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Aberdeen Energy report October 2008


Aberdeen: a global center of excellence for oil and gas »Part

1 – Life after forty: a second wind for the UKCS?

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he discovery of significant oil deposits in the North Sea during the 1960s and 1970s marked the beginning of a new era and a definitive turning point in the modern history of Aberdeen, Scotland’s third largest city. Not only did the city (and, more broadly, the Northeast of Scotland) become the UK’s main base for oil and gas operations in the North Sea, it also established itself over the years as – arguably – Europe’s oil capital and one of the industry’s most important global hubs. “Although Aberdeen is a provincial city of only 220,000 people, it is the base of one of the UK’s only two truly global economic sectors, oil and gas, the other being financial services,” underlines Geoff Runcie, Chief Executive of the Aberdeen and Grampian Chamber of Commerce (AGCC). Over the last four decades, Aberdeen has experienced the ups and downs of the oil and gas industry first-hand and matured alongside the UK’s Continental Shelf (UKCS). After the early years in which foreign players dominated almost entirely the services market for the industry, a myriad of local companies slowly emerged and joined the international firms, consolidating a highly diversified and integrated supply chain concentrated in Aberdeen. Today, despite a widely unexpected revival of the ageing oil province thanks to the effects of sustained high oil prices, everyone in Aberdeen and the UK can’t help but wonder just how much longer it can maintain its position as a global centre of excellence for oil and gas, even as the UKCS moves well into a period of longterm decline. Project coordination: Carolina Oddone Text and research: Robert Murillo This supplement was produced by Focus Reports LLC. For more information and exclusive interviews, log on to www.focusreports.net

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Not that you would be likely to get any type of ‘decline’ sensation while driving down the Bentley-filled streets of the Granite City, checking out property prices or trying to get a table at one of the city’s many high-end restaurants. Indeed, in just one generation the oil and gas industry has catapulted a once economically stagnant region towards having one of the highest GDP (Gross Domestic Product) per capita in all of the UK, and an unemployment rate of less than 2%. If anything, the number one challenge for companies – from the supermajors to the small suppliers – is the lack of available skilled workforce in Aberdeen to keep up with demand deriving not only from the North Sea, but also from oil provinces around the world. Still, numbers don’t lie and what is clear is that the main source of Aberdeen’s wealth and prosperity, the UKCS, is dwindling. After attaining a production peak of 4.5 million barrels of oil equivalent per day (boepd) in 1999, daily production in 2008 has averaged only about 2.7 million boepd, with most producing fields in their decline phase. How these figures are likely to evolve and exactly how much oil and gas can still be recovered from the UKCS is a matter for debate and the estimations vary. Professor Alex Kemp from Aberdeen University, one of the most prominent analysts on the issue, has elaborated models which indicate that between 2008 and 2035 total oil and gas output from the UKCS will amount to somewhere between 17 and 20 billion boe, depending on variables like price fluctuations and exploration activity.

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Aberdeen’s center and emblematic Union Street Source: Aberdeen City Council

Kemp’s calculations are slightly more conservative than the figure of 21 billion put forward by the government (with a potential upside of up to 30 billion) and the estimates of 25 billion used by the trade association Oil & Gas UK. However, unlike Kemp’s model, both the government and industry numbers consider production will go on beyond 2035. “We also consider that production is likely to continue towards 2040, though at very small amounts,” says Kemp. Future projections aside, all agree that ultimately the continuity of production from the UKCS will depend on a combination of optimizing existing production, bringing on stream undeveloped fields, and continuing the exploration effort so as to add reserves. Maturity has also meant that the average size of new discoveries has decreased considerably in the UKCS. Adding this to the fact that many of these discoveries tend to be geologically complex fields and far from existing infrastructure, it is no wonder that the average cost per barrel in the UKCS is notably higher than in other oil provinces. The high oil price environment of recent years has managed to encourage established players in the UKCS to continue investing in existing fields and rekindled the interest of new companies to enter the region, but many of the challenges facing the industry have yet to be tackled.

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Keeping the window of opportunity open It was only in 2007 that the main trade bodies in the UK representing the operators (oil companies), on one side, and the contractors, on the other, decided to come together and form Oil & Gas UK (OGUK) to jointly address the issues affecting the whole industry. Malcolm Webb, Oil & Gas UK’s Chief Executive, explains that “it had become clear that it would be of great interest for all parts of the value chain to have an association which could act as a single – though not exclusive – voice for the industry, particularly in order to raise our profile amongst the government and the general population.” As the main spokesbody for the industry, OGUK represents the sector and interacts with policy-makers at different levels, from local governments to Brussels. OGUK has been proactive in engaging the British government, at a moment in which it is increasingly under pressure due to concerns about the cost and security of energy supplies. Webb maintains that there is a ‘window of opportunity’ to seize in the North Sea while the existing infrastructure is still operational, but there are many obstacles to overcome in order to ensure that the UKCS remains a dynamic producing region and continues contributing to the country’s energy supply and wealth. “There is no magic switch that can change the production profile of the UKCS overnight. The only way to achieve this is through sustained capital investment, meaning billions of pounds if we are to recover the full 25 billion barrels of reserves estimated in the basin”,

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Malcolm Webb, Chief Executive, Oil & Gas UK

affirms Webb, adding that “to this end, the industry needs to have the right business climate: on one hand fiscal stability and predictability, which as not been the case in recent years. On the other hand, we need specific stimulus to capital investments in order to start seeing a more positive trend in a few years’ time.” For OGUK, the special incentives should focus particularly on promoting investment in marginal field opportunities, unlocking the reservoirs West of Shetlands, and encouraging enhanced oil recovery from existing operations.

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As major oil companies tend to focus their resources and efforts on the big plays in regions like West Africa and the Caspian, new opportunities have been opening up for medium-sized operators in UKCS. These dynamic players have been arriving en masse over the last several years and setting up offices in Aberdeen, an encouraging sign for the city and the mature UKCS. In Prof. Kemp’s view, towards the future, “the UKCS is going to depend more and more on these types of players, so the government has been proactive in trying to attract them to continue coming and investing.” One of the most notable entries to the UKCS was achieved by Texas-based Apache in 2003, when it acquired BP’s Forties Field – the largest field ever found in the UK North Sea, discovered in 1970 – and has since managed to not only increase production, but also add new reserves to the ageing assets. Talisman Energy, an international oil company from Canada, is another one of the success stories regarding acquisitions and turnarounds of mature fields in the UKCS. As one of the pioneers of this trend, Talisman established a diversified UK portfolio, allowing it to become one of the biggest operators in the UKCS. Aberdeen-based Dana Petroleum and Venture Petroleum have built on their North Sea success to expand their E&P activities abroad.

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An interesting aspect of the UKCS’ E&P landscape in recent years is the high number of Canadian companies investing and operating in the area. The Buzzard Field, the UKCS’ largest discovery in over a decade with over 500 million boe, was brought on stream by mid-tier Canadian operator Nexen in early 2007, following the company’s major asset acquisitions in the area in 2004. Fellow PetroCanada also holds a significant non-operated interest in the Buzzard project. North Sea-focused Oilexco entered in 2002 and has since been one of the most prolific companies in terms of drilling in the UKCS. Yet another Canadian and UKCS-focused company, Ithaca Energy, entered in 2003 through participation in licensing rounds and has made considerable discoveries. “Canadian oil and gas corporations are entrepreneurial in their outlook and willing to diversify overseas and internationally,” suggests Iain McKendrick, Chief Operations Officer (COO) of Ithaca, adding that in terms of the kind of reservoirs that they have been dealing with, “the North Sea is well suited for Canadian companies’ technical capabilities and risk profile.” In 2008, Ithaca has been busy raising funds in order to finance its ambitious exploration, development and acquisition plans in the UKCS. The company’s Jacky and Athena discoveries are expected to come into production in late 2008 and 2009 respectively, while the Stella assets bought from Shell and Esso are slated to come on stream in 2010. Ithaca has also spent much of 2008 finalizing the details regarding the acquisition of Talisman’s Beatrice and Nigg facilities, in a transaction that will free Talisman of assets too

small for its now larger scale, while giving Ithaca the opportunity to develop infrastructure for neighboring Jacky. In McKendrick’s view, investors are putting their money into Ithaca for two main reasons. “The first is the quality of our portfolio, and the fact that we take high equity interest in all of our assets. Ithaca has interests of 90% on Jackie, 70% on Athena, 66% on Stella and 100% on Beatrice. The second is the quality of the people who work on our developments, some of which are recognized experts in their fields,” he says. Ithaca does not rule out potentially making company acquisitions of its own in the future, after having rejected a non-binding offer made public by Endeavour. “The number of independent companies we see in the UKCS is unsustainable,” states McKendrick, adding that “within the current banking situation, many are going to find themselves high on ambition but short on cash.” Though Petro-Canada is a much larger and internationalized (after the 2002 acquisition of Veba Oil & Gas’ upstream operations) player, the UKCS also represents a large chunk of the company’s overseas production, primarily through its interest in Buzzard, with the remainder coming from the company’s operated assets around Trinity and Scott. Petro-Canada inherited assets scattered over a large swath of territory in the UKCS, which, according to the company’s Northwest Europe Regional Manager, Jim Scrimgeour, required developing a ‘concentric growth approach’, based on core areas with infrastructure to which the other surrounding fields are tied back.

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“The key example is the Triton core area, which receives the oil from the Western Extension, Clapham and Pict fields,” states Scrimgeour. “Pict illustrates how Petro-Canada is bringing to developJohn Scrimgeour, ment fallow fields Northwest Europe discovered almost Regional Manager, Petro-Canada two decades ago. These are all small fields of between 10 to 20 million barrels of oil, but we are able to make them highly profitable,” he adds, highlighting the company’s contract strategy that has allowed it to sanction first oil in 15 months in some cases, “which is exceptional.” “The main challenge in the coming years will be to have access to acreage, and we hope that the government keeps delivering. There are licensing rounds coming up and fallow processes which could allow us to invest in exploration ideas developed by smaller companies,” states Scrimgeour, adding that “growth will probably be based more

on exploration than on acquisitions, but they are not completely ruled out either.” All these dynamic Canadian players have had to share the headlines in 2008 with TAQA (Abu Dhabi National Energy Company), a fast-growing energy group based in Abu Dhabi, after acquiring six mature fields in the UKCS in July. TAQA had already set its foot in the UK initially when it acquired Talisman’s non-operating interests in the Brae assets in 2007, afterwards finalizing its ‘Big Bird’ transaction with Shell and ExxonMobil in 2008 for assets currently producing about 40,000 boepd and containing between 200 and 300 million boe in reserves, according to the company’s own numbers. Peter Barker-Homek, CEO of TAQA worldwide, was recruited in 2006 shortly after an IPO, with the mission to turn a company essentially focused on the power generation business in the UAE into a global energy group. “They basically asked me what I would do if I had the opportunity to build a global energy company. I shared my vision with them, and they said go do it. Needless to say, it was a dream come true,” states Barker-Homek. In record time, he put together a small team to assess different opportunities around the world, and with $4.5 billion in their pockets went on to make acquisitions in Canada, Africa, Northern Europe and the Middle East. According to Barker-Homek, the UK acquisition “is a defining moment for TAQA’s European business, creating an upstream player of a considerable size. We have gained not only a significant amount of reserves, but also the opportunity to grow them,” states Barker-

Leo Koot, TAQA Managing Director UK (left); Peter Barker-Homek, TAQA CEO (center); Paul van Gelder, TAQA Managing Director Europe (right)

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Total’s Alwyn North platform

Homek. “TAQA is dedicated to giving new life to mature assets, which the majors tend to keep in harvest mode. We are playing a key role in reinvigorating those assets in the North Sea, while at the same time helping fuel the prosperity of Aberdeen.” A brand new office building in the Westhill area will house TAQA’s growing staff, which is expected to reach between 400 and 600 people. TAQA’s Managing Director for the UK, Leo Koot, explains that the company will continue to build around the existing assets as hubs, seek opportunities to acquire other mature assets, and look into the possibilities for corporate acquisitions in the area. “All of this will take us to the next level in which we will be aiming to double production,” states Koot.

Still a majors’ world after all Major oil companies the likes of BP were the main architects of the huge developments that quickly turned the North Sea into one of the world’s main producing regions in the 1970s. Today, however, the big reservoirs and mega-projects which are material to a supermajor are located in oil provinces in Africa, South America and Asia, while most of the existing UKCS fields are in decline and the possibilities of major discoveries in the region are very slim. So, does this mean the end of the line of the supermajors in the UKCS? Not so fast, says Roland Festor, Managing Director of Total E&P UK. “There is still a lot of potential in the UKCS, even for the major oil companies,” he affirms, adding that “it is not right to consider that the only dynamic companies are the independents. I can say that Total E&P UK, after 40 years, remains very dynamic; there is a great atmosphere and a desire to stop the decline and get production growing again.” Although Total’s production in the UKCS is currently declining, recent discoveries are leading the company to believe that it is not only possible to stabilize production – 250,000 boepd, representing 10% of Total worldwide – but that it may actually rise again. “We have had incredible success in exploration, with our last five wells drilled turning into discoveries,” affirms Festor. Total’s achievements are illustrated by its enduring Alwyn development, which came on stream in 1987 with an initial production profile of 10 years yet is still on stream today in 2008 and looking forward to 20 more years of life. Total is also set to play a key role in the development of the West of Shetlands, where it is operator of the two largest gas discover-

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ies in the area, Laggan and Tormore. According to Festor, “we are looking to launch a new project there and hoping to move into the development phase in the near term. Our two discoveries are very close to each other and contain enough gas to build a stand-alone project; however, they are not big enough to support the construction of a large regional infrastructure development.” Indeed, in order to begin developing the considerable amount of reserves sitting in the West of Shetlands to its full potential, brand new infrastructure will have to be built in the area. In order to work together to find infrastructure solutions for the West of Shetlands, government and industry have established a ‘West of Shetland Taskforce.’ Along with Total, other companies with interests in the area such as BP, Chevron, ExxonMobil, and Dong are part of the special taskforce. For Rick Cohagan, President and Managing Director of Chevron Upstream Europe, the challenge of developing West of Shetlands is a prime example of why the supermajors are still crucial for the UKCS, as smaller players lack the financial strength to carry out

North Cormorant platform, acquired by TAQA from Shell in summer 2008

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large infrastructure projects. “Overall, the industry works very much like an ecosystem,” says Cohagan. “Every company has its place and role to play, each one making an important contribution to the big picture. In the end it is about finding a way to make all of this work for everybody’s benefit, and maximizing production from the UKCS,” he adds. Chevron has recently contracted a new drill ship with Stena which is set to start drilling wells in the West of Shetlands in late 2008. Though Chevron’s involvement in this area is still in the early stages, and there are major economic and technical challenges to overcome, Cohagan is optimistic about the company’s strong lease position there. “The early indicators we have for our prospects in the West of Shetlands are promising, so we are excited to begin drilling and hopefully have the kind of success that could take us to further development in the coming years.” In terms of existing production, Chevron Upstream Europe represents around 180,000 boepd, with the UK production accounting for 120,000. “The profiles of the fields vary, with some fairly large oil fields like Captain and Alba, which are in their mid-life phase, and gas developments like Britannia, co-operated with ConocoPhillips.” says Cohagan. As for its presence in Aberdeen, not only has Chevron chosen the region as its headquarters for all European E&P operations (including the UK, Norway, Denmark, the Netherlands, the Faeroe Islands, and Greenland), but it also established a new Technology Center in 2006. The center, currently employing around 60 people, carries

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Roland Festor, Managing Director, Total E&P UK

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Rick Cohagan, President & Managing Director, Chevron Upstream Europe

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out research, provides technology services for European operations, and supports global operations. ConocoPhillips’ UK managing director Archie Kennedy shares his peers’ view that there are still good opportunities for the supermajors in the UKCS and that they have a key role to play in the future of the basin. “ConocoPhillips has been one of the most active investors in recent years in the UKCS,” he says, adding Archie Kennedy, UK Managing that “we have reinvented ourselves Director, ConocoPhillips several times over the many years of operations in the country. Our portfolio has evolved; we have changed our competencies, developed new technologies and a huge skills base to reflect our current scope of business in the area." The UK is currently one of ConocoPhillip’s largest business units outside its core area, North America. “The general focus is to attempt to hold the UK’s production roughly flat, which is quite a challenging thing to do in a mature basin. In order to achieve this, we have to grow the base business every year just to keep our production at the same level. This requires considerable investment plus the need for continued success in drilling. We have to ensure that the UK is an attractive place to do business and that our projects remain competitive,” Kennedy says.

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The ever-changing Aberdonian entrepreneur When Sir Ian Wood took over his family’s Aberdeen-based fishing business in 1964, after obtaining a university degree in psychology, few could have imagined that it was the beginning of a career that would lead to the creation of one of the UK’s largest and most successful engineering companies, Wood Group, employing over 26,000 people in 46 countries. The arrival of the first oil people in Aberdeen in the late 1960s, clad in cowboy boots and hats, was quite a culture shock for the locals, and Wood was no exception. But the young Ian Wood soon perceived the huge potential that this new industry in the North Sea could bring for Aberdeen. “I can’t really say I had a long term vision at that point, but I did have a kind of stubbornness and was able to recognize the opportunities that this new industry could bring,” says Wood. Much of Wood’s motivation at that point in his life came as a reaction to what he perceived as the newcomers’ patronizing attitude towards Aberdonians. That filled him with “a real hunger and ambition to prove that a Scottish company could do just as well as the Americans or anyone else,” admits Wood, quickly noting that he is much less parochial nowadays and simply considers himself and the Wood Group as global citizens. That initial drive, however, and his strong focus on getting the right people cemented Wood Group’s early success and served as the guiding lines throughout the company’s evolution.

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The oil price crash in Sir Ian Wood, Chairman, 1986 and Wood’s own Wood Group long-term vision drove him to make diversification and international expansion a cornerstone of the company’s strategy, aspects in which Wood Group was also a pioneer among the other Aberdeen-based service providers. The company has since gone public in 2002, and Sir Ian Wood has taken a step back by handing over his position as Chief Executive to Allister Langlands (Wood remains involved as an active Chairman), but Wood Group’s reputation as an icon of Aberdeen and the North Sea is all but secured. Many in the Granite City express regret that more companies did not take Wood Group’s lead early on in order to become major international players in their own right. Nonetheless, examples of Aberdonian entrepreneurship and business-savvy abound since the beginning of the UK’s offshore industry. One such is Craig Group, a privately-owned company which got started in the North Sea’s shipping business 75 years ago. Douglas Craig, the third generation in the family-run business, led the company’s transformation since the 1970s towards offshore support services for the oil and gas industry. Today it is a company with turnover in excess of $180 million, leader in the supply of stand-by

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vessels in the North Sea, and growing internationally through its oilfield procurement services division. In a whole different business area there is the telecommunications solution provider Nessco, which was founded by Aberdonian Tom Smith in 1979 to service the offshore industry’s specific needs. Today, on top of Nessco’s established position in the UKCS’ oil and gas market, the company has branched out towards new sectors and expanded abroad. Another of Aberdeen’s emblematic entrepreneurs is Jim Milne, founder of the diversified Balmoral Group. Through the subsidiary Balmoral Offshore Engineering (BOE), Milne started providing buoyancy and elastomer products and services to the oil and gas industry over two decades ago. However, the industry’s latest downturn in the late 1990s seriously affected the business, to the point that BOE eventually shut down, after an unsuccessful attempt in 2003 to weather the storm through a joint-venture with its main competitor, CRP Group. Milne was not to remain out for long though, and in 2006 he decided to start Balmoral’s offshore business afresh. Milne and his team moved quickly to design, build, install, and commission a state-of-the-art plant with broad manufacturing facilities. To Milne’s own surprise Balmoral soon secured deepwater contracts for multibillion dollar projects in places like Brazil, India, the Gulf of Mexico and the China Sea. “Initially we assumed that we would have to start with small jobs and gradually work our way up again. I was humbled by the high opinion that the industry kept of Balmoral and its people through the tough years,” he says.

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Another man locally lauded for ‘taking big business back into Scottish hands’ is Bob Keiller. He was responsible for one of the most talked about transactions in recent years: the management buy-out (MBO) of Halliburton’s production services division. Only a few months after joining as managing director in 2004, he realized that the business would be better off alone and soon managed to get Halliburton’s approval to go ahead with the deal. After the long and arduous process of splitting a global business, Production Services Network (PSN) emerged in 2007 as a major contractor with revenues of over $1 billion and strong growth. Though he is reluctant to see himself as an Bob Keiller, CEO, PSN entrepreneur, his actions have won him several prestigious business awards. Many Englishmen have also arrived in Aberdeen with the oil and gas industry, and ended up making the Northeast of Scotland their home, such as Newcastle-born Kevin Mahoney. After moving up the ranks in Santa Fe to subsea superintendent, he left the company in 1992 and founded Yardbury, a business originally focused on the

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recertification of drilling equipment. “Over the years I built Yardbury up from very small beginnings, steadily developing a diverse range of services,” says Mahoney. One of Mahoney’s preferred means of growing the business was through acquisitions, the first being a long established hydraulics company specialized in the repair and manufacture of power units, Glenmac, in 1999. In 2002 Yardbury further expanded its capabilities by acquiring Dee Bridge Electrical Engineers. As a result, “today Yardbury is ready to provide hydraulic, electrical and mechanical services to the oil and gas industry, all in-house and controlled under the same roof,” he states. Internationally, Yardbury took its first major steps in 2003 when it entered into a co-operation agreement with a Libyan drilling contractor to re-certify equipment in that market. Mahoney admits that it was a challenge, “but today Yardbury has its own state of the art workshop in Libya similar to the one in Aberdeen, smaller in scale but with Yardbury management systems."

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PETRO-CANADA IS GROWING IN THE NORTH SEA

Petro-Canada is one of Canada’s largest oil and gas companies, operating in both the upstream and downstream sectors of the industry. Our goal is to create value through the safe and responsible development of oil and gas resources. Our International & Offshore business operates in the North Sea, East Coast Canada, Libya, Syria, and Trinidad and Tobago, and delivers more than half of the company’s oil and gas production. With offices in Aberdeen, The Hague, Stavanger and London, we are successfully growing our business in the U.K. and the Netherlands sectors of the North Sea, with associated exploration activities extending into Norway. Last year we doubled our North Sea production. Our strategy is based on “concentric growth”; phased development around core production areas. This approach has enabled us to build up a world-class execution capability in sub-sea developments, delivering them on time, on budget and, above all, safely. Companies like Petro-Canada are the future for the oil and gas industry in the North Sea. With a focused strategy, high quality assets and great people, it’s a good time to be part of our team. To find out more about Petro-Canada, please visit our website: www.petro-canada.com

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Cutting-edge technology for rough seas With more than 400 fields located around the British Isles, over 40 years the UK’s oil and gas industry has recovered a total of 36 billion boe from beneath the seabed, in one of the world’s most hostile offshore environments. Thanks to its own rough nature, Scotland has become a global centre of excellence in offshore engineering, subsea technology and in the export of offshore goods and services. In developing its Elgin/Franklin Dave MacKay, Managing Director, PD&MS assets, Total has had to overcome serious technological challenges due to extreme high pressure / high temperature (hp/ht) reservoir conditions. For Total’s Roland Festor, Total’s implementation of cutting-edge technology in the UKCS is one of the main elements helping the company attract new talent, at a moment of skill shortages and high turnover in the industry. “Total E&P UK offers both young graduates and experienced people the chance to work on some of the world’s most challenging fields in terms of technology like Elgin/Franklin,” he says. Another heavyweight, Chevron, is looking into opportunities to apply enhanced oil recovery technologies in order to optimize and prolong the production life of its older fields, despite the particularly expensive and technically challenging environment in the North Sea. For Prof. Kemp, mid-sized and independent oil companies are being successful in “extending the lives of the fields and enhancing recovery through increased drilling and the application of new techniques.” Scrimgeour, points out that Petro-Canada is not just about taking over old fields: “We are more about applying new high-end technologies in order to develop fields of different sizes, which allows us to deliver projects on time and on budget that make commercial returns,” he says. Balmoral’s Milne also highlights the great technical challenges the company deals with from Aberdeen, as it works in uncharted territory for projects operating at depths exceeding 3,000 meters. “We can be the last link on jobs that are worth many billions of dollars, so it is a big responsibility,” he admits. But Milne seems to crave the challenge and adrenaline of major undertakings, as illustrated by Balmoral’s current development of the world’s largest bend restrictor. “It is often said that Balmoral will not hesitate to go places where others fear; those who say this are right. I’m at my happiest when involved with innovative and revolutionary materials, processes and products,” he says. Aberdeen has also proved to be a fertile breeding ground for new engineering companies focused on niches within industry. Project Design & Management Services (PD&MS) was created in 2002 by a group of four friends with different backgrounds within the oil and gas sector. Providing primarily engineering and project management support to brownfield developments and rig upgrades, the company went from having just eight employees initially to over 100 in 2008, reaching a turnover in excess of $27 million. Managing director Dave MacKay states

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that they “saw a niche in the market for smaller types of projects, with quick and cost efficient turnarounds.” After six years of steady growth, he feels that PD&MS is nearing the upper end of its niche and is now looking at “taking things to the next level.” 2006 was a year of particularly meteoric growth for PD&MS, raising its profile and reputation among the UK’s oil and gas industry and making it a prized target for an acquisition. “As it has never been our intention to grow to the size of major companies in our Chevron’s Captain FPSO (foreground) and field such as typically wellhead protector platform (background) Wood Group and PSN, our growth strategy contemplated the possibility of being purchased by another player when the moment was right.” Indeed, that moment came in April 2008

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and the buyer was Wilton, a Teesside-based company mainly focused on providing fabrication and offshore mobilization services. According to MacKay, PD&MS and Wilton’s combined capacity allows them to target EPIC type projects which may have previously been out of their individual reaches. “Our initial philosophy of 'no job is considered too small' can now be expanded to include 'and no job is considered too large' and we can provide clients with a direct one-stop shop solution which will include design engineering, procurement and materials management, fabrication and FAT, construction and commissioning elements.”

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A special place for subsea Of the many areas of expertise which have been developed in and around Aberdeen in support of the UKCS offshore industry for over 30 years, the subsea sector stands out as one of the most cutting-edge and innovative. In fact, the Westhill district just outside of the city center is known as ‘SURF city,’ in reference to the high concentration of subsea-focused and related companies in the area. Major subsea contractors such as Subsea 7, Technip, and Acergy all have large headquarters there, supporting operations well beyond the North Sea. Many smaller emerging players specialised in the subsea sector have roots in Aberdeen, and are experiencing phenomenal growth as the global demand for subsea services continues strong. A prime example is TSMarine, established in 2004 in response to the growing needs in the field of subsea decommissioning and rigless intervention solutions. According to Alasdair Cowie, CEO of TSMarine, “The vision from the start has been to engage in these specific subsea activities, not to become an EPIC type company or drilling contractor ourselves. The idea was to open up new opportunities, going beyond the traditional thinking in the subsea market.” After observing several false starts over the last 20 years, Cowie is confident that the subsea well intervention business has finally started to take off, as a more cost effective alternative to drilling rigs. “Operators are now starting to establish long-term subsea field support contracts which include a high level of well intervention, IRM, component installation and indeed decommissioning services. There are only three operators doing subsea well intervention for the moment, but there

is no doubt that they are going to be joined by a large number of the other major oil companies over the next five years,” says Cowie. According to him, as some of the major subsea contractors move on with the majors to massive projects in areas like West Africa and Brazil, “a huge gap opens up which companies like TSMarine are in a prime position to fill.” In 2008 about 70% of TSMarine’s revenues came from overseas, Alasdair Cowie, CEO, TSMarine but Cowie believes that the UKCS should pick up in 2009, allowing the company to establish a 50/50 split between domestic and international business. TSMarine’s turnover has skyrocketed from $18 million in 2005 to an expected $140 million in 2008, driven by major contracts such as the one awarded by Woodside for rigless intervention in offshore Australia. Fresh new resources from both debt and equity are allowing TSMarine to build its own customized vessels and to accelerate growth. William Edgar, chairman of industry body Subsea UK, highlights that about 40,000 people are employed in the country’s subsea sector, which was worth about $9 billion in 2007 and growing at double digits. That is a very significant part of the global subsea market, which is estimated at about $25 billion. Well aware of the sector’s potential and growing needs, the founders of DES Operations set out to develop

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carry out well intervention without the need for a new drilling operation, a long term benefit throughout the life of any field,” he adds. Donald explains that, “BP and Shell were the first to move forward with our technology. While BP decided to use MARS for multiphase pumping in the Gulf of Mexico, Shell focused it on well stimulation in the North Sea.” With the benefits of DES Operations’ solutions proven, the company doubled in size for several years and in 2007 accepted an offer to become a part of the Cameron Group. In Donald’s view, this move has allowed DES Operations to truly globalize its offer to the industry. “Now we are able to support clients in all of their international markets, all while retaining a distinct identity within the Cameron Group. Their global footprint gives us the opportunity to move from the pilot projects phase to full scale implementation capability,” he says. DES Operations is already supplying operations in the North Sea, West Africa, the Gulf of Mexico, and soon in Brazil.

Petrofac’s new headquarters in Aberdeen’s city center

innovative solutions to facilitate companies’ access to subsea wells in terms of processing and production optimization. They eventually came up with several patents for a ‘USB-type port’ which could be retrofitted to the underwater christmas tree, most notably the Multiple Application Reinjection System (MARS) which was filed in 1999. “The business was set up with the aim of lifting reserves for subsea wells to the same level that can be attained through platform wells,” says Ian Donald, co-founder and current Vice President of DES Operations. “We found that the potential upside recovery that could be achieved through the application of MARS in subsea processing was, in certain cases, up to 20%. MARS also gives companies the ability to

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In with the new…in with the old While the UK’s North Sea may not be seeing the type of mega-projects taking place in other oil and gas provinces, there is plenty of work to go around for Aberdeen’s offshore contractors as operators seek to get the most out of decades old assets and push back decommissioning as far as possible. As Archie Kennedy points out, “the bulk of new developments in the UKCS will be relatively smaller fields that will be reliant on existing infrastructure for off-take, as opposed to greenfield projects. Much of that infrastructure is quite mature and maintaining asset integrity is a crucial aspect.” Local major engineering groups such

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as Wood Group and PSN have developed particular brownfield expertise in their North Sea operations, on the back of which they are now supporting production in mature fields around the world. International oil & gas facilities service provider Petrofac also has Aberdeen as its main hub for its Operations Services division, after the acquisition of Atlantic Power & Gas and PGS Production Services in 2002. Through a combination of organic growth and acquisitions, Petrofac is now pulling together a central capability based in Aberdeen offering a full range of services, from operations, maintenance, brownfield modification, well services, production engineering, specialist consulting and training. The company is in the process of bringing everyone together in its new offices in the city centre, where it already has over 700 people working. According to Gordon East, Managing Director of Petrofac Facilities Management, “Petrofac has deep roots and heritage in Aberdeen, and our base in the city is symbolic of our long-term commitment to the region and the North Sea. I believe that the oil & gas industry has many more decades of life here”. In East’s view, one of the keys to Petrofac’s success has long been its ability to generate commercial innovation. The most significant example of this has been the duty-holder model, which Petrofac pioneered over 10 years ago in the North Sea. “Whilst others have followed, Petrofac remains the leading player in this market, and has successfully taken the concept overseas”, he states. One of the company’s main milestones in this regard has been the major contract awarded by Dubai’s government to manage the entirety of its offshore oil and gas assets, which East hopes will open new opportunities in the Middle East and with other National Oil Companies around the world. Besides the Operations Services and its traditional Engineering & Construction business, Petrofac has introduced another innovative approach to the oil and gas industry with its Energy Development division. Indeed, through this division “Petrofac has provided its own capital for upstream and infrastructure projects and is investing alongside its customers and the services it provides, thereby producing another new concept in the industry”, says East. In the UKCS, Petrofac is keen on investing in the development of stranded, marginalized or non-core assets. The company has recently announced achieving field development approval for the Don area, which Petrofac is Cape Industrial Services’ engineers on-site

particularly proud of as many other companies beforehand had been unable to come up with a development solution for that area. Further along the value chain, companies specialized on the maintenance side are also keeping busy and focusing on renewing multi-year contracts with key clients. One of the main players is Aberdeen-based BIS Salamis, whose CEO Ian Nickerson explains that there is an increasingly strong demand for its services in the region since “assets that are already nearing the end of their estimated lifespan are being both upgraded and more rigorously inspected and maintained with the aim of remaining operational for another 10 or even 20 years”. Much like BIS Salamis, Cape Industrial Services has been diversifying from its traditional fabric maintenance and deck operations support offerings towards higher added-value services such as inspection. John Welsh is regional director of Cape’s UK Offshore division running from Aberdeen, which has doubled in turnover in the last five years and now represents 20% of the company’s total revenues. He states that “standing still isn’t an option for John Welsh, Regional Director Cape and we are constantly looking to – UK Offshore, Cape Industrial further enhance our skills portfolio and Services capabilities through training and shared knowledge.”

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For the North Sea and beyond Dominion Gas brought George Yule on board in 2006 to prepare the company for sale, culminating in an MBO in May 2007 and with his becoming chief executive subsequently. After climbing up the ranks of the industry, from the workshop floor through several levels of management, he is now ‘living the dream’ as leader of Dominion Gas’ new and ambitious team. Dominion Gas is a provider of diving and industrial gases and equipment for the offshore sector, and as a complement, also offers engineering solutions. “We are not what some would call a ‘catalogue’ gas company; we are in fact an oilfield services company, focusing on providing total solutions rather than (just) selling gas,” says Yule. Dominion Gas is currently broadening its range of products, services and capabilities; some are being developed organically and others through mergers and acquisitions. Only seven weeks after finalizing the MBO, Dominion Gas bough its closest independent competitor called Global Gas Supplies, making it market leader in UKCS in terms of offshore cylinder gases and giving it new overseas presence in Azerbaijan and Singapore. The UK currently represents about 70% of Dominion Gas’ business, while the remaining 30% is done overseas, but Yule sees this balance shifting in favor of international operations in the coming years. “Aberdeen is a mature market, but it is important that we retain a critical mass of presence here, because it does represent a ‘supermarket’ for many oil and gas and diving companies for their global activities,” states Yule. “Dominion trades from Aberdeen into

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22 different countries, but certain regions require having a physical presence in-country. Our plans are to expand to other areas such as Latin America, Gulf of Mexico, West Africa, and the Middle East but we remain open-minded to other project-led opportunities in other locations too,” he adds. Though emboldened by the company’s growth, from $9 million turnover in 2006 to about $40 George Yule, Chief Executive, million in 2008, Yule acknowledges Dominion Gas that it is important to find the right balance and avoid over-stretching. “In terms of our existing business locations, we believe that Norway is interesting because it offers a sustainable market going forward, with longer-term perspectives than the UK North Sea.” He also sees Norway as a strategic stepping stone towards the countries of the former Soviet Union. Aberdeen-based environmental services company TWMA, focused on handling and treating waste generated by drilling operations, has also established itself in Norway and is rapidly expanding its international presence well beyond. A significant injection of capital in early 2007, provided by investment partner Lime Rock, has enabled TWMA to make acquisitions, build equipment, and develop new technologies. One of the company’s recently launched innovations, the TCCRotoTruck, is a compact, mobile, and versatile process equipment which helps overcome the logistic and environmental issues that arise when having to move waste material over long distances. “TWMA is positioning itself as a provider of total environmental services for the oil and gas industry, both onshore and offshore. We can offer operators in any location to look at the waste generated by their activity, and thereafter provide advice and environmental solutions to safely recycle or dispose of them,” says Ronnie Garrick, TWMA’s managing director. Besides Aberdeen, the company has bases in Norway, Egypt, and Nigeria, plus newly opened sales offices in Houston and Kuala Lumpur. “As a result, TWMA has been experiencing a high level of enquiries and global interest in the services that we provide,” he adds. The company’s turnover, projected to reach about $48 million in 2008, has doubled over just two years. In Garrick’s view, the environmental services market can only keep growing in the future, and in preparation for the even busier times TWMA is moving to a Ronnie Garrick, Managing Director, TWMA new and larger location in Aberdeen.

www.ogfj.com • Oil & Gas Financial Journal October 2008


Aberdeen: a global center of excellence for oil and gas »Part

2 – Life after forty: a second wind for the UKCS?

I

n the midst of global economic turmoil, Aberdeen’s oil and gas industry seems to have at least partially insulated it from the rest of the UK, if not the world. Even in an oil province of declining production and reserves, the city has remained a fertile hub for international expansion, M&A activities, and posted record cargo traffic at the airport and harbour. As though to emphasize this imperviousness, in the thick of the financial crisis, an unlikely vote of confidence was cast with the approval of Donald Trump’s plans to build a £1 billion golf resort just north of Aberdeen. However, there is growing sentiment that it’s a matter of when, not if, Aberdeen will feel the pinch, and alongside declining oil prices, other circumstances aren’t lending much of a hand. Dramatic cost inflation, ageing infrastructure, and the looming prospect of decommissioning have only amplified calls for a renewed focus on innovation. Continued trends toward asset transfers from larger to independent players, and their reliance on easy finance, seem doubtful in light of a credit crunch. And even if these difficulties are overcome, there is still the matter of who, exactly – with painful shortages of skilled labour – will do the overcoming.

Project coordination: Carolina Oddone Text and research: Arthur Thuot This supplement was produced by Focus Reports LLC. For more information and exclusive interviews, log on to www.focusreports.net

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First Minister Alex Salmond

If cause for concern should be felt from the top down, it’s understandable Aberdeen has not yet felt the same impact as elsewhere. As Scotland’s First Minister Alex Salmond puts it, his “biggest concerns are not in the energy sector at all – they lie elsewhere in the economy.” Where exactly is uncertain, although the recent takeover of centuries-old Scottish stalwart HBOS by Lloyd’s TSB would certainly rank among the more prominent. To assuage worries around wildly swinging oil prices, the former Oil Economist with the Royal Bank of Scotland responsible for the 1980s development of the Royal Bank / BBC Oil Index draws a historical analogy. “To people who wonder about volatile oil prices, I remind them that when Colonel Drake discovered deep oil in Pennsylvania, the price went from $30 per barrel to about $0.20,” says Salmond, arguing that “the price of oil is volatile, and has always been volatile. People involved in hydrocarbons are accustomed to volatility, but the volatility experienced as of late is nothing compared to when deep oil was discovered.” Perhaps true, but then again, 150 years after Drake’s discovery, the role of oil bears a much different relationship to the world economy.

terpart Councillor Kate Dean. As a board member of WECP (World Energy Cities Partnership), a grouping of 15 major world oil and gas centres, Stephen meets other civic heads, business leaders, and politicians, with the aim of creating and developing strong working relationships, which he says are a vital part of doing business, particularly on the international stage. The Lord Provost sums up the city’s image put forth in the economic arena: “Aberdeen has half a century of experience in the oil and gas sector. Initially expertise and education came from America; over time the city has developed its own repository of skills and expertise. Aberdeen’s expertise has been hard won in the hostile environment of the North Sea and is highly valued in oil and gas provinces throughout the World. We are very proud to boast that Aberdeen City & Shire is the Energy Capital of Europe.” As host of the WECP Annual General Meeting, Aberdeen will be showcasing itself to others in the partnership including Houston, Baku, Luanda, and North Sea neighbour Stavanger. Stephen is quick to point out that, as a city, Aberdeen has “a broader perspective than oil and gas alone and see ourselves as Europe’s Energy Capital. Over the past decade, alternative and renewable energy has become increasingly important in the wider scheme of things.” As proof of this importance, he offers that “Aberdeen hosts an alternative energy conference that is growing in size year on year; the 2009 conference holds a lot of promise. So we are very supportive of local efforts to diversify from hydrocarbon production.” These local efforts are indicated by the Aberdeen Renewable

Lord Provost Peter Stephen

Fig. 1: UK oil and gas production 5.0 Oil Gas

4.5 4.0 Million boepd

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

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As a consequence of challenging externalities and the underlying reality of a declining resource, solidarity is needed at all levels of government, from the First Minister at Holyrood in Edinburgh all the way down. Lord Provost Peter Stephen represents the Queen in Aberdeen, and in turn the city throughout the world, as Aberdeen’s civic head – in partnership with political coun-

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Energy Group’s work on several projects including joint investigations into windfarm feasibility, and establishing a new Professorship in Energy Futures supported by the University of Aberdeen, The Robert Gordon University and Aberdeen City Council. However, for the time being, it will be hydrocarbon production and its related activities driving the economy forward, and there David Doig, Chief Executive, OPITO – are still many challenges in the The Oil & Gas Academy way of extracting the rest of the 25 billion barrels remaining under UK waters. These challenges are largely nothing new; after the industry went from $10 oil in 2000 to $60 oil in 2004, David Doig, Chief Executive of OPITO – The Oil & Gas Academy, explains “the industry realized that its behaviour was based on market demand but such a major change in product price had made a significant change to future plans and opportunities. Basically, this unpredicted and swift change had caught the industry with inappropriate levels of infrastructure, plant, and people. What the industry decided to do was realize its responsibility and take full ownership: to deal with the issues itself, and understand them much quicker, rather than relying on outside help.” Taking matters into its own hands, Doig

Brian Nixon, Director of Energy, Scottish Enterprise

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continues in explaining one such manifestation. “At this point, what industry did was look to its traditional skills body called OPITO and morph it into a wider, bigger and stronger entity,” he says, referring to the entity he now heads, aimed to counter a history of “wait-and-see” policies in a low oil price environment. As Doig elaborates, “There was almost no investment made in workforce at $10 oil. And why would there be? It didn’t make business sense. In previous years, there were other industries in the UK – shipbuilding, mining – which don’t exist anymore. The oil and gas industry doesn’t have an issue of attraction. There’s a big long list of people trying to get in. But there’s an issue of skillsets, and transforming people with a given skillset to the ones needed.” Once transformed, those people will be looking for work in robust, internationally competitive companies. Scottish Enterprise, a main economic development agency funded by the Scottish Government, is charged with doing just that. Brian Nixon, the organization’s Director of Energy, states its importance to the economy: “Energy, and the oil and gas sector in particular, is obviously a priority industry as it meets all the criteria: it has

www.ogfj.com • Oil & Gas Financial Journal February 2009 1/16/09 12:00:45 PM


huge opportunities for growth domestically and internationally, a very strong supply chain, significant academic expertise in our Universities and a real will to work with us towards prosperity and growth.” Moving these abstractions towards concrete actions, Scottish Enterprise has mapped the shape, size, and strength of supply chains in energy across various sectors and subsectors, finding not as many very large companies in the contracting sector as the organization would like, but rather seeing a small number of large and conversely a large number of small companies. Nixon affirms that “Scottish Enterprise recognizes the need to work with these companies to help them become the next generation of major contracting companies: an ongoing program is currently working to identify companies that have the right technology and service expertise to meet the real market opportunities potential,” with the eventual aim of transforming such candidates into the next generation of majors like Wood Group, AMEC, and PSN. Of course, to achieve this goal requires horizons beyond Scotland. According to Nixon, growth in international markets has been sustained over the last seven to eight years, and a third of the supply chain business is now conducted in international markets, accounting for approximately £4 billion annually. He notes “a large majority of our companies are now active internationally, and we support maximizing activity in the growing international market. We do so in a number of different ways,” including market intelligence,

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capex and opex projections in over 60 countries, all followed up by Scottish Development International, a partner organization offering in-country services to make the process as smooth as possible. Nixon gives the big picture: “To sum it up, our action starts by identifying which markets are of interest now and why. We then offer a range of information about the best market-entry strategy for each market and each country, to give companies the necessary support to develop sustainable long-term businesses.”

Aberdeen, hub for a spokeless world Notwithstanding such helpful associations, and Aberdeen’s claim as Oil & Gas Capital of Europe – or for the more forwardthinking, Energy Capital of Europe – there is a warranted level of scepticism whether the city, despite years as an important centre of offshore and subsea technology, can remain an attractive hub for companies in need of increasing international expansion, especially as the region enters long-term decline. However, even in shifting times, some companies have never had anything but an international reality. Garry Farquhar, Director/Dogsbody of Vector Supplies Limited, states his company is no stranger to foreign markets: “It’s a hard figure to put numbers on, but 60-70% of Vector’s business is overseas, and those figures have always remained fairly steady.” Strangely, and bucking the trend of increased internationalization, Farquhar points out how his company differs in having “a far greater international market than a local market in the early days. We set out to deliberately

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target the overseas locations simply because they were the ones suffering the most from the breakdown in the supply chains, and we started helping them straight away.” Vector’s help has come by representing three companies as main distributorships: American ball valve manufacturer Balon Valves, and two Dutch companies in De Wit for pressure gauges and instrumentation, and Resato specializing in high pressure technologies and equipment. Although Farquhar admits Vector could operate anywhere with good transportation and logistics infrastructure, he cites an advantage of closer contact to large clients with significant city presence and worldwide decision-making as important success factors. However, even if opening up satellite offices would have its advantages, he notes “as with everything else, when you’re flat-out busy, as we currently are, these decisions never come quickly.” Flat-out busy could certainly also describe Aubin, whose 300% growth in the past three years has been driven mostly outside Scotland, by the recent NOC trend of using local independent companies, with which Aubin counts itself in good stead. As Managing Director Patrick Collins explains, “Although the company is based in the North East of Scotland, about 75% of our business is elsewhere, predominantly in the Middle East.” Focused on cement and stimulation chemicals and subsea technologies, Collins explains Aubin supplies “specialist cement stimulation chemicals to local service companies in the Middle East rather than

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the big three major companies. It might seem strange that, being Aberdeen based, we sell most of our products there, but Aubin has been successful in developing that market.” Even if the majority of business is done in the Middle East, Collins says there is an advantage to being located so far away: “Presenting chemicals coming from Europe and developed in Patrick Collins, Managing the North Sea gives them validity Director, Aubin and provides a level of comfort for our customers’ customers. Indeed, the North Sea is perceived as a technical area of expertise, therefore tools developed and proved in the North Sea have a distinct advantage when marketed in other parts of the world.” On the subsea side, Collins anticipates that with increased commissioning and decommissioning activities in the UKCS, the company’s pipeline gels and pigging technologies will be further developed into a range of niche specialties and services to provide alternative solutions for insulation, sealing, or buoyancy applications. “In that respect our location helps us to enter our market, especially as there are not many other companies with chemistry skills operating in that sector. Aubin has been knocking

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on doors of course, but subsea companies are also coming to us looking for solutions that need a chemistry input,” he concludes. Compared to Aubin, a relative newcomer to the international scene in Aberdeen is G.O.T. Director Warren Anderson says that “until two years ago, 90% of G.O.T.’s business was Aberdeenbased, either onshore or offshore. This included refineries down south, platforms in Yarmouth, Fife, Mosmorran, and customers as

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Colin Smith and Paul Day, Managing Director and Business Development Director, Petrowell

far north as Orkney. G.O.T. used to have customers as far away as Baku, although this was though a third-party. That market fell through, and G.O.T. decided to focus more on existing customers to see where we could grow with them.” Through one such existing customer in Mobil UK, G.O.T piggybacked on a contract that led the firm down to the West African country of Angola. Speaking to the country’s specificity, Anderson explains: “Angola as a country is starting a project of nationalization to reinvest back in infrastructure, development, and education. Their stipulation for end-users like Chevron,

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Total, and Esso is that if they want to do business in Luanda, their suppliers must be on the ground operating on-site. Over the course of the last year, G.O.T. has been back and forth to Luanda looking at premises, staff, and going through a lengthy registration process.” The end result has been a current station of staff, offices, and approvals – all waiting on final documentation, which will see G.O.T. fully establish a satellite office in Luanda servicing up to one third of company turnover. Staying cautiously optimistic, Anderson admits that other than a Luandan outpost, “there are no plans for G.O.T. to grow geographically, and the company is quite comfortable managing what it has. A few years down the line, if Luanda is performing well and we manage to control both sides of the business, then expansion will be investigated.” Founded in 2001, Petrowell recognized from day one that the only certainty was change. Identifying decades-old oilfield completion techniques not destined to forever remain the gold standard, Colin Smith and Paul Day, Managing Director and Business Development Director, explain that “Petrowell knew there was an opportunity for a small service provider with engineering excellence to get into the market and focus on new areas, like open-hole completion and remote operation completion, in the expanding subsea markets of West Africa and burgeoning business in the Middle East, so these were focus areas for Petrowell along with the UK.” Elaborating on the technology focus, Petrowell’s expertise has also expanded to develop RFID technology with IP partner

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Marathon, a longstanding member of the North Sea community on both the Norwegian and UK sides. “Petrowell was looking for technology and services that would suit not just the low-cost land markets of the UK and the Middle East, but the expensive, more investment heavy markets like West Africa and the Gulf of Mexico as well as the North Sea,� note Smith and Day. Taking a practical approach, Smith and Day emphasize their strategy’s core: “Petrowell wanted to concentrate on technology and equipment development with operators, and then provide a platform to the larger service companies where they could buy and license our technology and take it into a much larger global footprint.� This has reduced overhead requirements, and the nononsense approach has achieved its goal of attracting some of the world’s largest service companies like Weatherford. A natural extension of this strategy is to avoid excesses whenever possible. Smith and Day say that “although Petrowell has one other international office in Baku, Azerbaijan, the aim is not to have multiple Petrowell-branded offices, but rather to adopt the most expedient and cost-effective method to support customers wherever they are in the world.� In a phrase certain to please its partners present and future, Smith and Day stress the company’s focus: “Petrowell’s money is better spent on products than infrastructure, and because infrastructure and supply chain management exist around the world, Petrowell wants to plug into that in a way beneficial to us and our customers.� However, Petrowell could not afford to lack a physical presence in one particular major oil and gas center. Smith and Day note, “Petrowell had to be in Houston, because many operators run deepwater fields exclusively from there, regardless of their actual geographic location, and technology developments applicable on a global basis are handled out of Houston.� To the credit of their counterparts across the Atlantic, they describe the city as “a springboard to integrate Petrowell into the technology groups of the world’s biggest operators, the top four of which are based in the city, and also to demonstrate relationships with the service companies whereby if BP asks for Petrowell to be in Australia, we can say we will be there with Weatherford, for example. This approach has proven to be very successful.�

Alan Gray, Global Integrity Manager, and Dave McKechnie, Deepwater Technical Solutions Eastern Hemisphere Manager, Oceaneering International

2+2=5 Although this minimalist approach may work for some, not all companies are as keen to keep such a large degree of their business outside. Exemplifying the Gestalt adage of the whole being greater than the sum of its parts, some have decided to parlay this philosophy to maximize impact and reach across traditionally segregated business lines. While niche specialists can operate in silos, and take an appropriately narrow approach to their solutions, bigger companies – increasingly composed of these smaller niches themselves – are finding an advantage in hunting in packs. Evolving out of necessity a decade ago from a diving company into ROVs, subsea inspection, and fields as diverse as US Navy nuclear submarine service and NASA space systems, Oceaneering International has created a virtuous cycle expanding its offerings from first client contact. Alan Gray, Global Integrity Manager, and Dave McKechnie, Deepwater Technical Solutions Eastern Hemisphere Manager, explain: “It’s crucial; when one of us appears, regardless of division, the client conversation may begin

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on the intended subject, but very quickly opens up to equipment, integration, ROVs, rope access, and it quickly expands from, for example, the need for a torque tool into corrosion awareness. There’s always an awareness of the bigger picture, and while there may be a standard client presentation, many clients may not be aware of the breadth of the offering.” Of course, some areas may be more specialized than others, but that just increases the need for cross-communication. For example, Gray and McKechnie note that Oceaneering in Aberdeen is pursuing international contracts in Egypt, Azerbaijan, and Trinidad, even if they will never see 90% of revenues. Fortunately, this works both ways. They note, “Oceaneering is working closer now than ever and there is a reciprocal relationship between groups, so that even seemingly disparate interests can work in concert in a synergistic manner. An individual may be a small part of the whole system, but also be wired and connected into the right person for a particular meeting and particular question,” which means that when Oceaneering is called upon with a problem, it can put the relevant pieces together itself and come back with a solution. “It may be a matter of all divisions collaborating to solve a problem, but that’s the mechanism you can call on in Oceaneering,” conclude Gray and McKechnie. While Oceaneering’s evolution has occurred over the last decade, Triton Group presents a less gradual example. Originating from current CEO Martin Anderson’s vision as former head of underwater vehicle specialists and Technip subsidiary

Martin Anderson, CEO, Triton Group

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Perry Slingsby Systems (PSS), Anderson explains the evolution since its genesis in mid-2003: “Throughout 2004 and 2005, PSS developed in a position to have a business plan going forward including some acquisitions and add-ons to balance the business. There were still some basic weaknesses of the company to be addressed. Irrespective of how the technology came together, PSS was still effectively selling products into the strategic capex market, in other words, selling assets to service companies who would then deliver their service. This is quite a cyclical market, so the basic weakness was the reliance on one particular product in one particular commercial model, and that market it sold into was quite cyclical, with long gaps between capex, assets, and replacement.” Looking to smooth out this cycle, Anderson realized he would have to grow the business. Being constrained financially within Technip, Anderson took the company independent in February 2007 with private equity backing, creating Triton Group as the umbrella for the planned expansion. Having all the pieces in place, this newfound freedom enabled Triton to act quickly, signing heads of agreement just one week later to acquire SubAtlantic, filling a product gap to complement PSS hydraulic power with electric. In April of the same year came freelance offshore personnel business UKPS, and since that time, DPS and VisualSoft have joined the fold, simultaneously rounding out Triton’s offerings and expanding the market for their own services. With infrastructure developments in place covering Aberdeen, Houston, and Singapore, Martin sums up: “The last 18 months have been about putting building blocks in place. To use a Churchill phrase, ‘we’re at the end of the beginning.’”

ENSCO 85 Drilling Breagh Prospect 2007

Sterling Resources Ltd

DRILLING SUCCESS

No field left behind

DRILLING SUCCESS ENHANCES TWO NEW EUROPEAN GAS CORE AREA DEVELOPMENTS STEWART GIBSON - CEO

BREAGH - NORTH SEA

Not limited to wartime or aspiring subsea conglomerates, another beginning’s end can be found in the continued evolution of asset transfers. The trend of majors divesting assets to smaller, more dynamic companies is not news to anyone in the North Sea. Led by a slew of Canadian international oil companies, the UKCS now has a broad range of well-known names like Apache, Marathon, and Petro-Canada increasing life production and pushing reserves to their maximum. However, this trend has been taken to the next level, with specialized companies cropping up, armed with specific expertise in the region’s geology and sufficient cash to rescue underperforming or neglected assets – often smaller in size and

Fig. 2: Proportion and investment contribution, 1999-2007

BREAGH

40 35%

Proportion of total production Proportion of total capital invested

35

Percent

25 21% 20 15 10

DOINA - BLACK SEA

30 ROMANIA

DOINA ANA

5 0

- STERLING ACREAGE

2000

2001

2002

2003

2004

2005

2006

2007

Source: Wood Mackenzie

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Stronach’s Oil & Gas Team

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poorly matched to the scale of their previous owners. Now, reserves otherwise characterized as marginal or stranded are seeing new life, with three of 15 asset deals in 2007 alone from new entrants, the cohort increasingly driving production and investment going forward. One such company is Venture Production, whose Chief Executive Mike Wagstaff assesses the asset transfer Mike Wagstaff, Chief Executive, situation: Venture Production “There are a number of reasons why old discoveries in the North Sea became ‘stranded’: they are either not material, too remote, commercially complicated i.e. broken up into too many partners, too difficult due to infrastructure or can be unlocked by evolving technology. For example, many of Venture’s assets represent discoveries made 10-20 or more years ago. In late September, Venture brought onstream the Chestnut oil field discovered 27 years ago, and the Chiswick field brought onstream in 2007 was discovered in 1984. On Chiswick between that time and now, 10 field partners had come and gone, and none could make the field work.” Clearly, however, with production of over 40,000 boepd, Venture succeeded where others failed. Wagstaff makes a strong case for the company’s presence in the region, noting “in terms of the operating environment, as a location to do business for an oil company, the UKCS is a pretty good place. In fact, for a company of Venture’s size and business model, it’s hard to think of anywhere else that would be better.” However, he acknowledges not everyone shares this rosy view. “Most people consider the North Sea mature, in terminal decline, expensive, highly regulated and bureaucratic, with high competition for opportunities – and if you do make any money, the taxman’s going to take it anyway. That’s the negative prejudice. On the other hand, while the opportunities may be smaller than in other less-mature basins, it’s just a fact of life, and the UKCS does have a number of things going for it,” and Wagstaff points to items on the plus side like infrastructure in the form of pipelines, platforms, and terminals facilitating tie-backs of discoveries or developments, alongside a ready market onshore to snap up any production. Add in a globally com-

petitive taxation regime compared to neighbouring Norway or PSCs of Libya and Algeria in a higher oil price environment, with market responsiveness for tools needed to get the job done, and the picture of how Venture has grown from zero to FTSE 250 in under a decade becomes clear. Although Venture is among the largest UK independents, there are many smaller companies at the table and plenty of opportunities to whet their appetites. Stewart Gibson, CEO of Sterling Resources, explains that at the company’s inception, it “had to be quite selective where to operate, because there were only two of us.” This was more out of necessity, given that

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Stewart Gibson, CEO, Sterling Resources

according to Gibson, “when Sterling started, it was very much on a blank sheet, meaning no assets and no money.” From these humble beginnings Sterling has come a long way. With a deep knowledge of North Sea geology, Gibson explains the company “entered areas with proven hydrocarbons, so it wasn’t high risk exploration, but rather exploration within proven parameters,” and counter to conventional correlations between risk and reward, Gibson has frustrated actuaries worldwide with a spate of successful discoveries. Both Breagh and Doina assets were drilled by majors over a decade ago, but “weren’t developed for various reasons, such

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as gas prices, contractual terms, or materiality, whereas a smaller company going into the same area can look at the situation with a different perspective,” says Gibson. This perspective has seen over 50% of Sterling’s drilled wells finding hydrocarbons, and Breagh testing at rates six times those achieved by the previous operator from the same reservoir, and as Gibson notes, “with changing gas price and current terms, something that had been stranded can be made to work.” Fundamentally, what makes the assets work is the ease with which they can change hands. “There are major issues around the complexity of title transfer in the UK,” remarks David Sheach, Managing Partner of Stronachs, a law firm with an Aberdeen history stretching back over two centuries, who estimates that with the city’s evolution toward the oil and gas industry, his business evolved as well to 75-80% of commercial activity being linked in some way to the sector. “Unfortunately,” he says, “it’s not a nice, neat, registered title system, but layer upon layer of contract, and therefore the legal process involved in transferring ownership of assets can be quite complicated and time consuming. The fractional ownership of many fields can be quite a challenge as well, which is more a commercial than legal point, but obviously it impacts on the speed of the legal process.” Sheach differentiates the UKCS from other areas: “Unlike regions with onshore licenses, where the capital costs are much less and therefore there may be a single company or two who buy, in the UK it’s not unusual to have four or more field owners,

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and the dynamics of getting all of them to go in the same direction at the same time can be interesting.” One equally interesting case is Fairfield Energy, whose Chief Executive Mark McAllister explains how initially, it was a question of getting the sellers to go in the same direction. Harkening back to the halcyon days of 2005, McAllister explains “Fairfield had existed for a month, so for large companies like Shell, OMV, Exxon, and Statoil to come to terms with selling an asset of that scale to a company of our immaturity was not an easy task; it took a lot of work to persuade them,” including establishing a duty-holder relationship with AMEC and presenting a consortium of six international private equity financiers.

The tall order of skills shortages Financing is not the only area in short supply. Indeed, lack of human capital is an oft-cited roadblock in the way of expansion. However, regardless of a new recessionary reality, the pressure to find the best and brightest is not likely to ease significantly. According to David Edwards, Chief Executive of the Engineering Construction Industry Training Board (ECITB), “the current skills base is just not big enough. The number of people needed for growth might soften, but we still need to replace the existing workforce.” The association, acting as a government body directly on the interface between government and industry, collects £5 of £18 million in annual training levies from the oil and

gas industry, which it uses towards a system of grants which support training products and qualifications, designed in partnership with industry. Edwards continues, “Our core business is providing the right people with the right skill set, and by 2014, there will be a need to recruit, train, and retain in the area of 44,000 people across the skills range, of which 15-20% will be in the upstream oil and gas sector. This Wally Georgie, Principal Consultant, includes high-level engineering Maxoil Solutions at the graduate level, as well as craft, technician, and operator level. ECITB now has the best-ever picture of industry needs and how to address them, and by and large the industry players have subscribed to it.” Of course, addressing the full spectrum of industry needs is difficult on a limited budget, and even then, in niche cases requiring years of experience, no amount of training is likely to provide an immediate solution. This is especially true for Maxoil Solutions, a firm created by bringing together experienced consultants with a wealth of hands-on and practical experience. Speaking to the search for qualified personnel, Wally Georgie and Mel Dow, Maxoil’s

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Principal Consultant and Director, note “they’re proving very difficult to find. Many of our existing employees were acquired via networking after having been in the industry for a number of years and establishing good contacts. Unlike other companies in Aberdeen who can more readily acquire people from different industries, Maxoil requires certain in-depth oil and gas process knowledge.” However, Georgie and Dow have recently addressed the skills gap by taking on graduate engineers, fuelling a younger wave benefiting from older consultants and specialists. This bumper crop is likely to aid in the company’s ongoing international expansion, which has seen inroads to Norway, Gulf of Mexico, and Alaska. “In Houston for example, Maxoil’s plans in the medium term are to recruit people locally and bring them to Aberdeen for familiarization. They will then return as local Maxoil staff. Aberdeen is Maxoil’s training base and though there is good knowledge in all the spheres of the world, it is absolutely essential to have grounding in the fundamentals of the Maxoil philosophy and applying all the skills we’ve learned throughout our many years of offshore and onshore operating experience,” Georgie and Dow say. Maxoil has also diversified its talent base, reaching out to “technically orientated people to help with business development because at the end of the day, we need to build on our resources. There’s an important balance in having both technical understanding and capabilities for business development rather than solely depending on personnel recruitment

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and development because this is an important fit for Maxoil’s plans.” One company helping to round out the knowledge of such technical experts is Adept Knowledge Management. Director Colin Balchin explains the reasons behind what made the company a preferred training provider for ECITB among many others: “The first thing that Adept has is knowledge: we know about project management, and managing big and small projects, because our people have done it. So our knowledge comes from practice, expertise, and also study, because we aren’t afraid to study and learn from others. Secondly, Adept has very good material and case studies, and tries to understand client needs and what they’re trying to do with the courses.” Understandably, knowledge and materials are necessary but not sufficient, which is why Balchin points to the last piece of the puzzle. “Thirdly, Adept staff take pride in being good teachers. All of the people who deliver the courses are really excellent at communicating, and do so with enthusiasm and humour, which is always appreciated,” Balchin remarks. Perhaps ironically, Adept’s growth is itself limited by a lack of skilled people. “Adept’s overseas presence has to be limited by the quality and number of people who can successfully deliver the courses to our standard.” Being a smaller training firm, Adept can’t afford to adopt the shotgun approach of bigger competitors “because we are not organized to put out 50 different types of courses. We have ten or so courses, of which four are really

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Colin Balchin, Director, Adept Knowledge Management

the most popular. This also means that we can design and build courses to fit client needs and emphasis; and that’s what works well for us and our clients.” Not everyone is feeling the talent pool pinch. When asked whether he has noticed an impact on employee attraction and retention in recent months, Neil Bruce, COO of AMEC Natural Resources, replies bluntly: “Not at all. The people who have suffered from resource shortages are the ones who haven’t had a long term investment program in people. If you are out in the market trying to hire people, and your only differentiator is paying them an extra dollar or pound an hour, you’re going to struggle.” Despite its size of nearly 11,000 individuals, AMEC has hardly struggled, increasing professional staff in 2007 by 15-16%, compared to the same figure the year before, and 12% in 2005. Bruce continues, noting that “Additionally, the company maintains a structured program in place to bring graduates through, with 200 technicians in our system at any point in time. Effectively, AMEC has an entire development program around human resources, and in constantly recruiting and developing its people, has found an increase in numbers by 15-16% annually very achievable.” Bruce says that “for the people who want to go for the extra pound, we aren’t particularly bothered about them leaving. AMEC has people leaving, but has excellent retention rates, with employee turnover less than 5% across Natural Resources. If you provide people with training, development, and good interest-

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ing work, then you will keep the vast majority of your people motivated to stay with you. And the small amount interested in an extra dollar per hour can go get it elsewhere.” Although not for directly financial reasons, Bibby Offshore’s CEO Howard Woodcock found he could keep a similar minority from leaving by bringing the business closer to its employees – literally. Woodcock explains “the company opened an office in Newcastle-upon-Tyne in early 2008 after recognizing that Tyneside, historically, has a lot of links with the subsea and offshore industry, and there are many people living and working in the area who have the kind of skills needed up here. The fact is that many of those people make a weekly commute to Aberdeen to work in the offshore industry, which is what gave us the inspiration to open an engineering facility in Newcastle.” Although still early days yet for this operation, he explains it “has both extended reach in terms of our resource pool whilst reducing carbon footprint in travel to and from, hopefully creating more satisfying and happier jobs and careers for our people.” Leading by example, Woodcock himself is in his 16th year at Bibby, working his way up from deck cadet in the 1980s. Still, an available person with such experience is hard to come by. “The number of highly competent and qualified people available is limited, especially in the North East of Scotland, because there’s a lot of large calls from many companies, and choice in terms of employment at the moment. To overcome this, Bibby Offshore has had to think a little bit laterally and be innovative,” he concludes.

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Howard Woodcock, Chief Executive, Bibby Offshore

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Do the safety dance Innovation in the UKCS has not only been a product of business necessity, but sometimes a matter of life and death, as the community was recently reminded with 2008 marking the 20th anniversary of the world’s worst offshore oil disaster at the Piper Alpha production platform. Since that time, safety responsibilities transferred to the Health and Safety Executiv (HSE), which has set in place a system with mandatory approval of safety cases documenting management controls on every installation prior to use, and conducts reports on a continual basis into key industry interest areas. KP3, the HSE’s most recent report, involved an inspection of close to 100 offshore installations. Its findings acknowledged a lingering legacy of underinvestment, while identifying, as HSE Chair Judith Hackitt puts it, “the need for greater leadership, more good practice sharing and improved worker involvement.” Iain Light, Oil & Gas Director of Lloyd’s Register, offers a snapshot of the current state of affairs: “There are competing objectives in terms of production, operations, and what really does needs to be taken care of. One of the challenges we have in the offshore business here in the North Sea is that many platforms and structures are well beyond their design life. The question arises of how operators and owners can reliably sweat their assets safely.” Light stresses the difficulty many operators have justifying the necessary investments to do so under any circumstances: “In times of high oil prices, operations become so important at a time when you can afford to spend the money to improve the assets for the longer term. This is the dilemma when you have the money for the work but the pressure is on production. Now, with lower oil prices, they suddenly don't have any money to spend. The question arises: will we ever have the right amount of money to spend on the things we should be doing?” Light, explaining the nature of the group’s role in trying, says “the organization is very much about having an independent role, acting as an honest broker and company that is trusted by society, government, and operators.” “Lloyd's Register's focus is going to be on getting a better balance with asset assurance issues, and understand not just the safety-critical issues, but also the business-critical issues,” Light articulates, a fact evidenced in work at 80% of the largest US refineries, where the Lloyd’s approach has enabled reductions in inspection and maintenance costs, improved environmental performance and safety records, and a better bottom line. In a message meant to clarify the traditionally UK-focused enterprise’s move towards true international dominance, the man bringing the organization forward at ‘the speed of Light’ says “Lloyd's Register wants to be very much positioned in that space of helping organizations strike the balance between their business, safety, and environmental agenda. We are about providing independent assurance helping our clients year by year improve the safety and sustainability of their contributions to the increasingly important energy supply chain.” Improving safety in a more specific area of the value chain, Cosalt’s new Managing Director Calum Melville explains the company’s revised role after combining efforts with his former company GTC, noting “The products and services supplied as

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“Chevron’s ALBA FSU, managed and run by Bibby Offshore”

GTC and those offered by Cosalt, on the face of it, do not have a particular match, but they’re all safety-critical and driven by legislation. Looking at the range of products and services Cosalt now offers, this includes lifejackets, life rafts, lifeboat servicing, things that GTC historically didn’t do before.” Broadening this range has meant a multifaceted approach to increasing safety. Citing an impressive case study, since Cosalt’s writing of a scheme of compliance for Shell, statistics have shown a 70% drop in incidents. Melville emphasizes the company’s three-pronged strategy that “for Cosalt, we are looking to drive safety in a number of ways: internally, through the equipment, and added value in supporting our clients.” The oil and gas industry’s well-known conservatism and necessity for safety, extending to new technology adoption, perhaps explains Swellfix’s trajectory as a provider of innovative swellable elastomers. Despite a stellar failure-free performance record, CEO Arie Vliegenthart talks about the difficulties in swaying potential clients. “It takes a while to convince people to change their ways, especially with a maturing industry that may have been doing things one way for 40 years. It was not always an easy sell, entering an office with a “funnylooking” packer and convincing potential clients that it will replace or change the way they work. Having a good track record of course helped, and Shell’s techno- Arie Vliegenthart, CEO, Swellfix

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“The DSV Bibby Topaz arrives in Aberdeen, April 2008”

logical reputation was like an approval stamp,” says Vliegenthart, referring to the company’s origins as a spin-off from the major. However, the approval stamp was hardly a free ticket. “The first milestone, quite bluntly, was to get sales outside Shell. Having already run over 2,500 packers inside Shell, with a product suited to a few operations inside the company, Swellfix had the reputation inside, but not outside, Shell. Nobody knew Swellfix or the product, and it looks different than the competition,” Vliegenthart states, with the realistic assessment of his clients expectation that “In entering the market with a new technology to put in wells, there has to be a certain level of belief in the technology and the providing company’s structure and stability, because the company still has to be around when the well starts producing.”

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Oil and Gas Aberdeen report 2008  

Written after exclusive interviews with Aberdeen's decision makers from NOCs and multinational E&P companies, legislators, financial institu...

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