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Aberdeen: A city in transition

Aberdeen has enjoyed years of prosperity thanks to its oil and gas industry, but this is now under threat due to environmental issues. Can the Granite City go green?

Aberdeen-fdi-energy
Oil support vessels wait in Aberdeen harbour but the city is looking to diversify from fossil fuels to become a hub for renewable energy. (Photo by Jeff J Mitchell/Getty Images)

Aberdeen – often referred to as ‘the Granite City’ on account of its generous use of the native stone in its buildings – has made a name for itself over the past 50 years as a European leader in the oil and gas industry.

The city has clung on to this status like a golden ticket, one that kept its real estate bubble healthy following the 2008 financial crisis compared with the rest of Scotland and the UK. However, this golden ticket has become a vulnerability too.

As oil prices crash in response to the Covid-19 pandemic and the global climate crisis becomes more prominent in investors’ strategies, Aberdeen is on the precipice of a transition.

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Leading sectors in Aberdeen

Between 2000 and 2018, the agriculture, mining, electricity, gas, water and waste sectors led the way with regards to Aberdeen’s gross value added (GVA). Among those areas, oil and gas is the most significant within the city.

A sector that has seen huge growth in Aberdeen is professional, scientific and technical activities, which was in last place among those highlighted in 2000 but had risen to second in 2018. Indeed, Scotland has seen massive growth overall within life sciences. According to data gathered by Pitchbook and analysed by Savills, Scotland saw £600m in investment raised between 2017 and 2020 by life sciences companies headquartered in the country.

How does Europe’s oil and gas capital become a global leader in energy transition? The North Sea transition deal will be crucial for this. Russell Borthwick

Edinburgh and Glasgow held the lion’s share of this figure, with 50% of total capital-raising deals. Despite this, the report highlights Aberdeen as a rising star in this field, with its life sciences investment up by 17% in 2020 compared with the total that the city attracted in 2018 and 2019 combined.

Furthermore, the report states that although Aberdeen had fewer deals than the two larger Scottish cities, it showed more promise for growth and the figures show that “larger capital-raising transactions can happen in [Aberdeen]”.

Manufacturing in Aberdeen has followed a Scotland-wide trend in suffering a decline since 2009. The wholesale and retail sector also saw a big drop off after 2009, going from 12.47% of GVA to 10.05% in 2018. Despite the drop, the sector remains above real estate activities in fifth position in the ONS chart.

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How these sectors will fare in a post-Brexit environment remains to be seen. Aberdeen is, however, considered to be one of the least vulnerable big cities in the UK when it comes to the impact of the UK leaving the EU. In the New Statesman‘s Brexit Vulnerability Index, Aberdeen ranks 325th out of 379 local authorities.

The importance of oil and gas to Aberdeen

Oil and gas is synonymous with Aberdeen and has been since the 1970s. Employment figures highlight just how important the sector is to the city’s workforce and economy. Aberdeen’s rate for employment within the sector is ten times the Scottish average.

This reliance on a sector under threat from the environmental policies of both governments and businesses is something the city is keen to transition away from. This raises a concerning question for Aberdeen: how can an economy built on oil eliminate the economic fallout of a transition to cleaner, more renewable energy sources?

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Russell Borthwick, chief executive of the Aberdeen and Grampian Chamber of Commerce, explains: “How does Europe’s oil and gas capital become a global leader in energy transition? The North Sea transition deal will be crucial for this. We need to be asking what impact the decisions and the investments that we make will have. The chambers of commerce are very much behind the Oil & Gas UK-led deal that plot outs to help the industry do the right things to help drive new energy.”

The North Sea transition deal is an agreement between the UK government and involved industries to map out long-term action for transforming the oil and gas sector and delivering the energy transition.

Borthwick believes that a fast switch away from traditional oil and gas is unlikely. “If we start de-investing in oil and gas, no one is going to come in and pick up things like floating offshore wind, hydrogen, carbon capture, etcetera, because right now it is not commercially viable,” he says.

Many key Aberdonians acknowledged the need for government support through such a transition. A letter was penned to chancellor Rishi Sunak urging further progress on the North Sea transition deal, which was due to be completed at the end of 2020.

The authors included MSPs for Aberdeen Central, Kevin Stewart; Aberdeen South and North Kincardine, Maureen Watt; Aberdeenshire East, Gillian Martin; and Banffshire and Buchan Coast Stewart Stevenson. The letter stated: “We are yet to see a single sector-specific measure of support from your government and so we urge you to honour your commitment to deliver a sector deal as soon as possible – the north-east can no longer wait.”

The letter also called out the UK government for enjoying the benefits of Aberdeen’s oil and gas sector in good times and turning its back on the city when the sector struggles.

Energy and tech paving the way forward?

Aberdeen is keen to become a leader in renewable energy sources, and has initiated a number of projects to solidify this stance. The H2 Aberdeen initiative aims to boost the city’s hydrogen economy.

Wind energy is also a huge focus for Aberdeen. The city established the £200m Hywind Pilot Park, which is located offshore of Peterhead, in 2019. The site has six 5MW wind turbines and the project generates enough energy to power 20,000 homes. This adds to Aberdeen’s portfolio alongside the pre-existing £2.6bn Beatrice Offshore Windfarm situated on the Outer Moray Firth.

Furthermore, Aberdeen Bay is home to Scotland’s largest offshore wind test and demonstration facility. The £300m site is home to 11 turbines with a capacity of 92.4MW, with the facility focusing on testing and developing new technologies for offshore wind power.

Opportunity North East (ONE) also launched a £1.5m tech hub in the heart of Aberdeen in 2019. Prominent oil businessmen Sir Ian Wood partnered with ONE CodeBase (a digital tech start-up support arm of ONE) and Robert Gordon University to launch the hub.

Borthwick stresses that this puts Aberdeen in a strong position to lead the UK’s energy transition. “Not only are we becoming net zero in Aberdeen, but we are also helping other places in the UK and around the world to reach net zero,” he says. “Aberdeen is leading energy transition technology.”

FDI delivers on diversification in Aberdeen

Despite the challenges Aberdeen has been grappling with, the city has seen its reputation rise in recent years when it comes to what it offers foreign investors. The 2020 EY Attractiveness survey showed that Aberdeen had risen from tenth in 2019 to seventh in the UK rankings for foreign direct investment (FDI).

The report attributes this to the city’s diverse range of investments with regards to both sectors and source markets. Key source markets for Aberdeen in 2020 include the US, Norway, the Netherlands and Japan. In those 12 months, just under half of all FDI projects coming into the city were attributed to the energy sector. Other sectors that performed strongly include business services, machinery and equipment, electronics and transport equipment.

These figures reflect that Aberdeen is more than a large hub for oil and gas. Borthwick says: “During the last downturn for oil and gas, there was this sense that Aberdeen was finished for good. We set out to prove that that assumption is not true. We were able to identify more than £10bn in infrastructure and investment projects that were in the pipeline. Approximately £2.5bn of those were delivered between 2017 and 2019.”

These projects have helped to transform the logistics of the city and include a revamping of its airport and improvements to the Aberdeen bypass road. They have also taken in the building of the P&J Live events space, a £333m exhibition and conference complex that opened its doors to the public on 8 August 2019. The space has a 15,000 capacity and includes meeting rooms, three conference and exhibition halls, and two on-site hotels.

Before Covid-19 hit, the site was set to receive a further £70m investment. This was intended to improve connections through a proposed rail link from Aberdeen airport to the arena and then into the city.

Greater connectivity is a key focus for the city, according to Borthwick. “Something we worked really hard to get back was the EasyJet Aberdeen to Gatwick flight, which is relaunching in 2021,” he says. This is in addition to the city’s existing connections to Heathrow.

Location, location, location

Borthwick stresses that its remote location has always been a catch-22 for Aberdeen.

“One of the good things about Aberdeen is our geographical location, one of the challenges is our geographical location,” he says. “It is two-and-a-half hours to get to Edinburgh or Glasgow. So, if you have got markets, customers, offices or clients elsewhere, we are quite remote. Our air connectivity absolutely needs to be protected. The Union Connectivity Review will be key for this [following Brexit].” The Union Connectivity Review is a UK government-led assessment of how transport can support economic growth and quality of life across the UK.

On the more positive side, Borthwick highlights the beauty of Aberdeen’s surrounding countryside and coastal areas. “Aberdeen was never a place that tourists would go,” he says, attributing this to the city effectively pricing itself out of the market with steep business travel-focused hotel fees. “Over the past five to seven years, there has been a huge amount of really high-quality additions to the hotel stock within the city,” he adds.

One of the good things about Aberdeen is our geographical location, one of the challenges is our geographical location. Russell Borthwick

Borthwick also throws the gambit down to Scottish east coast rival Dundee, claiming that the Aberdeen art gallery – which reopened in 2019 after a £34.6m revamp – is superior to Dundee’s V&A museum. “Many journalists are saying that [the Aberdeen Art Gallery] is streets ahead of Dundee’s V&A and [the Glasgow museums].”

Aberdeen’s new harbour is also set to become a key tourism draw. In November 2020, approximately £230m had been spent on the underwater infrastructure at the Bay of Nigg development and it is set to open at the end of 2021.

Upon opening, Borthwick envisions big cruise liners docking to give tourists access to Aberdeen’s attractions. “[There are] golf courses, coastline countryside, whisky distilleries, Aberdeen city centre and Royal Deeside, where the Queen bides, to go and see,” he says.

Well paid and well educated

Another huge draw for investors in Aberdeen is the highly qualified workforce it offers. Aberdeen has an extremely well-educated population, with its inhabitants not only being significantly ahead of Scottish averages, but also those of the rest of the UK. The city is well below the UK average in measuring those with no qualifications.

Aberdeen is home to two universities – the University of Aberdeen and Robert Gordon University – both of which offer investors exciting opportunities in the digital and science sectors.

One such opportunity is the city’s BioHub project, a £40m health campus designed to provide support and infrastructure for businesses, academics and health researchers in life sciences. Through the Aberdeen City Region deal, a partnership between Aberdeen City Council, Aberdeenshire Council and ONE, the project received £20m in funding from the UK and Scottish governments.

Both Aberdeen and Robert Gordon University have been involved in the development, and despite delays due to Covid, construction of the campus is due to start in mid-2021. Borthwick highlights native biotech company NovaBiotics as one of the city’s key successes in the life sciences sector.

It is perhaps this focus on education – alongside the historically prosperous oil sector – that has paved the way for Aberdonians to become generally well paid compared with both fellow Scottish workers and those in the rest of the UK (see chart above).

When asked what the key message for would-be investors in Aberdeen is, Borthwick says: “We have got a strong track record for returning investment that is made here – many times over. We have got one of the most skilled and talented workforces in the UK. We offer an amazing business location, yes, but also an absolutely unrivalled work-life balance. It is really an incredible place to live, work, raise a family and get a great education.”

This article forms part of Investment Monitor’s ‘Future of British Cities’ series. Other UK cities and regions covered are:

Ruth Strachan

Ruth Strachan

Senior reporter

Ruth Strachan is a senior reporter at Investment Monitor, focusing on manufacturing, mining and commodities.