Maximising Value OIL+GAS STRATEGY

Transcription

1 Maximising Value OIL+GAS STRATEGY

2 FOREWORD In 2012, we published an industry led strategy for the oil and gas industry in Scotland. This was the first time for many years that such a document had been published. It was broadly welcomed at that time as it recognised the importance of the sector to our economy, the need for partnership between the public and private sectors to continue to develop it through a focus on key priority areas and an overall focus on the importance of maximising recovery. The objective of maximising recovery was subsequently taken up by the UK Government. The strategy set out six priority areas for focus and considerable progress has been made in, for example, increased support for the supply chain, at home and abroad and innovation. The oil and gas sector in Scotland has a strong record of achievement over 40 years and we are globally renowned in many sub-sectors. But since its publication, the sector environment has of course changed. We have seen the Wood Review and the subsequent setting up of the Oil and Gas Authority (OGA), the publication of the Independent Expert Commission report on Maximising Total Value Added and more recently the significant fall in the oil price which, combined with the high cost base, means that the industry here is currently facing some significant challenges with a subsequent impact on jobs and investment. Given such changes, we considered it appropriate to refresh the strategy. We stress that this is a refresh because the fundamentals of the previous strategy, such as supporting the supply chain, encouraging innovation with the overall longer term objective of maximising recovery remain relevant. But it is appropriate to consider what else we need to do to support the sector, both in the short term and the longer term. Although while of course we fully recognise the seriousness of the current situation and all respond accordingly, it is equally important to remain focused on assisting further development of the supply chain, enhancing our global reputation in key strengths to even higher levels and seeking to embed the sector in Scotland for the long-term through innovation and technology development. We need to ensure that the current competitive advantages we have remain and new ones are developed. While this is an industry which is used to a certain level of price volatility, no-one underestimates the impact of the current situation. Consequently there is also a recognition of the need for a fundamental change in the industry cost base and the way it does business. And while this is having an impact upon many companies and individuals there is a recognition that such changes are required to help the industry have a more sustainable future in the longer term. 2 MAXIMISING VALUE

3 The role of government and industry working together is to provide both assistance short-term to companies and individuals affected by the slowdown, such as the support via the Energy Jobs Task Force but also to support the sector to meet the longer term challenges around enhancing the competiveness of the supply chain and embedding skills and know-how. We need to balance our efforts between short and longer term actions. The most significant change in this refresh is a stronger emphasis on the role of the supply chain as a driver for change. Relationships need to be rebuilt between all parts of the sector to deliver more productive and efficient relationships, demonstrate true collaboration and develop a transformational model of doing business. It is the strength of our supply chain which will be the long-term source of our competitive advantage. This strategy, with an enhanced focus on supply chain support and innovation complements and is aligned with the work of the Energy Jobs Task Force, the OGA and others. We know that there is no single or easy solution to the current challenges. However we are confident that if the industry, government and agencies work together and agree to focus on the right things then there is a still a long-term future for the sector in Scotland. The shared goal of all of us involved in this world leading industry must be to maximise the impact of the sector for the Scottish economy for many years to come. Finally, we would like to thank everyone who has made a contribution towards the refresh process and the continued support of ILG members. There is currently a considerable focus on seeking to enhance collaboration within the industry to meet the current challenges. Such collaboration between the industry, government and stakeholders will also be required to ensure that actions are delivered and that the industry remains a key part of the Scottish economy for many decades ahead. Fergus Ewing MSP Minister for Business Energy and Tourism Scottish Government Melfort Campbell OBE Chief Executive, Imes Group Co Chairs of the Oil & Gas Industry Leadership Group OIL + GAS STRATEGY

4 OIL AND GAS STRATEGY REFRESH The Oil and Gas Industry will be focused on maximising production from the UKCS and maximising the value it generates for the Scottish and UK economies as a whole. Our supply chain will experience an entrepreneurial transformation which will result in being seen as one of the most competitive and efficient in the world, with knowledge developed here in demand around the globe. We will be truly renowned for our innovative approach to maximising recovery, keeping our existing strengths while developing new growth opportunities and ensuring that our sector remains anchored here for the long-term. PRIORITY AREAS AND OUTCOMES Supply Chain Domestic Supply Chain International Innovation For the Scottish supply chain to be a key driver of change and competitiveness in the North Sea underpinned by best in class behaviours, values and entrpreneurial drive To enhance our already strong global reputation, building on existing strengths and building new ones An enhanced focus on key technology priorities and innovative business models to maximise total value added from the sector Invest in Success New Opportunities People and Skills The development of key onshore infrastructure projects to further build our capacity and attract investment Using our sectoral skills and know-how to secure opportunities in other sectors MEASURES To build the strong leadership required to bring about transformational change in the industry Achieve total supply chain sales of 30 billion by 2020 See international sales increase to 16 billion by 2020 Work with the industry and support the UKCS target of increasing the level of production efficiency (with a target of 80% by 2016 from the 2014 baseline of 60%) Aim to close the gap in sectoral R&D expenditure, which is low in comparison to R&D expenditure for the economy

5 INTRODUCTION In 2012, the Scottish Oil and Gas Industry Leadership Group (ILG) published an oil and gas strategy and significant progress has been made to deliver key actions, including: The establishment of the Oil and Gas Innovation Centre (OGIC) and the National Subsea Research Initiative (NSRI) An increased number of companies in the supply chain have engaged with our Enterprise and Support agencies and a number of new international offices in regions such as Africa and the Middle East have been opened A Scottish Enterprise Innovation support mechanism Seek and Solve, to help large companies build relationships with SMEs was launched International Benchmarking research was undertaken to help identify priority areas for investment in future infrastructure Progress has been made on a number of strategic infrastructure projects such as the Aberdeen Western Peripheral Route, the development of the proposed new Exhibition Centre as well as progress on the development of Aberdeen Harbour The Energetica area in the North East continues to be developed with a current emphasis on R&D related investment The Aberdeen City Region Deal presents a significant opportunity for increased investment in the North East We have worked with Decom North Sea on additional further mapping of the decommissioning supply chain and assessment of its capability Key research on Enhanced Oil Recovery using CO 2 has been published An Energy Skills Investment Plan and the establishment of the Oil and Gas Academy of Scotland (OGAS) has been launched Why refresh the strategy now? The industry is at a crucial point, where it must adapt to survive and thrive in a low global oil price scene, a changing commercial and regulatory environment and a maturing North Sea basin with fierce international competition for investment. In this context it is appropriate to review and refresh the strategy, guided by industry partners and stakeholders, in order to fully reflect the opportunities and challenges facing the industry today. At present, the oil and gas industry is facing some severe and significant challenges and there has already been a negative impact on jobs and the profitability of the sector. The current situation makes it more difficult to deliver the long-term objective to extract the maximum possible value from the resources remaining in the UK Continental Shelf (UKCS). Addressing this will not only generate significant value from production itself but will also ensure we have a dynamic and competitive industry that will endure and deliver wider economic value to both the Scottish and UK economies, not least through international activity. OIL + GAS STRATEGY

6 Despite current challenges, new projects continue to be developed, firms are still winning business and our skills and know-how continue to be in demand around the globe. However, there is widespread recognition that action is required by the industry, stakeholders including government and the new regulator, the Oil and Gas Authority (OGA) to ensure that investment conditions in the UKCS are suitable to continue to attract investment in a globally competitive market. In undertaking this strategy refresh, we have ensured that it has been industry led through wide consultation and discussion from all parts of the oil and gas sector including trade bodies, operators, contractors, SMEs, Trade Unions and other stakeholders. The feedback from our various workshops, surveys and key stakeholder discussions has provided the basis for this refreshed strategy document. What s new? Our refreshed vision for the future of the sector is as follows: The Oil and Gas Industry will be focused on maximising production from the UKCS and maximising the value it generates for the Scottish and UK economies as a whole. Our supply chain will experience an entrepreneurial transformation which will result in it being seen as one of the most competitive and efficient in the world, with knowledge developed here in demand around the globe. We will be truly renowned for our innovative approach to maximising recovery, keeping our existing strengths while developing new growth opportunities and ensuring that our sector remains anchored here for the long-term. 6 MAXIMISING VALUE

7 The strategic objectives of the 2012 Strategy remain broadly relevant today, but feedback has led us to replace the previous priority Industry Promotion and Place with Invest in Success. This reflects the need to continue to invest in the sector and infrastructure to help unlock further growth. We have also expanded the skills priority into People and Skills. This Strategy therefore now focuses on the following six Strategic Priority Areas: Supply Chain Domestic Supply Chain International Innovation The vision of our strategy and the specific focus of each priority have been considered in order to fully reflect current challenges and future opportunities. Underpinning these will be a new model of working, with strong leadership and increased collaboration within industry, supported where appropriate by the public sector. In line with the Maximise Economic Recovery (MER) and Total Value Added (TVA) 1 approach, the overall driving force will be to maximise value from the UKCS both in terms of output, and in the widest possible contribution to the wider economy through supporting jobs, leverage of the company base and by continuing to enhance our international performance. Invest in Success New Opportunities People and Skills 1. Scotland s Independent Expert Commission on Oil and Gas : Maximising the Total Value Added (2014) OIL + GAS STRATEGY

8 Maximising Economic Recovery - the Wood Review 2 identified a number of key issues facing the UKCS, including a lack of focus on maximising economic recovery for the UK as a whole operators generally pursue individual commercial objectives in isolation of any shared commitment to maximise economic recovery across fields or within regions of the UKCS. Maximising Economic Recovery is about a partnership between industry, the regulator and governments to think collectively about the need for investment in shared infrastructure, for instance, and greater collaboration across the supply chain and a greater focus upon proactive stewardship of the UK basin. Total Value Added is the sum of 3 components namely; 1. That derived directly from the UKCS in the wages, profits and related taxes from production activity 2. The indirect contribution from wages, profits and taxes of the supply chain; and 3. The extra induced activity of the supply chain, in export markets and other non-oil sectors, from UKCS activity in the form of further wages, profits and taxes It is therefore a measure of the maximum value added by the whole industry to the economy. A number of factors are crucial in bringing about the optimal conditions for future growth within the sector; these include: The tax and fiscal regime The regulatory regime An effective and well managed offshore infrastructure A cost effective and efficient supply chain Development and deployment of innovation and technology and An engaged and skilled workforce 8 MAXIMISING VALUE The first three factors are mainly addressed at a UK level through discussions between Governments, Treasury, Industry as well as the Oil and Gas Authority. This strategy therefore has a focus on the latter three factors and in particular an even greater focus upon supporting the growth of the supply chain than in the previous strategy. A step-change in thinking is required to meet the challenge of maximising recovery from the UKCS, as well as continuing to be a leader globally. The strategy consultation highlighted the need for a greater focus upon the supply chain as a driver for change. It also told us that there needs to be increased focus on leadership, particularly from operators but also from the supply chain in terms of building new and more productive relationships, the promotion of collaboration and overall the need for the industry to accept, embrace and deliver change. 2.

9 In a globally competitive environment it is the strength of our supply chain which will be the long-term source of our competitive advantage. The industry as a whole must realise that the supply chain, given the opportunity, can invest in and provide the solutions needed to meet current challenges. To do this, the supply chain has to demonstrate it can respond and provide solutions. Operators and contractors need to clearly articulate their demands and challenge the supply chain to meet their requirements. A key aim of this strategy is to develop the supply chain s ability to thrive in a new more collaborative way. The investment required to achieve maximum economic recovery can only be achieved by reducing costs and enhancing efficiency which can be delivered by the supply chain. The conversations and actions to develop new models and attract future investment across the supply chain is therefore a key requirement. From this will stem investment to maximise both recovery and value, firstly from UK production and subsequently international opportunity. We need to be bold in the long-term we want to: Be ranked in the top 3 countries globally in terms of innovation and technology development for the sector, and maintain that position in the long-term, even when production from the UKCS has ceased Be recognised worldwide as having centres of excellence; in areas such as Subsea, Asset Integrity, Digital Offshore and Decommissioning This industry still has a long-term future if we do the right things. The aim has to be to create the opportunities of the future to encourage investment, to maximise recovery, develop real leading edge technology development. To do this we must ensure our supply chain, based on a strong reputation for cost competitiveness and technology leadership, is at the heart of our future growth both domestically and internationally. Role of the Industry Leadership Group In some areas, the ILG and its members will be the lead body responsible for driving the actions contained within this strategy refresh. In other areas it will play more of a supporting role and will be looking to others to deliver and progress with ILG support. The ILG also has a wider role to act as a champion, reinforcing the importance of the industry to the UK and Scottish economies and to work with both Governments to ensure that the industry benefits from a stable and supportive fiscal and regulatory regime. We welcome the establishment in January 2015 of the Energy Jobs Task Force and we have ensured that its priorities and work are incorporated into this strategy. The Scottish Government s Economic Strategy, which was refreshed in March 2015, looks to increase competitiveness and boost investment and innovation, and maintains our focus on increasing internationalisation. These approaches are all complementary to this strategy refresh. Maintain a vibrant oil and gas industry supply chain based here in Scotland - driving forward a profitable and competitive sector both in the UK and supporting worldwide markets and opportunities OIL + GAS STRATEGY

10 THE SECTOR ENVIRONMENT THE UKCS TODAY Percentage of production in 2014 compared to 2007 production levels The industry supports around 375,000 jobs in the UK of which between 40% and 50% are in Scotland OIL GAS 53% 48% Over 43 billion barrels of oil equivalent have been produced to date In 2014, oil & gas production is estimated to have been worth 13.1 billion to the Scottish economy. Overall recovery estimated up to 20 billion barrels of oil equivalent Expenditure in the UKCS There are around 2000 companies in the supply chain in Scotland The UKCS is a mature region costs have been rising while exploration and production has decreased N/K 2015 (expected) billion In 2013, international activity CAPEX OPEX Exploration Decommissioning accounted for 11.2 billion: over 50% of supply chain sales Sources: Oil & Gas UK, Scottish Government, Scottish Enterprise 10 MAXIMISING VALUE

11 In recent years, expenditure in the UKCS has been high in historical terms. More than 50 billion of capital investment was committed over the last five years, due mainly to the development of a number of large projects. Operating expenditure in the UKCS continued to increase year on year over this period, although half of this growth was driven by activity on new projects, whilst the remainder came from cost increases on existing assets. 3 As the industry itself states 4, there needs to be a balance between continued investment for the future and cost and efficiency improvements to deal with the current situation. The current challenges around the cost base of the UKCS existed before the recent price fall but the spotlight upon this issue has exacerbated the situation. There has been significant and unsustainable cost inflation within the CHALLENGES sector in recent years with unit operating costs in the UK quadrupling in the last ten years. In addition, the current level of exploration and appraisal (E&A) drilling is low in historical terms. In particular, the current level of exploration drilling is the lowest since 1965 and there is recognition of the need to incentivise drilling for new finds. This matters because a low level of E & A activity now means that new oil and gas reserves are unlikely to be found and this will have an impact on longer term activity and production. Despite this, we are viewed as a globally recognised centre of expertise in many parts of the industry including subsea engineering, asset management, well services, safety and training. OPPORTUNITIES HIGH COST BASE LOWER EXPLORATION AND PRODUCTION LEVELS INNOVATION AND ADOPTION - LOWER COSTS AND COMPETITIVE ADVANTAGE LONG FUTURE FOR THE UKCS THROUGH MER MATURITY OF FIELDS AND ASSETS LOWER PRICE OF OIL AND GLOBAL COMPETITION FOR INVESTMENT GLOBAL RECOGNITION FOR EXCELLENCE AND EXPERIENCE INTERNATIONAL MARKET OPPORTUNITIES 3. Oil and Gas UK Activity Survey Oil and Gas UK Activity Survey 2015 OIL + GAS STRATEGY

12 Consultation with industry identified the following key areas to maximise economic recovery. Fiscal Reform The concept of Maximising Economic Recovery is firmly grounded in a tripartite approach between industry, government and the new OGA. Given the challenges presented by lower oil prices and an increasingly complex operating environment, a key role for government will be to ensure that the fiscal regime is stable, predictable and internationally competitive. The tax changes announced in 2015 have been broadly welcomed by the industry. However, further action is required to remove fiscal barriers for exploration and late life asset transfers, and to review whether headline rates in the UKCS remain competitive. The Scottish Government is committed to working with industry, the regulator and the UK Government going forward to ensure that the recent fiscal reforms deliver the desired outcomes, and that further change is considered where necessary to safeguard and support continued investment. Regulatory Reform Following the Wood Review, a new regulator, the Oil and Gas Authority was set up to encourage effective stewardship of assets and shape collaborative behaviours in areas such as sharing data and access to infrastructure. There is a strong message from the industry of the vital role that the OGA needs to play, in partnership with industry and Governments in response to the current challenges. The OGA issued a report 5 highlighting two primary risks to the future of the UKCS: That the profitability of the sector currently will be insufficient to attract continued investment That a loss of confidence in the future potential of the UKCS could result in the failure to secure the critical long-term investment necessary to maximise economic recovery of our sector. Collaboration is key to the success of this new regulatory model and that should include constructive engagement between the UK Government and the Scottish Government on their respective oil and gas strategies. Cost/Efficiency There is clear recognition from the industry that there are significant opportunities to develop a fundamentally different industry especially around areas such as supply chain relationships, standardisation, lack of co-operation in areas such as logistics and inventories amongst others which have resulted in an unsustainable cost base. To achieve change, the industry needs to go through the following concurrent process: Cost out (3-9 months) Efficiency (5-19months) Transformational (12-36 months) 6 It is in the Efficiency and in particular the Transformational stages that the supply chain can have a positive and genuinely innovative role. 12 MAXIMISING VALUE Oil and Gas UK

13 A transformational process is required within the supply chain - this will encourage the whole supply chain to introduce innovations that transform the way that the industry as a whole does business. It will create an entrepreneurial dynamic within the supply chain. It is vital that entrepreneurial disruption takes place to drive innovation, reduce cost and increase value. Oil and Gas UK are leading work through the Efficiency Task Force looking at the following three themes: Cooperation, Culture and Behaviours looking at the behavioural changes the sector needs and with an Efficiency Charter and Efficiency Exchange now published Standardisation looking to simplify business approaches and drive standard solutions in order to lower costs, accelerate delivery and reduce operational complexity. Early analysis suggests that simplification and standardisation in areas such as well plugging and abandonment could deliver significant savings This is in addition to new ways of working and behaviours which need to be developed with a focus on priorities, common challenges and collaborating to solve them. There has been some progress but there is general agreement that much more needs to be done to adapt to the new environment. To extend the life of the UK sector, we need to change and reset both the culture and the model. Recent trends Production is expected to increase in the next few years as a result of the levels of investment in recent years There has been an increase in production efficiency levels, but progress has been slow and needs to be accelerated And the costs of operating existing assets is predicted to fall by 22% by Business Process review of day to day operations of the offshore oil and gas industry, exploring how companies can work together to share resources and good practice The situation presents an opportunity for entrepreneurial investment. To encourage investment in future exploration and development, the cost base of the UKCS needs to fall significantly. If this is to be achieved, significant levels of investment in cost saving practices and technologies will need to be implemented to achieve the transformational 7. Source: Oil and Gas UK OIL + GAS STRATEGY

14 Moreover, while our sector is already truly global, internationalisation will continue to be vital. The strength of our existing domestic sector will be central to developing our global impact even further. There is also a need to ensure that current messages that are communicated around the industry are balanced; we need to openly recognise the challenges that face us but at the same time be confident in the long-term future of the industry; communicate our successes and the longer term opportunities that this industry will continue to provide, especially to younger people 8. The industry is robust in many ways and we must be realistic. There are plenty of examples such as in the approach to safety where there has been a successful culture change and a clear demonstration of the benefits of collaboration. A similar approach is needed to bring about a more cost effective sector, which can continue to prosper both domestically and overseas in order to maximise the value of the sector to the Scottish and UK economies. Transformational change requires long-term thinking, sharing of best practice, commitment to a more trusting industry and a change in relationships. We are confident that despite the current challenges, the oil and gas sector will have a long and successful future ahead of it in Scotland, supported by the appropriate government and regulatory approaches and driven by the industry itself to develop a more competitive approach. The ILG can and will make a positive contribution towards this goal. 14 MAXIMISING VALUE 8. See case studies at:

15 OUR PRIORITIES, OUTCOMES AND KEY ACTIONS SUPPLY CHAIN DOMESTIC WHAT OUTCOME DO WE WANT TO ACHIEVE AND WHY? For the Scottish supply chain to be a key driver of change and competitiveness in the North Sea, underpinned by best in class behaviours, values and entrepreneurial drive. The supply chain will be enabled to develop better technology and capabilities as part of a new approach within the industry, delivering reduced cost and improved efficiency to ensure that both UKCS recovery and international opportunities are maximised. The impact on employment from the current slowdown has been felt most significantly within the operator and larger contractor sections of the industry and there is increasing evidence that the impact is now being felt though the supply chain. That said, there are still opportunities, both domestically and internationally and new finds and projects are occurring. For example the current focus on production efficiency provides significant opportunities for companies and the growing maturity of the UKCS means that demand for asset integrity and late life management services are likely to increase. Some of the proposals around enhanced seismic screening of the UKCS and, for example, the development of Regional Clusters by the OGA will also provide opportunities for exploration activity. But there is a clear need to provide additional support to the supply chain to help it react to the current challenges. In the longer term, however, the initial focus on cost reduction will not be enough. A new approach is required where the supply chain is investing in and developing new technologies and approaches based on those opportunities which are expressed by industry. This is driven as much by relationships and trust as it is by technology. The current relationship between operators/contractors and the supply chain has significant scope for improvement in terms of earlier engagement; developing a more trusting relationship and a focus on value and partnership, cooperation and leadership to deliver the change that is required. A number of these changes have already occurred, such as those highlighted by the work of the Efficiency Task Force. The Challenge is to turn these examples into common practice. OIL + GAS STRATEGY

16 We therefore need to better define the future requirements for investment and help the supply chain to understand those opportunities in which they can invest. It is primarily through the supply chain, along with leadership and commitment from operators and large contractors that we can deliver the reduced cost base and improvements in efficiency. SUMMARY OF KEY ACTIONS TO SUPPORT THIS APPROACH WILL INCLUDE: SHORTER TERM ACTIONS Lead and Support We are delivering additional support for the supply chain to help it react to the current challenges with a focus on issues such as leadership, innovation, and financial management as well as building longer-term resilience and competitiveness. Additional resource from our Enterprise Agencies is being deployed to assist companies. For example, a series of workshops focused upon the supply chain took place across Scotland in late 2015/early A new business resilience service, which will draw upon expertise from senior oil and gas leaders to conduct focused resilience reviews for account managed companies in areas such as strategy, operations, finance and market development has also been announced. And research is underway to analyse and understand the extent of gaps in the availability of finance for the oil and gas sector. Enterprise Agencies Supported by Trade Associations As part of this immediate support role, we will also increase the profile of the Scottish Manufacturing Advisory Service (SMAS) to work with more companies on individual company efficiency but also look at how it might make a contribution toward current industry challenges such as Offshore Production Efficiency. Scottish Manufacturing Advisory Service 16 MAXIMISING VALUE

17 MEDIUM AND LONGER TERM ACTIONS Lead and Support Help deliver a more cost efficient sector building on the work carried out to date: Contribute to the current work being led by Oil and Gas UK on cost efficiency as part of the Efficiency Task Force with a particular emphasis upon the supply chain and the positive contribution it can make, for example looking at how the Rapid Efficiency Exchange launched by Oil and Gas UK can be used to provide new opportunities for the supply chain. Work with operators and the supply chain to develop more effective relationships with a focus on articulation of demand; building better relationships and trust so for example working with operators, contractors and regulators to agree industry wide challenges and then engage with the supply chain to help bring solutions forward. Bringing in lessons learned and experience from other sectors to see how they might be applied. For example there is an opportunity to look at procurement models from sectors such as automotive and aerospace. Trade Associations supported by OGA and Enterprise Agencies linked to the Maximising Economic Recovery UK work Highlight case studies throughout the industry to ensure that people and companies are aware of best practice and progress. Work with operators, contractors and procurement teams to look at ways of maximising the value of major projects for the Scottish and UK supply chain. This will include working with the supply chain to ensure that companies are ready to meet the standards required in terms of quality, timescale and overall value. Enterprise Agencies Supported by Trade Associations, Major Operators and Contractors OIL + GAS STRATEGY

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19 SUPPLY CHAIN INTERNATIONAL WHAT OUTCOME DO WE WANT TO ACHIEVE AND WHY? To enhance our already strong global reputation, building on existing strengths and building new ones. We want to see increased international activity, driven by a more dynamic supply chain and a focus on current priority and emerging markets supported by continued inward investment into Scotland. Our reputation for excellence is renowned worldwide. From a recent global survey of 260 leaders within the sector: Almost 80% cited Scotland s important role in the international oil and gas sector 74% recognised Scotland s position as one the world s training grounds for the industry 71% agree that Scottish employees are some of the most dependable in the sector 9 The latest Scottish Enterprise Survey of International Activity reported that in the 2013/14 financial year, international supply chain sales stood at 11.2 billion, an increase of 12% over The international total now accounts for 50.3% of total Scottish oil and gas supply chain sales 10 compared with a third in The Scottish supply chain now operates in 137 countries. While the oil price is affecting the global oil industry, there are opportunities in a number of markets. For example we have seen increased interest in recent months in a number of international markets including the Middle East and Asia. Scottish Development International 11 is currently reviewing its priority markets for international activity in the light of the current slowdown. This will build on a recent set of country guides for selected markets which set out opportunities in those markets matched with Scottish capability. 12 In addition, the GlobalScot network continues to provide advice and assistance to develop new relationships and business opportunities in our key markets. At present attracting inward investment is challenging but there are still opportunities for investment into Scotland, both from existing and new investors although these will be subject to significant competition. However, we should see the decades of skills and know how built in Scotland as providing us with the key factors to attract more investment to Scotland Scottish Enterprise Survey of International Activity in the Oil & Gas Sector 2013/ SDI is the international arm of Scotland s enterprise agencies and is a joint venture between Scottish Enterprise, Highlands and Islands Enterprise and the Scottish Government 12. Available at the Scottish Enterprise Website - OIL + GAS STRATEGY

20 SUMMARY OF KEY ACTIONS TO SUPPORT THIS OUTCOME WILL INCLUDE: Lead and Support Scottish Development International Undertake a review of international market opportunities, covering both current priority and emerging markets to help the supply chain to become even better informed about overseas opportunities. Partners including UK Trade and Investment, Oil and Gas UK, Subsea UK, Local Authorities and Chambers of Commerce, and key trade associations Work with partners and networks such as UK Trade and Investment using their expertise where we do not have specific resources in overseas markets. For example. UKTI also run a number of meet the buyer programmes targeted on large scale infrastructure projects in emerging markets and where some of our oil and gas skills could lead to new business. Scottish Development International and UKTI Promote both trade and investment opportunities based on the fact that the UKCS is a leading hub for late life asset management and also our subsea knowhow. Scottish Development International and UKTI Partners including UK Trade and Investment, Local Authorities, Subsea UK and Chambers of Commerce Maximise our export opportunities by utilising existing networks such as GlobalScot, and also developing a more informal network for SMEs, where companies who want to export to a market for the first time can get informal advice from a company who have previous experience in that market. Scottish Development International Focus on inward investment opportunities linked to our current strengths and in particular to our existing innovation and R&D capability, in both the private sector and academia. Scottish Development International Partners including UKTI, Local Authorities, Chambers and Academia 20 MAXIMISING VALUE

21 INNOVATION WHAT OUTCOME DO WE WANT TO ACHIEVE AND WHY? An enhanced focus on key technology priorities and innovative business models to maximise total value added from the sector. For this to happen we need to see collaboration and driving of deployment and building capability. While we are already viewed as a global hub, keeping such a reputation means that the development and use of technology has to continue, albeit coupled with simplification and further efficiencies. Although this is difficult to measure, historic data suggests that the oil and gas industry in the UK currently spends less on Research & Development as a percentage of sales, around 0.3% compared to the 1% average for the economy as a whole 13. The contribution innovation can make towards the current cost and efficiency agenda is clear. Moreover, innovation can apply as much to changes in processes, culture and behaviours as it can to actual technology and research. Innovation has to be for a purpose and be focused on creating value. There is an opportunity to build on our current position and develop globally renowned centres of excellence; both in our current areas of strength such as Subsea and Asset Integrity and newer and emerging areas such as Decommissioning and Digital Offshore. We also want to encourage the oil and gas industry to both collaborate with, and learn from, other sectors, such as engineering, automotive, sensors and advanced manufacturing, to develop opportunities and efficiencies in a number of new areas. For example, some of the materials now commonplace in aerospace have the potential to make a significant contribution to cost reduction and reliability in the areas of drilling and well integrity. There is recognition that the oil and gas industry could be more open to such opportunities. As part of the consultation for this strategy refresh, there was interest in the concept of an Oil and Gas Industry Technology Centre where a combination of government and industry money is pooled to take forward research on key issues affecting the industry. There are already examples of such centres in other sectors such as aerospace and renewables. One of the key factors behind such an approach is co-operation between industry and academia on agreed priorities. 13. The 2010 R&D Scoreboard, Top 1,000 UK & 1,000 Global Companies by R&D Investment - Department for Business, Innovation & Skills OIL + GAS STRATEGY

22 While we currently have a number of research led bodies and funders, they are of a smaller scale than such centres in other sectors. This new approach would draw in both additional public and private investment and would provide facilities for industry, technology providers and universities to interact, a crucial factor in driving innovation. For example, additional facilities in Scotland in areas such as subsea testing and flow line testing have been identified as being important for the future of the sector. The proposal for an OGTC is now a key part of the recently announced Aberdeen City Region Deal. The work with partners including Scottish Enterprise, the Oil and Gas Innovation Centre (OGIC), Trade Associations, the UK wide Technology Leadership Board 14, the Industry Technology Facilitator and Universities to develop the concept in more detail is now underway. Initially the focus will be to establish solution centres which will use existing facilities and knowhow to help deliver practical solutions for industry challenges. Long term we need to become known as a key technology centre globally as well as a key operations centre. The OGTC can help deliver our ambition around global centres of excellence. 22 MAXIMISING VALUE 14. The TLB comprised senior industry leaders, Governments, Stakeholders, the OGA and others. The TLB has a focus on specific technology priorities and it seeks to integrate the technology system and ensure appropriate connections and communications are in place.

23 SUMMARY OF KEY ACTIONS TO SUPPORT THIS OUTCOME WILL INCLUDE: Develop and deliver the Oil and Gas Technology Centre concept. Seeking to develop a centres of excellence approach in key areas including an assessment of how they operate elsewhere. This will also include looking at enhancing test and research infrastructure which might be required. Provide enhanced Innovaiton Support for companies. For example, Scottish Enterprise has recently announced an increase in the level of Research and Development Grant available for the sector to help support innovation projects as well as help with the cost of hiring innovation professionals. Lead and Support Enterprise Agencies Supported by OGIC, Subsea UK, Universities, OGA, ITF and other industry stakeholders Enterprise Agencies Facilitate cross learning from other sectors and in particular highlight how innovation from other sectors could be applied to oil and gas. For example applications in areas such as sensors, digital and composites will have potential applications in oil and gas and vice versa. There is already a pilot underway around Subsea Engineering and we will build on learning from that. Enterprise Agencies and Trade Associations Provide a clearer route to innovation support for businesses. Through the ILG, we will work with other parties in this area such as OGIC, Innovate UK, the UK Government and funding councils to produce a clearer signposting approach to help smaller companies understand what type of help is available and from where and promote that support more widely to the industry. Enterprise Agencies, Oil and Gas Innovation Centre, National Subsea Research Initiative (NSRI), Scottish Funding Council and Innovate UK Promote investment opportunities based on a clearer understanding and promotion of our research related capability and assets in Scotland an exercise to map out sectoral R & D assets in Scotland due to be completed shortly will assist in that work. Enterprise Agencies, Universities and OGIC Ensure that the Oil and Gas Innovation Centre and the National Subsea Research Initiative continue to develop and meet their objectives. OGIC, NSRI and Enterprise Agencies OIL + GAS STRATEGY

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25 INVEST IN SUCCESS WHAT DO WE WANT TO ACHIEVE AND WHY? The development of key onshore infrastructure projects to enhance our capacity and attract investment. Scotland is established as a global energy hub, we need to continue to make it attractive to investors as the place to invest. We need to remain relevant, attractive and successful to both help anchor the supply chain here for the long- term and also continue to build our international reputation. Our oil and gas industry is in a global investment competition yet the costs of investing in the UKCS are currently among the highest in the world. While Scotland and the North East in particular is viewed as a global hub, future growth could be constrained by physical, human and industrial capacity. Even in the context of the current slowdown, investment to remain competitive and attractive is still required. Location attraction, perceptions of remoteness and poor connectivity can make it difficult for us to attract and access the resources required. Recent research undertaken highlighted that while we had some strengths as an oil and gas location, there was room for improvement in areas such as transport and connectivity 15. If we want to maximise recovery and activity as well as anchor the sector here in the long-term, continued investment is essential, even in the current climate. International companies looking at the region as a location to invest demand the highest standards of infrastructure and compared to other energy hubs the North East is falling short in some areas. Having attracted a huge amount of investment, people and skills to Scotland, and the North East in particular over the decades, we need to anchor people, economic activity and our assets for the long-term opportunities that will remain. Progress has been made. A number of key strategic projects are also being progressed including the beginning of construction of the Aberdeen Western Peripheral Route and development of the proposed new Aberdeen Conference and Exhibition centre, as well as the recently announced expansion of Aberdeen Airport. The Energetica Corridor also continues to be developed with the current emphasis including a stronger focus on R&D related investment. The recently approved Aberdeen City Centre Master plan has won backing from the business community, with a regenerated, vibrant City Centre seen as vital to a wider world-class offering for the region. The recently announced Aberdeen City Region Deal covering investment in innovation, infrastructure and transport, alongside further investment by the Scottish Government in infrastructure projects presents a significant opportunity for increased investment in the region and is very much welcomed by the ILG. A number of members of the ILG itself are involved in the shaping of the City Region Deal. The recent announcement of Opportunity North East, to focus on development and delivery of projects in key sectors of the North East economy is also to be welcomed. 15. The Competitiveness of North East Scotland as an Oil & Gas Hub OIL + GAS STRATEGY

26 SUMMARY OF KEY ACTIONS WILL INCLUDE: Lead and Support Ensuring that the North East and Scotland as a whole has the right long-term physical and digital infrastructure by ensuring that the views of the ILG are fed into the City Region Deal as it develops. Aberdeen City and Aberdeenshire Local Authorities Supported by partners including ILG, Enterprise Agencies, Universities and others Support the promised strategic infrastructure projects such as the proposed new Aberdeen Exhibition centre, expansion of Aberdeen Airport and proposals for enhanced port and harbour capability. Continue to support Energetica, the development corridor between Aberdeen and Peterhead which aims to create a concentration of energy technology companies, housing and leisure facilities. Local Authorities and Scottish Government for strategic projects Supported by Enterprise Agencies Complete the current project looking at the future Ports and Harbours energy infrastructure requirements across Scotland in Spring 2016 and consider what investment might be required to meet future opportunities. Enterprise Agencies 26 MAXIMISING VALUE

27 NEW OPPORTUNITIES WHAT OUTCOME DO WE WANT TO ACHIEVE AND WHY? To use our sectoral skills and know-how to secure opportunities in other sectors. We want companies to pursue new business both within oil and gas and into other sectors. Decommissioning will become an increasingly significant market. Its overall value has been estimated at 46bn between now and 2040; Oil & Gas UK report that over 1bn was spent in 2014 in this area, the highest to date. Our aim is firstly to avoid premature cessation of production and extending field life whilst also ensuring that the decommissioning process is managed effectively and that the Scottish supply chain can capitalise on the value that decommissioning of projects will offer. We want to avoid the risk of a domino scenario where the early closure of a production facility leads to others linked to that facility closing before the end of their economic life. However, it is clear that there will be increasing demand and opportunity for services in this area. A number of decommissioning projects have already taken place, and a number of companies in Scotland have the competencies and skills to diversify into decommissioning. Analysis of the industry 16 found we have strengths in areas such as the cessation of production, removal of hydrocarbons and hazardous materials from infrastructure, disconnection and onshore disposal. Areas where opportunities for significant development exist include well plugging and abandonment while availability of heavy lift vessels could be limited across Europe. Some initial infrastructure investment at Peterhead has taken place and there is significant potential to develop a second dedicated decommissioning facility in Shetland for example. Scotland can play a leading role in the development of the decommissioning market and we will continue to work with partners such as Decom North Sea, the OGA and operators to secure opportunities for the supply chain. This will include developing a clear understanding of operators decommissioning plans and developing programmes and support to ensure that the supply chain has the best possible opportunity to win business. There is also a need to understand in more detail what might be required in terms of port and harbour capability to support decommissioning activities and consider if any further investment to take advantage of the opportunity is needed. In terms of Carbon Capture and Storage (CCS), the recent decision by UK Government to withdraw the funding for the CCS Commercialisation Competition is extremely disappointing. We are currently reviewing the remaining opportunities for CCS in Scotland including the potential for oil%20and%20gas%20decommissioning?anchor=q=decommissioning OIL + GAS STRATEGY

28 industrial CCS and the proposed Caledonia Clean Energy project at Grangemouth which recently secured 4.2m from Scottish and UK Governments. Despite recent events there are still opportunities to use captured CO 2 to enhance hydrocarbon extraction in the Central North Sea. And while there are some uncertainties, it remains a longer term goal with potentially significant economic returns. Oil and Gas can also continue to help develop the Offshore Renewable Industry through skills and knowledge transfer. For example the Offshore Energy Catapult centre is currently developing a programme to promote the transfer of skills on such a basis. SUMMARY OF KEY ACTIONS TO SUPPORT THIS WILL INCLUDE: Outcomes/ Actions Develop further understanding of decommissioning opportunities with a focus on promoting capability, supporting operators to deliver future plans and what investment might be required around infrastructure capacity; with the overall objective of increasing the opportunities for the Scottish supply chain in this area. To work with partners including the OGA in developing a decommissioning action plan Continue to consider what support might be offered to assist the development of Carbon Capture and Storage in Scotland with the objective of maximising the value for the supply chain. And continue to support research into use of CO 2 for Enhanced Recovery. Lead and Support Decom North Sea, OGA and Enterprise Agencies Supported by other Trade Bodies Enterprise Agencies and Scottish Government Continue to promote oil and gas skills and their use in other sectors including helping develop our Offshore Renewables Industry and seek to promote learning and skills cross over between sectors. Enterprise Agencies and Offshore Energy Catapult 28 MAXIMISING VALUE

29 PEOPLE AND SKILLS WHAT OUTCOME DO WE WANT TO ACHIEVE AND WHY? To build the strong leadership required to bring about transformational change in the industry. Leadership at individual, company and industry level is at the core of bringing about the change we require. We also need to continue to promote messages around the career opportunities that the sector will continue to provide despite such difficulties. There have been a significant number of job losses in recent times and unfortunately more are anticipated in the current environment. However, despite the current challenges, the industry will need to continue to attract and develop new entrants for the long-term good of the sector. It is vital, therefore, that the industry continues to send out a strong message about the long-term career prospects it will offer. We must strike a balance between responding to the shortterm issues by delivering the support needed to individuals and companies, and continuing to develop the talent that will be required to support the industry longer term, including the development of emerging leaders. In previous downturns, short-term measures to reduce apprentice and graduate intake have ultimately caused greater damage to the industry when the sector has recovered. Companies are understandably having to adjust and react to the current difficult circumstances but the industry must maintain a longer term view if at all possible and seek to minimise redundancies now wherever possible to keep people and skills within the industry for the future. To help this additional Scottish Government Funding is available for companies to take on apprentices who may have been let go by other companies. In January 2015, the Scottish Government announced the setting up of the Energy Jobs Task Force as a response to the current challenges. It has three main themes: Retain and grow the talent and skills in the industry where possible Deliver support to individuals who are facing redundancy Enhance partnership and collaboration As well as immediate actions to help protect jobs and help people find alternative employment if necessary, such as the Transition Training Fund announced in February 2016, the Taskforce has also set out to help stimulate cultural and behavioural change within the industry. A Shared Principles and Values event was organised in May 2015, bringing together different parts of the industry and this has been widely viewed as accelerating some of the current actions and discussions on building better behaviours and relationships. A follow up event is currently being planned. More information on the Taskforce can be found in Appendix 1. The Industry Leadership Group will be taking forward and monitoring many of the actions which have emerged from the Taskforce such as promotion of balanced messages, support to the supply chain and providing a forum to discuss work on cost efficiency as it relates to the supply chain and beyond. OIL + GAS STRATEGY

30 Currently, there are numerous skills initiatives in place across the industry that can create confusion. OPITO, the skill bodies for the oil and gas industry has recently established a Strategic Alliance in Scotland, involving the Enterprise Agencies, Skills Development Scotland and Oil and Gas UK to support improved connectivity between all the relevant stakeholders and ensure that coherent and targeted skills action plans are developed to help develop better evidence on future skills requirements. This partnership forms part of a larger UK alliance with organisations such as the Department of Business Innovation and Skills and the UK Commission for Employment and Skills (UKCES). SUMMARY OF KEY FUTURE ACTIONS WILL INCLUDE: Outcomes/ Actions In the short term implement the Transition Training Fund announced by the Scottish Government to provide financial support to help individuals retrain into other related sectors or help meet the cost of maintaining licences they need to work in the sector To provide additional support on the theme of leadership to deal with current challenges, through promoting case studies and examples of strong leadership throughout the industry; increase support on leadership training whilst also helping industry to identify and support the next generation of leaders. Seek to emphasise the long-term opportunities that still exist in the sector through promotion of a set of balanced messages which recognise both the current challenges within the sector but also highlight what support is available in the short-term. Develop better evidence on future skills requirements. In particular, support the current work led by OPITO to simplify the numerous skills strategies that are in place to build a stronger more coherent message about future skills priorities. Lead and Support Skills Development Scotland Supported by Government, Energy Skills Partnership, Energy Technology Partnership and other skills related stakeholders Enterprise Agencies, Skills Development Agencies and Trade bodies Supporting work streams from the Energy Jobs Taskforce Supported by Government, Enterprise Agencies and Trade Associations OPITO Supported by Skills Development Scotland, SE and Trade Associations 30 MAXIMISING VALUE

31 MEASURES The targets set out in the original 2012 strategy related to supply chain sales and maximising recovery. We have revisited these goals and adjusted them, as well as adding some others. These changes reflect both the changing market conditions but also the changing priorities of the sector with a greater focus on innovation and efficiency compared with the 2012 strategy. These targets are challenging but they needed to be viewed as aspirational and long-term and have been endorsed by the industry during the consultation for this strategy. Working groups for the main priority areas in this strategy will meet in between full ILG meetings. These will allow a greater focus on relevant issues and actions in each area to ensure that progress is made and responsibilities agreed. A dashboard will be produced for each ILG meeting showing progress in key areas. Our new goals are as follows Achieve total Scottish supply chain sales of 30 billion by 2020 currently they stand at 22bn. See international sales increase to 16bn by currently they stand at 11bn. Work with the industry and support the UKCS target of increasing the level of production efficiency (a target has been set of 80% by 2016 from the 2012 baseline of 60%). Aim to close the gap in sectoral R & D expenditure which currently lies at around 0.3% of sales and is low in comparison to the figure for the economy as a whole of more than 1%. (Some additional work is required to develop measures as the quality of the data in this area is not as robust as it might be). OIL + GAS STRATEGY

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33 APPENDIX 1 The Scottish Oil & Gas Industry Leadership Group The ILG meets three times a year and is co-chaired by Fergus Ewing MSP, the Minister for Energy, Enterprise and Tourism and Melfort Campbell OBE, Chief Executive of the Imes Group. The group has the following focus: To maximise jobs, exports and the sustainability of the Scottish oil and gas supply chain by increasing capability to: Maximise recovery (and value to the Scottish economy) of remaining North Sea Reserves Access current and future business opportunities in oil and gas both domestically and around the world Recognise and diversify into new opportunities in other energy sectors Membership is comprised of a range of operating companies, supply chain companies, representative bodies, academics, colleges and universities, skills bodies as well as the Scottish Government, Scottish Enterprise, Highlands and Islands Enterprise and the UK government. Working with others This strategy refresh will ensure that our work is complementary to that of our partners and stakeholders. We have no desire to duplicate any work or responsibilities being undertaken elsewhere, such as the current work being led by Oil & Gas UK on cost efficiency, and it will be essential we work closely with the new OGA going forward, which has formed some UK wide workgroups in a number of areas. We want to ensure that the work of the ILG complements and supports the work of other groups. There is significant cross representation across these groups to ensure that duplication is minimised, ideas are shared and responsibilities are clear. As stated earlier, in some areas such as developing the supply chain and looking at the centres of excellence ideas, the ILG can play a leading role in conjunction with partners. In other areas such as fiscal matters, it will be for others to lead but the ILG can play a supporting or advocacy role. The creation of the Energy Jobs Taskforce, set up in January 2015, is a demonstration of co-operation in action. OIL + GAS STRATEGY

34 The Energy Jobs Task Force is chaired by Lena Wilson, the Chief Executive of Scottish Enterprise, and it has 6 action areas, with industry champions identified and a number of actions undertaken: Action Area Focus Example of Progress to date Balanced Messaging Cost Efficiencies Develop and communicate a set of key messages reflecting current challenges, balanced by opportunities and highlighting what is being done to support those affected. Pull together industry led work on cost efficiency for the sector. Provide practical help and assistance to the supply chain. Series of Video case studies and Thought Leadership pieces and articles produced by Task Force members. To date we have delivered three video case studies with a further four in the pipeline. OGUK has launched an Efficiency Task Force and a Rapid Efficiency Exchange Portal to share industry best practice, and also created the Industry Behaviours Charter. SE has delivered a series of Resilience in Oil and Gas events, Aberdeen, Dundee, Glasgow, Inverness, Troon attended by 130 companies. Leadership for Change Shared Principles and Values To equip leaders and future leaders in the sector with the skill set and mutual support to deliver strategies and cultural change required in the sector. Commit to working together to promote good practice, demonstrating and embedding behaviours that can protect and sustain jobs in the industry. Over the 12 months to December 2015, Scottish Manufacturing Advisory Service has carried out 38 Manufacturing reviews in the Oil and Gas sector generating 4.3m of Value Add Cost Savings. Leadership has been aligned with the Shared Principles and Values action area. Executive Masterclass Development Programme first cohort of 8 business leaders have completed with second cohort now underway. A series of Executive Leadership events have been delivered, attended by delegates from 108 companies including a Bart Van Ark Masterclass, a Jim Alampi event and a Harvard Leadership Lessons event. Action plan published following May 2015 event, updated in September with a follow up event planned for Spring Following the May event a Tier 1 Contractors Forum is now meeting regularly and focused on issues such as behavioural guidelines and people management. Now greater ongoing engagement between the Unions, OGA and Oil and Gas UK. 34 MAXIMISING VALUE

35 Action Area Focus Example of Progress to date Supporting our People Retain our Talent and Skills Co-ordinated and responsive support to make every individual displaced or at risk of redundancy aware of, and able to access, all of the options and outplacement support available to help them move forward into employment, new ventures, training or education. Encourage and influence flexible approaches to employment that limit job losses and avoid losing skills and talent vital in the medium term. 3 PACE events have now been delivered in Aberdeen which have attracted in excess of 2,500 individuals displaced or at risk. As at January 2016, of 57 Modern Apprentices made redundant; 37 are back in work, with 21 of these supported by the enhanced Adopt an Apprentice offer. Additional focus on supporting new starts. 24 new start ups assisted by Elevator to December Progress a Job Loan concept to support the retention of skills before they are displaced from the industry. An action plan is under development as a checklist for sharing with HR Professionals, to highlight options to mitigate against redundancies. A progress report has been published setting out actions, both underway and planned, in more detail