The tide is turning for the North Sea

THE TIDE IS TURNING FOR THE

Martin Findlay, KPMG Aberdeen, UK, reports on the findings of a survey that show the Scottish oil and gas sector is on the brink of transformation.

It is no exaggeration to say that the Scottish oil and gas sector is at a tipping point.

The transition from carbon-based to sustainable energy sources represents a huge opportunity for the country’s oil and gas firms.

But, while the COVID-19 pandemic has put huge pressure on many oil and gas businesses, it has also created a new sense of political confidence for policy makers grappling with the energy transition, accelerating the journey along the road to a low carbon future. No doubt the COP26 conference in Glasgow later this year will focus minds even further.

Against this backdrop, the results of the latest Aberdeen & Grampian Chamber of Commerce Oil and Gas Survey are striking, and show a sector that is primed for change.

The survey, conducted in partnership with the Fraser of Allander Institute and KPMG UK, gathered the views of 100 firms that employ 27 400 workers in the UK (and more than 183 000 globally) and covers the six months to April 2021.

Driving diversification

It is heartening to see contractor confidence in the UK Continental Shelf (UKCS) bounce back so robustly, from a net balance of -76% six months ago as the peak of the pandemic’s second wave loomed, to 6% this spring.

Almost half (49%) of contractors now say they are on a recruitment drive as they embrace change in the sector, with three-quarters (75%) planning a move into renewables work in the next three to five years – more than in every other survey since the question was first asked in 2015.

More than two-fift hs (44%) said they are already moving to diversify away from oil and gas and will accelerate this strategy.

This should help put to bed the common misconception that the oil and gas industry is the cause of much of the climate crisis, when it is actually oft en the driving force behind the renewables revolution.

Indeed, the firms surveyed in the report said oil and gas will account for less than three-quarters of their business activity by 2025 – down from the current average of 86%.

But, while firms appear convinced of the opportunities available in the renewables sector and are taking action to make the most of this new revenue stream, this will require investment.

A pressing paradox

Unfortunately, the global impact of the pandemic means these firms are approaching this crucial phase in their evolution from a relatively fragile position.

The challenges faced over the past year are reflected in the reduced level of reported activity in production and exploration work, with the net balance reported for production related activity of -15% indicating a continued overall decline, although this has eased from the -47% reported in 2020.

The level of demand is the most pressing worry for contractors, remaining a very important concern for three-quarters (75%) of those surveyed.

Still, this is no time to prevaricate.

While it is the larger corporates that are currently driving the sustainability agenda, it is the smaller supply chain firms that are crucial to its delivery.

It is a paradox that they are also oft en the firms that have the fewest resources – including capital and expertise – to invest in transitioning to a more sustainable footing.

But if smaller operators want to remain part of these supply chains, they will have to align themselves with corporates’ environmental agendas.

Transition targets

That is laid clear in the research, with more than a third (37%) of firms saying they would evaluate their suppliers’ carbon footprints when awarding or renewing contracts – a figure that KPMG would only expect to grow in coming surveys.

When asked about their plans to reach net zero, only around a quarter of firms (27%) have set their own carbon neutral target, with their ambitions ranging from 2030 to 2050.

This aligns pretty well with a key commitment in the UK Government’s North Sea Transition Deal, which lays out targets to reduce emissions by 10% by 2025 and 25% by 2027 and has committed to cut emissions by 50% by 2030.

Just 3% of the firms in the Aberdeen and Grampian survey had already achieved net zero, while almost two-fift hs (38%) said that, while they are committed to becoming carbon neutral, they have not set a deadline for achieving it.

Firms cited a range of reasons for committing to reduce their emissions, with a fairly even split between environmental concerns (56%), a desire to increase their sustainability or longevity as a company (51%) and a drive to improve perceptions of their own business (50%).

An initiative that is purely driven by image enhancement is inadvisable – any firm perceived as greenwashing their operations risks being quickly called out for it, causing potentially catastrophic commercial and reputational repercussions.

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Pride in pioneers

The report finds an industry on the brink of transformation, with Scottish firms gearing up to deliver the energy transition.

Though many told researchers they feel hamstrung by their shaky financial position, it is expected that their sentiment will strengthen going forward, given that the majority of this survey was conducted before the announcement of the aforementioned £16 billion North Sea Transition Deal in late March.

The deal includes a commitment to support Scottish supply chains; by 2030, 50% of off shore decommissioning and new energy technology projects must be provided by local businesses.

Those firms that are taking action to build and retain a competitive advantage now will surely benefit as net zero ambitions become an increasingly tangible part of the procurement process.

As we emerge from the pandemic, there is an amazing opportunity to harness the skills and capabilities of Scotland’s oil and gas sector to steal a march in hydrogen production, carbon capture, off shore wind and decommissioning.

While Scotland and the North Sea have previously been synonymous with oil and gas exploration, there can be confidence that future generations will take pride in its pioneering role in the green energy transition.

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