Summary of Study Results

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CONTENTS

Foreword 1

Summary of Results 2

Background 3

International Activity in the Service/Supply Base 4

Market Analysis of International Activity in the Service/Supply Base 10

- Geographic Analysis 10

- Country Analysis 12

Active Exporting in the Scottish Service/Supply Base 16

Small and Large Exporters 16

United Kingdom Activity in the Service/Supply Base 17

International and Domestic Market Sales Comparisons 19

Sector Diversification 20

Conclusions 21

Acknowledgements 22

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Foreword Since our last published report twelve months ago, demand for hydrocarbons has continued to increase globally, prices have correspondingly remained high, and it was therefore to be expected that activity levels in the international oil & gas supply and contracting chain would keep pace.

Fortunately, Scotland’s companies are already highly regarded and experienced in international markets, transferring experience, innovation, technology, skills and expertise gained in the UK Continental Shelf. They have therefore been able to capitalise on this sustained demand, and have yet again recorded increased sales during 2006/07.

This study, which was started ten years ago in recognition of the need to track domestic and international sales and service activity, provides valuable insight into the trends and characteristics of our supply, service, manufacturing, design and contracting businesses that go to make up the Scottish oil & gas supply chain.

2006/07 activity levels in the maturing domestic market saw a steady, but very small, annual increase of just under 3%, while in international market sales have recorded a near 27% increase over 2005/06. On average, the supply chain now secures a healthy 36% of its total sales from international markets.

I hope this latest survey will once again serve to illustrate the scale of this hugely significant sector, and its importance to the Scottish economy. I also hope that it will be a useful source of industry information and reference.

Brian Nixon Director of Energy, Scottish Enterprise

No representation or warranty is given by Scottish Enterprise as to the accuracy of any information or completeness of the information and opinions contained in such publications. Scottish Enterprise do not accept any responsibility for the accuracy or sufficiency of any of the information or opinions or for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on this report or the information and opinions therein.

1 ______SURVEY OF INTERNATIONAL ACTIVITY IN THE OIL AND GAS SECTOR 2006/2007

Summary of Study Results

An increase of 10.6% in the value of the total oil and gas supply chain sales from the Scottish market is recorded. Total sales now stand at their highest ever level of £12.91 billion.

In contrast direct exports from Scottish based operations have decreased by 4.7% and are valued at £1,806 million in 2006, compared with £1,898m in 2005.

There has been a 59.4% rise in international sales derived from Scottish owned subsidiary operations, with trade now valued at £2,958m.

In 2006 total international sales are estimated at £4.76 billion, 26.9% higher than the 2005 level.

Provision of General Services to the Oil and Gas industry accounts for 74% of total international sales, followed by the provision of Products/Equipment/Materials at 14% and Bulk Materials at 7%.

Sales into the North American markets have risen and the region takes 28% of total supply chain sales.

Exports into Eastern Europe have grown by almost two thirds and now amount to £478m.

The top 5 international markets are the United States, Norway, Russia, Australia and Azerbaijan.

15% of total international sales are now delivered via SMEs (companies with less than 250 employees), compared with 14% the year before.

There has been a 2.9% increase in the value of sales into the domestic UKCS market.

Background

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from Scotland since 1961. The focus of this initial research was to measure the level and value of manufactured goods which were sold outwith the United Kingdom’s borders and which were produced from within Scotland. With the emergence of a growing service based economy and the ongoing impact of exports of Primary Goods, such as fish, minerals, oil and gas, this ultimately led to the production of a single export research document covering the primary, manufacturing and service sectors. This was produced annually by SCDI until 2003 when the statistical gap was filled by central government figures produced by the then Scottish Executive.

SCDI had long been conscious that contained within the above export survey was much information which would act as a starting point in measuring the level of international activity being undertaken within the Oil & Gas industry in Scotland. As it became clear that the skills and knowledge base of the UKCS supply chain was eminently exportable, more of a focus was taken by both the public and private sectors in enabling the internationalising of the industry. In collaboration with Scottish Enterprise, SCDI looked at what could be done to monitor and measure the extent to which this global approach to sales was impacting upon the Scottish-based supply chain.

The upshot of this collaboration was the decision in 2000 by SCDI and Scottish Enterprise to work closely together to undertake the inaugural survey of international activity in the oil and gas sector. This was done with a view to providing an ongoing measurement of Scotland’s success in this internationalisation process. This latest document represents the eighth in-depth survey which has been carried out and aims to provide updated data for the year 2006. The main focus of this research is to measure the export activity undertaken by the supply base associated with the oil & gas industry. This is principally because the international activity of the service/supply base represents the key client group that is being encouraged by Government and others to develop overseas markets. As well as international markets many oil and gas supply companies are also diversifying into non oil markets and this research aims to measure the extent of this diversification and also to examine what are the key non oil sectors being targeted.

The survey research into the service/supply base was undertaken in such a way as to try and distinguish between differing types of international activity. Hence questions were posed which enabled companies to distinguish between direct export activity, where the product or service was supplied/managed from Scotland, and where the product or service was supplied/managed via an overseas located subsidiary organisation.

Although the response rate and sample size will, to a certain extent, alter each year the survey is undertaken, SCDI employs a methodology which allows us to measure growth rates which are then applied to each annual set of data. Given that great care is taken to ensure that responses are received from all the key industry players this enables us to have confidence that these published figures represent an accurate picture of the trends taking place within the oil and gas sector.

This approach by Scottish Enterprise and SCDI was also spurred on by an understanding that the development of this international dimension is vital to sustaining ongoing employment levels in Scotland beyond the productive life of the UKCS. However, it is very clear that the UKCS sector itself will continue to be a major, albeit slowly declining, source of revenue and employment for at least another 30 years, although forecasting history would suggest that this is likely to be an underestimate.

The Scottish Council for Development and Industry (SCDI) has been involved in undertaking research into export performance

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International International Sales Activity in the The survey defined international sales as a combination of direct exports and sales Service/Supply delivered via overseas owned subsidiaries. The first part of this section examines the level Base of direct export activity undertaken by the service/supply base, the second element looks at the activity within overseas owned subsidiaries and lastly the combined results of these are examined to give a total picture.

It was clear that many businesses which supplied the oil and gas industry would not necessarily have this as the sole end market for their products or services. Thus the survey research asked companies to give an indication of total export activity and also to estimate the proportion of such revenues that were derived through sales to end user customers in the oil and gas sector. In addition the companies who responded to the survey were categorised into four main business or product areas to help define from what segment of the service/supply industry the greatest activity levels were generated. These category areas are defined below: See Appendix A on Page 22 for more information.

Business Category 1 Product/Equipment/Materials Business Category 2 Bulk Materials Business Category 3 Services Business Category 4 Engineering/Procurement/Construction/Installation

(i) Export Values

This section looks at directly generated export revenues where the product or service is supplied/managed from Scotland. The results of the research are presented in Table 1.

Table 1. Scottish Service/Supply Direct Exports 2004 - 2006 (£m current prices)

Exports Exports to Oil & Gas Sector 2004 2005 2006 2004 2005 2006

BUSINESS CATEGORY

(1) Prod/Equip/Materials 442.7 415.0 485.8 404.5 377.5 449.1 (2) Bulk Materials 227.8 216.3 315.4 228.3 208.7 315.4 (3) Services 1,049.8 1,201.3 923.7 905.0 1,041.7 790.6 (4) Eng./Proc/Constr/Install 323.3 269.7 251.0 323.3 269.7 251.0

TOTAL £2,043.6 £2,102.3 £1,975.9 £1,861.1 £1,897.6 £1,806.1

The 2005 results came against a backcloth of a fluctuating but nonetheless steadily increasing oil price. In 2006 the picture was somewhat similar although in price terms the bar was once again raised higher. Starting the year at around $61/bbl the price of Brent Crude peaked at $78/bbl in August 2006 finishing the year at $59/bl. This in reality was not much different to the 2005 year end price of $58/bbl, but in general oil prices had been trading at a higher average level during the 2006 period. This trend has of course continued in 2007 and with the end of the year approaching the price of Brent Crude is around $90/bbl

Many of the factors which have contributed to this steady upward rise in the price of crude oil are still very much prevalent. The economies of India and China continue to show strong growth creating an ever rising demand for key world commodities such as oil. The political instability and threat of conflict in key oil producing countries such as Iraq and Iran remains as potent a threat as ever. So the upward price of oil is being strongly influenced by concerns over the supply side of the equation but also by the strong rise in demand as a result of a positive growth phase in the world economy. China and India are often seen as the major drivers of this increased demand but it shouldn’t be forgotten that most of the major countries in the world have witnessed a period of sustained growth

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International also contributing to the price pressure on a barrel of crude. This is a somewhat different position than in the past when price rises or certainly spikes were usually principally the Activity in the result of a shock on the supply side, normally due to an interruption in supply or the threat Service/Supply of one via some form of geographic conflict. The analysts have been predicting a Base downturn in the price of oil for some time but as yet this has not happened. Perhaps as we head into 2008 the combination of a slow down in global growth rates and an increase in supply, as recent investment in new exploration and drilling bear fruit, then this may occur but attempts to predict the oil price remain notoriously difficult.

What is clear though is that the price of crude oil will remain at a sufficiently high level to continue to encourage investment, both in the UKCS and globally. This will be true both for new exploration and production opportunities as well as for enhancing oil recovery from existing fields.

Moving on to the results of this latest survey into international performance from the oil and gas supply chain, the 2006 survey, somewhat surprisingly, records a small decline in the value of direct exports. Against the pattern of rising oil prices and increased activity globally this dip is unexpected, although it may reflect some of the issues raised in the 2005 survey regarding resource constraints and an increased investment in the domestic UKCS. In value terms the drop is from £1,897.6m to £1,806.1m, representing a decrease of 4.7% in the value of direct exports. When looking at the results over a longer time frame, the decline does fit into a pattern of falling growth in direct exports. Last year’s increase of 2% compared with 15.9% the year before, 18.3% the year before that and 27.5% in 2002.

Overall direct exports, that is those which include non oil and gas derived sales, have also shown a decrease, this time of 6.0%, a fall from £2,102m in 2005 to £1,976m in 2006. This compares with 2.9% growth the previous year and 15.1% growth the year prior to that.

EXPORT GROWTH BY BUSINESS CATEGORY

1100 1042

1000 905 900 791 800 £M's 700 600 449 500 404 377 400 315 323 228 270 300 209 251 200 100 0 Pr od/Equip/M at B ulk M ate r ials Se r vic e s Eng/Pr oc /C on/Inst

2004 2005 2006 Figure 1

The information presented in Figure 1 illustrates the sectoral breakdown of direct exports into the oil and gas sector.

The picture is mixed in sectoral terms with an increase from the Product/Equipment/Material category and also from the Bulk Material category. The major drop was in the export of services which showed a substantial value decline from £1,042m in 2005 to £791m in 2006. The Engineering/Procurement sector also showed a

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International small decrease in export value over the period. Activity in the As Figure 2 illustrates the direct export of Services continues to account for the greatest Service/Supply proportion of direct exports from the oil and gas supply chain, but its share has fallen Base substantially from 55% of the total to now stand at 44%. Bulk Materials and Products/Equipment/Material show a gain in share whilst the remaining sector, Engineering/Procurement maintains its share.

% SHARE OF 2006 EXPORTS BY BUSINESS CATEGORY (2005 % Share in Brackets)

SERVICES 44% (55%) ENG/PROC/CON INSTALL 14% (14%)

PROD/EQUIP/ BULK MATERIALS 25% MATERIALS 17% (20%) (11%) Figure 2

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International Activity in the (ii) Overseas Subsidiary Values Service/Supply This section looks at international sales generated via overseas owned subsidiaries which Base although they may operate in a largely autonomous fashion ultimately report back to a Scottish based headquarters. The results of the research are presented in Table 2.

Table 2. Overseas Subsidiary Sales 2004 - 2006 (£m current prices)

Sales Sales to Oil & Gas Sector 2004 2005 2006 2004 2005 2006

BUSINESS CATEGORY

(1) Prod/Equip/Materials 162.3 212.4 238.8 132.3 168.5 193.5 (2) Bulk Materials 6.3 11.8 11.3 6.3 11.8 11.3 (3) Services 1,713.3 1,870.0 2,956.8 1,529.2 1,675.7 2,753.6 (4) Eng./Proc/Constr/Install 125.2 0.0 0.0 125.2 0.0 0.0

TOTAL £2,007.1 £2,094.2 £3,206.9 £1,793.0 £1,856.0 £2,958.4

Since the survey’s inception one of its key features has been to monitor not only the growth in direct exports from Scotland, but also the level of activity undertaken by overseas subsidiary operations which report to a Scottish headquarters. As with direct exports recent surveys have recorded a growth in the level of international sales via subsidiary operations, albeit with a much reduced rate of growth. This trend alters in this latest survey and the figures for subsidiary sales return to a position of substantial growth more akin to that shown in the early part of the decade.

Looking at sales from subsidiaries into the end customer oil and gas market, we can see that unlike the position for direct exports these have not only continued to show growth during the 2006 period, but rapid growth. The level of sales has risen from £1,856m in 2005 to £2,958.4m in 2006, a rise of 59.4% or £1,102.4m in value terms. This compares with a 3.5% rise in 2005 and a 0.3% increase in 2004. As a result of the decline in direct exports the level of sales via subsidiary operations is once again higher than the direct export figure, the first time this has been the case since 2003. Overall exports via subsidiaries i.e. exports into non oil and gas markets as well as the oil and gas customers, have also witnessed a rise of broadly similar proportions, slightly higher in value terms at £1,112.7m and slightly lower in percentage terms at 53.1%.

The Service sector is clearly dominant in terms of activity delivered via subsidiary operations, being by and large very much people orientated businesses this is not at all surprising. With sales of £2,754m delivered via subsidiary operations the sector accounts for 93.1% of the overall total value figure of £2,958m. It is worth noting that one of the key constraints on growth within the supply chain in the UK is the difficulty in recruiting the skills necessary to deliver the project opportunities that have been made available by the rising oil price. Anecdotal evidence from some of the key industry players would suggest that this is increasingly a global phenomenon and that the UKCS as an oil province is not the only one which is facing the challenges associated with the skills shortage. It is not a problem that is highlighted by all companies as being an issue though and there is clearly a great opportunity for some cross industry learning about how to tackle recruitment issues. However, with competitive pressures being so great it is perhaps unlikely that a solution will be found to the problem via this route. In a domestic context the answer must lie in increasing the talent pool and initiatives such as the recently announced Oil and Gas Academy are a welcome addition to this effort. Perhaps one of the reasons why sales from subsidiaries seem to be less affected by such resource constraints is that such growth is often based on acquisition.

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International (iii) Total International Activity Activity in the Summarising the previous two sections this element of the report combines both categories Service/Supply of international activity and presents a total picture for the level of internationally derived Base sales from the Scottish oil and gas industry. The results of the research are presented in Table 3.

Table 3. Total International Sales 2004- 2006 (£m current prices)

Sales Sales to Oil & Gas Sector 2004 2005 2006 2004 2005 2006

BUSINESS CATEGORY

(1) Prod/Equip/Materials 605.0 627.4 724.6 536.8 546.0 642.6 (2) Bulk Materials 234.1 228.1 326.7 234.6 220.5 326.7 (3) Services 2,763.1 3,071.3 3,880.5 2,434.2 2,717.4 3,544.2 (4) Eng./Proc/Constr/Install 448.5 269.7 251.0 448.5 269.7 251.0

TOTAL £4,050.7 £4,196.5 £5,182.8 £3,654.1 £3,753.6 £4,764.5

Total international sales to oil and gas customers in 2006 now stand at £4,764.5m, a rise of 26.9% compared with the 2005 figure of £3,753.6m. Total sales, including those to non oil and gas customers, have increased by 23.5% over the equivalent period. These increases are dramatic and represent a return to the substantial percentage growth levels which were witnessed in the earlier part of the decade. Growth in 2005 and 2004 was 2.7% and 7.7% respectively, whereas in 2003 and 2002 growth was measured at 25% and 44%.

In sectoral terms the Services category shows a large rise in sales but decline is witnessed in the Engineering/Procurement category. International sales of Bulk Materials have in relative terms also substantially risen, albeit from a small base and there has been strong growth from the Products/Equipment/Materials category. Figure 3 clearly shows the dominant position occupied by the international sales of Services from Scotland’s oil and gas supply chain.

TOTAL INTERNATIONAL ACTIVITY GROWTH BY BUSINESS CATEGORY

4000 3544 3500

3000 2717 2434 £M's 2500 2000 1500

1000 537 546 643 327 448 500 235 220 270 251

0 Prod/Equip/Mat Bulk Materials Services Eng/Proc/Con/Inst

Figure 3 2004 2005 2006

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International As Figure 4 illustrates the Services category continues to dominate total international sales and accounts for 74% of the total value. The rise in value of sales from the Services Activity in the category has led to an increase in the proportion it accounts for, up from 72% to 74%. The Service/Supply growth in sales of Bulk Materials, which in percentage terms is greater than the growth in Base the Services sector is reflected in a 7% share of the total in 2006 compared with its 6% share in 2005.

% SHARE OF 2006 TOTAL INTERNATIONAL ACTIVITY BY BUSINESS CATEGORY (2005 % Share in Brackets)

ENG/PROC/CON PROD/EQUIP/ INSTALL 5% (7%) MATERIALS 14% (15%)

SERVICES 74% BULK (72%) MATERIALS 7% (6%) Figure 4

In last year’s report a slow down in the rapid growth of international sales from the oil and gas sector was recorded. While sales figures showed growth it was in the lower single digit range as opposed to the double digit levels recorded in the first half of this decade. In attempting to analyse what the reasons for this might be a number of ideas were postulated including resource constraints in terms of equipment and labour shortages. In addition, the strong investment levels into the UKCS were clearly offering a range of opportunities closer to home than had perhaps been the case in recent years. As the 2006 results in this report show there has again been a slow down in international sales via Direct Exports but the exact opposite is being shown in relation to sales from Overseas Subsidiary companies. As can be seen elsewhere in this report there has been some growth in the value of sales in the domestic UKCS but this does not represent a substantial rise. It may well be that the labour resource constraints are truly beginning to bite and restrict the potential for growth in the Scottish supply chain at least domestically and in what is being delivered by domestic labour (Direct Exports). As was stated in last year’s survey:

“Manpower, or lack of, remains a significant constraint and it is vital that the oil and gas sector redoubles its efforts to attract more young people into its fold. By growing the manpower resource the Scottish based supply chain can then begin to operate successfully domestically and internationally in tandem”.

During 2007 there has been some anecdotal evidence that at least in a domestic context there has been some signs of a slow down in activity levels and in the number of projects coming forward. However, if the theory that labour and skills constraints were impinging on the industry’s ability to deliver all the projects brought on-stream by the high oil price is true then maybe this might be no bad thing. Rising costs across the supply chain have also been stated as a factor for this slow down. There have been a number of significant commitments by the supply chain announced in 2007 as regards investments in key infrastructure such as vessels. Assuming the oil price remains high and that supply chain infrastructure investment continues, plus the labour pool can be increased, it may well be that the results from the last two surveys simply represent a lull before further strong growth is delivered both in the UKCS and in Direct Exports.

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Market Analysis of In addition to measuring the level of international sales a further rationale for undertaking International the research was to accurately gauge what overseas markets were the principal targets for Activity in the international activity. Over time it is hoped that this can be measured in such a manner that Service/Supply will allow trends to be monitored which will assist in the targeting of export assistance and Base other measures aimed at encouraging the growth of overseas sales. In responding to the survey, companies were asked to give details of their sales in overseas markets and to indicate whether the sales revenue was generated by direct export activity or via an overseas subsidiary. In addition companies were again asked to distinguish between sales to oil and gas industry customers and general sales outwith this sector. The data presented is for 2006 only and covers only sales to oil and gas end user customers.

Geographic Analysis

Initially the responses are broken down at a broad geographic level to give an indication of the principal market regions in which activity is concentrated. Table 4 examines the level of total international sales activity on a geographic region basis and breaks this down into direct sales and overseas subsidiary sales.

Table 4. Destination of International Sales by Geographic Region in 2006 (£m Current Prices)

Direct Export Overseas Subsidiary Total International

North America 138 1,196 1,334 Africa 258 274 532 Eastern Europe 135 343 478 European Union (EU) 183 100 283 Western Europe (excl. EU) 131 146 277 Latin America 34 201 235 Middle East 120 114 234 Australasia 15 177 192 Asia Pacific 65 92 157 Unallocated 727 316 1,043

TOTAL £1,806.1m £2,958.4m £4,764.5m

NB See Appendix A on page 22 for more details of geographic region definitions.

As has been the norm for many years North America retains its position as the top geographic destination for Scotland’s supply chain sales. During 2006 there has been a further strong increase in sales into the market such that they top the £1billion level for the first time, an outcome predicted in last year’s survey report. The value of international sales is estimated at £1,334m compared with £953m in 2005, representing an increase of 40%. The 2006 data represents a slight change in the distribution of these sales compared with the position in the last few years. Namely we see an actual rise in the value of direct exports into the market from what admittedly was an all time low of £35m in 2005, to stand at £138m in 2006. The value increase has also emanated from a rise in activity undertaken within Scottish owned and managed subsidiary operations, where sales rose from £918m in 2005 to £1,196m in 2006.

Clearly there can be variation in figures dependent on not only market factors but issues such as mergers, acquisitions and indeed disposals. Indeed during the 2006 period a disposal of a major US subsidiary was undertaken by a Scottish company. However, the general trend in recent years has been an increase in the number of companies in the North American market which have been acquired by the Scottish supply chain thus providing them with an important foothold in this key oil region. The results suggest that these Scottish owned subsidiaries continue to grow their business and that this overall trend has

11 ______continued with a number of recent acquisitions announced in late 2007. Whilst as can be

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Market Analysis of seen in Table 5, the United States is the principal North American market there is also a International steady and growing interest in the Canadian market, with more Scottish companies looking Activity in the at business opportunities across the region. Service/Supply Base The relative share of total international sales taken by the differing geographic regions is shown in Figure 5.

% SHARE OF 2006 TOTAL INTERNATIONAL ACTIVITY BY GEOGRAPHIC REGION

OTHER WEST MIDDLE EAST EUROPE 5% 6% EU 6% LATIN AMERICA EASTERN 5% AUSTRALASIA EUROPE 4% 10%

ASIA AFRICA 3% 11%

NORTH UNALLOCATED AMERICA 22% 28% Figure 5

Following the increase in sales into North America, Figure 5 shows that it accounts for 28% of international sales compared with 25% in 2005 and 24% in 2004. It is more than likely that the region will continue to represent the top destination for our supply chain over the coming years.

The second top market area for the supply chain also remains as it was in the last survey, namely the African market. Unlike North America there has been a downturn in sales, albeit small, and also a change in the distribution pattern of these sales. The overall export value is estimated at £532m in 2006, compared with £567m the year before, a drop of 6.2% over the year. This year’s data suggests that a much greater proportion of this business has been delivered by subsidiary operations than has been the case to date. In 2005 £127m or 22% of the total was delivered via established subsidiaries, whereas this has now risen to £274m or 51.5% of the 2006 level of revenues. Given the ongoing security issues in certain African markets these activity levels, particularly in terms of subsidiary operation sales remain dominated by the larger global players in the supply chain.

One consistent trend in the survey results over the past few years has been a steady and consistent growth in the level of sales into the Eastern European markets. The latest figures indicate that this is continuing and in terms of 2006 it is in fact accelerating. The total international sales figure of £478m shows a large increase from £263m in 2005 and £215m in 2004. The 2006 data also shows a greater proportion of this business now being delivered via established subsidiary operations in the various Eastern European markets. There has of course been long established links between the UKCS supply chain and many Eastern European markets, in particular those centred on the Caspian region. Fostered by a mixture of individual company efforts and a strong network of support through public sector backed trade missions this region has established itself as a key export market for Scottish companies. The net effect of this is that the region now accounts for 10% of total international sales from Scotland’s oil and gas sector, a figure which has almost doubled

13 ______since 2004.

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Market Analysis of Internati onal Activity In geographic region terms the other principal feature to come out of the figures in Table 4 in the is the sharp increase in sales into the Western European (Non EU) markets. These have risen from £83m in 2005 to £277m in 2006. Although not the only market where sales are Service/ recorded the principal country accounting for this change is Norway where a return in Supply sales levels to nearer the pre 2005 figure is noted. Overall exports into the region in 2004 Base were estimated at £152m.

Country Analysis

Table 5 provides a more detailed analysis of the country markets in which the Scottish oil and gas service/supply base is trading. These figures again relate solely to sales from the industry to oil and gas end user customers.

Table 5. Destination of International Sales by Country Market in 2006 (£m Current Prices)

Direct Export Overseas Subsidiary Total International

(1) United States 119 1,103 1,222 (2) Norway 130 146 276 (3) Russia 96 173 269

(4) Australia 13 178 191 (5) Azerbaijan 34 141 175 (6) Angola 68 67 135 (7) Netherlands 112 20 132 (8) Canada 19 92 111 (9) Arab Emirates 77 28 105 (10) Equatorial Guinea 21 62 83 (11) Nigeria 54 25 79 (12) Venezuela 1 73 74 (13) Oman 3 68 71 (14) Germany 11 51 62 (15) Chad 1 45 46 (16) Libya 4 40 44 (17) China 11 31 42 (18) South Africa 36 2 38 (19) Colombia 1 37 38 (20) Trinidad & Tobago 5 32 37 (21) Argentina 1 36 37 (22) Mauritania 32 0 32 (23) Kazakhstan 3 29 32 (24) Brazil 25 3 28 (25) Egypt 24 2 26 (26) Denmark 26 0 26 (27) Austria 0 22 22 (28) Algeria 7 14 21 (29) Saudi Arabia 3 17 20 (30) Singapore 16 4 20

OTHER NAMED MARKETS 126 101 227 UNSPECIFIED MARKETS 727 316 1,043

TOTAL £1,806.1m £2,958.4m £4,764.5m

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Emphasising the surge in sales into Non EU Western European markets is the recovery of the position of Norway in the top 30 market table. From a placing of 6th in 2005 it is now the second top market for exporters in the Scottish supply chain. The business is split almost equally between that which is being delivered via direct export and that which is

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Market Analysis of Internati onal Activity the result of subsidiaries. The Norwegian market has often proved a difficult one for the in the Scottish supply chain to access with many companies having established operations in Norway but not having gained the success they had hoped for. From an operational point Service/ of view there has been a much greater emphasis in the past two to three years of the need Supply for co-operation on developments both at a company and governmental level. The need for Base the UK to access “risk free” Norwegian gas has of course been one of the imperatives for this more cross border approach. It will be interesting to monitor in future survey results whether this has the effect of creating a greater range of opportunities for Scotland’s supply chain and thus continued growth in sales revenues into Norway.

Despite this surge in exports into Norway the top market once again for Scottish companies is the United States where exports are valued at £1,222m in total, a sharp rise of some 33.6% from the £915m level in 2005. There is also a significant rise in sales into the Canadian market where total international sales have risen from £39m in 2005 to stand at £111m in 2006, this makes Canada the 8th top export market in 2006 compared with the year previous where it was 21st.

In geographic terms Africa remains the second most important trading area for Scotland despite a decline in sales. The picture at a country level is varied with a large decline noted in sales into Nigeria, these having fallen to £79m in 2006 compared with the £185m level in 2005. Indeed in 2005 Nigeria was the second top export market for our supply chain. Other sales declines in Africa were limited to Egypt and on the upside growth was noted in Equatorial Guinea and Chad. The largest African growth market in 2006 was Angola, where exports almost doubled rising from £68m in 2005 to a current level of £135m. Nigeria in particular has been the location of considerable security concerns over numerous years but this appears to have escalated in the last couple of years with a number of high profile incidents in the Niger Delta region. Whether this has had an impact on trade levels is open to speculation but it is clear that a number of companies within the supply chain are currently taking a stance against doing business in the market as security for their staff cannot be guaranteed.

The 2006 survey pinpointed the key growth region as being the Eastern European market, where overall sales have risen by 82% to £478m. There are three markets of significance in the region which attract almost all of the export trade from Scotland to the region, namely Russia, Azerbaijan and Kazakhstan. Currently the most significant of these is the Russian market where there has been consistent and steady growth in sales over the past few years. In 2004 Scottish supply chain sales totaled £120m, this rose to £155m in 2005 and in 2006 has reached £269m, keeping it in 3rd position by sales value. There has also been consistent growth in sales to Azerbaijan over the same period with revenues rising from £81m in 2004, to £102m in 2005 and now to £175m. In short both of these important oil provinces have seen a doubling in the value of business being conducted by Scotland’s oil and gas supply chain in the last two years. Although some way behind in value terms Kazakhstan also appears to be showing some growth with 2006 sales estimated at £32m compared with £3m in 2005. Whilst security and political instability remains a hazard in some areas of the former Soviet Union, there is little doubt that there is a strong representation of major players in the Scottish industry which are now well established and active in these key markets. This should augur well for continued sales growth and should also create market opportunities for some of the smaller companies in the supply chain.

In contrast to Eastern Europe the 2006 results show a sharp drop in sales into the Asian Pacific markets. There has been a decline in sales to Thailand, Singapore, India and Pakistan and perhaps most significantly a steep drop in sales into China which fell from £96m in 2005, when it was the 5th top market, to £42m in 2006, making it now 17th.

The Australasia region recorded a surge in the level of business done from the Scottish supply chain. Although some £2m of business was done in New Zealand the major market

17 ______is Australia and the latest figures show exports valued at £191m. This has more than doubled from the 2005 figure of £79m and makes Australia currently the fourth top market up from eighth.

18 ______

Market Analysis of Internati onal Activity In overall geographic terms there was little change in sales into the Middle East or Latin in the America, but once again at a country level there were a number of significant variations, particularly in the Middle East. Looking at these markets, there were strong increases Service/ recorded to the United Arab Emirates, up from £45m to £105m in 2006, and to Oman Supply where sales rose from £36m in 2005 to £71m in 2006. On the other hand declines were Base noted to Iran, a decrease from £64m to £12m and to Saudi Arabia where sales fell from £41m to £20m.

Finally in relation to Latin America the markets of Brazil and Colombia showed a modest drop in Scottish exports, whilst there was slight rise to Venezuela and Argentina maintained its status. The main growth market was Trinidad and Tobago where sales rose from £19m to £37m during the period.

Figures 6-8 graphically illustrate the key markets for Scottish based oil and gas supply/service companies.

% SHARE OF 2006 DIRECT EXPORT ACTIVITY BY COUNTRY MARKET

OTHERS 62%

AZERBIJAN NORWAY 2% ARAB 7% EMIRATES NETHERLANDS NIGERIA 4% 6% UNITED STATES 3% ANGOLA 4% RUSSIA 7% 5% Figure 6

19 ______

% SHARE OF 2006 OVERSEAS SUBSIDIARY ACTIVITY BY COUNTRY MARKET

AZERBIJAN RUSSIA NORWAY 5% AUSTRALIA 6% CANADA 6% 5% 3% VENEZUELA 3%

OTHERS UNITED STATES 35% 37% Figure 7

20 ______

Market Analysis of Internati onal Activity Looking at Figure 6 it can be seen that Norway and the United States take the greatest in the share of the direct exports. The USA did not appear in this chart in 2005 but the upsurge in direct trade with this market has once again seen it account for a significant share of the Service/ total. Nigeria which had an 8% share of direct trade in 2005 has seen this drop to 3% in Supply this latest survey. Base In terms of sales delivered via subsidiary operations then the United States remains dominant with a 37% share, although in 2005 it accounted for 48% of subsidiary sales. The strong growth in subsidiary sales into Australia and Russia has seen them both take a 6% share compared with 4% and 3% respectively in 2005.

% SHARE OF 2006 TOTAL INTERNATIONAL ACTIVITY BY COUNTRY MARKET

AUSTRALIA 4% AZERBIJAN ANGOLA RUSSIA 4% 3% NETHERLANDS 6% NORWAY 3% 6% CANADA 2%

UNITED STATES OTHERS 26% 46% Figure 8

Figure 8 illustrates the combined total international sales. The United States takes a 26% share compared with 24% in 2005. Norway and Russia take both 6% compared with 2% and 4% in the previous year’s research.

As can be seen by the large percentage figure for “Others” there is clearly a long tail in terms of market destinations and once again this survey relects export activity in an astonishing diversity of markets across the globe. Sales activity is recorded in 95 different markets across the world as high a number of different destinations as has ever been recorded. Perhaps even more significant is the fact that sales activity via subsidiary operations is noted in 56 different country markets. This is the highest geographic spread of sales activity via subsidiaries recorded in the history of the survey research.

21 ______

Active Exporting in the The definition of an active exporter is a company which generates more than 15% of its Scottish turnover through export sales. The data generated by the survey allows us to measure the Service/ number of active exporters in the sample and to compare the 2004, 2005 and 2006 data. Supply For the purposes of this analysis export activity has been defined as international activity, that is the sales figures for direct export and via subsidiaries are counted as equally valid. Base Table 6 details the results within different export turnover bands.

Table 6. Active Exporting in the Scottish Service/Supply Base

% Turnover Derived No of Companies % Change Internationally 2004 2005 2006 2005-06

76-100 18 19 19 0 51-75 29 33 18 -45 26-50 38 27 39 +44 15-25 20 16 8 -50

TOTAL 105 95 84 -11

The results from this part of the survey show a downward trend compared to recent years. Whilst at the very top end there has been no decline in the number of companies exporting between 76% and 100% of turnover, there has been a reduction across two of the other % turnover bands, whilst an increase is shown in the 26%-50% band. In overall terms there has been a drop in the number of companies who come under the “active exporter” category, down from 95 companies in 2005, itself a fall from 2004, to 84 companies in 2006.

Again it is difficult to draw too many conclusions from these results although they do tend to reinforce the view that the companies which are strong internationally i.e. those which export greater than 25% of turnover, have by and large maintained their positions and that the companies which are less dependent on export markets may well have continued to refocus on the relatively buoyant domestic market.

The statistics in Table 7 were derived by estimating the proportion of sales accounted for Small and Large by SMEs (i.e. those with up to 249 employees) and large companies (250 plus employees). Exporters This enables the relative contributions of small and large companies to be assessed.

Table 7. Relative Contributions of SME and Large Companies - 2006

SME Company Share (%) Large Company Share (%)

Direct Exports 31 69 Subsidiary 5 95 Total International Sales 15 85

The latest breakdown of the results for SMEs and Large companies show a slight increase in the proportion of total international sales accounted for by SMEs.

In value terms a 15% share equates to £708m in total sales compared with £526m in 2005. The growth in sales from the SME sector has come about via a strong increase in direct exports. SMEs accounted for 21% of direct exports in 2005 or £398m, compared with 31%, or £560m in 2006. There has been a decline in activity amongst SMEs in terms of sales via subsidiaries during the period, with this falling from £186m in 2005 to £148m in 2006. The opposite is true for Large companies where sales via direct exports have fallen,

22 ______but there has been strong growth in sales via subsidiaries.

23 ______

United Kingdom Domestic Sales Activity in the Service/Supply Although not a core part of the survey, which principally was designed to measure international sales activity, respondents were asked to indicate the value of their domestic Base sales i.e. sales within the United Kingdom marketplace. A breakdown of these results is given in Table 8 and Figure 9 illustrates the changes within the four main business categories as defined below:

Business Category 1 Product/Equipment/Materials Business Category 2 Bulk Materials Business Category 3 Services Business Category 4 Engineering/Procurement/Construction/Installation

Once again businesses were asked to indicate their total domestic sales but then also to define the proportion of these which were sold to end user customers in the oil and gas industries. It is these latter estimates which are focused on.

Table 8. Scottish Service/Supply Sales to the UK Domestic Market 2004 - 2006 (£m current prices)

Total Sales Sales to Oil & Gas Sector 2004 2005 2006 2004 2005 2006

BUSINESS CATEGORY

(1) Prod/Equip/Materials 826.1 938.6 898.3 663.6 777.7 767.6 (2) Bulk Materials 504.8 574.8 657.1 421.8 512.4 627.5 (3) Services 5,279.3 6,497.3 6,220.3 4,471.3 5,517.1 5,246.4 (4) Eng./Proc/Constr/Install 956.1 1,215.8 1,649.6 849.6 1,109.3 1,505.1

TOTAL £7,566.3 £9,226.5 9,425.3 £6,406.3 £7,916.5 £8,146.6

UK SALES GROWTH BY BUSINESS CATEGORY

6000 5517 5246 5000 4471

4000 £M's

2000 1505 1109 778 768 850 1000 664 422 512 627

0 Prod/Equip/Mat Bulk Materials Services Eng/Proc/Con/Inst 2004 2005 2006 Figure 9

As Table 8 shows there has continued to be growth in the level of sales activity into the domestic UKCS market. The value has risen from £7,916.5m to £8,146.6m, an increase of 2.9% compared to the 2005 figures. In comparison last year’s figure represented an increase of 23.6% over the 2004 level, so unlike the international picture 2006 domestic growth has been somewhat modest and shows greater correlation to that of Direct Exports.

24 ______

United Kingdom Activity in the At a sectoral level there is again quite a lot of variation in performance with the Services Service/ category recording a 4.9% decline in sales value, whereas the Engineering/Procurement Supply category saw a large 35.6% rise in domestic sales, representing its third year of growth in the UKCS. As in the case of international markets the Bulk Materials sector showed Base growth domestically and the Products/Equipment/Material category showed some modest decline.

% SHARE OF 2006 UK SALES ACTIVITY BY BUSINESS CATEGORY (2005 % Share in Brackets)

PROD/EQUIP/ ENG/PROC/CON MATERIALS 10% BULK INSTALL 18% (10%) MATERIALS 8% (14%) (6%)

SERVICES 64% (70%) Figure 10

Figure 10 shows the share of UKCS sales taken by the four Business categories. There is a sharp reduction in the share accounted for by the Service sector, down from 70% to 64%, although it remains dominant. There is uplift in the share from the Procurement/Engineering sector mirroring its strong growth, likewise a small increase for Bulk Materials and no change for the Product/Equipment sector.

Trying to look ahead to the picture for 2007 and immediately beyond is difficult. On the one hand given the sustained high oil price environment it would seem likely that investment levels in the UKCS will continue to remain high. It is clearly also a province that continues to attract great interest and potential investors as can be judged by the success of the 24th Licensing Round in February 2007. Despite this it seems increasingly clear that the aforementioned resource constraints are limiting the capacity of the supply chain to take on and deliver additional work and this is likely to be a strong limiting factor on the opportunities for increased revenues in the UKCS at least in the short term future. Whilst there are signs that some companies may be reducing direct international activity and switching resource to the more familiar UKCS market, there is only so much additional capacity this can introduce into the home market. In reality most of the major businesses which have established themselves overseas have done so on the basis of major growth opportunities and are to a large extent indigenous in terms of their workforce.

In summary UKCS activity levels and hence supply chain revenue levels are likely to remain high in the next 2-3 years but scope for significant growth is limited.

25 ______

International and Having carried out the survey for a number of years, SCDI considered it valuable to take a closer look at the relative trends in international and domestic sales since 1999. Whilst the Domestic Market growth in international activity is welcome, is it actually substituting for a decline in the Sales Comparisons UKCS market or is it part of a wider growth picture?

Table 9 below details the overall Total International sales figures and Domestic sales data between 1999 and 2006, as well as the sum of these. Figure 11 illustrates the growth trend in these same categories again over the seven year period.

Table 9. International and Domestic Market Sales 1999 - 2006 (£m current prices)

1999 2000 2001 2002 2003 2004 2005 2006

International 1,246 1,888 2,199 2,716 3,394 3,654 3,754 4,764 Domestic 4,979 5,107 5,599 5,965 6,481 6,406 7,916 8,147 Total 6,225 6,995 7,798 8,681 9,875 10,060 11,670 12,911

International % Share 20.0% 27.0% 28.2% 31.3% 34.4% 36.3% 32.2% 36.8%

INTERNATIONAL AND DOMESTIC MARKET SALES 1999 - 2006

8000 £M 6000

0 1999 2000 2001 2002 2003 2004 2005 2006

International Domestic Total Figure 11

Figure 11 emphasises that in terms of international sales there had been a leveling off in performance over the past 2-3 years compared with the very strong growth recorded in the early part of this decade. These latest results show international sales once again on a strong upward trend. Domestic sales have largely continued to grow, although there was a slight downturn in 2004 followed by a very sharp uplift in 2005. The 2006 results show modest growth. As a result the share of total sales (domestic and international) accounted for by overseas business has risen to 36.8% its highest ever recorded share.

With the combination of continued domestic sales growth and rapid international growth then these latest results record yet a further rise in the combined sales total for the UKCS oil and gas supply chain. A record value of £12.9 billion in sales has been reached for the 2006 period, up from £11.7 billion the year before. As has been discussed earlier in this report it seems likely that due to a variety of resource constraints rapid upward growth in UKCS Domestic and Direct Export sales for 2007 is doubtful, but nonetheless it is expected that overall growth should be more than sufficient to continue a strong upward performance trend in 2007.

26 ______

Sector The 2002 survey incorporated an additional question which aimed to focus on the extent to which companies traditionally selling into the oil and gas sector were beginning to Diversification diversify their business. In truth the response to this was patchy and although the data generated enough information to give an indication of what other key sectors were being targeted, it was the intention to build on that in subsequent surveys. A more precise definition of the question, whose fundamental aim was to record the level of sales into non oil & gas end market sectors has since helped generate an improved response. Table 10 summarises the information received in 2006.

Table 10. Scottish Service/Supply Trading with Non Oil & Gas Sectors 2006

BUSINESS SECTOR VALUE (£m)

Defence £38.1m Non Oil & Gas Energy £318.0m Non Oil & Gas Engineering £71.7m Industrial Equipment, Materials and Services £57.5m Other £193.4m

TOTAL £678.7m

% SHARE BY SECTOR OF 2006 NON OIL & GAS SALES

OTHER 28.5% ENERGY 46.8%

ENGINEERING 10.6% INDUSTRIAL 8.5% DEFENCE 5.6% Figure 12

It is important to be cautious in interpreting the results for this element of the survey as it is not the core element of the research, nonetheless it does give a good representation of the other industry sectors which are targeted by the oil and gas supply chain as they attempt to diversify. These latest results reverse the trend of recent years which has seen a dip in the value of sales generated from non core oil and gas markets. The 2006 survey records £678.7m of business being done outwith the oil and gas end user markets, a sharp rise from the £454.7m in 2005 and close to the highest level recorded which was £701m in 2003.

The top sector for diversification remains Non Oil and Gas Energy which is typically renewables and the power generation sector. With 46.8% of the sales value some £317.6m business is being done here. Despite fluctuations in the overall level of sales into non oil and gas markets, the one consistent factor since the incorporation of this question into the survey has been growth in sales into this Non Oil and Gas Energy category. In 2003 £169m of business was recorded, in 2004 £223m, in 2005 £298m and now £317.6m. Although still modest when compared with sales into the oil and gas industry it seems clear that progress is being made by the oil and gas supply chain as it seeks to grab a proportion of business being presented by the growth in renewables.

27 ______

Sector Table 10 and Figure 12 show the principal non oil markets and once more the detailed results show a very wide spread of sectors being targeted. These include Shipping and Diversification Transport Services, the Agriculture/Food sector and the public sector including the water industry, local government and the Health Service.

Conclusions Once again the sole focus of the study is the key client group of the Oil and Gas Service/Supply chain. The main aim of the study was to continue measuring the degree to which it is beginning to develop international opportunities based on the expertise it has gained in the UKCS. In addition the survey took the chance to measure the level of domestic sales being generated by the same Service/Supply base and also looked at the extent of diversification into non oil and gas end user markets. This is the eighth time the research has been carried out and it further adds to the data set which over a period of time should reflect the trends in internationalisation and also oil price impact on sales.

In last year’s conclusions it was noted that the growth in international sales had continued but was clearly slowing down from the rate which was recorded at the beginning of the decade. The 2006 results have reversed this trend and record the largest rise in sales values since 2003 with the figures up 26.9% at £4,764.5m compared with £3,753.6m in 2005. There is a large divergence in performance between the levels of business which is being done via direct exports and that delivered via subsidiary companies in the overseas markets. Sales via subsidiaries managed to show substantial growth rising 59.4%, but direct exports declined by 4.7%. The picture was more positive on the domestic front where sales levels grew for the eighth year in succession to stand at £8,146.6m. The net effect was that the domestic growth combined with the substantial international increase meant that the overall level of sales from the supply chain grew markedly to reach £12.91 billion, a figure which also represents eight years of growth in a row.

The geographic distribution of exports for 2006 brought about some interesting changes with one of the main points worthy of note being the consistent growth in business being undertaken with Eastern Europe and in particular Russia, Azerbaijan and Kazakhstan. The North American markets continued to show strong growth with sales into the United States being particularly vibrant and it remains by far the most significant market for international sales from Scotland’s supply chain. This United States rise is being driven by a surge in sales through subsidiary companies but also an upturn in the level of direct exports. In addition, sales into Canada more than tripled.

The 2007 period has continued to be a busy and productive one for Scotland’s oil and gas sector. Anecdotally there may be signs of a slow down in the number of potential projects coming forward domestically, or at the very least a stretching of the timescales on which projects are being considered. Given that the supply chain is clearly resource stretched in terms of delivering the volume of work which has been coming through in recent years it is unlikely that any such slow down will have an impact on the UKCS domestic sales figures in at least the next couple of years. That having been said it is important that the UKCS remains a globally competitive and attractive location for mobile investment. Hence, SCDI is firmly behind efforts to address some of the labour shortages such as the Oil and Gas Skills Academy initiative recently announced by OPITO (Offshore Petroleum Industry Training Organisation). It is by growing the labour pool that the oil and gas sector can deliver projects globally and domestically while keeping a lid on labour costs. In addition, it is vital that the UK Government has an active and positive dialogue with the oil and gas operating companies and the wider supply chain to ensure that the UKCS fiscal regime is fit for purpose if the full extraction potential of the UKCS is to be achieved.

The rationale behind internationalising the Scottish supply chain is as strong today as it was when this survey was first undertaken. If we have strong businesses operating globally out of Scotland then the greater likelihood that major headquarter functions and regional centres will remain here even as the UKCS diminishes in relative importance compared to other worldwide opportunities. This survey records the success of this “going global” process and undoubtedly the domestic industry is stronger as a result of that success.

28 ______

Appendix A Geographic Region Definitions

Region Main Markets

North America United States, Canada Western Europe (Excl’ EU) Norway, Faeroes, Switzerland Latin America Brazil, Mexico, Columbia, Venezuela, Trinidad, Argentina European Union Denmark, Netherlands, France, Germany, Italy Eastern Europe Russia, Azerbaijan, Kazakhstan Middle East Iran, Qatar, Saudi Arabia, UAE, Oman, Syria Africa Egypt, Ivory Coast, Nigeria, Equatorial Guinea, Angola, Libya Asia Pacific Singapore, Vietnam, Brunei, China, Indonesia, Malaysia, Thailand Australasia Australia, New Zealand

Business Category Definitions

1.Products/Equipment/Materials

Pumps, drilling equipment, computers, wellhead equipment, ROVs, Instrumentation/Process Control Equipment.

2.Bulk Materials

Chemicals, Valves, Building Materials, Plastic/Composites

3.Services

Surveying, Logistics, Certification, Repair/Maintenance, Drilling Services, Diving, Testing/Inspection, Seismic Services.

4.Multidiscipline

Engineering, Procurement, Construction, Installation, Commissioning. (Platforms, Subsea, Pipelines etc)

Acknowledgements The Scottish Council and Scottish Enterprise thank all the companies that responded to the survey. Without the excellent level of support received it would not have been possible to undertake this research.

Published by the Scottish Council for Development and Industry. Not to be reproduced in part or in whole without permission.

Ian Armstrong/Yvonne MacArthur/Fiona Downie December 2007