Having weathered the downturn and now navigating the path back through a slow but sure upturn, the Scottish oil and gas industry remains resilient, robust and competitive on the international stage. But one element of the industry requires particular care and attention as the sector gets back on its feet: the oil and gas supply chain.
It is without question one of the major working operations in the country’s energy industry, but in a climate where there’s an ever-increasing move towards low-carbon and targets are being set, which, in global terms, Scotland is meeting faster than many countries, questions are being raised over its long-term future.
While it’s no cause for immediate alarm, due to the fact the UK as a whole still remains three-quarters reliant on hydrocarbons for heat, transport and other prime energy needs, with oil and gas production actually rising in Scotland, there is a clear need to diversify the traditional oil and gas supply chain.
It’s already happening in many areas, and we’ve seen numerous examples of traditional oil and gas companies transfer their skills, expertise and technology into the low carbon playing field. There is still a future for the oil and gas supply chain, however it might look slightly different decades from now.
For a start, there remains an incredible amount of value in, and investor appetite towards, upstream assets in the UKCS, in which the oil and gas supply chain plays a crucial role. Perhaps it’s down to our modest nature as Scots, but we don’t always showcase and shout about its vast potential, something we must do in order to attract continued international investment.
In May 2019, Scottish Enterprise reported that, despite a fall in total sales due to the sector downturn, the proportion of international sales remained above 50 per cent for the sixth year running, with the US, Norway and UAE the top markets for activity. Interestingly, there was also an increase in sales into non-oil markets.
However, amongst the positivity, there is a clear understanding that supply chain companies are still experiencing highly challenging market conditions, with cashflow, low margins and uncertainty in their pipelines remaining some of the key issues.
Even in the upturn, rising core costs are forcing many businesses to enter into cash reserves, putting more pressure on cashflow. In a climate where companies are being encouraged to provide more services and invest into diversification, some are simply running out of resource.
In light of the current challenges, the sector has naturally welcomed the recent announcement by the Scottish Government that a further £4 million in funding will be made available to provide support for projects to enhance the decommissioning market and supply chain in Scotland.
Decommissioning North Sea infrastructure will help Scotland’s supply chain gain a higher share of North Sea projects and capitalise on international market opportunities by exporting knowledge and experience. The fund will also support innovation in the supply chain, further cost reduction and improve the skills of the Scottish workforce.
In order for the oil and gas supply chain to continue to remain competitive, those who have stuck by the industry through the downturn must also be protected, and we must ask what the industry can do to attract back those who have left. We will need the wealth of knowledge, talent and innovation that exists in the industry to bring forward new exploration and projects. We must attract, nurture and support young people so that they see a career in our industry, and help shape its future.
If the industry can maintain discipline and drive, then there is no reason why the Scottish oil and gas supply chain cannot reap the benefits of a host of opportunities – both in oil and gas and in low-carbon, here and across the globe.
David McEwing is a Partner in Addleshaw Goddard’s Aberdeen office