Callum Gray, a Corporate Finance Partner at AAB, explains how despite the obstacles, there are still opportunities for growth in the UK Energy Sector.
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There’s a constant spotlight on the energy sector right now – from concerns around security of supply caused by the conflict in Ukraine to the increasing pressure to reach net zero in Scotland by 2045.
My view is that there is a real opportunity now for governments to do something fundamentally different in terms of how they approach and support the energy industry. Fundamentally, we need public sector support to develop a rounded portfolio of supply sources in the UK.
Reinvesting in renewable sources of power
Firstly, let’s look at the impact of the UK Government’s Energy Profits Levy (EPL), the additional tax introduced in May 2022 and then increased in the Autumn Budget, on some of the profits of oil and gas companies.
Not only has this change in the fiscal regime created uncertainty and arguably more aggressive than other governments, but we need to ask ‘what is being done with that money’?
I believe it would be good to see the government ringfencing taxes raised from the EPL and directly reinvesting it to encourage the further development of renewable sources of power.
Some money could be invested in oil and gas service companies which have become involved with greener energy projects to help them utilise their skills and expertise.
If the government was to provide more funding to the likes of hydrogen initiatives, it would give companies the confidence to also invest in these areas.
The theory being this would facilitate commitment from the private sector to co-fund engineers spending time on research and development projects to create new technologies and enhance capabilities.
A call for a different approach
I would like to see greater visibility from Westminster on what the money raised is being spent on.
As is well publicised, energy is a cyclical industry and one idea to mitigate that feature would be for the government to create a fighting fund to offset the fall in oil price that comes with a downturn.
At least some of the money raised from taxation could be ring fenced and put in an independent administered fund to support the industry in the future or to support sustainable investment to reach our ambitious green targets.
Such long-term thinking from the government would encourage businesses to confidently invest in the energy sector in Scotland.
It would remove some of the worry about future taxation on oil and gas by governments in the future from whatever political party is in power.
The UK Government’s approach to tax, especially the EPL, and the possibility of it becoming an even bigger burden on industry are points of discussion around boardroom tables when businesses are exploring whether to make investments.
There is a danger Scotland is at a competitive disadvantage when investors are deciding which countries to invest in.
Deals are continuing to be done and Scotland is still attracting investment. For example, last year Ithaca Energy completed its acquisition of Cambo operator Siccar Point Energy for almost $1.5 billion. Also in 2022, Waldorf Production reaching agreements with Hungarian based, MOL and Shorelight Partners to buy MOL’s UK upstream assets and the share capital of Alpha Petroleum Resources respectively.
But, as a result of the material changes to increase the levy in the Autumn budget, I think fewer deals have been done than might have been completed if the EPL had not been amended in the Autumn.
Scotland is well-placed when it comes to renewables but certainty and transparency is needed to boost investment and position the country a more attractive proposition.
It would also help if the UK Government, which approves licences, would give more feedback on projects, when they will come on-stream and provide a comprehensive picture of the whole energy landscape.
More information would help businesses make decisions on where and when to make investments and in which part of the industry, from wind power to hydrogen and beyond.
It’s not just Westminster that has a role to play, the Scottish Government needs to show its support too. Unfortunately, its recently published energy strategy has created more uncertainty with people I’ve been speaking to in oil and gas describing the paper as unhelpful and lacking in detail.
We need clarity from governments on their approach to energy. We also need recognition that it takes time to transition to renewables – you can’t set-up an offshore wind farm overnight.
In the meantime, energy companies need to make profits to escalate the speed of that process.
In conclusion I would say that Shell’s chief executive previously put it very well when he commented that his company wanted to “accelerate the transition” of the business to clean fuels and it had to do it “with profit” as well as “with purpose”.
Callum Gray is a Corporate Finance Partner at AAB, overseeing project management of all corporate finance transactions with a focus on originating opportunities. Learn more about how Callum and AAB can help your business today.