Westminster parties rerunning of the referendum makes them look fools!

I suppose given that I’ve written previously about so many similar instances I really shouldn’t have been surprised when I read that an organisation called “Social Investment Scotland” was doing a deal to help fund a developer of low carbon projects install an Australian developed micro combined heat and power unit (MCHP) on initially seventy but potentially up to three hundred and fifty properties across Scotland with a view to helping residents reduce their fuel bills. 

The company producing the MCHP is Ceramic Fuel Cells Ltd and according to their website they were spun out of the Australian Government's Commonwealth Scientific & Industrial Research Organisation (CSIRO), their corporate head office and research and development facilities are in Melbourne and they have a fuel cell assembly plant in Heinsberg, Germany and a ceramic powder plant in Bromborough in the UK. 

So perhaps not surprised but just downright gobsmacked that once again we have let an international competitor steal a march on us in an important area of technology.   It’s perhaps even more frustrating because I know that at least two of our universities have specific recognised expertise in fuel cell technology. In fact a few years ago one tried to commercialise a ceramic fuel cell but as is often the case in Scotland, couldn’t get together the funding.

So why raise this now?  Well it’s simple.  I’m truly fed up to the proverbial back teeth with Westminster unionist political parties ranting about how badly the economy of an independent Scotland would have been affected by the rapid and unpredicted fall in the oil price and wasn’t it a wonderful thing that the sensible Scots voted against independence.

Now if the unionist army of doom merchants had told us before the independence referendum that the oil price was going to collapse I’d be a bit more generous but on the steam radio recently even Ian Wood – in no sense someone I consider an independence supporter – said  "Frankly, no one foresaw the oil price coming down from $100". 

Now given Wood is Westminster’s favourite oil and gas guru then we should believe him and so should all those miserable, childish and generally incompetent unionist politicians who would prefer to re-run the independence referendum than beat George Osborne round the head to make him get on and sort out a new and sensible oil and gas fiscal setup now instead of waiting for budget day in March.    The industry knows what’s needed. So why the heck doesn’t Osborne do as he’s told instead of insisting on yet another consultation.  More delay, more of Danny Alexander pretending he knows what he’s talking about.   I really can’t take these people seriously anymore and I’m afraid the opposition isn’t any better. 

Demanding a “£10m resilience fund” to help struggling companies is a joke.  £10m in an industry the size and value of oil and gas is a drop in the ocean.  If they wanted to do something serious how about proposing the Bank of England set up a Quantitative Easing fund directed specifically at say, increasing exploration or stepping in to pick up industry funding when the lousy banks start pulling the plug on the loans they’ve made to both operators and supply side companies.   Not specifically my idea by the way but one that bears consideration.

Anyway, I was talking about fuel cells which are just of course one sort of technology Scotland should be active in but there are plenty of others. 

As an example, Scottish Renewables told me recently that there are 196 operational wind farm projects in Scotland with 2,590 turbines making a total installed capacity of 4,966MW.  At a cost of roughly £1.5m per MW installed then a quick back of the beermat calculation suggests implementing a policy to build windfarms has increased Scotland’s trade deficit by around £7.5bn!

I don’t know how large the overseas market is for companies such as the Danish wind turbine builder Vestas but a good guide is that with 13% of the market they turn over around 5bn Euros and employ some 17,000 people.   Would have been nice to have had a Vestas based in Aberdeen to add value to our economy and provide an alternative source of high value adding jobs.

Other parts of the renewables sector aren’t fairing much better whereas one might have thought that by now it would be humming. It’s not as if we don’t have the intellect or the engineering and scientific capability because we know we do and that should have been used to build up the Scottish economy to the point where oil and gas was just something else in our economic armoury.

But the sad fact is that even since I came into the oil and gas industry in 1974 Scotland has lost its aircraft building sector, most of its civil shipbuilding and a large chunk of its military shipbuilding capacity, its car manufacturing and other elements of what once formed a formidable industrial sector including of course steel production. 

This is hugely difficult to replace and whilst there were attempts to develop new sectors such as electronics this has largely only resulted in the establishment of small or medium size companies working in specific niche areas.  For example, Scotland has a company that builds micro satellites. 

It’s dynamic, innovative and technically highly advanced but it only employs around 30 or 40 people. I’m not belittling it because I think it’s a great company but its size illustrates the scale of the problem in building up a higher value more broadly based industrial economy.

Now I hate to mention this but this decline all actually took place under Westminster’s watch.  So if those unionists are right and Scotland couldn’t withstand the collapse in the oil price then it’s obviously their fault. 

They allowed and in some cases deliberately invoked policies that resulted in Scottish industrial and economic decline.  Even in the oil and gas sector they pretend they’re so passionate about then according to Strathclyde University we ended up with a situation where poor levels of investment and an utterly lunatic attitude to foreign ownership has resulted in 80% of all post-tax profits being remitted overseas.

Frankly, Westminster by rerunning the referendum arguments on oil price is shooting itself in the foot: no, both feet.  Maybe they should just keep quiet and get on with the business of restoring confidence in the future of the oil and gas industry if indeed that’s what they really want which I have to say I sometime doubt.

©Dick Winchester Jan 2015  

(First published in the Press & Journal Energy Supplement Jan 2015)

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)

UK Govt’s latest apology for an Energy Policy

Energy – Jan 2013

I was once told that if Moses had been a LibDem he’d have come down from Mt Sinai with ten “really jolly good suggestions”. 

It’s the same with Ed Davey’s attempt at an Energy Policy. It’s full of proposals for processes that , worryingly, sound as if they’ve been dreamt up by a bunch of City types.

What appears to be top of Ed’s priority list is Electricity Market Reform.   This he says “puts in place measures to attract the £110billion of investment which is needed to replace current generating capacity and upgrade the grid by 2020, and to cope with a rising demand for electricity”.

Sounds simple enough doesn’t it. We all know that we need to replace ageing conventional and nuclear stations, increase renewable energy and all that obvious stuff and so I was looking for a plan to do that.

Sadly though, having written the scene setting bit of his policy Ed must have then sent it to the Treasury. That worries me because I read recently that a lot of new Treasury advisors are former investment bankers. Just saying; nothing inferred. Honest! 

Anyway, the policy then starts talking about things like “Contracts for Difference” or CFDs which I always thought stood for Computational Fluid Dynamics which, come to think of it, is a considerably more interesting subject.

It turns out though that Ed’s CFD’s are complex financial contracts designed to provide stable revenues for investors in low-carbon projects so guaranteeing they get their money back and make a few quid on top.

They effectively take the risk out of the investment which logic would suggest should mean that the rate of return will be quite low although I would bet it doesn’t turn out that!

CFDs are supposed to work by being set at a fixed level called a “strike price”, although I haven’t quite worked out yet who determines that it would be the subject of negotiation.

In addition, from what I understand the “strike price” won’t actually be set until sometime in 2013 so passing judgement on whether CFDs are a sustainable way of dealing with this won’t really be possible until then and of course – critically – it will also determine how attractive the UK market will be for renewables investment.

In addition we have the setting up of a new company (Government owned I think) to act as a single counterparty to the CFDs with eligible generators and if you want to learn more about this go and find the CFD Heads of Terms document on the DECC website yourself.

However, let me warn you it consists of 74 pages of gobbledy-gook that you will only understand if you’re a lawyer, civil servant or a policy wonk.  I gave up at about page ten and I was still only on “definitions”.    

Now inevitably, where there are mechanisms like this there are costs.  Managing this pile of bureaucratic nonsense will cost a fortune.

It will employ lots of people that we – the poor darn consumers – will be paying for.

Doubtless also there will soon be a market in CFDs much as there is or was in carbon credits and so people will be making money trading these backwards and forwards and the cost of doing that will somehow find its way back into our bills.  That’s the modern way.

Fancy financial instruments worry me. Remember the sub-prime mortgages scandal and instruments so complex that bankers didn’t understand them?

The German company RWE npower, which scrapped its plans to build a new nuclear plant in the UK last year, was reported as saying:  “The proposals for the contract for difference have become increasingly complex and far removed from what we, the wider industry and the investor community, expected which was a commercial contract, backed by government. “  I think that was an understatement.

Anyway, what I was really looking for in this “policy” was some form of energy related industrial strategy. However, I knew that being the UK Government this was probably too much to ask for and I wasn’t disappointed. Well I was disappointed but you know what I mean.

We should remember that the total cost of the Government’s proposals amounts to around £7.6billion. Well, that’s a current estimate which will doubtless go up.  It will pay for new nuclear and presumably gas power plants, wind farms and so on and so forth.

Consumers are currently paying about £20 a head a year towards all that but by 2020 the Government say that will rise to about £110.

Others though think it will be considerably higher than that and I have to say I tend to agree. 

But the point of course is that a large part of that £7.6billion will be added to the UK trade deficit because we don’t build reactors, wind turbines and much of the other hardware needed.

The only exception perhaps being gas turbine generators which is probably just as well because some estimate the UK could be as much as 80% dependent on gas by 2020.

So it’s disappointing but not surprising given Westminster’s track record that there is not even the sniff of a suggestion in the energy policy that the Government intends to put any real effort into growing an indigenous energy industry manufacturing base capable of taking on the challenge this Government policy presents. 

Ah yes, gas.  According to some reports Ed wants full fat decarbonisation by 2030 whereas George Osborne is insistent that gas will have to be part of the energy mix past 2030.  Now this leads me straight to the shale/unconventional gas issue which I shall be commenting on in part next month.

A Very Happy and Prosperous New Year to you all.

North Sea viability dependent on New Technology – again..

At the recent ITF technology showcase in Aberdeen BP’s North Sea regional president, Trevor Garlick was reported as saying “If new technology is not developed fast enough the life of the North Sea oil and gas industry could be shortened”.

Without being cynical I know many will have heard this before so let me give Garlick a history lesson and some advice.

Between the early 80s and middle 90s the Marine Technology Directorate (MTD) used to invest £10-12million every year in R&D programmes involving the universities, operators, contractors and particularly SMEs.

Around £5m of that came from the Engineering and Physical Sciences Research Council and the remainder from industry. MTD was the only private sector organisation managing Research Council funds.

Then, shortly after the Blair-led Labour Government was elected in 1997 EPSRC advised MTD that it intended to pull that funding back in house. Despite MTD’s success this was a political decision as it was to protect jobs within EPSRC, which was undergoing a “reorganisation”.

MTD’s membership included most of main oil/gas operators and it was hoped they could be persuaded to lobby the Government to reverse the EPSRC decision and reinstate MTD’s funding.

Instead though the operators – or a few of them – thought it would be a much better idea to merge MTD with the Petroleum Science and Technology Institute (PSTI) of Aberdeen and Edinburgh to form a new organisation called the Centre for Marine and Petroleum Technology (CMPT).

PSTI was also a membership based research enabler but its work was mainly aimed at sub-surface issues.  It was just as successful and invested roughly the same amount as MTD.

The aim with CMPT was to have a properly financed organisation that would act as a broker/agitator/catalyst working with operators, contractors large and small, the DTI (now DECC) and the universities to develop appropriate research projects some of which CMPT would manage. 

Unfortunately, CMPT’s interim management team (drawn from the DTI, operators, universities and so-forth. did not take into account the actual costs of the start-up (severances, legal fees, headhunter fees, etc).

In addition, they did not properly take into account the inherited costs of on-going projects. Consequently CMPT started life with an £800,000 collar around its neck.

The interim management team also agreed – under pressure from some but not all operator members – to reduce the subscription to CMPT from the joint £75,000 that its predecessors MTD and PSTI received to £30,000.

The interim board then further bemused many in the industry by appointing a CEO from a military background who had absolutely no experience of the oil and gas industry, no experience in running what was a small company and no direct experience of technology development.  He was a really nice bloke though.

Despite this CMPT was able to get some useful projects going including a number of so-called Pathfinder projects which were low cost, short term feasibility type programmes quite a few of which later evolved into much larger projects and eventually commercialised. 

Regrettably though, this all coincided with the collapse in the oil price to $10 per barrel during the late 1997 through early 1999 slump and the resultant, crisis-driven setting up of the Oil and Gas Taskforce the role of which was – in part – to develop better ways of ensuring a flow of new technology into the North Sea. 

Of course the oil price was actually only at $10 a few days and in fact recovered fairly rapidly from March 1999 to comfortably pass $21 before the end of that year. The barrel has of course been on the up pretty much ever since,

Sadly for me, 25 of my then colleagues (yes, I was a director at CMPT), the R&D programmes we were running and the network of university technology centres CMPT was involved with, one of the outputs of the Oil and Gas Taskforce was that our organisation should be killed off and replaced with the Industry Technology Facilitator (ITF). It was a triumph of process over progress.

Trevor Garlick may like to know that the BP manager involved in that decision said to me at the time that BP didn’t actually need ITF or any other third party-type R&D organisation and that if BP wanted to do some R&D the company would just do it anyway.

This arrogant and patronising statement told me that the whole deal of setting up ITF was essentially politically expedient.

The proof of the pudding is of course that since its inception ITF has only secured project funding of around £50million.

That’s £50million over 12 years, or an average of less than £5million per annum.

That’s a third or a quarter of what MTD and PSTI were investing before the “suits” came along and probably less than the cost of maintaining BP’s board.  To say the least it’s shameful.

ITF’s chairman, Melfort Campbell, also said that, despite the oil and gas industry being the largest industrial investor in the UK for 25 years, less than 0.5% of government spending on research and development had been in the sector.

Energy readers knew this of course because we’ve talked about the UK’s lousy record on energy technology R&D often.

But we also know that in Brazil firms are ordered to spend 1% of their revenue on R&D. Even in Newfoundland there’s a diktat.

But here in the dear old UK where so many of our assets are foreign-owned to boot, there is no such requirement. Why? Because Whitehall puts ideology ahead of national and economic logic and ignores what our competition does.

So Trevor, if you’re really serious about the technology issues you’ve raised then the answer is in your hands and the hands of the other operators.

Stop repeating the old and well worn “we need new technology” mantra, start doing some real innovating and above all get your corporate wallet out and be prepared to fund it properly.

Then you might actually see some results and get what we all want. A longer-lived North Sea industry.