Subsea is one of the North East economy’s star performers, an area where the region’s expertise is truly world-beating.
Andrew Hodgson is chief executive of Soil Machine Dynamics (SMD), the Wallsend-based engineering business which specialises in the design and manufacture of remotely operated vehicle systems to function on the sea bed.
It is, by any standards, a major player and it is, therefore, fitting that Hodgson should also be chairman of Subsea North East.
Subsea North East grew out of some work done a few years ago involving Durham University to look at smart sector networks, where there were groups of businesses which could be pulled together to help grow the profile of that sector. In the North East, the subsea sector was chosen for the formation of an informal network made up of the key players.
Managing directors and chief executives get together on a quarterly basis to look at key challenges and issues they face, which has tended to be largely the skills agenda.
Subsea North East worked with Newcastle College and Newcastle University to develop a foundation degree and a master’s degree in subsea engineering.
“Sometimes it’s easier to define Subsea North East by what it isn’t,’’ explains Hodgson. “It’s not a trade body – you cannot become a member because it’s not a membership organisation. Participation from the broader business community is done through events rather than through any kind of formal structure.
“We partnered with Subsea UK who were the UK membership organisation for the subsea industry and NOF Energy who are obviously the more regionally focused energy organisation.’’
How is the industry doing?
“The subsea industry is growing, effectively doubling in size every five years, which is a kind of ongoing trend and the UK companies account for about 45% of the world
But North Sea oil is running out and production is declining, won’t that put a serious brake on growth for the industry?
“The North Sea became a proving ground for a lot of technologies and a lot of subsea technologies, and the UK companies have become very good at exporting their knowledge and technologies around the world,’’ Hodgson says. “In reality the North Sea over the past few years has been pretty flat, but it hasn’t really hampered the growth of the companies in the subsea industry because areas such as Brazil and West Africa have more than compensated for the slowing in the North Sea.’’
These will be more challenging environments than the North Sea with water depths of 3,000 metres as opposed to a few hundred.
“In, for example, the Gulf of Mexico, they’ve virtually exploited what’s on the shelf, which is at a few hundred metres, and even in the US Gulf of Mexico now they’re going down to a few thousand metres,’’ says Hodgson.
“And some of those areas are very challenging in terms of the terrain people are operating in.’’
He points out that the fields off Brazil and West Africa are much bigger than the North Sea. Furthermore, he predicts that, following recent investment, North Sea activity will pick up again over the next two to three years.
Even when North Sea oil does run out, there will be considerable opportunities for the subsea sector in decommissioning. Companies which are drilling in the North Sea are legally bound to remove their assets at the end of the life of a field. Legislation is being drafted to prevent companies keeping fields technically operating, in appearance if not fact, as zombie fields to avoid decommissioning obligations, along with tax incentives to encourage them.
Hodgson says: “The decommissioning market is just really starting to kick off, and like a lot of new and emerging markets, it’s very difficult to predict how quickly it will take off.
Decommissioning is a huge market and it’s a huge opportunity for North East companies and UK companies.
“We’re very much at the start of a journey with decommissioning and we’re starting to see some decommissioning opportunities emerging. But at the moment it’s a very small proportion of the total market space.’’
Despite all the early promise, alternative, renewable offshore energy generation sources – which would also generate opportunities for subsea – remain for the future. The technology for tidal generation has not been developed sufficiently to make it economical and large scale wind turbine farms still await the political will to drive them forward.
“Offshore wind has been disappointing because UK Government policy hasn’t really given clarity for the developers in round 3,’’ says Hodgson. “We started to see some movement and some positive signs. Siemens signing up to build a big facility in Humberside shows that we’re getting very close to some major announcements on round 3, but we’ve been delayed for a good couple of years.’’
This created problems for a company such as SMD which had invested heavily in installation products.
“You know, 2013/2014 has been incredibly disappointing, having invested a lot in 2011/12 to be ready for that market,’’ says Hodgson.
With the growth in the oil and gas markets, it’s difficult to arouse the interest of companies with the relevant experience in offshore wind and they could drive down the cost.
“It’s really difficult, because we’re just not seeing wind farms coming on at anything like the pace that even the low case predictions were forecasting.’’
For SMD, an exciting prospect is in the field of subsea mining.
He says: “The world of mining is very excited about the prospect of subsea mining and there’s some massive prospecting going on and a lot of material being found. What’s missing is the demonstration that the technology to extract those minerals is not only available, but works.’’
SMD is currently working on the Nautilus minerals project just off Papua New Guinea to extract copper and gold, which will be the world’s first site in production. This was delayed by a legal dispute between Nautilus and the government of Papua New Guinea.
“That has delayed that project and we’re expecting the first ore out of that site in 2017. Despite that we have continued to build the machines and they are due to be completed and delivered in the first quarter of 2015.’’
Subsea cable laying for the telecoms market is reviving after collapsing with the bursting of the dot.com bubble. SMD has had steady business in building machines for cable maintenance to repair internet cables that have broken under water.
“Japan is almost the home of broadband but they haven’t got enough capacity going in and out of Japan,’’ says Hodgson. “So that’s really where that market’s at. At SMD we produce most of the equipment that laid most of the cable around the world. It puts us in a good position when the market comes back. The only frustrating thing for us is that the market was great until 2000 and then didn’t exist again until 2013.
“What we’ve seen lately with the broadband explosion is a significant expansion of broadband. Also, with countries getting heavily reliant on the internet, we’re actually seeing the emergence of new telecommunication installation ships. We’re building equipment for the first cable laying ship, which is being done in Dubai at the moment, that’s the first one in 13 years. We’ve got bids to outfit three more telecommunications ships that we expect to be built over the next two or three years, and people who’ve got pre-existing ships are looking to refurbish or replace equipment that they bought over 13 years ago as part of the original telecoms boom. We’re expecting the telecoms market to substantially grow over the next five years.’’
With all these opportunities for subsea, could growth in the sector accelerate and more than double in the next five years? Hodgson believes it’s not as straightforward as that.
He says: “There are a number of checks and balances and I think one of the checks is the amount of skilled people there are globally to continue these developments. Is there a capacity for more developments that would drive a higher proportion? Absolutely there is, but, as we’ve seen in Brazil, which has a fantastic subsea industry and it has got a lot of opportunity, but really it cannot develop the fields anywhere near as fast as it would like to because of the lack of skilled resource.’’
He explains that SMD has provided 30 Remotely Operated Vehicles (ROVs) for a client in Brazil. They needed 850 ROV operators, all Brazilian nationals, who had to be trained from scratch as ROV pilots straight out of university.
“If you multiply that right across the whole of the various skills, it just demonstrates the size of the challenge of a fast growing industry,’’ says Hodgson.
The skills shortage then is a global problem and the North East cannot remain immune. Unlike other offshore areas such as Aberdeen, the North East subsea demands highly specialised skills and high level, highly qualified engineers, or highly qualified project managers.
On the other hand, the region has a great heritage to draw upon.
“The legacy of the old shipyards still remains and we still get a lot of high quality people,’’ says Hodgson. “Obviously we’ve got people like Nissan who train quite a lot of people. So there’s quite a lot of people at factory and shop floor level.’’
The difficulties arise at the higher level engineering and with some higher level management skills.
“You know we haven’t got a lot of other head quartered businesses around here from which we can just go and pick up some high calibre people.
“I’ve got vacancies in design and software but software is a very niche skill. Also people are needed in hydraulics, electrics and control systems and these are all very high level specialisms, we’re talking about first class honours and PhD people, we’re not talking
run of the mill guys that have just come through. Not that they don’t have a place in the industry, but it’s not where the real shortage is.’’
A lack of people going into engineering in past decades has created a skills gap in a specific age range.
“In order to be able to perform anything like the level we’re talking about, you’re talking about ten plus years’ experience, so by definition you’re talking about people in their 30s.
The reality is that manufacturing and engineering wasn’t seen as an attractive place for people who were entering their studies 15 or 20 years ago so that’s where the gap and the opportunities lie.
“Obviously, we’ve got a lot of very experienced older people in the industry but some of those are getting to the end of their time and will need to be replaced and that’s the problem. We’ve got an experienced pool going out at the top, and we haven’t got the quantity of people to replace who are in the early to mid-thirties and you can’t just recreate those overnight.’’
Hodgson says Subsea North East identified this problem some five or six years ago and did something to address it.
What could be done by government?
“That’s a very difficult question to ask the vice chairman of the Local Enterprise Partnership for skills, because basically I’m asking myself to resolve it. I think we’re doing a lot of the right things. We’ve got very good links with the universities and we recognise that recruiting and retention of people in the North East would be easier if people are coming through the North East universities. We get very good stats for retaining people who’ve come through the North East universities.
“The development of the Neptune Subsea Research centre is a great beacon, because what that’s demonstrating is that we’re fetching people into the industry to work on exciting and future development projects and that’s part of the regional attractiveness.
“We’re one of the only regions in the country that’s got an education challenge running at the moment and those things are being addressed so, yes, there are things that need to be done, an incredible amount that needs to be done, but I understand that most of those things are actually in progress.’’
Subsea, he points out, provides great and rewarding careers.
“It’s a great life because you get exposed to very exciting challenges and we try to solve problems that exist all across the world. You can travel to some very exciting places. If you just look at SMD, we’ve got an office in Singapore, we’ve got an office in Rio de Janeiro and an office in Texas.
“The jobs in our industry pay exceptionally well. I read recently that the average salary in the oil and gas sector was significantly higher than the average salary in the banking sector. Believe me, if you look across the car parks of the oil and gas companies or the subsea technology companies of the North East of England, you don’t see many cheap cars hanging around.
“The money’s extremely good and will continue to be extremely good because it’s a rare skill, and the UK leads the way. Subsea is a success story for the region and it’s a success story for the country.’’