Resourceful Scotland

Morag Dickson looks at the declining productivity of the North Sea and how the tide is turning for Scotland's energy industry.

Among the top deals of 2007 in Scotland was a £280 million transaction in the energy sector – a mainstay of Scottish deal flow in and out of the mid-market, according to PKF corporate finance partner Graeme Cassells. The deal saw Abu Dhabi National Energy Co subsidiary Taqa Bratani acquire non-operated North Sea assets from the UK subsidiaries of Talisman Energy Inc in Canada. The investment represented an ideal entry point into the UK Continental Shelf (UKCS) up-stream oil and gas market.

“The transactions that tend to grab the headlines are those involving larger foreign companies buying businesses with operations in Scotland such as Taqa,” claims Cassells. “What is less well documented is the transactional activity of growing and acquisitive Scottish companies in the mid-market, of which there are many.”

Weir Group and John Wood Group are two such examples. Glasgow engineering business Weir acquired SPM Flow Control Inc of Texas for £328 million in July, followed in December by the £113 million purchase of CH Warman Pump Group. Wood Group, an Aberdeen-based energy services company, expanded its international operations in November with the acquisition of Canada’s IMV Corporation.

Kenny Stewart, managing director of Corporate & Structured Finance for Royal Bank of Scotland, has also observed a healthy degree of activity in a selection of sectors.

Back in May, Dominium Technology Gases, an industrial gases supplier to the oil and gas industry, disposed of Dominium Technology Gases Holdings – a new company set up by the management team and venture capitalists Graphite Capital. RBS provided additional bank funding for the acquisition. July saw the bank provide senior debt for the management buy-out of engineering contractor MotherwellBridge’s subsidiaries MB Aerospace and MB Faber, and in September RBS supplied Aberdeen-based drilling waste management specialist TWMA with a £17 million growth-funding package.

Oiling the wheels

Commenting on the industry that is perhaps most closely associated with Scotland, Jack Ogston, head of Specialist & Acquisition Finance Scotland at Clydesdale Bank, says: “The oil industry is strong with oil prices reflecting global demand, and the fundamentals suggest that Scotland’s oil producers will continue to benefit from the UKCS, along which reserves have got some time to run.”

Of course, eventually the oil and gas will run out, and output is slipping (oil and gas production fell by 10 per cent in the 12 months to September 2007, according to RBS’ Oil & Gas Index December 2007), but there are still serious reserves to be exploited and taxes to be collected – £9.1 billion was collected by the British Exchequer, with £55 billion due to be delivered over the five from 2007/8.

Energising new industry

Another area with serious assets to exploit is the technology sector that has and is serving the drilling and exploration of the North Sea. Says Ogston: “Specialist technologies were first developed to access the trickier UKCS fields – and that’s where smaller operators with smart applications are coming into their own. These readily-transferable technologies have found a home in oil exploration and production companies as far afield as Africa and Russia where there are a lot of unexploited fields.” Take the example of Edinburgh-based oil explorer Cairn Energy, whose recent drilling activity in India and Bangladesh has been widely reported.

More power to you

In addition to having positive implications for the oil and gas sector, Scotland’s advanced submarine technologies could be adapted to assist projects in the new energy space. Last year, Spanish utility group Iberdrola’s acquired marine power specialist ScottishPower and put in motion a plan to build the world’s largest wave energy unit. It is likely to cost £10.5 million and launch later this year. The move has potential to spawn an industry rivalling that of North Sea oil:ScottishPower studies show that tidal power could supply more than one-third of Scotland’s electricity needs by 2020.

ScottishPower is also engaged in a project in partnership with Norwegian technology company Hammerfest Strøm to optimise a prototype of the firm’s tidal stream generator. Construction begins this year in preparation for its 2009 launch.

Confidence in the renewables arena was echoed recently by the Scottish Executive, whose members have set a 40 per cent renewable energy target by 2020. “Scotland has a vast future as a green energy powerhouse for Europe,” comments Salmond. “We have the natural resources to succeed, the skills base to drive research and development, and a government with the will to ensure that renewable energy generation is allowed to thrive.”

The potential of Scotland’s largely untapped renewable resources pool is an exciting prospect, and the efficient harnessing and distribution of green power will help Scotland to continue doing what it does best.

Related: Why are so many overseas companies relocating to Scotland?

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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