Aubin's CEO on operating in the North SeaOctober 2015 | Viewpoint
This year for the first time in its history the North Sea will lose money, writes Aubin's CEO Paddy Collins. The cost of getting the oil out will be more than the value of the oil extracted. The sudden drop in the oil price from over one hundred dollars to less than fifty per barrel and the realisation that this is the new normal has put our community in real economic danger. Perhaps it's not obvious yet , as unlike the U.S. or the Middle East it takes longer for the impact of oil industry cutbacks to be felt in Aberdeen. Operating in the North Sea is too expensive and we need to reduce our costs. How can we do this without cutting corners, compromising safety and damaging the environment?
My company, Aubin, is an SME based in Ellon. We make and supply our own chemicals to the oil and gas industry. Although based in Ellon, over sixty percent of our business is overseas principally in the Middle East. We are good at what we do, this year we won the Queen’s Award for International Trade by growing our overseas sales by more than one hundred percent in three years.
Towards the end of last year my colleagues and I became concerned at the sudden and unexpected drop in the oil price and the calls for cuts in prices of 20 – 30%. We knew there was no way we could do this, but it was clear that we had to do something. We decided to focus on the things we knew, the things we were good at, and the things we could make money on, for Aubin that means chemistry and chemicals. We looked at how we do things and asked “does it add value? does it make the boat go faster?” if the answer was no then let's stop doing it. This meant that we had to make the painful decision to say goodbye to some of our colleagues, good people, doing good work, who through no fault of their own could not be part of our plans for the future.
Working in the supply chain I regularly see ways customers can reduce their costs but there is no mechanism to tell them and to do so means we run the risk of detriment to our business. After talking to other leaders in the supply chain, it’s clear that there is too much unnecessary complexity and bureaucracy in the North Sea compared to overseas markets. If this unnecessary complexity was removed significant cost reduction could be achieved. The supply chain needs to be empowered to politely tell their customers when they are doing something stupid.
We realised that, if viewed properly the challenge of fifty dollar oil could be a fantastic opportunity. The established ways of doing things were going to have to change and our customers would have to accept this. I feel that the people running our largest companies understand this, but I also feel that the need to change is not understood further down organisations in the permafrost. How to change the current culture within operators and tier one contractors is perhaps the biggest challenge we face as an industry, but we have to change and change fast because there isn’t much time.
One opportunity to radically reduce costs is through innovation. At Aubin we have built a product development pipeline that is focussed of making things more simple. If they are more simple they are easier to do, if they are easier to do they are quicker, if they are quicker they result in significantly reduced total costs - our aim is to reduce customers cost by between thirty to fifty percent.
I am confident we can do this in Aubin but what worries me is the “We want to be second” attitude that plagues our industry and stifles progress in innovation. It is born out of the same rational self-interest that resulted in not hiring and training young people (it’s too expensive they will get poached by our competitors) and as a result relying on a diminishing pool of increasingly expensive, and not always very good, contractors. This rational self-interest works until everyone does it, then nowhere near enough young people get hired and nowhere near enough cost saving innovation gets adopted. As a direct consequence young people look elsewhere for work and R&D budgets get slashed. Consider, if Shell hadn’t been brave enough to try the Cormorant UMC, would we have a subsea sector today – probably but it wouldn’t be in Aberdeen. I feel that this might be something that government and the OGA can help with, by rewarding or incentivising early adopters of new technology. I don't mean marginal improvements, I mean significant, disruptive, never been done before stuff. This would not only reduce costs but also create new jobs and new opportunities for export for the supply chain.
I have mentioned that we do not have very much time – the next couple of years will be crucial for the North Sea, Aberdeen and the North East. Just trying to muddle through like we did before won’t work and Aberdeen and the North East will quickly go into an almost irreversible decline similar to the loss of shipbuilding on the Clyde. If we get it right our industry will be rejuvenated and we will be able to access the 20bn barrels of oil remaining in the North Sea and perhaps make Aberdeen the Cambridge of Scotland creating high value, exciting new technology focussed businesses that we can all be proud of.
It’s up to us.