Scotland is firmly on the global energy map, particularly for its contribution to the oil and gas industry.
Predominantly based in the north-east, the sector continues to play a critical role in energy production and employment and is a substantial part of the socioeconomic fabric of Scotland.
Having weathered the downturn and now navigating through a slow but sure upturn, the Scottish industry remains resilient, robust and competitive on the international stage. But one element requires particular attention as the sector gets back on its feet: the supply chain.
It is without question one of the major operations in the country’s energy industry, but in a climate where there’s an ever-increasing move towards low carbon, questions are being raised over its long-term future.
While it’s no cause for immediate alarm, due to the fact the UK still remains three-quarters reliant on hydrocarbons for heat, transport and other prime energy needs, there is a clear requirement for diversification of the traditional 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 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 to attract continued international investment.
Its robustness is substantiated by the numbers. In May 2019, a report by Scottish Enterprise revealed that, despite a fall in total sales which was reflective of 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. There was also an increase in sales into non-oil markets.
However, among the positivity, there is a clear understanding that supply chain companies are still experiencing highly challenging market conditions.
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 resources.
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, further cost reduction and improve the skills of the Scottish workforce.
In order for the 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 existing wealth of knowledge, talent and innovation 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.
The Scottish Government’s 2017 energy strategy focused mainly on diversification and the supply chain, and there is undeniable opportunity as we move to a low-carbon future, but the renewable energy sector must be open and support this transition with opportunities for traditional energy companies to utilise their skills, technology and workforce to thrive in a low-carbon environment.
For firms who believe they have the potential to diversify, but aren’t sure about the opportunities available, there is no lack of support from sector organisations such as the Oil and Gas Technology Centre and the Oil and Gas Innovation Centre.
Despite cashflow issues which inevitably ensue following the downturn, there is plenty of positive innovation taking place right now across the oil and gas supply chain.
If the industry can maintain discipline and drive, 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, Partner in Addleshaw Goddard’s Aberdeen office
