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Interview

with Geoff Runcie, Chief Executive, Aberdeen and Grampian Chamber of Commerce

21.06.2008 / Energyboardroom

As a man with a successful career in international companies, private investments and other business support organizations (Glasgow), what motivated you to take up this position in the AGCC?

I worked in Aberdeen in the 1970s, in the early part of my career in the construction equipment industry, ironically during the beginning of the oil and gas industry in the area with many important infrastructure projects underway. I was working for the Caterpillar Dealer at the time, so this was a region of significant and important economic activity. I had the opportunity to return to Aberdeen when my predecessor at the Chamber of Commerce (CoC) left, and having already lived and worked in the area, I knew that the business community was very supportive of the CoC and that it was a great part of the world to live and work, so I decided to come back about five and a half years ago.

Every important city and region has its CoC, but what do you consider as the main distinguishing element of the AGCC when compared to other CoC’s in Scotland and the UK?

It is worth noting first that the CoCs in the UK are fundamentally different from those in the USA. We are in fact all private sector businesses, not an arm or instrument of the government. The CoCs are essentially private entities owned by the business community, and live on their membership subscriptions . We also have business services offered on a commercial basis that supports a lot of the non-commercial activities that we provide.. The AGCC is the only CoC the Aberdeen city and shire region, (about 2000 square miles) unlike Houston TX, for example, which has dozens of CoCs within the city region.

There are two national CoC associations which are owned by the local chambers themselves, one which is the Scottish Chamber of Commerce, acting to lobby the Holyrood government in Edinburgh, and the other is the British Chamber of Commerce which does the same in Westminister. Since these CoC associations belong to the local chambers, it is not a franchise but rather a bottom-up organizational structure. It is completely privately funded, bringing objectivity and proximity to the business community. We are heavily involved in the major economic debates and activities in the region as a private sector representative.

Regarding the AGCC, it is one of the leading CoC’s in the UK. This is born out of the absolute support that we get from the business community, with clarity of purpose and a key alignment of businesses’ interests in the region’s economy. The northeast of Scotland is reasonably isolated economically from the rest of the Scottish and UK cities, and we are in a corner of the country so people who come here do it for a reason. Aberdeen is the base of one of the UK‘s only two truly global economic sectors, Oil & Gas, the other being financial serviceswhich is based mostly in London with a strong element in Edinburgh. So although Aberdeen is a provincial city of only 220,000 people, it is the home of a truly global industry sector, setting us apart in terms of the economic status. The AGCC has been around over 160 years, dating back to the 1800s when it was common for British port cities to have CoCs.

Today it is a very successful and dynamic CoC, running many activities and events with the strong support of the members. We endeavour to do things which reflect the general business agenda for the region, and are effectively promoting the region. The AGCC is very well connected with the British Chamber of Commerce in London, where we do a lot of policy work on behalf of the energy industry, particularly oil and gas upstream, which is our main area of interest. In this regard, we are actually helping create the national policies for the entire sector on issues such as taxation and other areas of relevance to the industry.

How would you rate the importance of oil and gas related business to the overall economy of Aberdeen today? How has this been evolving over the last few years?

There is no doubt that the companies in the oil and gas sector are of enormous importance to Aberdeen today, although there is a difficulty of classifying them exclusively in this sector as many of them tend to have some business in oil and gas while having a more general range of services for several industries. Understanding the pyramid of companies in the supply chain of the oil and gas sector is very complex, but there is no doubt that most businesses in Aberdeen have some element of their activity in that industry and that therefore it has a profound impact on the region’s economy. That said, Aberdeen has a diversified economy which has been developing for hundreds of years, previously as a major producer of paper and granite, for example, and still today an important region in terms of agriculture and fishing. Certainly, the oil and gas sector is predominant at the moment, but this is an economy which will survive the passing of the oil and gas industry once production declines to a point that won’t support an industry of the current size here.

The smart money is on diversifying the economy consciously rather than waiting for the predictable decline in production to take full effect. Some of this awareness was born out of a reaction to the eighties’ collapse of oil prices, which had a profound impact on Aberdeen and there were a number of lessons learned from that event. There is a conscious economic diversification strategy in place at the moment. The main idea is to jump the curve while we are at the top, like today with record-high oil prices, and not wait until the roller-coaster is going downhill. The technical and cost challenges in the North Sea are not insignificant, and the speed with which the decline manifests itself is of concern, and for the moment it is in large part thanks to the price that the decline is at manageable level. But if there was a sharp drop of the oil price, there would likely be a more immediate impact in Aberdeen than in other parts of the world, so it is clear to us that long-term diversification is fundamental.

With oil prices at record high levels and the resulting increase in demand for oil and gas services, many are talking about a new boom time for Aberdeen. Do you agree?

I prefer not to use the word ‘boom’ for what is happening, as that tends to beg the next thing which is a bust. The situation is quite different because the increase in activity has been

gradual; over the last few years the companies in the sector have seen a steady increase in work load and demand for resources and people. In addition, a boom usually is associated to a local event, but the current situation is driven by global demand for oil and energy, so companies are busy thanks to international and not only North Sea related business. There is no doubt that there is significant economic activity at the moment with a profound impact on the region’s economy, and we could even say that these are good times, but I would rather not refer to it as a boom.

Has this increase in economic activity translated in more companies setting up operations in Aberdeen, be it for the North Sea or for international operations?

One of the interesting things about the oil and gas industry in the UK is that it is not only based in the northeast of Scotland. There are many businesses in London and throughout the UK offering engineering,technology and professional services for the oil and gas industry. Aberdeen is central because it is the point of application, the converging point for the UK supply chain and without a doubt the place of greatest concentration. But the supply chain extends across the entire UK, and conversely companies are deploying their products, people and expertise around the world to buoyant areas such as West Africa. The industry itself is very vibrant at the moment, the main challenges being for the facilities, people and equipment to keep up with the demand.

How well prepared is Aberdeen’s infrastructure to support the renewed interest in operations in the area?

Regarding offshore infrastructure, a lot of the key infrastructures such as pipelines and jackets originally had a 20-25 year design life, since there was an anticipation that the business case for oil production in the North Sea would get weaker towards the end of the century. The reality has been quite the contrary, so we find ourselves with aging infrastructure which requires a great deal of maintenance. There are international standards for asset integrity, and with all the money at stake the big companies have a clear interest in ensuring that it is all holding together. A lot of technology has been developed in terms of maintaining and ensuring integrity. But even with life extension programs, the asset base is old and there has to be a balance between extending its life further and the natural decline in production. Cost escalation is a real problem in the North Sea, and that is in part exacerbated by the age of the infrastructure. Thanks to high commodity prices, the equation is balanced out for the moment but if they were to move the other way, the cost implications would be at the top of concerns.

In terms of onshore infrastructure, both the sea and air ports have responded very well to the oil and gas industry’s demands. There have been significant investments in both the Aberdeen and Peterhead harbours, and therefore the port infrastructure has been absolutely crucial to the industry even beyond the North Sea. For example, a large amount of traffic for West Africa is going through here and also for the Caspian through the canal system in Eastern Europe. The airport has also played a fundamental role, initially by bringing in the expertise necessary to exploit the North Sea as it came from abroad, and today to a large extent the industry’s flow is in the other direction. It also had the function of being the base of helicopter traffic, together with Shetland for more distant North Sea fields. Improvements can still be made on road infrastructure in and around the region, though

there are plans to address these shortcomings such as the major peripheral route around the city due to be ready in 2012. Journey times to central Scotland could also be more competitive, but since the industry is essentially maritime and air based, typically the ground surface transportation is not as critical.

How has Aberdeen’s oil and gas industry coped with the shortage of skilled labour which has been plaguing the entire sector for several years?

Aberdeen has generally been quite successful in this regard. The quality of life proposition in the area is very strong, and that is the anchor point of the region’s promotional strategy. If you look at the oil provinces around the world, few if any of them can offer such a good proposition as Aberdeen. We are top-notch in terms of education, healthcare, cultural offering, strong heritage, natural environment and relatively good climate considering how far north we are. This whole proposition has been important in attracting people to the city and surroundings. Additionally, the two universities have responded extremely well to the requirements of the industry, creating educational streams and doing research related to the sector, attracting students from all over the world. From the industry side, companies carry out a huge number of technical and commercial training themselves here, making Aberdeen an important training center for the global industry.

The city is aiming to attract not only the people but also the companies themselves to set up headquarters in Aberdeen. What’s missing in order to get the big names in the energy sector to enhance their presence in the region?

The oil companies operating in the area have presence in the city, but it is true that for the moment the big national oil companies (NOCs) do not have offices in Aberdeen, despite the fact that they are drawing on the local expertise and technology. This is a structural weakness which we are working to overcome, creating investment propositions that will attract global interest, and not just directly for North Sea operations. One of the main initiatives is called ENERGETICA, consisting of a proposal to develop a corridor running from the north of Aberdeen up towards Peterhead, focused on energy and energy efficiency businesses. It is aiming to take advantage of new ground-based infrastructure to create an investment area which will have a unique proposition to attract global investors. This means the energy companies in the broadest sense, not just oil and gas companies. In particular, there is a major opportunity to develop renewable energy here, crossing over the technology and expertise from the oil and gas industry. We are seeing the boundaries between offshore oil and gas merging with renewable energies, linked by technology and know-how.

How exactly is Aberdeen promoting itself internationally?

Initially, the Aberdeen City and Shire Economic Forum (ACSEF) focused on developing a ambitious strategic plan for the region. Three years ago as part of this pan we created a strong regional identity, in order to be able to send out a succinct message to the world. The second step has been to deploy the message in key arenas, such as trade shows in Houston but also intensively with all of the inbound visitors coming to Aberdeen to the numerous conventions we host. We are not doing as much global advertising as we could, but there is no doubt that the region has a strong message and story to tell, and is taking the opportunity to promote itself effectively wherever it can.

To what extent is the UK taxation regime an issue for companies making investment decisions in the area?

Regarding the fiscal regime for oil and gas activities, if you spoke to the government it would tell you how low the tax levels are, while the industry would complain how high they are. I think that there has been a reasonably strong disconnection between the government in terms of its view of the longevity and the industry’s ability to contribute economically and from a tax perspective. The typical 4-5 year government thinking cycle has often gotten in the way and prevented Politicians on all sides from looking beyond the next election, and this is an industry looking at 20-30 years cycles. Even with the decline in production, we are looking at an industry that will have a domestic production based on current finds for at least 20 years. There are relatively few industry sectors where you can be sure it will be around for several decades. This is an industry with significant opportunities towards the future, as an employer and as a place to develop a career. There are also significant opportunities related to decommissioning, as yet to be realised.

The difficulty with the taxation regime is that the government is probably looking at the next election, and its actions suggest it sees the industry as a cash cow, making fundamental changes to the fiscal structure that have had a considerable impact on both inward investment and continued investment by indigenous companies. In the last few months, politicians have gained a renewed interest in the industry, particularly as there have been problems on the downstream side and the pump price of fuel has brought the government to a new realization of how important the industry is for the public opinion. That may have a new bearing on the taxation regime. In addition, if the government changes in the next election, we might be seeing a completely new set of policies. The problem with all this is that oil and gas companies are in a global industry, and they will invest where they will get the highest return on investment. There needs to be a better conversation between industry and government in this regard, and this is the type of engagement the AGCC is promoting at the moment along with the major trade associations.

Which Aberdeen-based companies in the oil and gas sector would you highlight as success stories on an international scope?

The Wood Group is certainly the one of the most successful in terms of scale, and Craig Group is another major player today on the international scene. PSN is another success and an interesting case to study, as it used to be a part of Halliburton but became independent through a big management buyout. The sale of assets in the North Sea has also brought a new wave of lower-cost operating companies, such as Venture Production. There are probably a hundred such cases of indigenous success stories in Aberdeen, throughout the value chain of the oil and gas industry and diverse service providers.

What is your final message to the readers of Oil & Gas Financial Journal on the AGCC and Aberdeen’s O&G industry?

Aberdeen and Grampian Chamber of Commerce (AGCC) is justifiably proud of its reputation as a centre of Oil and Gas sector Competency. With over 40 years experience as an oil and gas city Aberdeen has earned its title as the energy capital of Europe. Both Scottish and UK Parliaments as well as Scottish and British Chambers of Commerce have in the past sought the advice and expertise of AGCC and we intend to continue to build on this reputation.

AGCC will remain focussed on assisting their members win new business in both the domestic and international oil and gas markets by offering a comprehensive programme of networking and information events run throughout the year as well as inward and outward trade missions to key overseas markets.

With the UKCS province now being classed as being in the mature phase of its lifecycle it is vital that UK companies with proven expertise and products are encouraged to enter rapidly expanding international markets such as West Africa to protect their revenue streams. Our unique UK West Africa Action Group (UK WAAG) formed in 1997 will continue to supply the necessary information and ‘in country’ support services our members require in order to penetrate these challenging markets.

AGCC will vigorously lobby the UK Government and Treasury on fiscal and taxation policies to ensure that a favourable investment climate is created to maintain the financial attractiveness of the UKCS to inward investors, our member companies and premium partners. Given the substantial contribution our indigenous oil and gas taxation revenues makes to the UK Treasury and the economic well being of the region and the country as a whole AGCC will continue to support the maintenance of a strong and varied domestic business infrastructure.

Aberdeen and Grampian Chamber of Commerce remains as committed as ever to ensuring That we articulate and communicate the views of the business community in matters relating to the oil and gas industry and on wider energy issues.

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