with Brian Nixon, Scottish Enterprise
Could you please introduce Scottish Enterprise to the readers of OGFJ and exactly what role it plays in Scotland and Aberdeen, particularly regarding the energy sector?
Scottish Enterprise is the main economic development agency for Scotland, funded by the Scottish Government. Our role is to help our key industry sectors to grow and prosper by maximizing their contribution to the economy as well as their growth and level of sustainable employment. We have selected six priority industries with opportunities for growth in the domestic and international markets, which all have solid industry capability and experience, strong academic reserves, and are keen to work with us. We also work with other growth industries that are important to the Scottish economy.
Energy, and the oil and gas sector in particular, is obviously a priority industry as it meets all the criteria: it has huge opportunities for growth domestically and internationally, a very strong supply chain, significant academic expertise in our Universities and a real will to work with us towards prosperity and growth.
So the Energy Team is Scottish Enterprise’s main interface with the oil and gas industry, maintaining awareness of the market trends, political drivers, regulatory and fiscal terms, and setting from that analysis of the prevailing circumstances the strategy for investments and interventions which will allow us to aim for maximum growth opportunities. The overall objective is to maintain awareness of what is happening in the market, what the trends and opportunities are, where the failures and blockages are, and what we can do to resolve them and stimulate growth.
Despite Scotland being a relatively small area, there are some important divergences in terms of regional economic performance: Aberdeen has benefited from the oil and gas sector, and now more than ever. Do you think it is an issue, and how can the benefits of this industry be better spread throughout Scotland?
It is widely recognized that the North East economy is not only out-performing the rest of Scotland but also arguably most of the UK.
The interesting thing is that Scotland ‘punches above its weight’ in many different sectors aside from Oil and Gas: we now also have very strong industries in life sciences and our food industry is active throughout the world… Our key strengths are the same ones that usually allow very small countries to play on the world stage.
But our oil and gas sector is still certainly the most recognized. All of the countries I have travelled to in support of industry promotion and market research have a very clear recognition of Aberdeen as a key source of technology development, innovation and experience as well as an operational hub and this is very encouraging for Scottish Enterprise.
Scotland’s service providers have developed cutting-edge technology and expertise in areas like subsea, and some have become global players, but there is still a lot of room for growth in terms of size and internationalization for many of these companies. How does Scottish Enterprise encourage and support them?
Scottish Enterprise has done a very substantial piece of work to map out the shape, size and strength of the supply chains in energy across various sectors and subsectors. We share your view, there are not as many very large companies in the contracting sector as we would wish to see: there are in fact a small number of large companies and a large number of quite small ones.
Scottish Enterprise recognizes the need to work with these companies to help them become the next generation of major contracting companies: an ongoing program is currently working to identify companies that have the right technology and service expertise to meet the real market opportunities potential. After identification, we are able to offer tailor-made support to assist sustainable growth of companies that have the ability to add strength to the supply chain. We will try and help them become the next generation of majors, the next Wood Group, AMEC and PSN.
Do you think that the Scottish companies are too focused on the North Sea market, and therefore missing some international development opportunities?
I don’t think it is the case. Scottish Enterprise has been monitoring and measuring international activity on an annual basis through consistent methodology. Our assessment is that our growth in international markets has been sustained over the last seven or eight years and that a third of the supply chain business is now conducted in International markets (approximately £4 billion a year out of the total turnover of £12 billion for the oil and gas industry).
A large majority of our companies are now active internationally, and we support maximizing activity in the growing international market. We do so in a number of different ways.
One of our main actions is to supply companies with market intelligence within the different areas of the oil and gas industry (subsea, drilling and exploration, operational and maintenance phase, etc.). We provide five year projections of capital investment and operational expenditures in 60 or 70 countries around the world, and a historical summing up of what has happened in the past five years. Companies are then able to look across their particular sector to see exactly where the opportunities lie and where the biggest growth is, and then to look below the headline focus to see how much of these opportunities and growth is applicable to their company. They can therefore probably select the top-five country markets for their particular business.
Thereafter, my colleagues and I provide detailed market research about what we believe to be the top-ten key markets. We visit those markets, look behind the headlines of investment focus and try to understand through detailed discussion with key industry players what specific technologies, services and products they have been looking for, how the supply chain operates, what is already available in the market and what is needed. This information is then fed back to our supply chain here in order to encourage companies with the right kind of skills, products and technologies to visit the markets where there is a serious application of their particular niche.
With Scottish Development International, a partner organization, we also manage and deliver a range of in-country market services designed to provide a soft landing for companies seeking to develop internationally. Interested companies can join learning journeys, typically one-week programs with the aim of allowing them to measure their business opportunities in precise countries, to check what the employment regulations and legal options are and what the supply chain looks like. We can conduct specific research for individual companies to help identify a client base, providers or potential partners.
To sum it up, our action starts by identifying which markets are of interest now and why. We then offer a range of information about the best market-entry strategy for each market and each country, to give companies the necessary support to develop sustainable long-term businesses.
There is a wide range of bodies and association supporting companies at an international, UK and local level. How do you work together in order to make sure that there is no overlapping or contradictions in the ways you support the companies?
The critical factor is coordination.
UK Trade and Investment is the first player within the UK, with an overarching responsibility. Within Scotland, Scottish Development International has a recognized responsibility: we are tasked with delivering all the services previously described, and this therefore avoids overlap or duplication.
We then support the work of key organizations in specific sectors, which allows us to bring the focus on the most important aspects of the industry.
UK-WAAG for instance is an association that has been very successful in looking after Aberdeen companies with a particular interest in West Africa. We recognize the fact that they have made good progress setting up legal support, meeting group services, sheltering associations, etc. – and we clearly wish to have access to this work without duplicating it. So we collaborate with UK-WAAG for our activities in West Africa, trying to add as much value as possible to the very good support they provide.
We also sponsor Subsea UK, again avoiding any duplication. A great part of this collaboration is aimed at supporting Subsea UK companies in their international development path. We therefore support specific technical seminars focusing on the key subsea areas, and are also conducting research abroad: in Brazil for example where there are huge subsea opportunities. When we look to take companies for a conference or a seminar in Brazil, Subsea UK will work with us to identify specific companies and recruit them.
In parallel of the need for Scottish companies to develop international activities, there is a need to attract inward investment. Do you feel there is still an interest from international companies to invest in Aberdeen?
Yes, we are still seeing that interest. We do see continuing opportunities for inward investment on the operator’s side, where it is currently well in excess of 60 or 70 companies from Canada, the US, Japan and Europe investing in reservoirs, in producing assets etc. There is also some interest in contracting from the supplier side, especially in the new niche technologies coming from the Gulf of Mexico, Houston, China and Japan. And there is still continued interest in inward investment for other energy sectors.
But the oil and gas supply chain is so strong that there is actually very little need to seek inward investment. The majority of our efforts therefore focus on trying to maximize outward export trades of existing companies.
That said, major companies like Subsea7, Acergy, Technip, Chevron, Shell and BP are making very significant investments in their Aberdeen headquarters in terms of operations, research and design, support, etc. Such initiatives help enhance the role that Aberdeen already has as an international centre of excellence and a hub for training.
Chevron offers a typical example of what we are currently experiencing: the company brings staff from newer markets to Aberdeen, they spend one or two years here gaining operational experience in the North Sea and then go back to their own indigenous market with the knowledge and experience of the business conducted here. Chevron’s Technology Centre is also based in Aberdeen; they now have a staff of over 100 people focusing exclusively on technology developments.
The overall investment in innovation is currently at low levels by European standards. Do you think there is still more that can be done by the Scottish companies in the energy sector in terms of R&D?
The Energy Team, which is very much involved in technology development and the relation with industry in a number of areas, has found that there is much more focus on development than on research, and that there is a significantly larger proportion of ongoing innovation in technology development. As the industry moves deeper into harsher climates, the approach is not with completely renewed concepts, devices or technologies. In fact, companies usually use technologies that have been proven under certain circumstances and further develop them for application in even harsher environments – deeper water, colder temperatures and higher pressures.
We do not often see technology from other countries being brought to Scotland. Of course, we can’t claim to be the source of all technologies in the industry – but in a large measure the North Sea and Aberdeen in particular are seen as very strong sources. The adaptation of existing technologies to new conditions is also often designed, engineered and tested here.
The main reasons for this are because the industry is already significant, with a very strong industry body, and a good academic backup.
Do you think that there is a lack of government support in order to really be at the forefront of the next wave of new technologies?
Our role is to be aware of innovation capability and to match that capability with a market opportunity. Scottish Enterprise carries out a lot of work at a stage called “Proof of Concept”, aimed at moving new concepts to a stage where it can be proven that a device or a technique will actually work or be competitive. Scottish Enterprise funds and manages such programs which usually last between 18 months and two years.
A number of successes have come out of this process with a target to help commercialize new technologies that would preferably be manufactured and designed here in Scotland and create opportunities for business growth. At the end of the Proof of Concept programs, companies can benefit from an enterprise fellowship: this is a one year program which provides support to very capable and skilled academics, who may not have as much business experience as is needed to start a new company, in terms of exposure to market planning, financial planning etc.
Brinker Technology is a good example of a company that started with a Proof of Concept project then benefited from an enterprise fellowship and is now working with Scottish Development International on internationalizing their business. It is therefore a typical example of an academic idea that we have been able to support and bring to life with huge domestic and international opportunities, and from an economic development point of view, with the prospect of consolidating that new business for the benefit of the Scottish economy.
How would you describe Scotland’s ability to establish lasting and productive private public partnerships on energy issues?
There is a real willingness in the industry from both the private and public sector to work towards common goals and because of this there are a number of successful partnerships, many of which were formed and are based in Scotland.
One of the key oil and gas industry bodies, PILOT, combines government, industry and trade associations and is instrumental in building alignment for future direction of the industry.
A number of the industry trade associations were formed on the basis of private / public partnerships, and have gone from strength to strength, now operating by in large independently on behalf of their membership companies.
Subsea UK is one such example as the industry body and focal point for the entire UK subsea industry. Scottish Renewables, and the Industrial Power Association (IPA) are also good examples of partnerships that effectively represent their respective energy sectors.
Do up-and-coming companies in the energy sector count on enough options and risk funds for financing their fledgling businesses?
There are three existing funds at three different development stages that Scottish Enterprise supports:
The first one is quite often guided by the industry teams such as my own team. If we see a company with significant potential and something that could be really exciting, we can bring this to the attention of our investment colleagues in Glasgow. They will then do their own due diligence as with any other financial investment. Following that there may be opportunity to access funding from the Scottish Seed Fund which has capacity to invest between £20,000 and £100,000.
The second level of investment currently available is the Scottish Co-Investment Fund, which requires collaboration with investment partners (venture capital companies and investment banks, etc). Partner(s) can apply for funding, in this case with investment thresholds ranging from £100,000 up to £500,000. At present, in excess of 120 companies have invested and benefited from this support.
The top level is the Scottish Venture Fund, similar in its investment requirements to that of the Scottish Co-Investment Fund. Usually this funding would be at least in the third round of the development stage and very much growth orientated. This allows higher sums of investment ranging from £500,000 to £2 million.
We can sometimes “close the circle” when a deal is nearly achieved and we believe there is a strong opportunity for growth in that company, and hence paybacks to the economy. Or we can actually start the circle by introducing the idea to other investors and see if they could be interested in it.
There is a lot of talk in Aberdeen about anticipating the inevitable end of the North Sea’s oil and gas production and therefore developing other energy sources, based on the technological expertise developed for the oil and gas industry. Which sources of energy represent the biggest opportunities in this regard and how would you rate the progress on this front?
We try to look longer term and to focus on diversification, with a clear recognition of all the activity levels. Although we expect domestic oil and gas activity levels to remain high for many years, we are entering a slow decline phase and the opportunities for growth are therefore restricted.
We see 3 prime areas for diversification that could relieve the dependency some companies may have in the North Sea. One is clearly continued international growth, with significant opportunities, and we therefore help companies to diversify from a market perspective. But there are also opportunities from a sector perspective, the two main ones being renewable energies on the one hand, and both offshore and nuclear decommissioning on the other. Adding together offshore and nuclear decommissioning in the UK, the industry will represent a £60 or £70 billion market over the next 25 years.
There are very significant opportunities in these sectors, and we are trying to make Scottish companies aware of these by producing reports and doing specific research to map out what the technology requirements are, how the business is conducted and where the market is going. We then target relevant locations (particularly Aberdeen, Glasgow and Edinburgh) to present the findings, and work with our colleagues throughout Scottish Enterprise to raise awareness and encourage as many companies as possible to attend these events. As a result, these companies are benefiting not only from the information in the report but also from hearing directly from the consultants who conducted the work. If, through our morning session companies are convinced that their products, services and experience have some application in one of these sectors, they then have the opportunity during the afternoon to sit down and discuss it with industry experts.
The development of renewable energies is often seen as still being at a very early stage, but is actually not so embryonic. The technologies to exploit offshore wind in shallow waters are already quite advanced in Germany, Denmark and the southern coast of the UK, but moreover offshore wind in deeper waters is absolutely on the cusp of significant development. There is going to be a need for larger developments, much bigger machines in environments which are further offshore and therefore benefit from a more stable and predictable wind regime. The actual efficiency of offshore wind is significantly higher than onshore wind: onshore wind has approximately 30% efficiency (which means it generates power for about 30% of the time), whereas the feedback from demonstration projects in Scotland’s offshore wind farms are showing very significant efficiency levels. Some contracts for new developments are almost at the stage of being awarded. The third offshore wind licensing round is also underway, inviting applications in designated areas for development of up to 29GW in UK waters by 2020 – 96 companies have reported interest.
Scotland’s oil and gas expertise can also be used to help develop the two main forms of marine renewable energy, wave energy and tidal stream. Wave energy is the first commercial technology (bred in Scotland) being deployed in Portugal and we expect to see it being developed in Scotland quite shortly. But I think the real large scale marine energy developments are probably 3 years ahead.
From your perspective, where do the main opportunities and challenges lie for Scotland’s energy sector in the coming years?
At Scottish Enterprise, we honestly believe that in every challenge there is probably an equal opportunity: our role is therefore to try to convert challenges into opportunities.
I don’t foresee any significant decline in the offshore oil and gas activity levels in the coming years. Production in itself will probably decline, but I think investment and therefore activity will be sustained over the next five years.
However, one of the main challenges for the industry is to reduce the rate of decline. Good progress has been made in this regard, which goes back to the sharing of best practice and experience, and this progress is going to turn what is a challenge here today into an opportunity somewhere else tomorrow: the companies who had to develop new skills in the North Sea will then be able to export and apply those skills in other mature provinces like China, India and the Gulf of Mexico, which are experiencing exactly the same situation.
Another big challenge for us is to seriously capture the lead that we currently have in marine energy and in deep-water offshore wind. This lead is quite well acknowledged internationally, but it is now essential to capitalize on it, to secure commercial developments here in Scotland, and to build the industry’s supply chain which will then allow us to take our techniques and technologies to international markets. The idea is to work on that in Scotland first and foremost, in order to be able to capture the intellectual property, the experience and the expertise so we become recognized around the World.
What is your final message to the readers of OGFJ on behalf of the Scottish Enterprise Energy Team?
We are a small team and we aim to make a difference. We have had some good results over the years, however, the industry is very big and we have to be very realistic about where we can add value and where we can’t. There are huge capabilities and expertise in the oil and gas sector, and by continuing to be focused in our work we hope to maintain effective dialogue and continually develop our strategy which we aim to have endorsed by the industry.