The Economist: North Sea oil: When the wells dry up: decisions by Royal Dutch Shell have added to local worries

Jul 12th 2007 | ABERDEEN
From The Economist print edition

Offshore production has spawned a high-tech cluster of British businesses with global ambitions

“EVERYONE else in Britain hangs on what the Bank of England does with interest rates,” says one proud Aberdonian. “Up here, we don’t care about that. We’re much more interested in what OPEC does to the oil price.” An exaggeration maybe, but Aberdeen is the Houston of an offshore industry that has long made Britain a big oil and gas producer.

The petropounds coursing through the “Granite City” on the north-east coast of Scotland have turned Aberdeen into one of the most prosperous cities in Britain. The typical worker makes £481 ($971) a week, compared with median earnings of £447 across Britain. The city’s unemployment rate is well under the national average. The oil industry employs 33,000 people directly in Aberdeen and is estimated to provide work for 400,000 in Britain.

Aberdeen is booming now thanks to high oil prices, but the future looks less rosy. Offshore output peaked eight years ago, when Britain was the world’s sixth-biggest producer of oil and gas; by 2006 it had become the 12th-biggest. The International Energy Agency said on July 10th that the drop in production had been steeper than expected. “There’ll be nothing here in 15 years’ time,” says one former offshore worker. “Oil’s been good to me, but I wouldn’t want my son going into the business.” The recent decision by Royal Dutch Shell to sell off several of its North Sea fields and to abandon the construction of a £25m headquarters in the city has added to local worries.

Yet even though oil and gas output is declining, the local businesses that have sprung up to support it have bright prospects. The North Sea was one of the earliest offshore oil basins to be developed. Many of the technologies needed to produce oil from underwater wells—especially in the difficult, gale-prone waters off the British coast—were developed in Scotland. Around 90% of oil-industry workers are employed not by the big international companies such as BP or Total that operate the fields but by local businesses.

For example, Wood Group is a big oil-services firm that specialises in, among other things, enhanced-recovery technology and offshore pipelines. Sub-Atlantic is a small outfit that makes remotely operated submarines. Altogether such businesses—covering everything from catering and construction to geology and engineering—have a turnover of around £11.7 billion a year. The hope is that they will be able to sell the expertise they have acquired in the North Sea to an industry searching for oil and seeking to maximise production in ever more testing submarine conditions around the world.

One area of particular British expertise is in subsea technology, a catch-all term for things such as automated wellheads and long pipeline networks on the seabed. These allow oil companies to use cheap ships instead of expensive fixed platforms and enable them to operate several wells from one platform many miles away. Remotely operated vehicles are used to install and maintain equipment where water is too deep for divers.

In 2005 Britain’s subsea industry’s output was worth around £3.4 billion, half of which was exported, a 20% rise on the year before. There are big opportunities to keep growing fast. British firms account for half of global sales, and the industry is expanding rapidly. The world market for subsea services could be worth $40 billion by 2011, according to Scottish Enterprise, a development agency. David Pridden, the boss of Subsea UK, a trade agency, thinks exports from the British industry could reach $15 billion by 2020.

Local businesses also have experience in squeezing more output out of existing fields, or cheaply developing smaller ones—something that should extend the life of Britain’s North Sea industry (see article). As big finds become rarer, producers are focusing on how to extract oil from smaller reservoirs that can be geologically or technically tricky to operate. “As other oilfields around the world begin to mature, there’ll be a centre of expertise here that can tell them how to get the most out of their remaining reserves,” says Geoff Runcie, the boss of the Aberdeen and Grampian Chamber of Commerce.

The city’s cluster of high-tech businesses may have sprung up to support the North Sea oil industry but there are also opportunities beyond it. Many local firms have branched off into other areas, such as defence. Technologies developed to pull oil and gas from the ocean floor can find other uses, too. When a Russian mini-submarine became caught on the Pacific seabed in 2005, it was cut free by a British remotely operated submarine based on technology developed for the North Sea.

Aberdeen also has ambitions to exploit its oil-support know-how in green energy. The hope is that local businesses with expertise in offshore construction and engineering can provide services to firms building offshore wind turbines or, in future, tidal and wave-powered generators. And even exhausted oil and gas fields may come in handy. One idea is that they can be used to store carbon emissions from fossil-fuel power plants.

The city is not short of ambition, but cooler-headed businessmen point out that it is easier to recognise opportunities than to grasp them. Exports still account for only about a quarter of the oil-support industry’s output. Last year they grew by just 2%, compared with 16% in 2005, despite efforts by Scottish Enterprise to encourage firms to expand overseas. Oilmen make similar complaints to their counterparts in the rest of Britain’s engineering sector: that the country lacks skilled workers; the standard of technical education is inadequate; and the government is ineffective in tackling these problems.

Yet such complaints have been made ever since the first North Sea well started pumping in 1967. The cluster of businesses in Aberdeen has achieved a critical mass thanks to the North Sea. It now stands a good chance of thriving in more distant offshore markets as the demand for energy continues to boom.

http://www.economist.com/world/britain/displaystory.cfm?story_id=9481445

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