From the outset, the U.K.'s oil and gas industry was able to build a large part of its development on the back of the country's long-established and well-developed industrial base. Providing capable engineers, technicians and a solid supply chain, the British industrial sector was able to sustain its overall growth, which went some of the way in reversing the steep decline of traditional heavy industry in the second part of the last century. A direct inheritance from the Victorian industrial revolution, the textile, mining and metallurgical industries plummeted from the post-war years onwards, but some engineering firms were able to grab the benefits of the birth and rise of a new sector of activity-the offshore oil industry. While the onshore exploration and production industry was marginal in fuelling the development of a service industry, the vigorous development of offshore production activity following the first oil shock gave a very welcomed breath of life to two areas in particular. Aberdeen, a city on Scotland's eastern coast, was looking at its traditional fishing activity with an increased sense of doom, as the European Economic Community (now the European Union) brought union fisheries under a common set of stringent norms and fishing limitations. The oil boom reverted the gloom and turned the city into the offshore petroleum center of the U.K., and indeed Europe, with the Norwegian city of Stavenger playing a similar role on the eastern fringes of the basin. Aberdeen witnessed a flow of oil and gas workers and industrial operators coming and settling down in its region, creating jobs and lifting the local economy and spirits alongside the production levels off its shores. Today, the city is using these 30 years of development and accumulated experience to claim the title of "Energy Capital of Europe," notably putting together incentives to attract and promote technology-intensive industries linked to the oil and gas sector and to the development of alternative renewable energy sources. A number of ambitious wind-farm projects are in the pipeline along the northeastern Scottish coast. The other region that saw its economy regenerated by the birth and rise of the U.K.'s oil and gas industry is northeast England. Traditionally known for its heavy metallurgical industry and ship-building, the region had been declining since the early 1960s. The development of offshore exploration activities allowed shipyards to use their docks to manufacture platforms, manufacturers to work on topsides, and steel foundries to turn to pipe-making. Cities like Newcastle benefited strongly from this second industrial revolution which helped to offset the decay of their industrial facilities. Today, the level of activity cannot be compared to what was the case in the late 1970s through the mid-1980s, but some fabrication yards have been catching the wind of change and have started developing competencies in pressure vessels, FPSOs or subsea equipment, managing to conserve the strong industrial tradition of the region. The service providers Today, U.K.-based service operators range from engineering firms to fully integrated service companies. One of the major engineering, procurement and construction (EPC) operators is Wood Group, based in Aberdeen, which grew from a family owned fishing business to the rank of No. 1 service company in the U.K. It has become a market leader in engineering design and project management-services, providing "life-of-field" engineering, from green-field to infield engineering, production enhancement and maintenance management, to decommissioning of platforms. Employing 12,000 people worldwide, the group demonstrates the strength of the U.K. service sector. Ian Wood, chairman, says, "Out of the U.K.-based companies, we are probably the one that has the biggest impact on the U.K. oil and gas service sector." Clearly, the role of such an organization is expanding beyond its direct scope of business, as Wood adds. "We have a very significant role in the supply chain by the sheer size of our operations. But we also take a direct approach by running seminars for local SMEs (small- and medium-size enterprises), helping them to integrate themselves into the supply chain and expanding ways on how they can cooperate amongst themselves and with us. As we move internationally, we also try when possible to take those who can offer potential services to our foreign customers." Competition is lining up from the likes of Expro Group. Employing more than 2,000 people worldwide, it has become an innovative leader in oilfield technology aligned with the needs of its customers. In addition to its presence in the U.K., Expro Group has a corporate office in Houston and facilities in Broussard, Louisiana. Chief executive officer Graeme Coutts says, "Expro is a top-tier player in the global service industry. As such we require state-of-the-art facilities to support our activities and our growth aspirations. The Gulf of Mexico, and both the deep and shallow U.K. Continental Shelf (UKCS), remain very important to the future development of Expro. But we believe that the U.S. market will underpin the strategic growth plans for years to come." Amec Plc, an international provider of specialized services and engineering solutions for clients in manufacturing, commercial, infrastructure and process industries, is another key operator in the U.K. basin. It is also headquartered in the U.K. and although oil and gas isn't its main field of business, it has made a name on this front too, playing a major role in the development of the North Sea offshore infrastructure. Internationalization With the maturing of the industry, some service companies have developed major international dimensions, to the extent that foreign operations now represent the major part of their activity. Internationalization works both ways, however, through acquisitions abroad (like Wood's purchase of Houston-based Mustang Engineering in August 2000) and through the entrance of foreign service operators into the U.K., bringing with them their expertise and pragmatic approach to development at a time when it is largely required. "U.K. offshore engineering service companies had a strong tendency to 'over-engineer.' We dropped this approach when we internationalized that environment in the 1980s and 1990s and opened up to the use of fit-to-purpose equipment, notably with U.S.-made topsides and platforms. Now, we have learned to combine the two approaches, thanks to this influx of foreign expertise," says Wood. An aggressive acquisition campaign and successful internationalization of the U.K. upstream sector helped to fuel the global development of the local service sector and put it in a position to become a serious contender for major projects in the Caspian, West Africa and the former Soviet Union. The British service sector has also made its way in the Gulf of Mexico in recent years, but the North Sea is still very much a core area for most of them and isn't considered to be abandoned. "Exit strategy from the North Sea? No way," says Wood. "We see it as a mature area with many more years of productivity. The basin still has got a huge number of brown-field opportunities and a large number of fallow fields that will offer much work for the service industry in the U.K." Increasing safety The service industry has also been building on the basin characteristics, which are unforgiving in many cases and necessitate a particular approach to safety, health and environment. When tragedy struck in July 1988, the basin was changed forever. On July 6, a fire broke out aboard a production platform operated by Occidental Petroleum, followed by an explosion and, in what became the worst accident in the offshore industry worldwide, 167 men died. The Piper Alpha disaster was a turning point in the U.K. offshore industry and marked the low point of safety in the basin. From then on, the number of accidents has decreased dramatically as more stringent rules and regulations were imposed and observed. Some organizations were able to build on this necessary threshold and developed their own products to answer the needs of the industry. RGIT, an offshore survival and safety training company, merged with Montrose, an organizer of fire-fighting courses, in May 2000 and is today dispensing compulsory safety and survival courses to offshore workers from the British and Norwegian sectors of the North Sea. With the change in the shape of business of the majors and the increasing number of new entrants in the basin, organizations like RGIT Montrose have had to address the challenges of change, notably providing their customers with the possibility of totally outsourcing their health, safety and environmental (HSE) training. The safety culture, force-fed into the sector following the Piper Alpha tragedy, is now widely exported. "The culture of safety is spreading across the industry, and we can bring the North Sea approach and experience to the world, and build on the most stringent set of norms," says Murray Strachan, RGIT Montrose group managing director. Similarly, marine operations have developed, notably through the security requirements for safety standby and supply vessels being moored to offshore facilities at all times. Local fishing companies struck by the crisis in the 1960s managed to develop and expand their role in this area of operations, later on expanding into mooring, towing, transportation, cable- and pipe-laying, offshore catering and a wide range of necessary operations to sustain E&P operations offshore. Cooperation With the maturing of the U.K. offshore basin also came the need to reinvent the market approach for the service sector. Based on the traditions of high-level cooperation between oil companies in the basin, a number of innovative approaches stand out, notably based on the spread of cooperation between service operators. The Sigma 3 project epitomizes this cooperative approach. Set up in April by Amec, Wood Group Engineering and KBR, a business of Halliburton, to support Shell U.K. Exploration and Production (Shell Expro), Sigma 3 provides integrated services for a seven-year contract on behalf of Shell Expro worth an estimated 750 million pounds to operate in the U.K sector of the North Sea for Shell, Esso and other co-venturers. "Sigma 3 is a very pragmatic approach. We have skills that our competitors don't have and they have skills that we don't have. So we put all our skills together to serve Shell and also managed to develop a cooperative approach on the cost front," says Wood. Expanding on this cooperative approach, Bill Murray, chief executive of the Offshore Contractors' Association (OCA), points to the role played by the OCA in developing the spirit of cooperation among companies. "This cooperative approach would not have happened to the same extent had not the association published codes of good practice for a number of years to which our members have signed up," Murray says. "As an example, all the workforces on the Sigma 3 project should be paid roughly the same, as we negotiated, on behalf of the member companies with the trade unions and we produced baseline terms and conditions. Similarly, we took care of good contracting practices for transfer of workforces and in matters of standard contracts. All these have contributed to the ability to nail these contractual agreements together and we believe this is a great contribution from our side. The overall lesson from these operations is that companies can cooperate together for better business." BP's MAST initiative Another initiative that attracted attention before Sigma 3 was the Mast Experience, brought to life in 1998 by BP. Having recognized in the early 1990s that a different approach was required for the management of its mature fields, BP brought together the Beatrice, Buchan, Clyde and Thistle fields, along with their respective satellites, to form a single asset named MAST. The net result was a big success involving the coming together of an alliance of various contractors that together managed to increase the value of BP's assets. The four fields were consuming 17% of overheads, yet contributing 4% of production. These fields were each at an advanced stage of maturity, but did not share many other characteristics. Beatrice, with its series of platforms, is in the environmentally sensitive Moray Firth. Buchan was one of the very earliest floating production facilities, with subsea wells tied back to the platform. Thistle, in the northern North Sea, was one of the first-generation platforms with many wells, so the estimated abandonment costs were high. Clyde was much more modern and in the central North Sea. BP's goal was to improve cash flow, extend field life and defer abandonment by increasing reserves, improving production profiles and lowering costs. The super-major wanted to focus on core skills and looked to the marketplace to provide the expertise and operational experience required for those activities perceived as noncore. This was a bold move at the time as some of these activities, like reservoir management, were being outsourced for the first time in the North Sea. An operating alliance of different contractors was formed to manage the fields, and members were given challenging targets and incentives for extraordinary delivery. The seven alliance companies were given various responsibilities, for the topsides, the well-management, subsurface operations and other tasks. Teamwork was a key contributor to the success of the group, featuring interesting innovations like board meetings held on the platforms. During the first year of MAST operations, operating expenditures were reduced by about 20% across the board for the four fields. Significant savings were achieved in logistics, marine helicopters, and other areas. Headcount cuts occurred everywhere too, helped by cross-training onshore and offshore personnel. Production profiles were improved by additional water-injection capacity generated by rerouting some of the topsides systems, and additional reserves were realized through infill drilling and satellite development. The most tangible result was that abandonment was deferred by a number of years. Before MAST, the four fields would have reached the end of their lives between 1995 and 1999. This deadline was pushed to beyond 2000 in all cases and the assets are still producing today. Field management Besides this and other innovative approaches, some of the local service operators have built their competitive edge on a radical rethinking of their client needs and a remodeling of their businesses. Founded in Texas in 1981 and today based in London and Aberdeen, Petrofac is a name that has stood out during the last decade. Now with more than $700 million in revenues per year, the company has expanded its presence in the Middle East, the Caspian region and the former Soviet Union and has added facilities support and operational management to its EPC activity, notably through the acquisition, in December 2002, of Aberdeen-based PGS Production Service. The company has announced its ambition to become a world-leading, fully integrated EPC and facilities management company. The dimension of its activity that may make the difference with the competition in the years ahead is Petrofac's capacity to provide financing and take equity participation in selected projects. Unlike other attempts at contract-to-produce experiments in the 1990s, Petrofac co-invests as a minority for alignments, only where it can drive value for customers through application of its enginering, construction or operational services. Petrofac remains strongly service-led. Petrofac also recently struck facilities-management deals (not including equity participation) with Paladin Expro, Tullow Oil and Venture Production. All three companies are amongst the most prominent of U.K. independents. These deals were following on five years of successful management for ChevronTexaco's Galley Field. In the case of Paladin, Petrofac Facilities Management took over responsibility for their Montrose, Arbroath and Arkwright assets in May 2003. The deal with Tullow Oil came as a blessing for this company, as it was struck straight after Tullow had purchased the entire ConocoPhillips interest in the Hewett assets in the southern North Sea sector of the UKCS. That allowed the oil company to manage a smooth transition, using the service operator's experience to successfully take onboard the management of six gas-producing installations (three unmanned, the others connected to a central complex) as well as the operation of the Bacton onshore gas terminal in East Anglia. It was the first time in the U.K. that a service operator was given responsibility for an onshore gas terminal, demonstrating again the change in business approach that has been filtering through the sector. Aidan J. Heavey, chief executive of Tullow Oil Plc, says, "The operatorship is a key issue in the North Sea, as the companies who operate have to have very specialized staff and very strict HSE departments and policies in place. To take over the operatorship, you have to obtain the approval of the Department of Trade and Industry. "What has changed, is that a lot of the duty-holding activities, basically the people on the rig doing the day-to-day work, is passed on to contractors, but the actual operatorship is still maintained by the companies. So companies like ourselves would have a very specialized operating group and we subcontract the duty-holding job to someone else, like in our case in Bacton and Hewett." In the case of Venture Production, Petrofac Facilities Management took over operation of Kittiwake, a production platform and oil-loading facility previously owned by Shell. The deal included the Mallard oil field, a subsea development tied back to Kittiwake, as well as the Goosander, Grouse and Gadwall oil fields, which have yet to be developed. Rob Pinchbeck, Petrofac Facilities Management managing director, says "Our aim in this business has long been to develop as a turnkey operator, because we saw many more companies coming to the North Sea, notably much smaller companies that did not necessarily have the capacity or the interest to develop operating capability. "The logic was that the oil company would do the reservoir management and investment management, and the service company would do the production management. If you look through the independent oil sector, they tend to be mostly exploration-driven rather than production-driven." This service is, in any case, widely welcomed in a basin that is eager to find cost savings, but also for companies that as new entrants, may not benefit from any offshore production experience, while their financial lifeline resides in the fast and steady flow of oil or gas from their assets. Besides which, Petrofac's readiness to become a direct stakeholder through equity participation in the management deals is a guarantee for the client that the service operator will seek an aligned common interest in the production success of an asset while also guaranteeing a fair service fee. Such a scheme was organized in Algeria's Ohanet gas project, where Petrofac is co-venturer, alongside eight partners including Sonatrach, in a risk-service contract. The U.K. service operator, besides being associated 50/50 with ABB Lummus Global in the EPC for a gas-processing facility, is also receiving a share of the liquids production over a target eight- to 12-year period. Future contracts This kind of agreement promises a great future in a mature basin like the U.K. offshore, where operating costs are the biggest headache in the face of declining production levels and where new entrants might be willing to go for innovative approaches for asset management. The success of facilities management, and the announced will of other U.K. service operators to move into such duty-holding schemes, is a clear indication that the U.K. service sector is looking at the future with confidence. Its successes abroad and the second breath of the North Sea are reasons for optimism. But the keen interest from North American operators in the recent licensing rounds is also expected to trigger a wave of interest from North American service players in the years ahead. Most North Sea players are keen to draw parallels between the history and profiles of offshore development in the Gulf of Mexico and the UKCS. It is also clear that service companies from the U.S. and Canada have developed strong competitive edges in mature basin operations, end-of life and remedial field work and tailor-made, cost-cutting solutions to meet customers' exact requirements. This possible increase in the competition levels could bring even more interest in the U.K. offshore's renewed lease of life. At a time when decommissioning and the future cost of abandonment is a worry to some operators, it allows the basin to refocus on some of its more immediately optimistic prospects.