The Scottish oil and gas sector is booming

Jul 15, 2004 02:00 AM

by James Dow

Over-used words in Scottish industry, number one: maturing. No, not maturing as in: "Too many of the board are balding, Charles." Maturing as in: "North Sea oil fields are maturing! The oil industry in Scotland is doomed! Thousands of job losses are unavoidable!"
It is time to put a cap -- preferably a deep-sea, multiple-reinforced, 20,000 psi cap -- on the use of the M-word. And not just because there's a lot of life still left in the Continental Shelf, as the upbeat report from the UK Offshore Operators' Association shows.

It is time to ditch the word "maturing" -- and all the fatalism it carries with it -- because Scotland's oil and gas firms, anticipating that inevitable day when North Sea production finally dries up, have already made substantial moves to win business overseas. And they have succeeded in winning that business at an astonishing pace.
Some of these firms are household names. Edinburgh's Cairn Energy, with its mega-oil strikes in India, is the most famous of several exploration and production (E&P) businesses already renowned for their success overseas.
Aberdeen's Dana Petroleum is another that has stuck its Saltire in foreign markets, with production interests in some 34,000 sq km -- the equivalent of more than 150 UK blocks -- offshore Mauritania, East Africa.

Far less well-known are the scores of oil and gas firms on the service side and in the supply chain that have moved beyond -- which does not mean out of -- the North Sea. In fact, there is a remarkable statistic about the service/supply side of the Scottish oil industry that none of the prophets of doom-and-gloom ever bother to mention.
In 2002, the latest year for which accurate data have been collected, a staggering 31.3 % of business done by Scottish service/supply firms was outside the North Sea. That was up from 23.1 % just five years earlier. The chart on the right shows how this breaks down.

The salient facts are that after stripping out sales of oil and gas by E&P firms, overseas income earned by Scottish companies jumped to almost £ 2.8 bn in 2002, from £ 1.1 bn in 1997. International business has grown for three straight years and now accounts for almost a third of total turnover. For many firms, the proportion is even higher.
"Over 50 % of our revenue comes from overseas," says David Dent, managing director of Aberdeen-based Circle Technical Services. "Without that business we would not actually have survived the last 12 months, the North Sea being so unpredictable and fickle."

Dent's business, which provides cold cutting, cleaning, dredging and friction welding "solutions" learned in the extremes of the North Sea, opened a subsidiary in the Gulf of Mexico three years ago. It has been an uphill struggle, but it has paid off. And like other Scots firms who've done business abroad, Circle is now passing on the lessons it has learned to those yet to take the plunge.
"You've got to go in with your eyes open and be prepared to accept you've got a lot to learn," Dent says. "Get a decent accountant and a decent lawyer, right from day one. And the sooner you can employ a local, the better."
Finding the right contacts and recruits "can be hit and miss", he warns. "But there are people out there to point you in the right direction. We used Scottish Development International [the Scottish Enterprise agency] in Houston, and they had the contacts we needed. All the market research and cold calls I did myself."

Some obstacles are totally unexpected. Most are surmountable. Banks in the US are "not friendly" to incoming companies, Dent found. Compared to UK lenders, they also tend to be more risk averse. Circle had to back up all its guarantees with banks in Scotland before it was able do business in the US.
But the rewards were there for the taking. Dent says: "What you need is a business plan that projects the amount of money it's going to take to do the job. "And you've got to see it through. Once it starts, if you put the brakes on, you're just going to lose money."

Tom Smith, managing director of Nessco, an Aberdeen firm that provides telecoms systems on offshore projects -- and has a full-scale operation in Baku, Azerbaijan -- echoes Dent's experience of a long, hard slog before reaping rewards.
"Only very rarely are there quick wins," he says. "There's not too much low-hanging fruit out there. It's not unusual for a market to take two years before you start to get a return."
And just because a market is large "does not mean you'll succeed there. We're doing business in East and West Africa, Qatar, Iran... but that doesn't mean all of those markets. In South America, say, it means we've found a niche in offshore Venezuela."

Success will flow, he says, "when you go to markets where you have a competitive edge -- where there's a low capability in the market place.
"Then you've got to learn about managing currency risk, appreciating the cultural differences in doing business, making sure your marketing strategy is appropriate for that country." Plenty ofchallenges.
But the rewards can be immense -- and they don't just come from adding income streams that are isolated from the ups and downs of the North Sea.
"Doing business abroad sharpens up your commercialness," Smith says. "It also improves your business processes domestically."

There is a knock against Scottish firms doing business overseas. Foreign operations are not guaranteed to generate jobs in Scotland as fast as the industry in the North Sea puts people out of work. A base in Azerbaijan is just that - it repatriates earnings, but it employs a lot of people locally rather than Scots.
But the striking thing about the overseas business done by North Sea firms in the past five years is the amount they have done out of Scotland. A full half of "international business" captured in the latest SCDI/Scottish Enterprise survey was from direct exports out of Scottish-based operations. That business was valued at £ 1.357 bn in 2002 -- almost identical to the £ 1.359 bn of sales delivered by Scotsfirms' subsidiary companies in foreign markets.
A business like Aberdeen Skills & Enterprise Training is a good example. It brings in trainees from the Middle East, the Americas and Africa to learn skills with its practice equipment onshore. The courses support Scottish jobs and provide a local spending boost.

The opportunities for Scots firms to do business abroad are expanding by the day. E&P giants like BP and Shell are looking to new markets to replace fields like the North Sea, and that creates openings for firms they already know from the Continental Shelf.
"We're looking at West Africa, Russia, China and Mexico," says Sir Ian Wood, chairman of Aberdeen oil services giant Wood Group, whose engineering and production facilities division has expanded threefold in the past six years on the back of international expansion in the Americas. "We're looking to our E&P business out of the US and around the world."

The skills and expertise that firms have honed in the North Sea "are very exportable to other markets", adds Smith. "There's a lot of credibility associated with the work on the UK Continental Shelf." This makes the future of the industry in Scotland look bright, as an international hub for an increasingly global oil and gas sector.
For "maturing" read "momentum". It is time Scotland started talking about sustaining the momentum its oil and gas firms have already built overseas, rather than fretting about the unavoidable.

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