

                                                                                               •	 Ease of access to existing
“Although it began over 40 years ago, the story of the                                            infrastructure;
                                                                                               •	 Higher than global average
North Sea oil industry has a long way yet to run. BP                                              exploration success rate;
has produced some five billion barrels of oil and gas                                          •	 Well-established supply chain and
                                                                                                  close proximity to skilled workforce;
equivalent so far from the region and we believe we have                                       •	 Located close to developed high oil
the potential for over three billion more.”                                                       and gas demand markets; and
                                                                                               •	 Availability of infrastructure
                                                                                                  and processing terminals in
Bob Dudley, BP.                                                                                   the area mean that even small
Source: www.heraldscotland.com                                                                    fields can be brought into
                                                                                                  commercial development.




16	 Source: Oil & Gas UK Activity Report, 2011
17	 University of Aberdeen Long Term Prospects for Activity in the UK Continental Shelf


12          Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
As Ithaca has proved (see below),             Conclusion
there is potential to revitalise ageing       Despite production decline over
infrastructure and reap the rewards.          recent years, the industry remains
Sustaining such investments will be           upbeat about its prospects. There is
critical to the longevity of the UKCS.        plenty of life left in the UKCS, whether
                                              in West of Shetland, incremental
The life expectancy of North Sea oil and      field developments or extending
gas has been debated for over 20 years.       the life of mature field through
However, technological development            technological advances.
has prolonged production and will
continue to do so. IT developments,           The city and the industry should
seismic acquisition and interpretation        focus on publicising opportunities for
technology and enhanced oil recovery          growth and replace the perception of
(EOR) techniques have, and continue,          managed decline.
to make rapid advances.
                                              To realise the potential left in the
Two of the largest discoveries in the         UKCS industry players must continue
North Sea in the last 10 years – Buzzard      to invest. IOCs have a large role to play
and Catcher – have arisen in what             and can lay the foundations for further
was viewed by many to be the largely          technological development which will
depleted Central North Sea sector.            benefit companies of all sizes.
Similarly, Xcite’s “most-likely” (P50)
reserves estimate for their 160mmboe
Bentley discovery18 is considered to have
significant upside potential through the
application of EOR techniques used to
enhance production of heavy oil.

The benefits of technology are
unquestionable. The challenge is
how Aberdeen ensures that it is a
                                                 “We are talking about exciting new opportunities
technological hub; attracting and                in West of Shetland and an increase in North Sea
retaining the R&D functions of global
industry players, continuing to train
                                                 investment and production, not a decline.”
and develop some of the most creative
minds in the industry and fostering              Brian Wilkie, Total.
the development of equipment and
technology that will continue to move
the industry forward.



  Companies such as Ithaca and Apache breathe new life into mature fields.
  In late 2008, Ithaca Energy assumed operatorship of the Beatrice field from Talisman
  Energy for £10million.

  Ithaca’s motivation for the deal was to enable a tie-back of it’s Jacky discovery
  northwest of Beatrice. Reinstating production of the Beatrice Bravo platform and an
  ongoing programme of well workovers has yielded incremental production gains. As
  a result, monthly average production through Beatrice platform has reached levels
  not seen since 1994. Apache have also achieved similar success with the Forties field.

  Source: www.ithacaenergy.com




18	 Source: http://www.xcite-energy.com (Bentley Upgrade to Reserves Status, 10th May 2011)


                                                                                                    13
Complementary effect of emerging sectors –
Goal: Aberdeen leading in renewable energy
and decommissioning

                                                  Hypothesis                                      Renewables today and beyond19
                                                  Renewable energy will complement,               Scotland has a huge amount of
                                                  not replace, oil and gas in Aberdeen.           renewable energy potential to tap into
                                                  Opportunities and revenues will not             but relatively small domestic demand.
                                                  fall to Aberdeen by right but with focus,       Previous studies have identified that
                                                  vision and strategic planning Aberdeen          Scotland has sufficient renewable
                                                  can become the global centre for                energy resources to provide 75% of
                                                  decommissioning and a world leader in           the UK’s electricity needs. Estimates
                                                  clean energy.                                   also suggest that Scotland has 25% of
                                                                                                  Europe’s onshore wind resource, 10% of
                                                  Diversification of energy sources               wave resource and significant potential
                                                  The experience and skillsets gained             for tidal stream and offshore wind
                                                  through North Sea operations need to            capacity. It is clear that the potential is
                                                  be harnessed and exploited as we move           first class and that Scotland could have
                                                  towards cleaner sources of energy. The          a strategic role in delivering Europe’s
                                                  UK and Europe currently lead the way            renewable ambitions. Aberdeen has an
                                                  for offshore wind technology but this           opportunity to lead the way20.
                                                  is a global opportunity. By transferring
                                                  the engineering capability and the
                                                  experiences of working in the harsh             2010 Scottish Renewable Energy
                                                  conditions of the North Sea, Aberdeen           Generation Capacity (GW)
                                                  can establish itself as a world leader for
                                                  renewable energy.                                                Biomass – 0.3
                                                                                                                                    Waste – 0.1
                                                                                                  Hydro – 1.4




“Scotland is blessed with abundant natural energy
sources, particularly in our seas, where Scotland is                                                                                 Wind – 2.8

estimated to have a quarter of Europe’s potential
wind and tidal energy capacity and a tenth of its
wave resource.”

Alex Salmond, Scotland’s First Minister.




19	 Chart source: Scottish Renewables
20	 Based on the Scottish Government’s estimate that Scotland has the potential for an installed capacity for 60GW (i.e. before capacity
    factor constraints)


14          Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
Over the next decade Scotland’s                 The build period for offshore wind
renewable sector is set to grow                 farms is expected to be in the region of
significantly with a particular focus on        10-15 years. Initial capital expenditure
onshore and offshore wind and marine            on design and installation will be high.
energy. The government’s current                The oil and gas industry has a number of
target is that 100% of Scotland’s gross         transferable skills, for example in cable
electricity consumption should be               laying and offshore connection, as well
supplied by renewables by 202021. To            as in relation to ongoing operation and
achieve this goal, billions of pounds           maintenance.
must be spent on improving energy
infrastructure and developing carbon            Despite the opportunity, few appear
storage technologies making renewable           to have fully focused on how they will
energy a viable replacement for fossil          secure their part of the renewable
fuels in the long term.                         energy prize; few have created divisions
                                                that are focused on the sector. These
Industry view on renewables                     opportunities will not fall to Aberdeen
The potential of renewable energy               by right, they will have to be fought
in Aberdeen is keenly debated. Some             for and won, and the industry needs to
industry experts view it as a golden            move quickly before the rest of the world
opportunity while others are pessimistic        catches up.
about its potential to grow and its
capacity to generate revenue.                   Aberdeen has a huge opportunity to
                                                nurture experts and graduates who
Oil and gas fields and the related              view renewables as a more attractive
infrastructure creates thousands of jobs        career than one in finite resources.
in Aberdeen and huge revenues, with             With a combination of fresh talent and
the UK’s supply chain generating a              transferable skills, Aberdeen can create
turnover in excess of £16 billion per           the expertise and supply chain required
annum 22 . While it is expected that            to sustain renewable energy as a viable
the renewables sector will require a            industry to complement oil and gas for
smaller supply chain there is still plenty      the long term.
of opportunity.




                                                “The renewable energy industry could still centre itself
                                                anywhere – Aberdeen needs to grab the prize. There is
                                                no co-ordinated industry approach to attract renewables
                                                to Aberdeen.”

                                                Jonathan Roger, Centrica.




21	 Source: http://scotland.gov.uk (Renewables Policy)
22	 Source: Oil & Gas UK 2011 Economic Report


                                                                                                           15
UKCS projected cumulative decommissioning costs 2008-2040


                                                                               35.0

                                                                               30.0                 2005/6




                                                 Decommissioning Spend (£bn)
                                                                                                    2006/7
                                                                               25.0                 2007/8
                                                                                                    2008/9
                                                                               20.0
                                                                                                    2009/10
                                                                               15.0                 2010/11


                                                                               10.0


                                                                                5.0


                                                                                0.0
                                                                                      2008   2013        2018   2023      2028        2033       2038



                                                                                                                The only inevitability in oil and
                                                                                                                gas – decommissioning 23
                                                                                                                The UKCS faces an enormous challenge
                                                                                                                to sustain the productive life of
                                                                                                                existing infrastructure and postpone
                                                                                                                decommissioning. Although some fields
                                                                                                                now have production profiles beyond
                                                                                                                2040, there are a considerable number
                                                                                                                of decommissioning projects due to get
                                                                                                                underway in the next decade.

                                                                                                                Many fields have been able to postpone
                                                                                                                their decommissioning dates over recent
                                                                                                                years thanks to advances in technology.
                                                                                                                However, the trend has slowed
                                                                                                                recently. It is anticipated that 37% of
                                                                                                                the estimated £31 billion cost will be
                                                                                                                spent by 2020, with 144 fields due to
                                                                                                                commence decommissioning24.

                                                                                                                We view decommissioning as another
                                                                                                                great opportunity for Aberdeen to
                                                                                                                lead. The North Sea will be one of the
                                                                                                                first harsh offshore basins to undergo
                                                                                                                significant decommissioning and there
                                                                                                                is an opportunity to build vital skillsets,
                                                                                                                which can be exported to other parts of
                                                                                                                the world.

                                                                                                                Decommissioning should not be seen as
                                                                                                                a negative but as an opportunity to lead
                                                                                                                the way.




23	 Chart source: Oil & Gas UK Activity Survey 2011
24	 Source: Oil & Gas UK 2011 Economic Report and 2011 Activity Survey


16         Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
Decommissioning landscape
in the UKCS                                       PSN awarded Brent decommissioning project.
Generally, North Sea operators had
an economic incentive to push back
                                                  In July 2010 PSN signed a contract with Shell worth
decommissioning and extend the life               nearly $200 million for dismantling work on the Brent
of fields. However, a lack of certainty           field. The contract award was for decommissioning
over tax relief on decommissioning costs
and the need for letters of credit is tying
                                                  services on the Brent Delta platform topsides. PSN
up capital which could otherwise be               will provide services including integrity management;
reinvested in the UKCS and could lead to          module, process and utility separation; safe shutdown;
earlier decommissioning of some fields.
                                                  hydrocarbon cleaning; disconnections and preparation
The market continues to be volatile –             for removal of the topsides. Offshore work is expected to
25% 25 decrease since the peak of $146            begin in late 2011 as part of the initial stages of platform
a barrel in 2008.26 A decline in prices
from current levels will make certain
                                                  decommissioning.
fields uneconomical.
                                                  Peter Brown, UK Managing Director of PSN at the
Surprisingly, despite the size of the
market and the large projects which
                                                  time said “We are confident the contract will provide
are looming, investors and oilfield               a significant number of new job opportunities in the
service companies seem to have been               decommissioning services sector. It will also position
slow to exploit the huge potential
rewards. Presently, there are six fields
                                                  Aberdeen as a global centre of excellence for offshore
due to cease production and commence              decommissioning.”
decommissioning in the next 18
months, and therefore the investment
                                                  Source: www.woodgroup-psn.com
opportunity exists now to become a key
player in this market. A recent example
of the size and potential of the market
can be seen with PSN’s award of the
Shell Brent decommissioning contract.




25	 Based on crude oil price of $106 a barrel at 30 September 2011
26	 Source: www.energybulletin.net (Peak Oil and Worldwide Economic Recession Soften Oil Prices: Lull Before the Storm, James Leigh,
    3rd October 2008)


                                                                                                                                       17
Aberdeen as a decommissioning centre of excellence?

                           Strengths                                                          Opportunities
                           •	 	 ey skillsets in construction
                              K                                                               •	 UKCS market worth $31 billion; 27
                              and engineering;                                                •	 Create a niche which can be
                           •	 	 quipment and infrastructure
                              E                                                                  exported internationally;
                              exists to dismantle and bring                                   •	 Key part to play in Aberdeen as
                              platforms onshore;                                                 an international energy centre of
                           •	 	 xperience of dealing with
                              E                                                                  excellence; and
                              environmental issues on the                                     •	 Attract more investment into the
                              UKCS; and                                                          city and infrastructure.
                           •	 	 nnovative, entrepreneurial spirit.
                              I




                           Weaknesses                                                         Threats
                           •	 	 need for more focus and
                              A                                                               •	 Infrastructure still required
                              investment from local industry                                     by independents to develop
                              to grab hold of opportunity;                                       mature fields;
                           •	 Bad image – seen as death                                       •	 Competition from other mature
                              of the industry rather than                                        basins, e.g. Houston with shallow
                              opportunity to lead global                                         water Gulf of Mexico;
                              decommissioning; and                                            •	 Cheaper alternatives – seen
                           •	 Difficult to attract talent.                                       by some as low skilled, labour
                                                                                                 intensive projects with no money
                                                                                                 to be made; and
                                                                                              •	 Who is going to pay for it?




27 Source: Oil & Gas UK 2011 Economic Report


18         Northern Lights – A strategic vision of Aberdeen as a world-class energy capital
Conclusion
The renewable energy and
decommissioning markets offer
further potential for Aberdeen and
should be viewed as a source of growth
alongside oil and gas revenues as
opposed to a replacement.

Many of the skills and capabilities
required for construction of offshore
wind farms, tidal /wave technology
and carbon capture as well as the
decommissioning of old infrastructure
lie with local oil field service companies.

Few appear to have fully focused on
how they will secure their part of this
prize; few have created a division that is
focused on these emerging sectors.

These opportunities and revenues
will not fall to Aberdeen by right, they
will have to be fought for and won.
With investment, leadership and a
focus on how current expertise can be
leveraged to take advantage of these
opportunities, the city can become a
centre of excellence in these areas.




  “Aberdeen is recognised throughout the oil
  and gas world for its expertise in subsea
  technological innovation.”

  Jeff Corray, ITS.




                                               19
Fiscal regime to support E&P investment
Goal: Tax certainty is very important for
ongoing UKCS investment

                                                    Hypothesis                                   March 2011 tax increases
                                                    The UK Government demonstrated               jolted confidence
                                                    leadership by lowering taxes to make         Tax rates in the UK sector of the North
                                                    the UK a more attractive location for        Sea range from 62% to 81% depending
                                                    companies. Higher taxes for oil and gas      on the age of the oil or gas field28. Cash
                                                    operations do not necessarily make the       tax rates are generally higher as a
                                                    North Sea unattractive, but appropriate      result of anticipated reliefs for future
                                                    incentives, dialogue and certainty           decommissioning costs. However, many
                                                    are required to exploit resources and        reliefs are restricted, including relief
                                                    retain skills before and during the          for financing costs, which could lead to
                                                    development of the decommissioning and       eye-watering effective rates of 65%+ for
                                                    renewable industries.                        newer fields and 85%+ for more mature
                                                                                                 fields29. Total tax revenue from UK oil
                                                                                                 and gas production was £9.3 billion in
                                                                                                 201030 with an anticipated increase of £2
                                                                                                 billion 31 as a result of the increase in the
                                                                                                 Supplementary Charge to 32% in March.

                                                                                                 Is this third tax increase since 2003 a
                                                                                                 step too far?

                                                                                                 Current production from existing
                                                                                                 facilities should not be unduly affected
                                                                                                 whilst the net of tax economics remain
                                                                                                 favourable. However investment
                                                                                                 decisions around projects could be
                                                                                                 impacted. The vessels sitting unutilised
                                                                                                 in Aberdeen Harbour throughout 2011
                                                                                                 may be a barometer of the impact on
                                                                                                 exploration and development activity
                                                                                                 as the economics of new projects are re-
                                                                                                 examined and reassessed.

                                                                                                 High oil prices meant that the industry
                                                                                                 absorbed the tax increases in 2003
                                                                                                 and 2006. High market prices remain
                                                                                                 and the Government would argue
                                                                                                 that current tax rates represent a fair
                                                                                                 economic rent for the licences.




28	   Source: https://www.og.decc.gov.uk
29	   Source: https://www.og.decc.gov.uk
30	   Source: Oil & Gas UK Activity Survey 2011
31	   Source: http://www.hmrc.gov.uk


20            Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
Comparison of Oil and Gas Tax Rates

90
80
70
60
50
40
30
20
10
 0
          ay




                         k




                                           et




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                                                                        et
                                                     nd
                     ar




                                       dg




                                                                       dg
         w




                     m




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      or




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                  en
     N




                                                he




                                                                  e-
                 D




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                                                                  pr
                                 po




                                                N




                                                              K
                             K




                                                              U
                             U




     Marginal Government Take (%)
Source: Morgan Stanley Research; Wood Mackenzie


The recent increase in the
                                                      More certainty and incentives are
Supplementary Charge has impacted
                                                      needed to promote investment
the UK’s relative competitiveness on
                                                      When commitments are made to explore
the global stage. IOCs will of course
                                                      and develop a field, the investment
take this into account when allocating
                                                      profile can span up to a decade or more;
resources across capital projects
                                                      participants therefore need a degree of
globally. The restrictions on tax relief
                                                      certainty over their cash flows. The UK
for financing costs contribute to the
                                                      Government has recognised the issue
difficulties faced by independent
                                                      by introducing and extending ‘field
entities. When large IOCs reduce their
                                                      allowances’ and by committing to no
future investment in UK projects,
                                                      further industry tax increases during
the question arises as to whether the
                                                      the life of the current Parliament.
independents can fill the void?
                                                      The UK Government also needs to
                                                      embark on a dialogue with the industry
                                                      with a view to rebuilding confidence in
                                                      the UK regime. We recommend:

                                                      •	 Tax relief to ensure
                                                         commercial viability of smaller
                                                         or marginal fields;
                                                      •	 A competitive corporate and
                                                         personal tax regime for UK
                                                         headquartered companies;
                                                      •	 Clarity on the restriction
                                                         of decommissioning relief; and
                                                      •	 Reduced PRT rates to provide an
                                                         incentive to invest.




                                                                                                 21
Clarity on decommissioning relief            A more significant potential impact
                                              The link between the tax regime and          on decommissioning is that a future
                                              the timetable for decommissioning            Government may reduce or eliminate
                                              has dominated tax policy debates over        tax deductions for decommissioning
                                              many years.                                  expenditure when it is incurred. This
                                                                                           lack of clarity has stifled M&A activity,
                                              The longer term implications of the          impacted investment and tied up capital
                                              recent tax changes on decommissioning        unnecessarily in requiring guarantees
                                              are less clear; whether existing fields      for decommissioning costs to be made
                                              are decommissioned earlier and               on a gross basis without assuming
                                              existing infrastructure lost will be a       any tax relief.
                                              function of many factors including
                                              oil price, future tax rates and tax          One solution would be for the
                                              relief for decommissioning costs. The        Government and each licence holder
                                              impact of increased taxes on these           to enter into a contract where the state
                                              investment decisions will influence          agrees to pay any difference between
                                              when an asset is decommissioned. This        the tax deduction for decommissioning
                                              too will impact on decisions around          set out in the contract (which would
                                              exploration and development of new           reflect the tax rate at the time of
                                              fields, as many new smaller fields might     the contract) and the tax deduction
                                              be dependent on being able to tie into       available when decommissioning
                                              existing infrastructure rather than          actually occurs. The intention would
                                              utilising alternatives such as floating      be to “lock in” the deductions available
                                              production vessels.                          and provide certainty to current licence
                                                                                           holders and possible future entrants.



“Certainty on the availability of decommissioning reliefs
coupled with a clear and predictable fiscal regime could
be a game changer for North Sea developments.”

Malcolm Webb, Oil & Gas UK.




22      Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
Broader UK tax changes –                     Conclusion
making the UK more attractive                The impact of fiscal policy has
The Government has stated its objective      consequences both for the long term
of the UK being “open for business”,         health of the North Sea as well as
with the aim that more companies             the future of the renewable and
maintain or establish their worldwide        decommissioning industries.
headquarters in the UK.
                                             In order to maximise investment in the
With this in mind, the Government            UKCS we believe that fiscal certainty
outlined it’s intention in the 2011 Budget   and a more coherent and competitive
for the UK to have the lowest corporate      fiscal system is needed.
tax rate in the G7, although this does
not apply to oil and gas exploration and     The current regime taxes on the basis
production profits. They have also set       that oil and gas profits are super profits
out a number of other measures. These        that can endure very high marginal
include a move towards a territorial         rates. As the basin continues to mature,
principle, with taxation only on a           many of the future projects will be more
company’s profits earned in the UK,          challenging and riskier and will not
proposed reforms to the Controlled           result in super profits.
Foreign Companies Regime and changes
to the taxation of intellectual property.    The tax regime needs to adapt to reflect
                                             the underlying economics particularly
This makes it far more attractive for        in relation to smaller or marginal fields.
companies to base global headquarters        A reduction in PRT rates would provide
or regional headquarters in the UK and       an incentive to invest particularly for
to invest in exporting to new overseas       older fields.
markets, a key goal in promoting growth
for UK plc.                                  The Government must provide clarity
                                             in relation to the tax deductibility of
This, together with the Aberdeen             decommissioning costs when they are
skill base, gives the city a tremendous      incurred, possibly through contracts for
opportunity to attract and retain energy     differences with the state.
companies and HQ offices.




“Fiscal certainty is key to long term multi-million pound
investments with high execution risk.”

Jonathan Roger, Centrica.




                                                                                          23
Talent management
Goal: think career, think energy, think Aberdeen



                                                 Hypothesis                                   Effective talent management
                                                 If Aberdeen is to secure its long term       is a must
                                                 future as a global energy player it must     Over 50% of respondents to OPITO’s
                                                 emerge victorious in the war for talent.     recent Labour Market Intelligence
                                                 Industry and academia must collaborate       Survey identified talent as the
                                                 to a greater extent. An Aberdeen Energy      number one challenge facing their
                                                 Academy responsible for overseeing a         company. This is consistent with the
                                                 structured and consistent approach to        PwC global survey of CEOs in which
                                                 creating, marketing and funding tailored     66% of respondents fear they won’t
                                                 courses for tomorrow would appeal to the     have the right talent to compete
                                                 next generation and serve the needs of       effectively as recovery takes hold32 .
                                                 the industry.
                                                                                              Skills shortages lead to wage inflation
                                                                                              as employers are forced to pay a short
                                                                                              term premium to deliver the business
                                                                                              plan today using contractors, instead
                                                                                              of developing their own talent over the
                                                                                              longer term.

                                                                                              The industry model of using ‘one man’
                                                                                              service companies means that people
                                                                                              do not always get the development to
                                                                                              move to the next level. It is argued that
                                                                                              this has created a cynical workforce
                                                                                              which has little loyalty, allegiance or
                                                                                              long term commitment.

                                                                                              Why managing talent is
                                                                                              so important
                                                                                              As well as addressing short term skills
                                                                                              shortages, managing talent effectively,
                                                                                              and thereby increasing the supply of
                                                                                              labour with the right skillsets, could lead
                                                                                              to a virtuous circle of attracting more
                                                                                              industry players to the area, a greater
                                                                                              culture of innovation and development
                                                                                              and an enhanced reputation for the city.




32	 Source: Oil & Gas UK UKCS Workforce Demographics Report


24         Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
Demographic challenges and                       Oil and Gas Employment Trend 1998-2010 33
skill shortages
Recent research by Cogent estimated              450,000
the total UK workforce employed in               400,000
the oil and gas industry at 260,000 for
                                                 350,000
2010, of which approximately 50,000
are offshore. Others suggest that the            300,000
industry supports 440,000 jobs34, most
                                                 250,000
based in Scotland.
                                                 200,000
Industry observers have historically             150,000
pointed to an ageing workforce as a
key concern for the sector. However,             100,000
the average age across the sector is              50,000
4035 which is consistent with UK and
global averages.                                       0
                                                               8
                                                              99
                                                              00




                                                              08
                                                              09
                                                           20 1
                                                              02
                                                              03
                                                              04
                                                              05
                                                              06
                                                              07




                                                              10
                                                              0
                                                          9




                                                           20
                                                           20




                                                           20
                                                       19
                                                           19




                                                           20
                                                           20


                                                           20




                                                           20
                                                           20
                                                           20




                                                           20
The industry requires a higher                     Induced Employment Impact
proportion of skilled employees, such              Total Indirect Employment
as engineers and managers, than other              Direct Employment
sectors. OPITO’s research indicates
that these are the roles which are most
difficult to fill.
                                                 Most Difficult-to-fill Vacancies 36
Industry also reports mis-match
between the qualifications gained in                 Admin. and Secretarial
education and the technical, industry
specific and softer skills required to                                 Other
operate effectively in the industry.                              IT Support

                                                     Professional Scientists
The issue appears to be more than
simply a numbers game and, as such,                             Crafts people
our view is that focusing only on                                Technicians
boosting the number of younger recruits
will not solve the problem on its own.                        Project Support

                                                 Commercial and Marketing

                                                        Ops and Production

                                                                  Managerial

                                                                    Engineer

                                                                                0            10         20       30      40   50
                                                                                                      % of Respondents
                                                                                    Very difficult
                                                                                    Quite difficult




33	   Chart source: Experian/ONS
34	   Source: Oil & Gas UK 2011 Economic Report
35	   Source: Experian/ONS
36	   Chart source: OPITO – Labour Market Intelligence Survey


                                                                                                                                   25
Aberdeen and the industry are                 Establishment of an
                                                 losing the battle for talent                  Aberdeen Energy Academy –
                                                 Competition for limited talent is fierce.     collaboration between industry
                                                 Clean energy sectors and demand from          and educational bodies
                                                 other oil and gas regions will attract        A more structured programme of
                                                 an increasingly mobile local talent           academia and industry consultation
                                                 pool. Careers in financial services and       will deliver the talent that the industry
                                                 other professional services are even          requires. In our view, an Aberdeen
                                                 attracting technical talent away from         Energy Academy could nuture new
                                                 the industry. But this is not just about      talent focused in the right areas.
                                                 emerging territories or other industries.
                                                 Houston and Perth, with their advanced        Such an academy would promote oil
                                                 infrastructure and educational                and gas in the UK and beyond as an
                                                 development, have continued to be a           attractive career option and Aberdeen
                                                 choice for young oil and gas engineers.       as the best place to receive specialist
                                                 So Aberdeen should learn from                 education through:
                                                 their success.
                                                                                               •	 Tailored curricula matching
                                                 A new generation of individuals                  qualifications to future roles based
                                                 – the Millennial generation – is                 on industry needs;
                                                 entering the workforce. They have             •	 Practical work experience
                                                 different expectations in selecting the          through scholarships and summer
                                                 organisations they work for and have a           placements; and
                                                 strong interest in development through        •	 A channel to retain talent in
                                                 coaching, training and mobility37.               the local economy through the
                                                                                                  effective marketing of courses and
                                                 Domestic and international students              careers in Aberdeen both in the UK
                                                 need to be attracted and equipped with           and overseas.
                                                 the right skills. Investment for the long
                                                 term in scholarship, apprenticeship           With UK unemployment amongst 16-24
                                                 and graduate programs is needed or            year olds approaching 1 million 38 and
                                                 the trend of wage escalation to attract       ongoing concerns in relation to the
                                                 ageing talent will continue.                  financial burdens placed on students,
                                                                                               young talent needs a visible and
                                                                                               direct link to future careers. There are
                                                                                               excellent examples of collaboration
                                                                                               between industry and universities.
“There is a real need for industry and education to                                            Several local companies such as
                                                                                               Talisman and Wood Group provide
collaborate ever more closely – on a deeper and more                                           university scholarships39. The industry
consistent basis – to achieve more effective development                                       together should follow this lead and
                                                                                               develop a coordinated approach.
of skills as well as propagate the research and
development that will prolong the life of the basin.”

Professor Stephen Logan, University of Aberdeen.




37	 Source: PwC Managing tomorrow’s people: The future of work to 2020
38	 Source: http://www.telegraph.co.uk (Youth employment hits record, Harry Wallop, 16th February 2011)
39	 Source: www.talismanscholarship and www.rgu.ac.uk


26         Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
A number of overseas locations have           Conclusion
also embraced collaboration between           Industry must understand the needs
industry and education, for instance,         and aspirations of the next generation of
Houston and Singapore. Silicon Valley         potential recruits – career development,
has harnessed the potential of world          brand, image, mobility – and engage
class universities Stanford and Berkeley      with them early.
creating a virtuous circle of commercial
and academic advancement.                     Investment for the long term in
                                              scholarships, apprenticeships and
However, many interrelated factors are        graduate programmes is needed or
at play. An Academy will not solve the        the trend of wage escalation to attract
industry’s skills shortage in isolation.      ageing talent will continue. In our view,
The city’s physical amenities and             an Aberdeen Energy Academy which is
infrastructure – its image and reputation     responsible for creating, marketing and,
– are as important to career choice as        to an extent, funding tailored courses
the educational infrastructure. The           would attract career-minded members
final section of this document explores       of the next generation and serve the
the factors impacting Aberdeen’s              needs of local industry.
desirability as a place to live and work as
well as the role the public sector has to
play in influencing these factors.




                                                                                          27
Mid-tier OFS and independents
need access to capital
Goal: Billion dollar opportunities for smart
funders and ambitious independents
                                                  Hypothesis                                  Fundraising has been challenging
                                                  In an uncertain world, the dream ticket     for independents since the
                                                  is matching entrepreneurial independent     financial crisis
                                                  producers with funders willing to provide   Oil and gas independents are
                                                  access to capital. The growth aspirations   discovering new oil, offering attractive
                                                  of Aberdeen service companies need          investment opportunities. In 2010,
                                                  funders who will provide support through    capital investment in the North Sea
                                                  industry cycles.                            rose more than expected, to £6bn40.
                                                                                              However, in the current economic
                                                                                              climate, higher risk independents are
                                                                                              finding it difficult to obtain adequate
     Xcite Energy recieve funding to develop Bentley.                                         capital investment.
     In April 2009, Xcite Energy released a cautiously optimistic
     report quoting the Bentley field as “one of the largest                                  Independents require considerable
                                                                                              capital to get development and
     proven, but undeveloped fields in the North Sea.” At this                                production programmes underway
     time, the CEO expected a rush of interest from industry and                              however, once funding is secured, these
     financial partners alike.                                                                projects can often be very lucrative
                                                                                              for the investor. Correspondingly,
                                                                                              the higher risk associated with these
     In August that year, the company generated £2.1m                                         companies means exploration activity
     through the placing of 10 million shares. Over the                                       is often better financed by equity
                                                                                              rather than debt. Recent high profile
     following year, the company secured £60m from YA                                         failures have shown the danger of
     Global Master SPV – a fund managed by Yorkville                                          excessive gearing.
     Advisors. This allowed Xcite to perform a well flow test in
                                                                                              Selling shares on a public market such
     the field which reaped excellent results.                                                as AIM should be considered as a source
                                                                                              of finance, but not entered into lightly
     Xcite are now in a position to commence production and                                   as the volatility of share prices will be
                                                                                              linked to the most recent successful,
     are awaiting feedback for their first stage production                                   or unsuccessful, well. There may be
     programme from DECC. The field is estimated to be 690                                    opportunity for a new style of funder to
     million barrels in volume and, since April 2009, Xcite’s                                 emerge who is willing to provide equity
                                                                                              type funding into specific projects. For
     share price has grown 1200%. Xcite is an example of a                                    the right investment, the returns profile
     successful start-up and shows that investment in small                                   will still be very attractive.
     North Sea independents can offer opportunity to create
     significant value.

     Source: http://www.xcite-energy.com




40	 Source: Oil and Gas UK Activity Survey 2011


28         Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
Northern lights-aberdeen-energy-capital
Northern lights-aberdeen-energy-capital
Northern lights-aberdeen-energy-capital
Northern lights-aberdeen-energy-capital
Northern lights-aberdeen-energy-capital
Northern lights-aberdeen-energy-capital
Northern lights-aberdeen-energy-capital
Northern lights-aberdeen-energy-capital
Northern lights-aberdeen-energy-capital
Northern lights-aberdeen-energy-capital
Northern lights-aberdeen-energy-capital
Northern lights-aberdeen-energy-capital

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Northern lights-aberdeen-energy-capital

  • 1. www.pwc.co.uk/scotland Northern Lights A strategic vision of Aberdeen as a world-class energy capital November 2011
  • 2. 2 Northern Lights – A strategic vision of Aberdeen as a world-class energy capital
  • 3. Contents Introduction page 4 Executive summary page 6 New frontiers and technical innovation page 10 Complementary effects of emerging sectors page 14 Fiscal regime to support E&P investment page 20 Talent management page 24 Mid-tier OFS and independents need access to capital page 28 Public sector ambition page 32 Contacts page 36 3
  • 4. Introduction Aberdeen has reached a crossroads. Business as usual, and the possibility of a managed decline. Or all stakeholders collaborating to grasp the many opportunities within reach? 4 Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
  • 5. Our aim Our approach We seek to foster keen and open We have gathered data, analysis, debate amongst all stakeholders on opinion and comment from many how best to achieve the sustainable sources. The content, views and prosperity desired for Aberdeen. recommendations contained in the document are based on the following: PwC has a long-term commitment to the city and this document expresses our • Interviews with senior industry views on the key influencing factors and players and stakeholders such as suggestions to ensure a successful future executive members of International for the city and the industry. Oil Companies (IOCs), independents, oilfield service companies, We outline the vital facts and the impact industry and educational bodies, and of the current position in the North Sea, local government; future projections and the development • Desktop research on key industry of the industry. We explore the various discussion papers and data sources; opportunities and describe some of and the steps that we believe are necessary • The views of local PwC partners for sustainable development. and staff involved in day-to-day interactions with the industry and its key stakeholders. We have created a central hypothesis, for each key strategic focal point, which we then explore in detail. We would like to thank all those who have given their valuable time and views which have contributed to the development of our strategic vision. “PwC” refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. 5
  • 6. Executive summary Factors which will define Aberdeen’s future as an international energy centre of excellence Technical innovation Fiscal regime Reserves remaining to support E&P in basin Independents Development Complementary of the Potential to lead in effect of industry decommissioning emerging sectors Now sec ure Ab erd een fut ure O&G activity in Aberdeen Trigger 1 Large OFS IOCs leave basin retaining Talent local HQ management Aberdeen as a centre of excellence Trigger 2 Mid-tier OFS Large OFS leave basin Public sector with access to ambition capital Stand-alone economic cluster Triggers Opportunities Timescale unknown Future The diagram above illustrates our However, real and positive actions must view of the factors which will define be taken now, and continuously over the the future of the energy industry next 10-40 years, to secure this prize or in Aberdeen. the opportunities will slip away. Up one path is the remarkable golden Given the current turmoil in financial prize of Aberdeen as one of the global markets, the threat of a sovereign debt energy capitals of the next 40 years. If default triggering another banking we head down the other path, whilst calamity is real. The potential impact this may continue to bring some success, of a freeze in liquidity and further the future prosperity of Aberdeen is recession on energy demand, oil much less certain. prices and currency values must not be ignored. Energy, however, is an All stakeholders have a vested interest international business and Europe is in delivering excellence. The city is well only one part of this equation. placed to achieve its ambitious goal of becoming an international energy The recommendations highlighted in centre of excellence given its 40 year this document are focused on the factors track record in oil and gas, existing over which key stakeholders are able infrastructure and history of nurturing to exercise their influence to ensure talent and new technology. that Aberdeen is best placed to weather the storm and emerge strongly as an international energy centre of excellence. 6 Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
  • 7. The size of the prize The city and the industry should focus Fiscal certainty The numbers are compelling: on publicising and ‘talking up’ the The recent increase in the opportunities for growth and thereby supplementary charge has jolted the • 12 – 24 billion boe1 remaining for dispelling the perception of managed industry’s confidence in the stability extraction from the UK Continental volume decline. of the UK’s fiscal environment and will Shelf (UKCS); impact the majors’ decisions on the • Exploiting the West of Shetland Government also needs to view the global allocation of capital spend. (WoS) fields alone could generate up UKCS as an opportunity for investment to $600 billion 2 in new revenues in as opposed to a cash cow. The Government has also made the next 40 years; welcome changes to tax legislation to • The fledgling decommissioning To realise the potential left in the UKCS make the UK more attractive. In order to market is estimated at $31 billion 3 industry players must take the lead and maximise investment in the UKCS, and for the UKCS alone; and continue to invest. IOCs have a large therefore revenues and tax take for the • £75 billion is also estimated to role to play and will lay the foundations industry and Government respectively, be spent on offshore wind farm for further technological development fiscal stability and further incentives are construction by 20204. which will benefit companies of all sizes. needed such as: Collaboration and leadership Realising renewable and • Tax relief which will ensure the There are a number of interrelated decommissioning opportunities commercial viability of smaller or factors which will determine The renewable energy and marginal fields; Aberdeen’s future: decommissioning markets offer huge • Reduced PRT rates; and potential for Aberdeen. However, they • Decommissioning – the government • Securing the future must begin should not be viewed as a replacement must provide certainty in relation today with the creation of a for declining oil and gas revenues but as to the tax deductibility of definitive strategy embraced by a source of growth over and above these. decommissioning costs when they all stakeholders; are incurred. • Bold, decisive and proactive Service companies have many of the leadership is also essential; and skills and capabilities required for • Greater collaboration between construction of offshore wind farms, stakeholders in industry, public, tidal/wave technology and carbon private and education sectors capture, as well as the decommissioning is required. of old infrastructure. Yet only a few appear to have really focused on how Investment to maximise they will secure their part of this prize. revenues from UKCS Despite production decline and fiscal These opportunities and revenues will uncertainty over the last 10 years, not fall to Aberdeen by right. They oil prices have multiplied and there will have to be fought for and won. is plenty of life left in the UKCS. With investment, leadership and a The industry remains upbeat about focus on how current expertise can be the prospects for West of Shetland, leveraged to take advantage of these incremental field developments and opportunities, the city can become a extending the life of mature fields. centre of excellence in these areas. 1 Source: Oil & Gas UK 2011 Economic Report 2 Source: Based upon available reserves of 6 billion boe (University of Aberdeen Long Term Prospects for Activity in the UK Continental Shelf) at an average price per barrel of $100 3 Source: Oil & Gas UK 2011 Economic Report 4 Source: http://www.guardian.co.uk (£75bn for UK’s biggest offshore wind programme signals new era for renewables, Alok Jha, 8th January 2010) 7
  • 8. Aberdeen needs to be a Funding is available – The public sector can drive global talent magnet – establish but it’s not easy money collaboration and reap rewards an Energy Academy Lenders and the industry are still Standards of living in Aberdeen are There is a dearth of young talent recovering after the 2008/09 financial generally high. Further improvements with appropriate skills, particularly crisis and the consequential drop in to the city and its infrastructure are in management and engineering, North Sea activity levels. The strong necessary in order to attract more which is a pressing issue for many. fundamentals of the sector mean that business and talent to the area. Long term investment in scholarships, oil and gas remains one of the most apprenticeships and graduate attractive industries for new investment. A number of infrastructure and civic programmes is needed to stop the trend projects are in the pipeline but face of wage escalation. Although funding is available, controls barriers such as finance, planning over lending and investment hurdle and objections. Industry must understand the needs rates have strengthened. and aspirations of the next generation of Aberdeen can improve its image, potential recruits – career development, Investors must be careful to ensure desirability and business effectiveness brand, image, mobility – and engage their investment criteria do not which will help to secure the city’s with them early. become unrealistic and thereby future as an energy centre of excellence. stifle the next generation of Aberdeen- An Aberdeen Energy Academy could based companies. A long term strategic plan is needed. take the lead in creating tailored Here the public sector has a clear role to curricula that appeal to the next Companies, on the other hand, must play in showing leadership and helping generation whilst serving the needs of be aware that accessing capital is not a to balance the competing views and the industry. The benefits of a structured right. They must demonstrate financial interests of various stakeholders. and consistent approach to collaboration discipline and develop opportunities for can be seen in other countries. investors, who potentially have difficult How the city and stakeholders go about choices to make with less funds. this is open to debate. Our view is Increasing the local supply of labour that leadership is essential to embrace with the right skillsets will attract Strategic mergers and acquisitions change and take ownership for realising and retain more industry players and (M&A) matching pre production assets Aberdeen’s potential. enhance the reputation of the city. to cash flows to fund development would unlock opportunities in the Such an academy will not succeed in upstream and OFS sector. isolation. Aberdeen and the industry needs to find its voice and market itself The success of secondary buy-outs in the better through proactive engagement next 18 months will also be important with the government and press in to the continuing attractiveness order to attract the most talented of the of the sector to generalist private next generation. equity investors. As well as impacting on investment decisions, the lack of clarity in relation to the tax deductibility of decommissioning costs has also impacted M&A activity, particularly in terms of independents taking ownership of North Sea assets. 8 Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
  • 9. “Aberdeen has been a destination for global investment for many years and I want to see that continue for decades to come. There is still massive opportunity in the North Sea .” 5 David Cameron, UK Prime Minister. 5 Source: www.pressandjournal.co.uk 9
  • 10. New frontiers and technical innovation Goal: Maximise reserves recovery Hypothesis Why retaining operations Contrary to the view that North Sea in the UKCS is important to the production is in terminal decline, the city’s future outlook for the oil and gas industry in Aberdeen established itself as the Aberdeen is positive. There are a wealth UK’s oil and gas centre on the back of of exciting opportunities that will the industry’s operations in the North enable Aberdeen to continue prospering Sea. However, some question whether whether through utilising new technology ongoing oil and gas operations are to extend the life of existing fields, necessary for the city to continue to developing incremental reserves or flourish as an industry hub. developing green field sites. In our view, continued oil and gas production from the UKCS is critical for the city’s reputation in the industry: • Retaining UKCS production helps to keep the industry physically ‘anchored’ in the area; Long Term Prospects for Activity in the UKCS • Ongoing exploration and production Aberdeen University’s Alex Kemp recently conducted research looking at three (E&P) and service operations different oil and gas pricing scenarios and the impact on the UKCS. In his view, the maintain the city’s place at mid case long term price scenario of $70 bbbl and 50p therm represents the most the forefront of technological realistic outlook for the industry. developments as they deal with geological challenges and harsh In this scenario there is a predicted upturn in production in the later half of this North Sea conditions; and decade from new exploration and incremental finds, with the West of Shetland • More effective people development is having a growing influence and contribution to production. With stable and facilitated by having specialist skills sustained prices, production in smaller and less economic fields becomes viable in the city. and there is likely to be enhanced spending on exploration. The research predicts a spike in investment for the next 4 to 5 years in order to realise the higher level of production, with investment levels ranging between £6 to £8 billion. Under this scenario reserves are predicted to be around 20 billion boe, with incrementals accounting for 5.7 billion boe and new exploration of 3.5 billion boe. The research concludes that to realise the reserves potential, investments require to be screened based on the predicted pricing levels and a consistently high level of project design, development and completion is required. Source: http://www.abn.ac.uk 10 Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
  • 11. In order to maximise reserves Nonetheless, there is consensus among IOCs have an important role recovery, companies must leading industry players in Aberdeen to play in maximising the continue to invest that 12 billion boe is a conservative opportunity of new developments Compared to last year, Oil & Gas UK view – they believe that the industry including West of Shetland forecasts a 12% increase in oil and gas can continue to boom. This optimism WoS is predicted to grow from a 5% reserves recovery in the period from is supported by hard evidence: BP, share of total oil and gas production in 2011-2050 including: along with its partners ConocoPhillips, 2010 to 25% by 202015. BP, Shell, Total, Chevron and Shell, has recently Chevron and Marathon have already • 6 billion boe from existing and announced the £4.5 billion extension proved there is a willingness to invest sanctioned investment; of the WoS Clair field11 in addition in the area. We believe this trend must • 3.1 billion boe from development of to the recently announced £3billion continue with the IOCs leading the new fields; and redevelopment of Schiehallion & Loyal way. WoS offers both high risks and • 2.6 billion boe from incremental fields12 , Apache Corporation has agreed high rewards to the majors. However, investment in existing fields6. to acquire ExxonMobil’s North Sea as a result of the lack of infrastructure assets for $1.75billion13 and Premier and difficulties in obtaining and The most significant increase in total Oil is to pay $340million for Encore14 interpreting seismic data, significant reserves relates to West of Shetland to expand its interest in Catcher, one of investment is needed before other (WoS) with proven, probable and the largest UK offshore discoveries of independent oil and gas companies can possible reserves up 31%7 compared to recent years. commence operations. prior year business plans. The level of investment means oilfield Long-term activity forecasts for UKCS service companies will be able to reserves recovery vary widely, ranging take risks on the development of between 12 billion boe and 24 billion new technology. By oilfield services boe8 depending on the level of new companies pushing the innovation investment. Recovery of Oil & Gas boundaries for the IOCs, independents UK’s reserves estimate would require will be able to enter WoS at a later date investment of £70 billion9 across the using the technology already in place. next four decades whereas releasing This approach ensures that they will reserves potential at the upper end of not have to bear the initial technology the scale would require investment investment cost. approaching £150 billion10. Looking beyond the UKCS, the majors continue to expand their activities in the Arctic Circle. Given its location and the extent of local expertise, Aberdeen has an opportunity to become a hub for companies developing Arctic E&P operations. 6 Source: Oil & Gas UK Activity Report 2011 7 Source: Oil & Gas UK Activity Report 2011 8 Source: Oil & Gas UK 2011 Economic Report 9 Source: Oil & Gas UK Activity Report 2011 10 Source: University of Aberdeen Long Term Prospects for Activity in the UK Continental Shelf 11 Source: http://www.bp.com (£4.5 Billion Clair Ridge Project Receives Approval for Development, BP Press Office, 13th October 2011) 12 Source: http://www.scotsman.com (BP invests £3bn in Oil fields west of Shetland, 13th July 2011) 13 Source: http://www.bloomberg.com (Apache to Acquire Exxon North Sea Assets for $1.75 Billion, Brian Swint and Edward Klump, 21st September 2011) 14 Source: http://www.ft.com (Premier to buy North Sea explorer EnCore, Michael Kavanagh, 5th October 2011) 15 Source: University of Aberdeen Long Term Prospects for Activity in the UK Continental Shelf 11
  • 12. Technical innovation and Oil giants BP, ConocoPhillips, Chevron and Shell incremental developments can help maintain production levels announce £4.5bn investment in Clair field, West With the infrastructure in place and the of Shetland. maturing production profile of North During October 2011, BP and its co-venturers announced Sea fields, incremental developments in and around existing fields present that approval had been received from the UK Government a significant opportunity to sustain to proceed with the second phase of development of the investment in the UKCS. Many mature giant Clair field. The new development will have the and/or incremental developments may not meet the investment appraisal capability to produce an estimated 640 million barrels of benchmarks of the IOCs when oil and will provide a hub for future expansion, subject competing for capital investment on to further appraisal. Peak production is expected to be a global basis. However, the North Sea continues to evolve with the next up to 120,000 barrels of oil per day. The Clair extension generation of independent oil companies is planned to come on stream in 2016 and to extend taking up the challenge of maximizing production from the greater Clair area to 2050. In addition North Sea oil and gas production. to the 600 people already working on the project, it will Oil & Gas UK predicts that incremental provide hundreds of UK engineering, drilling and oilfield investment could deliver an additional services jobs over the field’s life. 2.6 billion boe16 over time with other research suggesting this could be as high as 5.7 billion boe17. While the Source: www.bp.com marginal cost/benefit model is key to the successful extraction of these reserves, the benefits of operating in an established environment can ensure that the marginal benefits outweigh the costs: • Ease of access to existing “Although it began over 40 years ago, the story of the infrastructure; • Higher than global average North Sea oil industry has a long way yet to run. BP exploration success rate; has produced some five billion barrels of oil and gas • Well-established supply chain and close proximity to skilled workforce; equivalent so far from the region and we believe we have • Located close to developed high oil the potential for over three billion more.” and gas demand markets; and • Availability of infrastructure and processing terminals in Bob Dudley, BP. the area mean that even small Source: www.heraldscotland.com fields can be brought into commercial development. 16 Source: Oil & Gas UK Activity Report, 2011 17 University of Aberdeen Long Term Prospects for Activity in the UK Continental Shelf 12 Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
  • 13. As Ithaca has proved (see below), Conclusion there is potential to revitalise ageing Despite production decline over infrastructure and reap the rewards. recent years, the industry remains Sustaining such investments will be upbeat about its prospects. There is critical to the longevity of the UKCS. plenty of life left in the UKCS, whether in West of Shetland, incremental The life expectancy of North Sea oil and field developments or extending gas has been debated for over 20 years. the life of mature field through However, technological development technological advances. has prolonged production and will continue to do so. IT developments, The city and the industry should seismic acquisition and interpretation focus on publicising opportunities for technology and enhanced oil recovery growth and replace the perception of (EOR) techniques have, and continue, managed decline. to make rapid advances. To realise the potential left in the Two of the largest discoveries in the UKCS industry players must continue North Sea in the last 10 years – Buzzard to invest. IOCs have a large role to play and Catcher – have arisen in what and can lay the foundations for further was viewed by many to be the largely technological development which will depleted Central North Sea sector. benefit companies of all sizes. Similarly, Xcite’s “most-likely” (P50) reserves estimate for their 160mmboe Bentley discovery18 is considered to have significant upside potential through the application of EOR techniques used to enhance production of heavy oil. The benefits of technology are unquestionable. The challenge is how Aberdeen ensures that it is a “We are talking about exciting new opportunities technological hub; attracting and in West of Shetland and an increase in North Sea retaining the R&D functions of global industry players, continuing to train investment and production, not a decline.” and develop some of the most creative minds in the industry and fostering Brian Wilkie, Total. the development of equipment and technology that will continue to move the industry forward. Companies such as Ithaca and Apache breathe new life into mature fields. In late 2008, Ithaca Energy assumed operatorship of the Beatrice field from Talisman Energy for £10million. Ithaca’s motivation for the deal was to enable a tie-back of it’s Jacky discovery northwest of Beatrice. Reinstating production of the Beatrice Bravo platform and an ongoing programme of well workovers has yielded incremental production gains. As a result, monthly average production through Beatrice platform has reached levels not seen since 1994. Apache have also achieved similar success with the Forties field. Source: www.ithacaenergy.com 18 Source: http://www.xcite-energy.com (Bentley Upgrade to Reserves Status, 10th May 2011) 13
  • 14. Complementary effect of emerging sectors – Goal: Aberdeen leading in renewable energy and decommissioning Hypothesis Renewables today and beyond19 Renewable energy will complement, Scotland has a huge amount of not replace, oil and gas in Aberdeen. renewable energy potential to tap into Opportunities and revenues will not but relatively small domestic demand. fall to Aberdeen by right but with focus, Previous studies have identified that vision and strategic planning Aberdeen Scotland has sufficient renewable can become the global centre for energy resources to provide 75% of decommissioning and a world leader in the UK’s electricity needs. Estimates clean energy. also suggest that Scotland has 25% of Europe’s onshore wind resource, 10% of Diversification of energy sources wave resource and significant potential The experience and skillsets gained for tidal stream and offshore wind through North Sea operations need to capacity. It is clear that the potential is be harnessed and exploited as we move first class and that Scotland could have towards cleaner sources of energy. The a strategic role in delivering Europe’s UK and Europe currently lead the way renewable ambitions. Aberdeen has an for offshore wind technology but this opportunity to lead the way20. is a global opportunity. By transferring the engineering capability and the experiences of working in the harsh 2010 Scottish Renewable Energy conditions of the North Sea, Aberdeen Generation Capacity (GW) can establish itself as a world leader for renewable energy. Biomass – 0.3 Waste – 0.1 Hydro – 1.4 “Scotland is blessed with abundant natural energy sources, particularly in our seas, where Scotland is Wind – 2.8 estimated to have a quarter of Europe’s potential wind and tidal energy capacity and a tenth of its wave resource.” Alex Salmond, Scotland’s First Minister. 19 Chart source: Scottish Renewables 20 Based on the Scottish Government’s estimate that Scotland has the potential for an installed capacity for 60GW (i.e. before capacity factor constraints) 14 Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
  • 15. Over the next decade Scotland’s The build period for offshore wind renewable sector is set to grow farms is expected to be in the region of significantly with a particular focus on 10-15 years. Initial capital expenditure onshore and offshore wind and marine on design and installation will be high. energy. The government’s current The oil and gas industry has a number of target is that 100% of Scotland’s gross transferable skills, for example in cable electricity consumption should be laying and offshore connection, as well supplied by renewables by 202021. To as in relation to ongoing operation and achieve this goal, billions of pounds maintenance. must be spent on improving energy infrastructure and developing carbon Despite the opportunity, few appear storage technologies making renewable to have fully focused on how they will energy a viable replacement for fossil secure their part of the renewable fuels in the long term. energy prize; few have created divisions that are focused on the sector. These Industry view on renewables opportunities will not fall to Aberdeen The potential of renewable energy by right, they will have to be fought in Aberdeen is keenly debated. Some for and won, and the industry needs to industry experts view it as a golden move quickly before the rest of the world opportunity while others are pessimistic catches up. about its potential to grow and its capacity to generate revenue. Aberdeen has a huge opportunity to nurture experts and graduates who Oil and gas fields and the related view renewables as a more attractive infrastructure creates thousands of jobs career than one in finite resources. in Aberdeen and huge revenues, with With a combination of fresh talent and the UK’s supply chain generating a transferable skills, Aberdeen can create turnover in excess of £16 billion per the expertise and supply chain required annum 22 . While it is expected that to sustain renewable energy as a viable the renewables sector will require a industry to complement oil and gas for smaller supply chain there is still plenty the long term. of opportunity. “The renewable energy industry could still centre itself anywhere – Aberdeen needs to grab the prize. There is no co-ordinated industry approach to attract renewables to Aberdeen.” Jonathan Roger, Centrica. 21 Source: http://scotland.gov.uk (Renewables Policy) 22 Source: Oil & Gas UK 2011 Economic Report 15
  • 16. UKCS projected cumulative decommissioning costs 2008-2040 35.0 30.0 2005/6 Decommissioning Spend (£bn) 2006/7 25.0 2007/8 2008/9 20.0 2009/10 15.0 2010/11 10.0 5.0 0.0 2008 2013 2018 2023 2028 2033 2038 The only inevitability in oil and gas – decommissioning 23 The UKCS faces an enormous challenge to sustain the productive life of existing infrastructure and postpone decommissioning. Although some fields now have production profiles beyond 2040, there are a considerable number of decommissioning projects due to get underway in the next decade. Many fields have been able to postpone their decommissioning dates over recent years thanks to advances in technology. However, the trend has slowed recently. It is anticipated that 37% of the estimated £31 billion cost will be spent by 2020, with 144 fields due to commence decommissioning24. We view decommissioning as another great opportunity for Aberdeen to lead. The North Sea will be one of the first harsh offshore basins to undergo significant decommissioning and there is an opportunity to build vital skillsets, which can be exported to other parts of the world. Decommissioning should not be seen as a negative but as an opportunity to lead the way. 23 Chart source: Oil & Gas UK Activity Survey 2011 24 Source: Oil & Gas UK 2011 Economic Report and 2011 Activity Survey 16 Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
  • 17. Decommissioning landscape in the UKCS PSN awarded Brent decommissioning project. Generally, North Sea operators had an economic incentive to push back In July 2010 PSN signed a contract with Shell worth decommissioning and extend the life nearly $200 million for dismantling work on the Brent of fields. However, a lack of certainty field. The contract award was for decommissioning over tax relief on decommissioning costs and the need for letters of credit is tying services on the Brent Delta platform topsides. PSN up capital which could otherwise be will provide services including integrity management; reinvested in the UKCS and could lead to module, process and utility separation; safe shutdown; earlier decommissioning of some fields. hydrocarbon cleaning; disconnections and preparation The market continues to be volatile – for removal of the topsides. Offshore work is expected to 25% 25 decrease since the peak of $146 begin in late 2011 as part of the initial stages of platform a barrel in 2008.26 A decline in prices from current levels will make certain decommissioning. fields uneconomical. Peter Brown, UK Managing Director of PSN at the Surprisingly, despite the size of the market and the large projects which time said “We are confident the contract will provide are looming, investors and oilfield a significant number of new job opportunities in the service companies seem to have been decommissioning services sector. It will also position slow to exploit the huge potential rewards. Presently, there are six fields Aberdeen as a global centre of excellence for offshore due to cease production and commence decommissioning.” decommissioning in the next 18 months, and therefore the investment Source: www.woodgroup-psn.com opportunity exists now to become a key player in this market. A recent example of the size and potential of the market can be seen with PSN’s award of the Shell Brent decommissioning contract. 25 Based on crude oil price of $106 a barrel at 30 September 2011 26 Source: www.energybulletin.net (Peak Oil and Worldwide Economic Recession Soften Oil Prices: Lull Before the Storm, James Leigh, 3rd October 2008) 17
  • 18. Aberdeen as a decommissioning centre of excellence? Strengths Opportunities • ey skillsets in construction K • UKCS market worth $31 billion; 27 and engineering; • Create a niche which can be • quipment and infrastructure E exported internationally; exists to dismantle and bring • Key part to play in Aberdeen as platforms onshore; an international energy centre of • xperience of dealing with E excellence; and environmental issues on the • Attract more investment into the UKCS; and city and infrastructure. • nnovative, entrepreneurial spirit. I Weaknesses Threats • need for more focus and A • Infrastructure still required investment from local industry by independents to develop to grab hold of opportunity; mature fields; • Bad image – seen as death • Competition from other mature of the industry rather than basins, e.g. Houston with shallow opportunity to lead global water Gulf of Mexico; decommissioning; and • Cheaper alternatives – seen • Difficult to attract talent. by some as low skilled, labour intensive projects with no money to be made; and • Who is going to pay for it? 27 Source: Oil & Gas UK 2011 Economic Report 18 Northern Lights – A strategic vision of Aberdeen as a world-class energy capital
  • 19. Conclusion The renewable energy and decommissioning markets offer further potential for Aberdeen and should be viewed as a source of growth alongside oil and gas revenues as opposed to a replacement. Many of the skills and capabilities required for construction of offshore wind farms, tidal /wave technology and carbon capture as well as the decommissioning of old infrastructure lie with local oil field service companies. Few appear to have fully focused on how they will secure their part of this prize; few have created a division that is focused on these emerging sectors. These opportunities and revenues will not fall to Aberdeen by right, they will have to be fought for and won. With investment, leadership and a focus on how current expertise can be leveraged to take advantage of these opportunities, the city can become a centre of excellence in these areas. “Aberdeen is recognised throughout the oil and gas world for its expertise in subsea technological innovation.” Jeff Corray, ITS. 19
  • 20. Fiscal regime to support E&P investment Goal: Tax certainty is very important for ongoing UKCS investment Hypothesis March 2011 tax increases The UK Government demonstrated jolted confidence leadership by lowering taxes to make Tax rates in the UK sector of the North the UK a more attractive location for Sea range from 62% to 81% depending companies. Higher taxes for oil and gas on the age of the oil or gas field28. Cash operations do not necessarily make the tax rates are generally higher as a North Sea unattractive, but appropriate result of anticipated reliefs for future incentives, dialogue and certainty decommissioning costs. However, many are required to exploit resources and reliefs are restricted, including relief retain skills before and during the for financing costs, which could lead to development of the decommissioning and eye-watering effective rates of 65%+ for renewable industries. newer fields and 85%+ for more mature fields29. Total tax revenue from UK oil and gas production was £9.3 billion in 201030 with an anticipated increase of £2 billion 31 as a result of the increase in the Supplementary Charge to 32% in March. Is this third tax increase since 2003 a step too far? Current production from existing facilities should not be unduly affected whilst the net of tax economics remain favourable. However investment decisions around projects could be impacted. The vessels sitting unutilised in Aberdeen Harbour throughout 2011 may be a barometer of the impact on exploration and development activity as the economics of new projects are re- examined and reassessed. High oil prices meant that the industry absorbed the tax increases in 2003 and 2006. High market prices remain and the Government would argue that current tax rates represent a fair economic rent for the licences. 28 Source: https://www.og.decc.gov.uk 29 Source: https://www.og.decc.gov.uk 30 Source: Oil & Gas UK Activity Survey 2011 31 Source: http://www.hmrc.gov.uk 20 Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
  • 21. Comparison of Oil and Gas Tax Rates 90 80 70 60 50 40 30 20 10 0 ay k et s et nd ar dg dg w m rla or bu bu en N he e- D st et pr po N K K U U Marginal Government Take (%) Source: Morgan Stanley Research; Wood Mackenzie The recent increase in the More certainty and incentives are Supplementary Charge has impacted needed to promote investment the UK’s relative competitiveness on When commitments are made to explore the global stage. IOCs will of course and develop a field, the investment take this into account when allocating profile can span up to a decade or more; resources across capital projects participants therefore need a degree of globally. The restrictions on tax relief certainty over their cash flows. The UK for financing costs contribute to the Government has recognised the issue difficulties faced by independent by introducing and extending ‘field entities. When large IOCs reduce their allowances’ and by committing to no future investment in UK projects, further industry tax increases during the question arises as to whether the the life of the current Parliament. independents can fill the void? The UK Government also needs to embark on a dialogue with the industry with a view to rebuilding confidence in the UK regime. We recommend: • Tax relief to ensure commercial viability of smaller or marginal fields; • A competitive corporate and personal tax regime for UK headquartered companies; • Clarity on the restriction of decommissioning relief; and • Reduced PRT rates to provide an incentive to invest. 21
  • 22. Clarity on decommissioning relief A more significant potential impact The link between the tax regime and on decommissioning is that a future the timetable for decommissioning Government may reduce or eliminate has dominated tax policy debates over tax deductions for decommissioning many years. expenditure when it is incurred. This lack of clarity has stifled M&A activity, The longer term implications of the impacted investment and tied up capital recent tax changes on decommissioning unnecessarily in requiring guarantees are less clear; whether existing fields for decommissioning costs to be made are decommissioned earlier and on a gross basis without assuming existing infrastructure lost will be a any tax relief. function of many factors including oil price, future tax rates and tax One solution would be for the relief for decommissioning costs. The Government and each licence holder impact of increased taxes on these to enter into a contract where the state investment decisions will influence agrees to pay any difference between when an asset is decommissioned. This the tax deduction for decommissioning too will impact on decisions around set out in the contract (which would exploration and development of new reflect the tax rate at the time of fields, as many new smaller fields might the contract) and the tax deduction be dependent on being able to tie into available when decommissioning existing infrastructure rather than actually occurs. The intention would utilising alternatives such as floating be to “lock in” the deductions available production vessels. and provide certainty to current licence holders and possible future entrants. “Certainty on the availability of decommissioning reliefs coupled with a clear and predictable fiscal regime could be a game changer for North Sea developments.” Malcolm Webb, Oil & Gas UK. 22 Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
  • 23. Broader UK tax changes – Conclusion making the UK more attractive The impact of fiscal policy has The Government has stated its objective consequences both for the long term of the UK being “open for business”, health of the North Sea as well as with the aim that more companies the future of the renewable and maintain or establish their worldwide decommissioning industries. headquarters in the UK. In order to maximise investment in the With this in mind, the Government UKCS we believe that fiscal certainty outlined it’s intention in the 2011 Budget and a more coherent and competitive for the UK to have the lowest corporate fiscal system is needed. tax rate in the G7, although this does not apply to oil and gas exploration and The current regime taxes on the basis production profits. They have also set that oil and gas profits are super profits out a number of other measures. These that can endure very high marginal include a move towards a territorial rates. As the basin continues to mature, principle, with taxation only on a many of the future projects will be more company’s profits earned in the UK, challenging and riskier and will not proposed reforms to the Controlled result in super profits. Foreign Companies Regime and changes to the taxation of intellectual property. The tax regime needs to adapt to reflect the underlying economics particularly This makes it far more attractive for in relation to smaller or marginal fields. companies to base global headquarters A reduction in PRT rates would provide or regional headquarters in the UK and an incentive to invest particularly for to invest in exporting to new overseas older fields. markets, a key goal in promoting growth for UK plc. The Government must provide clarity in relation to the tax deductibility of This, together with the Aberdeen decommissioning costs when they are skill base, gives the city a tremendous incurred, possibly through contracts for opportunity to attract and retain energy differences with the state. companies and HQ offices. “Fiscal certainty is key to long term multi-million pound investments with high execution risk.” Jonathan Roger, Centrica. 23
  • 24. Talent management Goal: think career, think energy, think Aberdeen Hypothesis Effective talent management If Aberdeen is to secure its long term is a must future as a global energy player it must Over 50% of respondents to OPITO’s emerge victorious in the war for talent. recent Labour Market Intelligence Industry and academia must collaborate Survey identified talent as the to a greater extent. An Aberdeen Energy number one challenge facing their Academy responsible for overseeing a company. This is consistent with the structured and consistent approach to PwC global survey of CEOs in which creating, marketing and funding tailored 66% of respondents fear they won’t courses for tomorrow would appeal to the have the right talent to compete next generation and serve the needs of effectively as recovery takes hold32 . the industry. Skills shortages lead to wage inflation as employers are forced to pay a short term premium to deliver the business plan today using contractors, instead of developing their own talent over the longer term. The industry model of using ‘one man’ service companies means that people do not always get the development to move to the next level. It is argued that this has created a cynical workforce which has little loyalty, allegiance or long term commitment. Why managing talent is so important As well as addressing short term skills shortages, managing talent effectively, and thereby increasing the supply of labour with the right skillsets, could lead to a virtuous circle of attracting more industry players to the area, a greater culture of innovation and development and an enhanced reputation for the city. 32 Source: Oil & Gas UK UKCS Workforce Demographics Report 24 Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
  • 25. Demographic challenges and Oil and Gas Employment Trend 1998-2010 33 skill shortages Recent research by Cogent estimated 450,000 the total UK workforce employed in 400,000 the oil and gas industry at 260,000 for 350,000 2010, of which approximately 50,000 are offshore. Others suggest that the 300,000 industry supports 440,000 jobs34, most 250,000 based in Scotland. 200,000 Industry observers have historically 150,000 pointed to an ageing workforce as a key concern for the sector. However, 100,000 the average age across the sector is 50,000 4035 which is consistent with UK and global averages. 0 8 99 00 08 09 20 1 02 03 04 05 06 07 10 0 9 20 20 20 19 19 20 20 20 20 20 20 20 The industry requires a higher Induced Employment Impact proportion of skilled employees, such Total Indirect Employment as engineers and managers, than other Direct Employment sectors. OPITO’s research indicates that these are the roles which are most difficult to fill. Most Difficult-to-fill Vacancies 36 Industry also reports mis-match between the qualifications gained in Admin. and Secretarial education and the technical, industry specific and softer skills required to Other operate effectively in the industry. IT Support Professional Scientists The issue appears to be more than simply a numbers game and, as such, Crafts people our view is that focusing only on Technicians boosting the number of younger recruits will not solve the problem on its own. Project Support Commercial and Marketing Ops and Production Managerial Engineer 0 10 20 30 40 50 % of Respondents Very difficult Quite difficult 33 Chart source: Experian/ONS 34 Source: Oil & Gas UK 2011 Economic Report 35 Source: Experian/ONS 36 Chart source: OPITO – Labour Market Intelligence Survey 25
  • 26. Aberdeen and the industry are Establishment of an losing the battle for talent Aberdeen Energy Academy – Competition for limited talent is fierce. collaboration between industry Clean energy sectors and demand from and educational bodies other oil and gas regions will attract A more structured programme of an increasingly mobile local talent academia and industry consultation pool. Careers in financial services and will deliver the talent that the industry other professional services are even requires. In our view, an Aberdeen attracting technical talent away from Energy Academy could nuture new the industry. But this is not just about talent focused in the right areas. emerging territories or other industries. Houston and Perth, with their advanced Such an academy would promote oil infrastructure and educational and gas in the UK and beyond as an development, have continued to be a attractive career option and Aberdeen choice for young oil and gas engineers. as the best place to receive specialist So Aberdeen should learn from education through: their success. • Tailored curricula matching A new generation of individuals qualifications to future roles based – the Millennial generation – is on industry needs; entering the workforce. They have • Practical work experience different expectations in selecting the through scholarships and summer organisations they work for and have a placements; and strong interest in development through • A channel to retain talent in coaching, training and mobility37. the local economy through the effective marketing of courses and Domestic and international students careers in Aberdeen both in the UK need to be attracted and equipped with and overseas. the right skills. Investment for the long term in scholarship, apprenticeship With UK unemployment amongst 16-24 and graduate programs is needed or year olds approaching 1 million 38 and the trend of wage escalation to attract ongoing concerns in relation to the ageing talent will continue. financial burdens placed on students, young talent needs a visible and direct link to future careers. There are excellent examples of collaboration between industry and universities. “There is a real need for industry and education to Several local companies such as Talisman and Wood Group provide collaborate ever more closely – on a deeper and more university scholarships39. The industry consistent basis – to achieve more effective development together should follow this lead and develop a coordinated approach. of skills as well as propagate the research and development that will prolong the life of the basin.” Professor Stephen Logan, University of Aberdeen. 37 Source: PwC Managing tomorrow’s people: The future of work to 2020 38 Source: http://www.telegraph.co.uk (Youth employment hits record, Harry Wallop, 16th February 2011) 39 Source: www.talismanscholarship and www.rgu.ac.uk 26 Northern Lights - A strategic vision of Aberdeen as a world-class energy capital
  • 27. A number of overseas locations have Conclusion also embraced collaboration between Industry must understand the needs industry and education, for instance, and aspirations of the next generation of Houston and Singapore. Silicon Valley potential recruits – career development, has harnessed the potential of world brand, image, mobility – and engage class universities Stanford and Berkeley with them early. creating a virtuous circle of commercial and academic advancement. Investment for the long term in scholarships, apprenticeships and However, many interrelated factors are graduate programmes is needed or at play. An Academy will not solve the the trend of wage escalation to attract industry’s skills shortage in isolation. ageing talent will continue. In our view, The city’s physical amenities and an Aberdeen Energy Academy which is infrastructure – its image and reputation responsible for creating, marketing and, – are as important to career choice as to an extent, funding tailored courses the educational infrastructure. The would attract career-minded members final section of this document explores of the next generation and serve the the factors impacting Aberdeen’s needs of local industry. desirability as a place to live and work as well as the role the public sector has to play in influencing these factors. 27
  • 28. Mid-tier OFS and independents need access to capital Goal: Billion dollar opportunities for smart funders and ambitious independents Hypothesis Fundraising has been challenging In an uncertain world, the dream ticket for independents since the is matching entrepreneurial independent financial crisis producers with funders willing to provide Oil and gas independents are access to capital. The growth aspirations discovering new oil, offering attractive of Aberdeen service companies need investment opportunities. In 2010, funders who will provide support through capital investment in the North Sea industry cycles. rose more than expected, to £6bn40. However, in the current economic climate, higher risk independents are finding it difficult to obtain adequate Xcite Energy recieve funding to develop Bentley. capital investment. In April 2009, Xcite Energy released a cautiously optimistic report quoting the Bentley field as “one of the largest Independents require considerable capital to get development and proven, but undeveloped fields in the North Sea.” At this production programmes underway time, the CEO expected a rush of interest from industry and however, once funding is secured, these financial partners alike. projects can often be very lucrative for the investor. Correspondingly, the higher risk associated with these In August that year, the company generated £2.1m companies means exploration activity through the placing of 10 million shares. Over the is often better financed by equity rather than debt. Recent high profile following year, the company secured £60m from YA failures have shown the danger of Global Master SPV – a fund managed by Yorkville excessive gearing. Advisors. This allowed Xcite to perform a well flow test in Selling shares on a public market such the field which reaped excellent results. as AIM should be considered as a source of finance, but not entered into lightly Xcite are now in a position to commence production and as the volatility of share prices will be linked to the most recent successful, are awaiting feedback for their first stage production or unsuccessful, well. There may be programme from DECC. The field is estimated to be 690 opportunity for a new style of funder to million barrels in volume and, since April 2009, Xcite’s emerge who is willing to provide equity type funding into specific projects. For share price has grown 1200%. Xcite is an example of a the right investment, the returns profile successful start-up and shows that investment in small will still be very attractive. North Sea independents can offer opportunity to create significant value. Source: http://www.xcite-energy.com 40 Source: Oil and Gas UK Activity Survey 2011 28 Northern Lights - A strategic vision of Aberdeen as a world-class energy capital