What next for the Aberdeen economy?

'Bon Accord' - That most traditional of Aberdonian greetings, 'Happy to meet, sorry to part, happy to meet again'. Will this be true of the next chapter in the economic history of the North East?

We are now 20 or so months into a reduced oil price and a realisation for many that it's not a temporary blip and lower oil prices are here to stay for some time. 

Firms are trying to acclimatise to the new norm of poor visibility in the order book, reduced margins on contracts and increased focus on business cash flows on the back of a plethora of projects being shelved that were due to come on line during 2016/2017. The reality for many is that a significant period spent gearing up to service these projects has now proven to be the root cause of a constrained cash flow.

Businesses whose services are now classified as discretionary spend are under pressure as customers seek to address their operating costs. Unless the products on offer are absolutely necessary then some companies may face the prospect of complete contract cancellation or a compromise of 'here is the new price we are prepared to pay'.

Even those businesses which are in the fortunate position of having a product considered as being absolutely critical, delays and visibility of the pipeline may still be a reality as things slip increasingly to the right.

Our restructuring advisory colleagues have been working with many clients in the oil and gas sector, assisting with discussions with banks in respect of funding requirements and advising on operational efficiency and turnaround. They work alongside our corporate finance team with companies who may find themselves to be an attractive acquisition target - particularly where their products are still needed in the supply chain and the underlying business activity and jobs attached to those activities can be absorbed by a buyer looking to increase top line activity and utilise existing capacity. Where the impact of current conditions has been too great, then we have been able to advise those unfortunate parties in respect of their duties as Directors and to pursue insolvency solutions where necessary.

On a brighter note, there continue to be more traditional opportunities with our corporate finance teams being kept busy with M&A activity. Aberdeen has long been seen as a market serving a truly global industry and companies which have focused on growth internationally and are less reliant on the UKCS alone are continuing to grab the interest of investors and acquiring corporates across the globe. Confidence is key in a depressed market and our teams are working closely with a variety of private equity houses and top performing companies who continue to have the confidence that despite a lower oil price, there remains a bullish appetite for good quality M&A activity. 

The recent news of government support offered by the UK and Scottish Governments is a welcome break. However, it will be interesting to understand how the support will filter its way through the industry and not be in breach of European state aid rules. 

Perhaps it would be better to follow the Norwegian model and offer enhanced tax incentives through a partial refund of exploration costs, leading to even further increases in long term production. Allied with a supply chain ready to innovate itself and bring more efficient technologies to the market, this could deliver a sustainable long term future for industry. Cementing the global supply chain in the North East for future decades is an opportunity too good to miss. 

Whilst nobody is quite ready to accept the early onset of it quite yet, another area to consider would be to subsidise the burgeoning decommissioning industry which again would allow activity to filter down through the economy as businesses achieve clarity around what remains a process shrouded in a degree of the unknown. 

The government hopes that the promised investment in local infrastructure will benefit businesses across the board, encourage diversification and innovation, and reduce the region's reliance on oil and gas as mooted by Sir Ian Wood. But it's hard to see how this investment in infrastructure - with the possible exception of the Aberdeen Harbour expansion - will be of immediate direct benefit to the beleaguered oil industry. That is, unless it brings with it a change in traditional thinking and truly delivers on the promise of kick starting an innovation revolution ensuring that meeting the next chapter of the oil and gas industry is indeed a happy experience.

To get in touch with any of our partners in Aberdeen to discuss the issues mentioned here.