2Securing the future: sector deal proposal
7.As we set out in our introduction, the UK oil and gas industry is undergoing a period of change, including:
- The drive to maximise economic recovery of the remaining petroleum from the UK Continental Shelf (UKCS). It is estimated that there is between 10 to 20 billion barrels of oil equivalent (boe) of reserves remaining in the UKSC.12 However, the recovery of remaining reserves is becoming more difficult as the larger and easier to access reserves have been depleted;
- The need to prepare for increasing decommissioning activity in the UKCS, to reduce the cost of decommissioning and to build on Scottish engineering expertise to increase the sector’s share of the global decommissioning market.
- The need to strengthen the UK supply chain and diversify its customer base by increasing its exports of goods and services to other markets and sectors; to help ensure a future for the sector beyond oil and gas production in the UKCS;
- To adapt to the need to reduce the industry’s carbon footprint, and find opportunities to use the sector’s skills, technology and engineering knowledge to deliver a low carbon economy.
We will cover each of these challenges in more detail later in this Report.
Vision 2035 and the sector deal proposal
8.In response to these, and other challenges, the sector has set out its “Vision 2035”. This plan is being jointly led by the sector body, Oil & Gas UK, with support from the Oil and Gas Authority (industry regulator) and aims to “double the productive life of the basin through maximising economic recovery and doubling the UK’s share of the global goods and services market.”13 Oil and Gas UK argue that the strategy could deliver “billions” of additional revenue by 2035, “a substantial proportion of which will benefit companies and the workforce in Scotland.”.14 The graph below shows the sector’s forecasts with and without Vision 2035 being delivered - with growth coming both from increased recovery of oil and gas, and a substantial increase to the sector’s exports.
Large parts of the strategy are being delivered by industry itself through efforts to achieve cost and efficiency improvements through the adoption of new technologies, improved collaboration between companies, and by securing additional investment.15 However, the industry is also asking for suppor3 from the UK Government through its sector deal proposal.
9.Sector deals are partnerships between the Government and industry on sector-specific issues which aim to “boost productivity, employment, innovation and skills.”16 Sector deals have already been agreed for some industries, including nuclear energy and life sciences and, as part of its Industrial Strategy, the Government is planning on extending these partnerships to other parts of the economy.17
10.The oil and gas sector deal aims to “contribute to Vision 2035, securing highly-skilled jobs, providing energy security and generating up to £1 trillion of revenue for the UK economy.”18 The overall objectives are to:
- Increase productivity, competitiveness and investment;
- Anchor and grow the oil and gas domestic supply chain and double market share of exports;
- Develop transformational technologies to support competitiveness and energy transition.19
11.At the centre of the deal’s proposal is the creation of three Innovation Hubs or “centres of excellence” co-funded by the sector and the UK Government which will “connect academic and scientific research institutions […] working with industrial partners to leverage expertise, knowledge and funding to deliver clean growth, increase productivity and sustain high-value jobs”.20 The areas of focus for the three centres of excellence would be:
- Transformational technology: Focused on developing and deploying technology to support the energy transition to a lower carbon economy while “harnessing the digital revolution to drive productivity, competition and clean growth”. The proposal is for industry and Government to co-invest £50 million (£25 million each) to create a hub as part of the Oil and Gas Technology Centre. It aims to deliver the recovery of 200 million additional boe,21 productivity improvements worth £2.8bn partially through investment in automation and remote operations, and £10bn of benefits in low carbon technologies through a mixture of less carbon intensive production techniques and research into “the production of low carbon, market-ready products” such as hydrogen.22 The sector deal team believe that the total potential value of this centre of excellence is £22.8bn.23
- Underwater innovation:24 Aimed at capitalising on the UK’s global leadership in underwater engineering through investment in R&D in industrial best practice, skills and education to “anchor and diversify” the sector at a time when the global market is expected to grow rapidly. The proposal is for industry and Government to co-invest £88 million (£53 million from industry and £35 million from the UK Government) to create a National Underwater Innovation Hub. The sector deal says that this would deliver 1.3bn additional barrels of production and a 5% share of the global market by 2035, which it estimates to be worth £44bn.
- Decommissioning: Prioritising developing and deploying technology that delivers cost effective decommissioning, with over 100 platforms forecast for removal over the next decade. It also aims to promote decommissioning supply chain capability and export this expertise to global markets. This is already underway through the National Decommissioning Centre, which opened in January 2019 through a partnership between the Oil and Gas Technology Centre and the University of Aberdeen and funded by both the UK and Scottish Governments through the Aberdeen City Region Deal. The key request in the sector deal is for the UK Government to support the development and implementation of a Decommissioning Export Strategy.25
12.The proposed sector deal has five supporting focus areas which are:
- People and skills focuses on developing the next generation of workers, retaining and re-skilling existing workers and exporting the industry’s skills.
- Culture and behaviours prioritises creating a business environment “built on strong collaborative behaviours”, for example, by enabling companies to work together to deliver plans when operating in the same area.
- Carbon Capture, Usage and Storage (CCUS) is described by the sector deal team as “a significant enabler of the UK’s cost-effective transition to a lower carbon economy”. There is a link between oil and gas exploration and production and the expertise needed for CCUS. The sector deal aims to provide input into the Government’s CCUS programme.
- International and export growth focuses on the Vision 2035 aim to increase the UK’s share of the global oil and gas services and technology market. Currently, 80% of supply chain firms do not export. The sector deal seeks to address this by developing a joint strategy with Government to maximise international and export growth.
- Efficiency and productivity seeks to build on the improved efficiency of operations on the UKCS in the past few years through a “commitment to cultural change, improved processes and simplification.”26
13.Oil & Gas UK have said that “these centres will play an important part in maintaining the global recognition of the expertise in oil and gas based in Scotland.”27 The sector deal team told us that their proposals create the opportunity for the industry and the Government to “align behind Vision 2035”.28 The sector deal proposal estimates that a total investment of £176 million can deliver up to £110 billion of potential value between now and 2035 (which is 38% of the total identified in the industry’s Vision 2035). They said that the sector deal is central to achieving Vision 2035:
Without this deal—or a similar focused intervention—we will not deliver Vision 2035. We will not achieve the full potential of MER UK or the additional supply chain value from increased UKCS production or significant additional value from growth in international markets.29
Evaluating the sector deal proposal
14.When we took evidence from the sector deal team we explored how confident they were in their projection that an investment of £176 million could deliver up to £110 billion between now and 2035 and what these projections were based on. Trevor Garlick, from the sector deal team, said while it was difficult to put “a hard prize” against specific investments they had tried to estimate “the scale of the prize.”30 He also said that most of the benefits would come from the expansion of the underwater engineering sector and these figures were based on work done by Scottish Enterprise. He added that while the exact number could be hard to determine “the significant point is that there is a big prize to go for and we feel this helps us get it.”31
15.We also asked the sector deal team what work had been done to develop an implementation plan and governance model for the sector deal. The Government’s Industrial Strategy White Paper, says that sector deal proposals should provide evidence:
that industry commitments can be delivered and that clear governance arrangements will be set up [...] To be credible, deal proposals should include specific delivery plans covering each component of the proposal.32
16.Trevor Garlick told us that the sector deal team had secured funding:
to build an implementation plan and a better business case. What that will be doing is focusing the scope, improving the cost estimates, improving perhaps the business case, but particularly focusing the scope and making sure that whatever we try to put in place in this co-investment model does not duplicate anything else and that it really does fill a gap that we think will make a difference to industrial growth.33
The sector deal team expected these studies to be finished by “the end of the year (2018)”.34 We were also told that the implementation plans would contain concrete milestones that could be used to check the investment was delivering what was promised,35 and that the team envisaged a similar governance model to the Oil and Gas Technology Centre, with a board including academic, industry and sector representatives, with an independent Chair and possible representation from the regulators.36
17.The response to the sector deal from both Governments has been positive. Paul Wheelhouse, Minister for Energy, Connectivity and the Islands, Scottish Government said he “certainly welcomed the oil and gas sector deal,”37 and that he had spoken to the relevant UK Minister and was “keen to engage with the UK Government on how we can support it.”38
18.For the UK Government, Claire Perry, Minister of State, Department for Business, Energy and Industrial Strategy said that she had “been extremely impressed in the work that Trevor Garlick and others have done in […] thinking hard about what the sector needs to do jointly to improve its productivity.” She said that there were on-going conversations about the deal, which she was understandably unwilling to discuss in a public forum:
All the sector deals are a conversation about, “In order to give you X, what will you do?” […] For example, if I can refer to the offshore wind sector deal […] where, in return for clarity [on] the future auction structure, we are asking for commitments, particularly about the onshoring of UK supply chains and jobs.39
19.Emily Bourne, Director for Energy Development and Resilience, BEIS, said that the department was “very positive about the proposals that the industry has put forward. We would like to talk to it more about some particular areas […] including the role of the sector in energy transition. There may be iterations to be discussed.” When she appeared before us at the end of December, the Minister said that she hoped that there would be an announcement on government support for the industry “in weeks, not months”, she also suggested that this sector deal may be announced in stages and might look different from previous sector deals.
The other thing with sector deals is you get version 1.0 and, as we have done with this sector over many years, you then get iterations. It may be that we announce some things that we are going to do together, but then we put on the table bigger conversations or other directions we would like to work at together. Whether we call that a sector deal or an ongoing partnership is a moot point, but clearly this is a sector that is absolutely vital to our economy.40
20.We support the proposals for an oil and gas sector deal which we believe is an ambitious and timely plan of action to strengthen an industry which is so vital to Scotland and the UK’s economy and energy supply. A sector deal would support Scotland’s oil and gas industry through a time of change; cementing its place as a global leader while it responds to new challenges.
21.When we took evidence from the sector deal team it was clear that there was more work to be done in developing the detail of the proposal and we welcome that the Government is seeking clear commitments on what would be delivered in return for this additional investment. We recommend that the UK and Scottish Governments work with the sector to convert the ambition and vision of the sector deal into a plan that will deliver the significant benefits it envisions and prepares the sector for future challenges. There are some areas where we believe the industry could be more specific or ambitious in the commitment it is making in return for this investment, which we will address later in this Report.
12 OGI19
16 BEIS, Introduction to Sector Deals, 27 November 2017
17 BEIS, Introduction to Sector Deals, 27 November 2017
21 Barrels of oil equivalent
24 During this inquiry most witnesses used the terms “subsea engineering” and “underwater engineering” interchangeably and we have followed this approach.
32 UK Government, Industrial Strategy, 2017, page 210
40 Q364
Published: 4 February 2019