The Winds Of Change

Martin Findlay, KPMG, UK, reviews the current state of the oil and gas sector operating across the UKCS, and discusses the industry’s journey towards net zero.

The oil and gas industry has recently contended with a series of extremes. After a run of years absorbing heavy financial losses, the pandemic caused demand for oil and gas to effectively dry up. Then, the global COP26 summit in November 2021 put further pressure on the industry to accelerate plans for transitioning to a greener future.

At the start of this year, rising gas prices were exacerbated by the war in Ukraine, and were driven by a combination of strong demand from China, as well as Western oil majors cutting back on exploration and production.

The Energy Transition Survey, one of the Aberdeen and Grampian Chamber of Commerce’s flagship pieces of research, which KPMG UK sponsors, has followed Scotland’s energy sector through these ups and downs, but never has so much changed so quickly in such a short space of time.

The survey, which launched its latest findings in May 2022, says that for now the good times may be back, but there are some important caveats to be aware of to get the full picture of where the industry operating in the North Sea currently sits.

The research shows that the value of international work is rising across all sectors, and confidence has rebounded, with 84% of energy firms believing their revenues will grow in 2023. There are positive indicators for the transition as well. Concern about the return on investment from renewables is falling, which bodes well for the future, and companies here now believe that almost half of their operations will be outside of oil and gas by 2030.

The skills gap remains a big issue

A big concern of companies operating in the North Sea is access to skills and labour – one of the most important pieces in the energy transition puzzle. There is so much about the energy sector that is different to other parts of the economy, but when it comes to human capital, the sector faces similar headwinds to almost every other business in the world right now – the skills and talent needed to move us towards a greener future are in sharp demand.

The firms surveyed by KPMG are clearly concerned about how to attract new people from outside the industry to work in oil and gas. The firms who can demonstrate their willingness to embrace the energy transition and their desire to flourish in the economy of the future will find that retaining and attracting talent will not be as challenging.

Workers are as precious a commodity as the energy they produce

Skilled workers have again become almost as precious a commodity as the energy they produce. KMPG’s latest research suggests this problem is only going to become more acute. There has been a 16-percentage point increase in the loss of staff to other oil and gas basins globally, suggesting that the battle for workers has become an international one.

At the same time, seven out of ten firms say they will need to grow their headcount over the next three years to cope with an increase in work. Something must give. Following the decline in production seen in the UK Continental Shelf (UKCS) over the last decade, it seems odd to be talking about labour shortages. But the data clearly points in this direction – and history tells us that this has potential to inflate wages and put pressure on costs. In the case of oil and gas, this is bad news in what is already a mature and expensive basin.

Careful planning and investment at a corporate and government level are needed to make sure Scotland’s decades of experience, the current skill sets, and existing infrastructure are used to their full potential as we move towards a greener future. Doing so will allow key cities such as Aberdeen to prosper as a major player on the global energy stage and continue its long tradition as a powerhouse for the local and UK economies.

Change is afoot

Clearly the perennial issue of climate change is not going away, and change must continue to happen. The industry is leading on that, and understands that it has the potential to grow Scotland’s economy and be a driving force in facilitating the transition to a lower-carbon economy and a net zero future.

The direction of travel is clear amongst oil and gas firms. They are expecting their businesses to transform substantially and at pace across the next decade. The firms KMPG surveyed predict that, on average, the share of their business outside of oil and gas will jump to 50% by 2030. With growing demand to support North Sea offshore wind development via leasing rounds, as well as traditional decommissioning projects, the work will continue to grow and vary.

The clock is ticking

Despite the clear need for companies to transition faster, the survey shows that more than a third of companies have yet to develop a net zero strategy.

Most across the sector are diversifying outside of oil and gas in some shape or form, although one in five still have no plan to change. Most pure play oil and gas exploration and production companies are addressing their own carbon footprint. But for those without a blueprint for transition, and where external stakeholders are increasingly looking for substantive transition plans, the clock is ticking.

Individually firms must ensure they remain focused on the long-term objective. This will allow firms to succeed, workforces to grow, the economy to benefit, and the planet to thrive.

What companies do now across the three strands of environmental, social and governance (ESG) will determine the talent they attract, the customers they serve, the profits they make, and ultimately the impact they will have on society.

What comes next?

Given the very real consequences of global warming, it is clear we must inject pace and clarity into the energy transition. It has become increasingly obvious that there is a need for clearer regulatory alignment between the UK and Scottish governments. Only 28% of firms surveyed believe support for an energy transition is visible, and this lack of clarity needs to be tackled urgently.

Delivery of offshore wind, for example, is a long and complex process. However, we must do all we can to speed this up. ScotWind – an auction of seabed plots for major offshore wind projects around the Scottish coast which netted £700 million earlier this year – will be crucial to Scotland’s net zero targets. Consideration should be given to a new offshore wind directorate to speed up delivery of this and other offshore renewables projects, given the complexity around sequencing, supply chains, and the number of stakeholders involved.

The ScotWind leasing auction attracted more than 70 bids from major oil companies, utility firms and investment funds from around the world. Most of the sites are on the east, north east or northern coast, with just one on the western side of Scotland.

Successful bidders include Scottish Power, which won the seabed rights to develop three new offshore wind farms with a total capacity of 7 GW. The farms include two new floating projects in conjunction with Shell and one fixed project.

The seventeen successful projects cover a total of 7000 km.2 They have a combined potential generating capacity of 25 GW –well above the expected auction outcome of 10 GW.

Scotland has 1.9 GW of operational offshore wind, and another 8.4 GW in construction or advanced development. While these leasing rounds are welcomed, it will be some time before these come online.

Windfall tax

Meanwhile, in the UK, a new windfall tax was introduced earlier this year, described as a 25% Energy Profits Levy. It applies to profits made by companies from extracting UK oil and gas and the Treasury expects it to raise about £5 billion in its first year.

When the Energy Profits Levy was announced in May of this year, it included an Investment Allowance which made energy companies eligible for tax savings worth 91p in every £1 on investments in fossil fuel extraction in the UK. Even though only temporary, the new levy means UK energy companies, which have been taxed higher than any other sector since the 1970s, now face a larger tax burden.

When tax on energy companies was last increased under previous chancellorship, the appetite to invest in the UK energy sector reduced. The UK Government will not want to see the same thing happen again, at a time when energy security and funding the energy transition are front and centre of the political agenda – hence the inclusion of an 80% investment allowance in the levy.

Many in the oil and gas industry feel strongly that this latest tax could make the North Sea – already one of the world’s most mature basins – less attractive to some investors and possibly put recruitment at risk.

Various players across the industry are calling for politicians to take a pragmatic view and be wary of the impact that short-term tax policies and continuing doubts over the future of exploration and drilling will have on investment and confidence in a sector that is of critical importance to our economy.

A bright future ahead as transition feels certain

The oil and gas industry is in a strong position overall. Producers and companies throughout the supply chain remain committed to the transition but individually they must remain focused on the long-term objective. That is the only way firms will succeed, workforces will grow, and the planet will thrive.

Keeping both eyes firmly on the future will allow those operating across the UKCS to prosper as major players on the global energy stage and continue the region’s long tradition as a powerhouse for the local, UK, and European economies. The test that firms are facing now is how firmly to keep the pedal pressed to the floor on the journey to net-zero.

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