OSO’s ability to release UK content figures in excess of 70% was the cause of much “triumphalism” by successive governments, whose PR machines “spun it” as evidence of the success of official policy, the competitiveness of the “British” offshore industry and the contribution it was making to the British economy.
But it was a role for which the statistics were ill suited. Those closer to the figures, whether within OSO or externally, took a less rosy view. Only the latter were able to voice their reservations publicly and, without exception, rejected OSO’s definition of British (that is, UK operations irrespective of ownership and control).
One of the first to do so was an Aberdeen University researcher, Paul Hallwood. Based on work carried out in the Aberdeen area in the mid-1980s (published in 1990), he estimated that only 36-39% of business was placed with indigenously owned companies. It is likely that a higher figure would have arisen on the basis of a broader geographic scope as Aberdeen was characterised early by the presence of the large US service companies.
Nevertheless, at much the same time, the British Indigenous Technology Group (BRIT) was reported as claiming that less than 30% of contracts were awarded to British-owned and controlled companies.
A persistent critic was economist Tony Mackay, who published estimates of the share of total UK Continental Shelf expenditure taken by UK-owned firms. He claimed that OSO’s figures gave only a partial, and therefore misleading, view of UK industrial performance in the North Sea.
Even if the same definition of “Britishness” were employed, there would have been significant differences between a UK content based on expenditure and one based on orders.
OSO recorded only the initial order value; contract changes and project over-runs often resulted in the final value being very different. Whereas orders were recorded when placed (and could extend over more than one year), expenditure was recorded when incurred. Additionally, expenditure included the numerous small orders below OSO thresholds and oil company in-house expenditure. As a result, expenditure exceeded order values by a significant margin. In the period 1980 through 1989, it was, overall, nearly 90% greater, with the imbalance tending to increase with time as exploration and development expenditure fell relative to operating expenditure.
The best that can be made of these conflicting viewpoints is that companies classed as foreign by any definition probably got about 25% of the business, UK subsidiaries of foreign companies about another 25% and British-owned and controlled companies the remaining 50%.
Unfortunately, most indigenous firms offered undifferentiated low added-value goods and services, suggesting that, on an added-value basis, the content provided by indigenous firms would have been lower.
Professional economists and statisticians would have been more comfortable had OSO’s figures been presented on an added-value basis rather than by turnover, which was never attempted.
But this was not the end of their concerns. The figures were based on quarterly returns submitted by the oil companies, which supplied their own estimates of UK content, often sourced from their suppliers, which may or may not have had an OSO input.
There was some case-by-case examination/querying to “police” the process, but no systematic checking.
Although OSO was often accused of inflating the UK content, prior to the arrival of EPIC (engineering, procurement, installation and commissioning) type contracts, it might equally have been accused of understating it because the figures were based on initial contract values rather than the final value.
Cost over-runs were common, and sometimes massive in scale, in early North Sea oilfield development and largely represented British labour costs.
In 1987, the minister then responsible took advantage of a submission to the House of Commons Select Committee on Energy “to demonstrate the OSO approach” with two examples.
One concerned a foreign-owned platform yard where it was assumed that, apart from a 5% profit margin passed to the parent, all other expenditure was in the UK, resulting in a UK attribution of up to 95% “subject to evidence”.
The other was an underwater construction contract awarded to a British-owned diving company using a foreign-owned support vessel costing 50% of the contract value. In this case, “subject to evidence”, OSO would record a 50% UK content.
Even had this process always been unfailingly carried out, it would still have been easy to “pick holes” in the figures.
Almost any UK order would have had some foreign content, even if not obvious enough to be identified by OSO, with the converse true of many non-UK orders.
Norman Smith is a former director-general of the OSO. His wide experience and knowledge of North Sea affairs is captured in extensive research for which he earned a PhD at Aberdeen University in 2008
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