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)

Is carbon capture and storage in the last chance saloon?

In a move that really did take the industry by surprise the new Norwegian government has announced that it is shutting down its full-scale carbon capture project at Mongstad.

From a Norwegian industry standpoint this is a major setback but the government has said it will continue to fund the research centre at Mongstad to enable it to test various carbon capture concepts and will commit 400million Kroner over four years – roughly £10m per year.

Needless to say, despite the cancellation of the main project this is still considerably more than the UK is currently spending.

According to the Carbon Capture Journal a number of big names have expressed interest in using the Mongstad amine plant to test their own technologies and the list of companies lining up includes Aker Solutions, Hitachi, Mitsubishi and Siemens.

Recently ousted Norwegian PM, Jens Stoltenberg, whose Labour Party lost the recent election, said in 2007 that Norway wanted to lead the world in carbon capture but a report by Norway’s Auditor General this week criticised the Norwegian state’s total spending of 7.4billion crowns on carbon capture and storage projects from 2007-12 and suggested that the costs had risen substantially.

That’s actually not that far off the £1billion or so that the partners in the Peterhead CCS project are hoping to win from the UK Government.

Stoltenberg had also claimed that implementing the Mongstad project would be Norway’s equivalent of performing a “Moon landing”.

Perhaps inevitably then, Frederic Hauge, of the Norwegian environmental group Bellona, said of the decision to drop the carbon capture plan: “This is one of the ugliest political crash landings we have ever seen.”

Well it made me smile!

So, putting all the politics aside, the question is, of course, what does it actually mean for other CCS projects if Norway has concluded the technology is too expensive?

After all, Norway has a powerful reputation when it comes to developing and commercialising energy technologies.

So perhaps we should sit up and listen to what they’ve said particularly given that, as I’ve said before, the impact on electricity prices of implementing CCS on coal or gas-fired power stations could be prohibitive.

In addition, I’ve also said before that I am totally unclear as to what the economic benefit of the Peterhead project to Scotland would be given that the critical bits of CCS technology are effectively imported.

Shell and Scottish and Southern Energy – who are fronting the Peterhead project – claim that the joint Government and Industry CCS Cost Reduction Task Force said that “gas and coal power stations equipped with CCS have clear potential to be cost competitive with other forms of low-carbon power generation”.

That is of course not really very encouraging because, reading between the lines it means that all generating costs will be going up – renewables and conventional. There has to be a better way and I believe the Australians have found it.

Algae Tec Ltd will build an A$150million (£90million) algal oils plant to process emissions at Macquarie’s coal-fired power station in the Hunter Valley, which is north of Sydney.

The algae converts the carbon dioxide into oils which can then be “refined” into a range of liquid fuels including bio-kerosene and diesel.

Russell Skelton, chief executive and managing director of Macquarie Generation the owner of the power station, said: “Carbon is now our single largest cost – this technology should reduce our carbon output, reduce our carbon bill, and at the same time improve our bottom line.”

We should be taking this seriously especially given the level of investment is relatively low. In fact, it’s a pittance compared with the cost of the Mongstad plant and the UK Government’s £1bn CCS demonstration budget.

That said, we must recognise that carbon capture technologies are already available. Cansolv Technologies Inc. (a Canadian company and subsidiary of Royal Dutch Shell), working in partnership with the German company RWE npower, is already capturing CO2 at the Aberthaw coal fired Power Station in South Wales.

It’s the world’s first integrated sulphur dioxide and carbon dioxide capture plant.

Interestingly – or depressingly for the UK – RWE in Germany is, as one might expect of German companies, already running a major R&D programme on carbon capture including the use of algae.

Self-evidently RWE also recognises the potential of algae to reduce the cost of carbon capture by providing an income stream from the products that can be produced from algae.

So, given all this activity in Wales, Germany and Norway and bearing in mind that all the technology involved will come from overseas companies then one has to wonder whether the UK Government will really cough up that £1billion to fund the Peterhead power station project.

Now I could be wrong but I actually disagree with those who believe that now the Mongstad project has been killed off then it’s inevitable that Peterhead will go ahead.

I think the UK Government is far more likely to take the view that if the normally adventurous and risk taking Norwegians think such a project is too expensive then that’s a good enough reason for them to take the same view.

Personally, I see no benefit in funding the demonstration of technologies that are already being demonstrated elsewhere especially given they can’t be sourced in this country. We’re too late for that – as usual.

However, I would not like to see the UK Government let off the hook completely and would much prefer to see that government funding going into new ideas such as the development of algae-based carbon capture.

Why? Because I believe it provides the potential for developing indigenous companies that could both benefit and gain an advantage from our exceptional scientific talent.

Scotland’s life sciences research is world beating. Let’s use it to develop a global business.

(First published in the Press & Journal Energy supplement - 7th Oct 2013)

Aberdeen – Nice try, but no coconut.

Apologies in advance but I’ve come over all parochial and am going to discuss Aberdeen itself. I’ve spent the best part of forty years either working out of or in Aberdeen and have watched it evolve into what it is now. Indeed, when I started working here the A90 was a single lane road, the airport terminal was on the East side of the field and flights to London still used some propeller aircraft! I also seem to remember Aberdeen harbour still had a dock gate which we had to wait to open before venturing out into the N Sea. This meant more time in the pub so it didn’t cause too much hardship!

Things have of course changed a great deal since then. From wondering what on earth had hit it in the early seventies Aberdeen has certainly gained confidence and stature and nowadays even calls itself the “Oil and Gas Capital of Europe”. Whether or not that’s deserved is a moot point.

During the run up to the decision on whether or not to redevelop Aberdeen’s Union Terrace gardens I clearly remember Ian Wood claiming that the redevelopment would help turn Aberdeen into “the Houston of the East”. I didn’t laugh – well not for long - at such a suggestion because whilst Wood must have realised that such a goal was impossible; when I thought about it I realised he was actually quite correct in that it is what Aberdeen should be aiming for. But does Aberdeen’s recent history suggest that’s ‘doable’ or not?

In the last month or so there has been a flurry of media praising Aberdeen’s success in doing so well out of the oil and gas industry with one broadcaster talking about “Aberdeen's central role in the North Sea oil industry”.

It’s an interesting turn of phrase. Aberdeen certainly has played a central role in that it has acted as host to the vast majority of oil and gas operators, service companies and manufacturers. Nearly all the important players are here in one shape or another. They’ve created jobs, spent money in our shops and had a huge – some would say negative - impact on our housing market. They’ve also kept our car sales people happy and filled our restaurants almost every night of the week. Our hotels, bed and breakfast providers are booming and our shops and supermarkets are also thriving. Aberdeen airport is constantly busy with both domestic and international flights as well as all those helicopter trips out to N Sea platforms, rigs and so on and so forth.

On some levels then Aberdeen has been a huge success but something niggles me about how deep that success actually is and how well rooted it is. Fact is that if it hadn’t been for firstly the Americans then the Norwegians and to some extent the French and others including the Danes, Italians, Dutch, Swedes and others Aberdeen would have been nothing like as buoyant as it has been.

Aberdeen then is like the oil and gas industry itself in that it’s certainly international. However it also means that because of oil and gas its economy is nothing like broad enough.

This brings with it some considerable risks. Firstly any downturn in the oil and gas sector regardless of what it’s caused by can have a large adverse impact on the Aberdeen and Aberdeenshire economy because there’s little to fill the gap. Secondly, companies can up sticks and move out at any time. Anchoring companies here is critical and because Aberdeen is a source of great engineering and other skills this is a major factor in our favour when it comes to deciding on where to invest. That said, it doesn’t always work like that. Witness Technip’s decision to establish an R&D centre in Paris and not Aberdeen where it has a major operations base. R&D operations are of course another essential element when it comes to anchoring companies anywhere. Where they’re based tells us a lot about where a company’s loyalties really lie.

So what to do?

Well I’m not first one to have talked about the need to broaden Aberdeen’s economy as much as we need to broaden the entire country’s economy and I’m sure I won’t be the last.

However, the time is now ripe to start developing a sensible strategy to actually do this drawing on the skills we have where possible but recognising we may need to develop or “import” others.

I had always hoped that ACSEF (Aberdeen City and Shire Economic Forum) would drive this forward but frankly, that organisation is turning out to be about as much use as the proverbial chocolate teapot.

For example, I’m still staggered that whilst it has a plan to develop a “Hydrogen Highway” as part of the “Energetica” global energy technology corridor, stretching from Aberdeen to Peterhead there is no plan to develop or even bring in a company to manufacture and trial hydrogen refuelling systems, fuel cells, electrolysers and so on and anchor that technology in Aberdeen for the future.

The same applies to their ideas on geothermal energy. Geothermal has huge potential, but where’s the plan to manufacture at least some of the hardware?

ACSEF desperately needs someone to press its restart button and revitalise it.

Ian Wood’s aspiration to turn Aberdeen into another Houston is possible only perhaps on a smaller scale. Houston has major aerospace and electronics sectors – Aberdeen is very good at electronics. Houston has a major medical science sector – as it happens both universities in Aberdeen are very adept at medical science and medical devices. Houston also has a powerful petro-chemical sector. I never have understood why Aberdeen doesn’t.

Of course, being a forward looking City Houston is attracting renewable energy companies to base themselves there as well and companies offering wind technology and low power LED lighting are typical of the ones that have moved in or set up already.
Ian Wood will be surprised to read this but I agree with him. Aberdeen has to emulate Houston and it has to start now.

(First published in the P&J Energy supplement & on EnergyVoice.com, Sept 2013)

Oil & Gas industry prospects in an Independent Scotland

The outcome of the referendum on Scottish independence in 2014 will be critical in determining how the future of energy and particularly oil and gas pans out.   In my personal opinion it will be the difference between actually being able to achieve some long term benefits from oil and gas or just exploiting it to help Westminster fund its current account expenditure for as long as it can with no financial or industrial legacy.

Let’s get the recently contentious stuff over with first. The idiotically named Office of Budget Responsibility said recently it expects the total taxation from oil and gas between 2018 and 2041 would now be £56bn, down £11bn from the £67bn it forecast only a year or so ago. 

Unfortunately their case is somewhat undermined by the fact that two years ago the OBR said that the oil and gas industry’s share of GDP would be more than three times higher than it is now at 0.1%. As the independence referendum became a reality they then cut it in half to 0.05% last year, before this year's further cut to 0.03%.  Bizarre.

On the other hand, Prof Alex Kemp – whose opinion is one I do trust – suggests that compared to his models the OBR is actually underestimating potential production up to 2040 by around 6bn barrels.

Alex has no political axe to grind. The OBR do.  I know who I trust.

Now let’s get to the real substance of the debate.   I have long been of the view that the UK Government has failed miserably in its duty to support the energy industry properly and doesn’t deserve the benefits it gets in terms of taxation, jobs and so on and so forth.   It has treated the industry as a cash cow, used the tax receipts to fund expenditure rather than invest it, and failed to save any of it for a rainy day.

Remember, Norway started putting money into an oil fund in 1996 and it’s now worth £450 billion, equivalent to £90,000 for every Norwegian, and is the largest Sovereign Wealth Fund on the planet.

There is also the issue of Westminster’s laissez faire attitude to company ownership which has been most unhelpful in the attempt to build an indigenous service and manufacturing sector. 

We all recognise this industry is probably one of the most international on the planet but by now we should be a much larger player in it than we are.   That of course is in no small part also due to the attitude of the UK financial sector which happily followed Westminster’s approach to the industry.  

Westminster also has a lousy record in its handling of N Sea taxation issues.  Its unannounced windfall tax in 2011 was politically naïve and strategically inept.   Its partial reversal in 2012 and the albeit welcome Brown Field Allowance still hasn’t fully repaired industry trust in the Treasury and its overall tax structure is still tilted in favour of the Government rather than the industry.  

The industry is also still waiting for a Norwegian type exploration drilling allowance. Improving exploration levels is key to extending the life of the industry.  Tax mechanisms and of course new technologies can help achieve that. 

So what might change if Scotland became an independent country?   Well my view is that having an Energy Department in Edinburgh or preferably Aberdeen should certainly facilitate better communication between government and industry and avoid hiccups such as Osborne’s tax hike.   It provides an opportunity for government and industry to work much more closely together for the overall benefit of the country.   I envisage a much more stable and open and essentially “grown up” relationship.

Stability is also important not just in terms of the tax regime but who the industry has to deal with. Westminster has changed its Energy Minister more times than I’ve got pairs of socks!   No sooner has the industry got used to one than he or she is either fired or given another job.   This is contemptuous and creates the impression that the industry isn’t important enough to warrant stable government management.

In terms of the all-important safety regime I don’t see much change is needed other than perhaps tidying up and streamlining the processes such as inspection and reporting. 

The same applies to some extent to decommissioning although I have to say I would really like to see a reappraisal of the decision not to allow the use of redundant jackets and other inert elements of offshore platforms for the creation of artificial reefs.  From an environmental standpoint this would cause few problems and it could have an extremely positive impact on fish stocks whilst not interfering with fishing itself. A win-win situation?

One piece of misinformation being used about decommissioning can be cleared up and that is that tax relief associated with decommissioning costs could never be afforded by an independent Scottish Government. Given it amounts to only somewhere around 2.5 per cent of the wholesale value of future reserves then this should be more than affordable but of course the UK Treasury has already accrued £300 billion in tax receipts from the oil and gas sector and it doesn’t seem unreasonable for the Scottish Government to expect a contribution to this cost from the UK Government.

The UK Government failed to develop a coherent strategy for developing, commercialising and deploying new technologies and has invested less in energy R&D than our main competitors. Improving this situation is essential and should be high up on the list of an independent Scotland’s priorities.

In other words in terms of R&D we need to adopt an approach that our indigenous industry can benefit from as well as improving discovery and recovery rates and costs.   Let’s have no more of Westminster’s laissez faire attitude where they don’t care who benefits providing the tax revenues keep flowing!

What else?  A national energy company?  Why not - although maybe that should be for renewables and other non-oil and gas areas.   So let’s look at that later in the year.  

(First published in the Press & Journal "Energy" supplement Aug 2013)