The impact of change in the energy sector

21 October 2021

Scotland, along with the rest of the world, is being challenged on its climate impact that we know must be addressed. Aberdeen, as a recognised energy hub and the entire north east of Scotland – indeed the whole nation – has a vital role to play in the green economy recovery as we aim to reach the ambitious target of net zero emissions for greenhouse gases by 2045.

The north east is well supplied with natural resources and has the relevant technology capabilities and a skilled labour force that can take the lead on the energy transition from oil and gas to clean energy. The potential is therefore huge albeit fossil fuels still remain an important component of our future.

The gap between the price of clean energy forms and traditional fossil fuels is narrowing as renewable technologies continues to advance and the infrastructure to accommodate the scale up in clean energy gathers momentum.

Government-backed initiatives such as the Energy Transition Zone announced earlier this year are pivotal to encouraging a mindset of creating a sustainable industry being willing to work together in genuine collaboration.

Wind technology is well advanced and we’re now seeing bigger offshore wind sites with larger turbines being commissioned along the east coast from the north of Scotland and down to England.

Another development is that businesses are increasing their public commitments to the energy transition, rather than just being seen to be green with traditional oil & gas operators such as BP, TotalEnergies and Equinor paying significant sums to acquire interests in UK and overseas offshore wind sites.

Thee Catapult initiative has been very effective in generating awareness of who does what in the offshore wind sector at an early stage. Being aware of when a field is being commissioned, set up and seeing it through its life cycle is useful information for companies interested in service and maintenance, for example, as they are more likely to tender for future work.

More recently, initiatives around floating wind are coming to the fore and these are having implications from an engineering point of view. Clients are beginning to be involved in the commissioning of projects such like the recently installed turbines at Kincardine which is expected to deliver enough clean energy to power approximately 55,000 Scottish households.

Specialist funds focusing on green and renewable technologies are also see opportunities arising from floating wind, hydrogen and offshore energy in general. And we’ve been involved with the relatively new Scottish National Investment Bank (SNIB) on some green business transactions, including electric vehicle charging. It’s promising that the bank has a significant budget to support green technologies.

In terms of the types of technologies that are being advanced and creating interest, there is a lot of activity around artificial intelligence (AI) and predictive maintenance in the service industry. Operators are looking to reduce the number of transportation trips, including helicopter flights, by using data to better plan engineering works. The analysis of this data also leads to efficiencies in future projects. I believe such technology has the potential to be game changing in many ways, from health and safety to sustainability. There is also more efficient technologies on the output side, such as how efficiently existing hydrocarbons are being extracted to improve recoverability and generate better returns while creating fewer issues around contamination.

Turning to the impact of Covid-19 on the supply chain, when the pandemic first hit there was a sharp intake of breath and an assessment by businesses of how they would deal with the short term pain. Since then, things have settled down and we’ve also seen a welcome rise and stability in the oil price. Trade buyers have regained their confidence and those that can are actively looking to expand their services with a focus on the environmental and renewables sectors. Many are keen to create off-market transactions as part of their diversification. And although the circular economy has been with us for some time, it’s only recently that it’s become big business which companies across the energy sector are focusing on.

Looking finally at the exploration and production (E&P) space, at the start of last year there were a lot of ongoing discussions and some highly acquisitive challenger businesses coming to market. Some of these firms were highly backed by private equity and were looking to make their mark quickly. The market was obviously turned on its head at the start of lockdown and the oil price was further suppressed. But conversations are now re-starting and activity is picking up. We expect this to continue, although the limiting factor of resource constraints will need to be addressed.

Overall, I would say the outlook for the energy sectors, in all forms, across the north east of Scotland and beyond is certainly encouraging but energy companies will need to focus on diversifying if they are to survive and thrive as the world’s attention is fixed firmly on reaching net zero.

If you would like to know more, please contact Callum Gray, director in the Corporate Finance Team, or your usual contact at AAB.

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