Well that’s that - it’s over – and I mean it’s really over.

I’ve been living in hope in recent months that we might finally be getting our act together on two important issues.  The first being the stewardship of the oil and gas industry and the second the development of an indigenous renewables technology manufacturing industry.

Following the Scottish independence referendum the former will now remain in the hands of the UK Government who say they will follow the recommendations of the Wood Review including the establishment of the new regulator and revising the fiscal regime.   This will be worth watching because the proposed new style regulator will still be subject to the uncertainties and unpredictability of a Treasury that has a huge and growing public sector debt level to deal with!

However, I don’t want to dwell on the regulatory issue until the new setup has been properly established, the new regulator himself or herself appointed and the promised new fiscal regime agreed. Then and only then will it be possible to judge whether it’s going to work.

That said, I remain seriously concerned about one aspect of the propaganda used to persuade Scotland to vote against independence. During the run up to the referendum Ian Wood asserted very strongly that by 2050 production will have fallen to around 250,000 bbl/day which will of course considerably lower the tax take. 

Of course, he was assuming that between now and 2050 few if any new fields will be discovered or new technologies developed to get more out of existing fields.  In short, he’s saying the strategy he proposed in his own review will fail and that the figure the industry suggested and he accepted, of a potential 24 billion bbl is unreachable or was guff all along. Strong stuff.

However, putting aside for one moment the validity or otherwise of his argument what struck me is that if Wood is right then where’s his Plan B?  Thinking locally, there are around 900 to 1,000 companies and circa 100,000 people reliant on the oil and gas industry in Aberdeen and Aberdeenshire and on the basis of his forecast we could see most of those gradually disappearing over the next 35 years. In fact, Wood said “… the rundown impact will begin to be felt by 2030, which is only 15 years from now"

So the suggestion is that the Aberdeen economy will all but collapse as people’s jobs go and they inevitably move away.  Not all will go of course.  Some will have retired here and some will stay as part of a much smaller supply chain which is still operating internationally.

However, without wishing to be too brutal there is a very good chance that under Wood’s scenario Aberdeen’s economy will shrink dramatically although it may not quite reach the level it was at before the oil industry took off in the early 70s and anyway a lot of what we did then has already gone including shipbuilding and paper production

Of course this wasn’t inevitable. In its June 2014 paper on reindustrialisation the Scottish Government said “Manufacturing is also vital to capturing the opportunities from the transition to a low carbon economy. Traditional manufacturing and engineering skills - such as in the offshore industry or shipbuilding - are transferable to areas such as the manufacture of renewables technology or oil decommissioning.”

In short, it understood the potential of creating an indigenous renewables technology manufacturing industry and to help make this happen was proposing to set up a Scottish Innovation Agency and critically, a Scottish Business Development Bank.

But that’s no longer on the table and without a strategy like this Scotland let alone Aberdeen has little chance of doing anything other than providing the opportunity for others to take advantage of those natural resources which were made so much of during the referendum campaign.  Don’t treat that statement as scaremongering. It’s already a fact. 

There is no indigenous wind turbine manufacturer, we will soon be getting overseas built tidal turbines in the Pentland Firth and most Scottish and UK companies involved in renewables are dependent on foreign investment with many now even majority owned by overseas companies.

However, Wood’s answer to what he sees as Aberdeen’s looming economic problem was to use the recent annual Northern Star Business Awards as a platform to strongly criticise Aberdeen City Council over the “golden opportunity” missed when plans to transform Union Terrace Gardens were rejected.

He claimed that Aberdeen Council showed “virtually no sign” of recognising the economic challenges facing them – and claimed it was “unbelievable” the ambitious project was scrapped.

Now I can certainly support the former but with the best will in the world I still do not understand how on earth spending £140m or so on revamping Union Terrace Gardens would have any impact at all on Aberdeen’s economy and I never have.

Personally, if I had a spare £50m burning a hole in my pocket as Ian Wood seems to have I’d be investing some of it in a couple of university spin-outs I’m aware of and I’d start developing some ideas around high value added clean tech manufacturing. 

I remember clearly Ian Wood saying a couple of years ago that Aberdeen could become the Houston of the East. As I pointed out at the time this was going to be difficult because Houston’s economy is considerably broader based than Aberdeen’s. It didn’t have any of the electronics, pharmaceutical and the other none oil and gas industries that Houston had when Wood made this claim and of course it still doesn’t.

The choice is simple and here finally Wood and I are in broad agreement. We either start putting some real effort into developing a strategy for a post oil Aberdeen or the next generation faces a genuinely grim future. Wood is right that we can’t expect any help from Westminster although I believe we could have from Holyrood if the referendum had gone the other way. 

But there are things we could do and we could start with supporting AREG (Aberdeen Renewable Energy Group) which Wood to my knowledge never has and we could revamp ACSEF which is just another glorified property development programme.  We could also start applying some pressure to all those financial sector outfits that did so well out of oil and gas to make some sensible funds available to entice new industries to Aberdeen to partly replace the Scottish Business Development Bank proposed under independence. Maybe Ian Wood would like to chuck his £50m into that pot if it ever transpired! 

©DickWinchester - first published in the Press & Journal Energy Voice and on line - Oct 2014

The Answer to that Question has to be…..

For 35 of the past 40 years I’ve been in the energy industry I’ve lived in Scotland and have watched Aberdeen and the North East grow and prosper on the back of oil and gas.

In a few weeks though we’re going to be asked to vote on whether or not we want Scotland to remain part of the UK or become an independent country and just like everyone else I’ve had to weigh up in which box I’m going to place my cross. Inevitably, a major contributing factor to which way I vote is how I think the UK Government has managed the opportunity of both oil and gas and renewables so far and how I think a future Scottish Government might manage them if it inherits that responsibility.

During the early 80s I ran the UK ROV and survey group of one of Norway’s then largest subsea contractors.  It’s still around but it’s long become part of one of the other large Norwegian subsea contractors and is perhaps ten times or more the size it was then.

Out to dinner during one of my frequent visits to Norway for meetings (no email & no Skype then) my Norwegian boss turned to me and said “What the heck is the matter with the British Government and your banks – why aren’t you Brits even trying to compete with us Norwegians?

It’s a question that I remember with particular clarity because it alerted me to a problem I hadn’t really considered before.

As Norman Smith – former head of the Offshore Supplies Office and author of “The Sea of Lost Opportunity” - puts it, “in terms of the global market place Britain probably occupies fourth place behind the USA, France and Norway, all of which exhibit a lower proportion of foreign-owned companies and a higher proportion of proprietary technology than the UK.”  This is backed up by Brian Ashcroft of Strathclyde University who determined recently that some 80% of all post-tax profits are remitted abroad.  I find that just utterly astonishing.

But it’s perhaps inevitable because since the early 80s UK Government policy has been based on so called neoliberal economics which includes a laissez faire attitude to company ownership.  Amongst all our major competitors including the USA, this attitude is quite unique.

The result has been that as overseas companies have flooded in then the UK Government – irrespective of the party in power - and the financial sector have been able to avoid having to invest in indigenous companies and technologies because others were already fulfilling the market demand.

This in turn has resulted in the level of public sector energy R&D funding being pathetically low. In fact the UK is now ranked 19^th out of a list of 24 other countries in terms of the percentage of GDP it spends on energy R&D.     

I consider this a major failure on the part of the UK Government compounded by the fact that the Treasury in its effort to suck in as much tax revenue as possible, raised then partially reduced tax levels so managing to achieve the double by introducing both fiscal instability and unpredictability which without a shadow of a doubt is still impacting on operator confidence.  The Scottish Government does however recognise that problem and is looking at mechanisms to guarantee fiscal stability in an independent Scotland.

Of course, there is also the question as to what the benefit of oil tax revenue has actually brought to the country.  It certainly didn’t go into an oil fund as it did in Norway nor was it invested in new industry. Instead, it just got added into the general tax pot.  What an appalling waste.

Considering the longer term future of the energy industry is also important. After all, in many ways this independence referendum and its outcome is more to do with how it will impact on our children, grandchildren and all future generations than it is about us.

Discussing the inevitable eventual run down in oil and gas production, in a recent interview about independence Ian Wood said “It means our young voters must be fully aware that by the time they are middle aged, Scotland will have little offshore oil and gas production and this will seriously hit our economy, jobs, and public services”.  

I disagree strongly with his timescales but if he was so concerned about the future why didn’t Wood ask why it is that Denmark – a country the same size as Scotland - Germany, the USA and elsewhere have already realised this problem and have – for example – developed wind turbine manufacturing companies. Why also are the big tidal technology manufacturers German, Australian and of course American and why did a small Scottish company developing a relatively low output tidal turbine have to turn to a Belgian company for support?  That one really surprised even me! 

And as for solar PV, biofuels and most other renewables technology Scotland and the UK are already well behind the competition. We also know that as far as new nuclear power capacity is concerned the UK is now reliant on French, Japanese or Chinese technology.  Given the UK was once a leader in this technology this is exceptionally disappointing but it’s not surprising given what I said earlier about UK Government’s R&D spend on energy technology. 

  

This really is a disgraceful state of affairs but Wood didn’t even mention it. Perhaps that’s because it reflects badly on the Union!

In contrast though, the Scottish Government’s strategy for an independent Scotland includes reindustrialisation which in part will be based on developing a renewables sector. They at least understand the industrial and commercial potential of renewables whereas Westminster seems ideologically blinded to the opportunity.

So for me the decision becomes easy.  I’ll vote in favour of independence because the evidence is that Westminster desperately wants the tax revenue but is even less prepared to plough any of it back into renewables technology than it was in oil and gas.

Such strategic short sightedness in a competitive global market plan is naive and Scotland can no longer afford it.

(First published in the Aberdeen Press & Journal Energy supplement & on the Energy Voice website Sept 1^st 2014)

More Political Shenanigans from Westminster

I was disappointed but not actually particularly surprised that the now former Minister of State for Energy Michael Fallon decided to ridicule the nine months or so of effort that I and my fellow Commissioners put into the production of the report of the Expert Commission on Oil and Gas by calling it “copy-cat stuff”.  

It was a childish, naïve and foolish remark which tells me he either hadn’t read the report thoroughly enough or hadn’t read it all because if he had he would have discovered that it was actually a far broader and considerably more detailed report than that produced by Ian Wood.  

That’s not in any sense a criticism of Ian Wood because whilst we had a pretty open remit Wood was instructed – for example – to exclude fiscal issues.  Despite being one of the most important issues affecting the oil and gas industry and in dire need of attention it was presumably deemed by the UK Government to be a matter that was entirely the domain of the glorious Treasury and mere mortals shouldn’t tinker with it.   That probably also tells us a lot about the how serious the Treasury are about the whole business of consultation.

Fallon’s response also means that I’m now obliged to counter with some observations of my own about Westminster policy.  Not that this will be a hardship you understand. Indeed, I’m grateful for the opportunity.

Fact is that the Treasury’s review on taxation is only just starting whereas by virtue of the Expert Commission’s report then the Scottish Government review is already completed.   The Commission consulted a wide swathe of companies across the industry and gathered a mass of evidence and expert opinion before reaching their conclusions and making their recommendations.   

I’d also like to remind Mr Fallon that the Scottish Government – after an extensive consultation with industry which included over one hundred company visits - developed their oil and gas strategy in the Spring of 2012.  Following that of course the UK Government also thought it might be a good idea to have a strategy.

Whilst the Scottish Government’s prime objective has always been to maximise recovery Westminster also decided this was a good idea.  Holyrood established its Oil and Gas Leadership Group to provide advice on this and other topics and bingo, Westminster set up the Oil and Gas Council.

But whilst both Holyrood and Westminster have been actively promoting fiscal and regulatory stability and predictability the fact is that the Treasury introduced an unannounced tax increase in 2011, since when it has engaged in appeasement via a hotch-potch of field development allowances, and is still prevaricating over the changes to the so called bareboat charter allowances.  As we know, the impact of these two changes on industry confidence is still very evident.

But Fallon has gone now.  He’s been replaced by a chap called Matthew Hancock who is disgracefully, the fourth Energy Minister in less than two years.   Hancock is a versatile chap.  Not only is he Minister of State at the Department of Energy and Climate Change but he’s also a Minister of State at the Department for Business, Innovation and Skills and Minister of State for Portsmouth!

I wonder if he does all this from one office or spends his time dashing across London and on the train to Portsmouth?  All seems a bit strange to me given the importance of energy strategy to the nation. I still believe there needs to be a dedicated energy minister.

But at least Hancock is an interesting character. In fact in a magazine article a couple of years ago he likened himself to wartime leader Sir Winston Churchill and William Pitt who became the youngest Prime Minister in the late 18th century aged 24. 

Asked for his view of the criticism that the Conservative party is “full of career politicians who have little experience outside politics and are too young,” Mr Hancock replied: “Well, I remind people that Winston Churchill is widely regarded as one of the finest statesmen our country has ever seen” and “likewise William Pitt became prime minister in his twenties, and both of these men achieved great heights over their careers.” Hancock added “I have a huge affinity for Disraeli, not least because I come from a provincial background and I went to the local village school and have arrived latterly in Westminster.”    Hmm. Hancock’s not lacking in confidence then.

He also seems to be an energy market expert as he was reported saying last year that shale gas tax breaks would mean “lower gas prices for everyone”.  Bless his cotton socks.

However, if as I do you use Twitter you’ll have noted that since his appointment he hasn’t “tweeted” once about energy or the oil and gas sector.  In fact he seems to be preoccupied with EU reform of Red Tape, planning a visit to Portsmouth, praising the fall in unemployment numbers, meeting the Indian cricket team and promoting government policy on small businesses.  Not a peep or a Tweet about energy which is something I find really concerning.  Perhaps this job sharing lark really isn’t a good idea or Hancock just hasn’t mastered the multi-tasking thing yet. Maybe that tells us his job should have gone to a woman.  Come to think of it has there ever been a female energy minister?

There is another reason for the oil and gas industry to be concerned because having put considerable effort into house training and educating the Financial Secretary to the Treasury responsible for oil and gas Nicky Morgan MP, she’s now been promoted to become Education Secretary.

So, we now have the fifth Treasury person in less than three years. It’s Priti Patel MP who is actually Exchequer Secretary to the Treasury. So the role has moved and to be honest I’m not sure if this is a downgrade or just a sideways move.

Regardless, Priti Patel is the MP who suggested the Scottish independence debate provided a “good opportunity” to slash spending in Scotland and wants to scrap any plans to bring in plain cigarette packaging.

So good luck with her folks. She seems like a real bundle of laughs. 

(first published in the Aberdeen Press & Journal "Energy" supplement and on www.energyvoice.com on Aug 4th 2014)

The state of UK Energy Research funding

Every now and then we all come across someone whose opinions are difficult to counter and who is so blindingly obviously correct you feel obligated to ensure they’re heard loud and clear so that others can benefit from their thinking as well.

In this instance I’m referring to the exceptionally talented economist Professor Mariana Mazzucato of Sussex University. If you’ve never heard of her then I strongly recommend that if you have any interest at all in innovation then you familiarise yourself with the work she’s been doing on the connections between state support for 

research and the economic benefits that can bring in terms of growth, employment and so on and so forth.   

Mind you, if you’re in the energy sector and you’re not interested in innovation then you’re probably in the wrong job! In her book “The Entrepreneurial State” which I’m hoping I’ll be getting a copy of for Christmas, she explains very lucidly that one of most iconic pieces of modern gadgetry – the iPhone – would not have been developed if it hadn’t been for US Government funding for technologies including the touch screen, the internet itself of course, GPS, micro-processors, speech recognition and others.

She also explains that the smart thing that Apple really did was to recognise the potential of all these technologies and cleverly assembled them in a package which under the iPhone brand has become a global success.   Others have of course done pretty much the same thing since just as successfully as Apple but that doesn’t change the fact that most of the core technologies were developed in US laboratories with US taxpayer’s money.

 

Of course the US Governments role in the development of new technologies goes back a long way.  Their space programme including the historic moon missions resulted in a whole range of new technologies including the ubiquitous Teflon coating used on non-stick cooking pots.

In the energy world the US Government has also been funding new technologies both via their own research laboratories and through collaboration with private sector companies. For example, the US Government through its armed forces is having a positive impact on the development of technologies such as biofuels by funding both its development and its trials.  Biofuels isn’t of course the only area in which the US Government is involved.

Now, what I find interesting about the US approach is that their government believes it should have a major role in technology development and that it considers it as a form of long term investment.  There is then a semi symbiotic relationship between the US Government and its industry which seems to work well and to their mutual benefit. 

It’s not however a perfect relationship in that as Professor Mazzucato points outs “We have socialised the risk of innovation but privatised the rewards”   In other words, companies such as Apple which have benefitted so much from publically funded research haven’t provided a financial return to government.  In fact I would add that in Apple’s case and indeed other companies as well they actually provided a kick in the particulars for their Government by manufacturing so much of their product range overseas in communist China and consequently paying far less tax than perhaps they should have.  

So why am I so interested in all this?  Well apart from the fact that the policies at play here are extremely interesting and I’m (sadly) fascinated by that stuff, it just so happens that Research Councils UK have just published their “Energy Research and Training Prospectus” which is somewhat optimistically entitled “Investing in a brighter energy future”.  So, I read that with a view to trying to understand to what extent it might satisfy Professor Mazzucato’s criteria for the state being the source of a range of new technologies with real commercial potential around which might lead to a UK energy technology revival or – as our glorious Chancellor promised – the rebalancing of the economy.

Bearing in mind that the Prospectus includes the contributions from not just the Research Councils themselves but all other public sector sources including the Technology Strategy Board, the Energy Technologies Institute, and the Carbon Trust and DECC then I was really quite astonished at how small the overall UK budget actually is. 

In fact the estimated budget for 2012 was just £288m which represents 0.025% of GDP which according to the Prospectus authors means the UK has fallen back to 19th position in the IEA rankings and 14^th within Europe in terms of energy RD&D spend per unit of GDP. This puts the UK just behind Italy and ahead of Belgium.  Norway – a small, independent oil rich nation on the other side of the N Sea is 6^th.

The Prospectus also reports that in its 2012 review of the UK, the IEA noted that “the levels of spending do not seem to match the UK’s ambitious climate policy objectives and its world-renowned academic institutions and capability” and recommended that “the UK acknowledge and publicly fund at world-class levels a focused energy RD&D programme to catalyse a broader United Kingdom innovation agenda that reflects the country’s industrial and intellectual comparative   advantage”.   

Some hopes I think because the Prospectus also calculates that the UK would need to increase its current public sector energy Research, Development and Demonstration spend by 70% to bring itself back to the median level of IEA countries, and by 200% to get itself onto the top rank.   They also suggest that “further increases would be necessary if global energy Research, Development and Demonstration budgets were to be aligned with the 2˚C climate change objective and, implicitly, UK climate policy.”

So what do we learn from this?  Well it’s now blindingly obvious that most of what comes out of Westminster in terms of rhetoric on how important carbon reduction, renewables technology and so on and so forth really are is just that – rhetoric not backed up with the wherewithal to make anything worthwhile happen.

It’s also now obvious that promises to rebalance the economy and in particular to build on the new industries of which energy is probably the most important were just hogwash.

Professor Mazzucato understands the clear link between state funded research and economic growth whereas Westminster very obviously either doesn’t or is still ideologically and idiotically opposed to the state doing anything much. 

This attitude is hugely damaging to our industrial potential and harms our academic standing.  It must change. 

(First published in the Press & Journal "Energy" supplement Dec 3013)