Seeking the next wave
As output slows and taxes bite, an oil town looks to new markets
WHEN George Osborne presented his “pro-growth” budget to Parliament in March he cited London and Liverpool twice each, and Germany no fewer than six times. Yet the chancellor made no mention of Aberdeen, a Scottish city of around 200,000 people that is home to the North Sea oil industry. Perhaps he should have, because the “Granite City”, lifted by high crude prices and teeming with enterprise, has been booming despite the steady decline in Britain’s ageing oilfields.
Perhaps Mr Osborne was sheepish about praising Aberdeen because he was about to hit its main industry with an extra £2 billion a year in taxes. This has dealt a heavy blow to the industry’s hitherto bullish mood, according to a survey published on May 4th by Oil & Gas UK, a lobby group. A report from academics at Aberdeen University said the tax rise could cut North Sea investment by £30 billion over the next decade. The government disputes this.
Although there are still thought to be around 20 billion barrels of the black stuff under the waters off Aberdeen, extracting it is getting ever more difficult and costly. Britain’s North Sea production peaked in 1999 at 4.5m barrels a day, and will decline to just 2m by 2016, according to Oil & Gas UK. Giants such as Shell and Exxon Mobil are drifting away, lured by more bountiful reserves in Africa and the Americas. Of the 440,000 workers Britain’s hydrocarbons industry supports, one-tenth are based in Aberdeen itself, so it is highly vulnerable to any decline in oil-related activity.
However, a new generation of smaller producers is taking over fields left by the oil giants, seeking to squeeze the last drops out of them. Ithaca Energy, a Canadian company, now operates in four North Sea fields off the British coast. Xcite Energy, owned by former employees of ConocoPhillips, is headquartered in Aberdeen and working the deepwater Bentley field.
More promising still, the expertise that Aberdonian oilmen have built up over decades on rain-lashed rigs is now being used to create high-tech start-up companies, which are exporting to offshore producers the world over.
One such is Flexlife, which makes equipment to detect and repair faults on the pipelines that connect undersea wells to floating platforms. The company began life in 2007 as a two-man operation, with a £20,000 bank loan. But it now employs 65 people and its revenues grew by 50% in the year to March, to around £7.5m. In 2010 two private-equity firms invested £5.5m to help the firm expand into new markets, including Brazil, Malaysia and Angola.
Red Spider, founded in 2003, is another nimble niche operator. Its patented technology shuts off the flow of oil through a valve quickly and remotely—a process that usually takes up to 36 hours and costs at least £500,000. The firm expects revenues to rise from £11m this year to £20m by 2013, with three-quarters of new business coming from Norway, the Americas and Asia.
So although the oilmen are full of gloom over the tax rise, Aberdeen’s enterprising spirit may see it through. The city’s boom offers a sharp contrast to the economic gloom elsewhere in northern Britain. Its house prices are closing in on pre-recession levels. Its smart hotels are booked up months in advance. Aberdeen, says Steve Nicol, Red Spider’s boss, “is like nowhere else”, a bustling mini-economy run by globally minded entrepreneurs. A recent survey by Campbell Dallas, an accounting firm, found that Aberdeen was one of only two British cities in 2009 to create more new companies than it lost. That, if nothing else, should grab the attention of Britain’s pro-growth chancellor.