Britain’s industrial future in the energy market lies in a mix of renewables and nuclear, where the manufacturing potential will be all about wind turbines and nuclear reactors. Right?
Wrong. Today Aberdeen has returned to boom town status as better technology and steadily high oil prices have driven an industry based on manufactured hardware and oilfield services to new heights.
The oil and gas supply chain racked up £27bn in revenues from 1,100 companies in 2011, according to a strategy framework by BIS and DECC in March, UK Oil and Gas – Business and Government.
New extraction technology and hard economic times means the UK Government has woken up to the oil and gas sector. “Government had focused more on renewables,” says Rod Christie, VP & CEO of Subsea Systems, GE Oil & Gas. “The green ticket has been a very attractive campaign, whereas oil and gas has not been the flavour of the month. And the oil and gas industry has not done a great deal to promote itself,” he adds, alluding to the obscurity of the sector outside its north-east Scotland nucleus.
Government has worked with industry for about two years on an oil and gas (O&G) strategy, a strand of its broader Industrial Strategy. It has identified 10 areas of focus needed for the UK to optimise its world-class status, including the UK supply chain, safety, access to finance, skills, technology and the fiscal regime.
The aim is simply to ‘maximise the economic recovery of the UK’s offshore resources of oil and gas’ while seeking to promote its perception and encourage more people to work in O&G, where recruitment remains a constant challenge.
The Treasury has changed the fiscal code, providing tax breaks for foreign investors in the UK O&G industry, which has worked. Oil & Gas UK, the industry trade body, expects £13bn of investment in the UK Continental Shelf this year alone, and some £40bn to 2020.
In 2007, oil production in the North Sea fell to an historic low but today the region is well and truly booming again. While total production is expected to dip slightly this year, by between 3%-6% below 2012’s 1.5 million barrels per day, new extraction techniques and up to the influx of regional investment will push production up by a third to two million barrels a day by 2017.
The new O&G boom goes far beyond the North Sea. Hardware and services are being exported globally, with hubs like Aberdeen and Newcastle acting as gateways to markets including the Gulf of Mexico, Gulf of Arabia, Indonesia and Australia. There are myriad opportunities for manufacturing and engineering for SMEs and larger firms to supply the oil majors like Chevron and Shell, and the global oilfield servicing giants including Schlumberger, Baker Hughes and Halliburton.
“Halliburton, Wood Group, all the big guys have strong order books, this feeds the SMEs and trickles down to their suppliers,” says David Rennie, international sector head for oil and gas at Scottish Enterprise. “This is my third OTC [industry trade fair in Houston] and I’m struck by the optimism. But the biggest issue for companies now is people,” he adds, referring to the labour market merry-go-round in O&G hotspots.
Cash-rich multinational operators have an insatiable appetite for an array of clever equipment. Oil and gas operations – from seismic surveys to data acquisition and subsea ‘Christmas tree’ valve array fabrication – looks increasingly like a giant playground for engineers and entrepreneurs, in Scotland and increasingly UK-wide.
Guardian Global Technologies, which makes downhole logging equipment near Bridgend, has averaged over 50% growth year-on-year from 2008 to 2012. Underwater vision systems manufacturer Bowtech had 25 employees in 2012, has 46 now and plans to have 80 by 2014.
Oil and gas cable manufacturer Hydro Group, run by Scots entrepreneur and Scottish Manufacturing Advisory Board member Doug White, is growing at about 18% net annually. Revenues at Aker Solutions UK, one of the bigger engineering groups that manufactures subsea electronic modules in Aberdeen and other components in England, increased by 60% in 2012. No-one in this sector thinks the world is running low on oil.
“The good thing about the future of the Scottish hardware industry is that if you can get oil out of hostile waters in the North Sea, you can do it virtually anywhere,” says David Rennie.
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The microeconomy of Aberdeen
The car parks of the industrial estates of Aberdeen are peppered with Range Rovers and Aston Martins. Every few hundred metres a banner reads: “Jobs in Oil & Gas – Call Company X” or “Aker Solutions Recruiting Now”. This city is the closest thing the UK has to a modern day Klondike, where the gold is black and lies under the seabed many miles offshore, an exemplar for Lord Heseltine’s vision for regional growth.
Oil & Gas UK says that GVA figures for the sector in Aberdeen City and Shire are not publicly available, “however, it could be assumed that around 75%-80% of Scottish oil and gas GVA is generated in the region.” O&G added £17.2bn to the Scottish economy in 2011. Average house prices here are only just behind a handful of counties around Glasgow and Edinburgh. No hotel rooms cost less than £200 a night on ‘changeover days’, between Monday and Thursday when the oil rig shifts change.
But there are risks to sustained growth. The government O&G strategy document says this has happened in spite of, not because of, its infrastructure. From a small airport through to traffic congestion and limited housing stock, Aberdeen has struggled to keep up with the demands of this thriving sector.
The document says “Aberdeen City Council is… aware of the shortcomings and is keen to tackle them. The City Council is now taking forward work on the western peripheral route that will ease congestion. The new harbour in Nigg Bay will be of particular value to the sector. The airport is up for sale and new owners will be encouraged to invest in its facilities to make it a true international airport.”
GE’s Rod Christie sums up the job market here. “Aberdeen’s population is up to 230,000, including the transient labour, but unemployment is 0.9%,” he says. “In 2012, GE added 180 people in one building (GE Oil & Gas’s HQ). GE Subsea Systems is hiring about 20 engineers a week, globally.”
While Aberdeen kicks on, the rest of Scotland feels the strain on HR as the city sucks in skilled technical people from all over Scotland and the rest of the UK (see Labour market) . Loyalty is light as big employers can afford to offer handsome packages, and staff turnover is massive.
“Two years ago when the business was headquartered in Houston, we suffered from a lack of presence here where people in Aberdeen maybe didn’t feel the focus on the business. Now, we are doing well in attracting talent,” says Mr Christie. “In the last two years we have been either number one or two in labour market share.”
While there is some inevitable ‘poaching’ from local SMEs, Christie says GE has been able to fill many posts internally by transfers from other sectors like GE Energy and Aviation, and says the company is very good at encouraging cross-divisional transfer.
Case study: Hydro Group
The shop floor at Hydro Group, manufacturers of composite cables, connectors and penetrators for hazardous environment applications, is neat and clean, configured in a demarcated U-shaped facility. “It’s a good factory, you could make food in this factory,” says production director Gary Caunt. He knows what a lean manufacturing plant should be, after 30-years in manufacturing and a spell with SMAS, the Scottish Manufacturing Advisory Service. “We are pretty lean, but there is a long way to go. 5S is in our blood, we look at bottlenecks routinely, we make to order and we don’t carry much WIP. What is anti-lean is the amount of inspection we do, and fact that no two orders are the same.”
Hydro can’t make its products fast enough as orders pour in from Turkey, Australia, Singapore and Canada for its rugged cables for applications including oil and gas, energy and submarines. The firm has grown 16% year-on-year, and this year the targets are higher “but realistic,” says Caunt.
“We build and ‘connectorise’ cables and we try to add as much value as possible,” he adds. As well as cable assembly, connectors are machined in-house using aluminium silicon bronze, 316 stainless, grade 1 and 2 titanium, with a few special inconel and monnel inserts.
“We do everything on site, it’s fully vertically integrated,” says a proud Mr Caunt. “We do the non-recurring, expensive element of technical design, manufacture, through to deployment and support on site. We machine from billets and make cable from raw drain wire, extruding an outer jacket onto that and strengthening it. Such integration makes it pretty unique as an SME and brings its own headaches,” but the firm’s versatility has helped the company win lots of work, he says.
Hydro is located on the Aberdeen Science and Energy Park, where 100% of firms serve the O&G industry, other than a few food retailers. “Specialist drilling, sonar buoys, PIG inspection devices, camera companies are all here and all associated with subsea engineering.”
What does the industry demand from people? “In this town, mechanical and electrical engineers have their choice, they play the merry-go-round very well,” says Caunt. “Sales and marketing jobs are also popular. We try to mitigate labour shift by offering only fixed term contracts, no agency work.”
“It’s a good place to be, it brings its pressures but the problems are all nice to have. I would rather be here than anywhere else in the UK.”
Perception challenge
O&G, compared with automotive and aerospace, is unquestionably Britain’s best kept industrial secret, to paraphrase the title of a 2011 survey used by Malcolm Webb, chief executive of Oil & Gas UK that highlighted the dangers of neglecting the industry. It demonstrated that, outside Scotland, and arguably north-east Scotland, the public are largely unaware of O&G’s strengths.
Consequently, image has become one of the oil & gas strategy’s 10-point plan. A nationwide education programme is being phased in to boost awareness and recruitment, says BIS.
Technology
New technology has helped the economics of sizeable investments stack up. For example, BP’s £4.5 billion Clair Ridge project includes pioneering full-field injection of desalinated water to enhance oil recovery.
Statoil’s £4bn+ investment in Mariner, a heavy oil field that was initially discovered in 1981, was made possible through innovative technological solutions. “A big trend I’ve picked up this week [at OTC in Houston] is new seismic techniques – they’re reshooting large chunks of the North Sea,” says Scottish Enterprise’s David Rennie. “It used to be 2D seismic, now it’s all 3D and increasingly 4D. Recovery levels in the UK’s part of the North Sea are about 40%. The industry recognises there’s work to do here. Norway’s recovery is about 50% with 60% targeted. Seismic can play a huge role in that.”
Oil recovery is more of a free market now, with more room for the small and nimble. “The majors are still there but have concentrated their production on more of a hub basis,” says Rennie. “The smaller independents have come in, taken on assets from the big guys, invested in technology. TAQA, the Abu Dhabi outfit, took over Comorant Alpha and have invested time and people and have managed to increase production significantly.”
It’s not just NE Scotland
While Aberdeen is the hub of subsea engineering and services, the oil and gas supply chain is UK-wide and the industry employs up to 440,000 people in the UK directly and indirectly to first tier suppliers, according to Ernst & Young (see map). Newcastle and the North East, Gt Yarmouth and its area – feeding the southern North Sea – and Sheffield, which hosts more than 25 companies supplying components to oil & gas, are among the English hotspots for engineering. At Sheffield’s Global Manufacturing Festival in April, Dr Lindsay Branston of Scottish Enterprise noticed a change. “There were noticeably more companies discussing oil and gas contracts than I’d been aware of before. Clearly capacity is spilling out of Scotland and into England.”
Case study: GE Oil & Gas
GE Oil and Gas was created when GE Industry delayered in 2011 and is now a separate business division or P&L. It has four factories in the UK, in Bridge of Don (Aberdeen), Montrose, Newcastle and Bristol.
GE Oil & Gas makes Wellstream flexibles, Wellstream being a company bought by GE in 2011 as an earnings enhancing acquisition that GE believed it could develop further.
On arrival at the factory on the north bank of the Tyne, the reels that hold the pipes tower above your head – each can hold up to 1.5km of continuous pipe and cost some £250,000 to make.
The vast factory receives three primary sub-components: steel wire that can only come from specialised steel mills in Europe and the USA, polymers that make the pipe sleeves from the USA and France, and end-fitting forgings, which attach the pipe to other ends like flanges, from a mix of UK and Continental European suppliers.
Ancillary items including buoyancy modules and end restrictors come from the UK – in total about 40% of the raw materials and direct purchases are from the UK.
“Flexible pipes offer customers a solution to access difficult-to-reach oils and wells,” says Bruce Heppenstall, General Manager of the GE Oil & Gas site in Newcastle, who moved over from GE Energy in July 2012. “Without flexibles, they’d have to extract the oil with rigid pipes that are more expensive and have less operational flexibility. A rigid riser is more difficult to design, engineer and manufacture. These come into competition with flexible on long lays.”
Making a long pipe may not sound advanced, says Mr Heppenstall, but that belies a lot of engineering. “A lot of capital equipment is needed to do this, so it fits GE’s sweet spot for high value-added very well,” says Mr Heppenstall. GE has worked heavily on polymer technology to ensure the pipes are strong, flexible, do not crack and are impermeable to the liquid or gas contained within. “We’ve tested pipes up to 30,000 psi. That’s a mind-boggling pressure,” he adds. GE Oil & Gas Newcastle is audited for quality by API, the O&G industry standard, and Lloyds.
Oil companies are drilling deeper as the technology improves. Deep wells mean long pipes, which exert huge weights on fittings on the surface. “Weight is the biggest challenge in the flexible pipe industry at the moment, one that will probably be solved using composite materials,” says Heppenstall. “There’s so much steel in the pipe, it gets so heavy that it can’t support its own weight. You try to take weight out of the pipe design but also maintain strength.” GE Oil & Gas has a composite development programme at its Newcastle site.
For such a big company, with 18,000 employees in the UK, GE has a small profile in some places where it has manufacturing operations. Heppenstall and the team across GE Oil & Gas want to emphasise GE’s work locally. “Our new carousels that can hold 10km pipes are being built with £17m of investment. This will create 125 jobs, safeguard a further 80 and is backed by £3 million from Regional Growth Fund Round 3 – that’s an example of what GE has brought here.”
The RGF money is split between the carousel capital investment and funding for the company’s technology programmes. “The carousels allow us to unlock the Asian market, where long runs are preferred by customers and makes [these pipes] more competitive.”
Labour market
The labour market in the UK O&G industry is famously fluid, some would say cut-throat; skilled professionals job-hop with alarming regularity giving O&G companies, especially SMEs, a real recruitment headache.
While the high churn of skilled people is bad but expected in Aberdeen, the more serious effect is that on companies in parallel sectors and other parts of Scotland. Castle Precision Engineering in Glasgow has lost several people, lured by the big bucks in O&G. “It’s disappointingly familiar, a good apprentice gets to his third or fourth year and he’s off to Aberdeen,” says managing director Yann Tiefenbrun.
Power Jacks, an Aberdeenshire manufacturer of power transmission and mechanical jacking, lost approximately 10%- 15% of its staff during a busy time last year, all of them to oil and gas related companies. “Pay is typically 25% higher in Aberdeen for the equivalent oil and gas job as for same job in Central Scotland. Salary inflation, outstrips the value of the job role,” says Barry Mole of Ecosse Professional Services, a manufacturing consultancy. “The recruitment market in Aberdeen is incredibly difficult and many companies are looking to fast-track professionals from other industry sectors to minimise the impact on the continuity of service.”
Long term or fad?
The O&G industry, in the North Sea, is here to stay. Some estimate that recoverable reserves in the North Sea alone equate to another 30-years production. “It depends on which data you read and the oil price, but it’s not going away soon,” says Guardian Global’s MD Iain Maxted.
For information about supplying parts to the O&G industry, contact Oil & Gas UK www.oil&gasuk.org.uk
Useful links
www.themanufacturer.com/wp-content/uploads/2013/05/2011-2012-Oil-Gas-Survey.pdf
Report written by Will Stirling
@WRStirling
