Aberdeen’s status as a global energy capital is at risk, a key industry report has warned.
And it says confidence in the UK North Sea is near a “record low”.
The stark warning in Aberdeen and Grampian Chamber of Commerce (AGCC) and KPMG’s Energy Transition 37 index report – published today – names government policy, including the energy profits levy (EPL), or “windfall tax“, as the biggest factor.
Jobs are being siphoned off to overseas regions with better prospects as confidence drops in the UK sector , the two organisations say.
AGCC and KPMG’s barometer of confidence in the UK North Sea has dropped from a positive reading of 36 points in April 2022 to minus 37.
‘Lured away’ as confidence drops
The current negative outlook score is trumped only by that seen during the 2008 financial crash, years during oil price collapses and the aftermath of Covid.
A lack of pace on new energy projects and a “hostile environment” for oil and gas are also blamed, while confidence in overseas work remains high.
Operators confirmed in the survey that spending is being diverted away from the UK to overseas, where there are more favourable conditions.
This, in turn, risks supply chain businesses in the north-east “being lured away from working in the North Sea, possibly never to return”, the report says.
The survey, now in its 19th year, has generated four recommendations:
- A windfall tax price floor
- Cross-party support for oil and gas
- Tripartite efforts across industry, government and academia to create a “new positive narrative” for the energy sector
- Further pace to be injected into the energy transition, particularly around licensing and consenting
While an uplift in renewables is expected, major issues exist around grid infrastructure, transmission grid charges, ports and the supply chain.
According to AGCC chief executive Russell Borthwick, it has “never been more crucial that we get these decisions right”.
Mr Borthwick added: “As has been warned for over a year now, we are risk of accelerating the decline of our oil and gas sector at a pace which jeopardises the skills and investment required to deliver the UK’s net-zero plans.
“Government and industry share the same green aspirations, but there is a clear disconnect between policymakers and those who will fund and deliver our low carbon future, particularly over the role of oil and gas. This needs to be addressed as a matter of urgency.”
Energy transition in action
Survey respondents said 45% of their operations would be in new energy activities by 2030.
Decommissioning, onshore and offshore wind, hydrogen and geothermal were cited as the main areas.
Robert Aitken, director at KPMG UK in Aberdeen, said the study findings show the north-east energy industry is “evolving and working towards a future where greener activities start to outweigh more carbon intensive ones”.
But he added: “Clearly, more support is needed from all corners to maintain focus on the long-term objective of net-zero.
“Keeping both plates spinning in unison is critical to delivering energy security, and creating the revenues and high-quality jobs that are desperately needed to grow our economy and to maintain the north east’s position as a global energy hub.”
Maggie McGinley, chief executive of ETZ Ltd, the not-for-profit company driving forward plans for an energy transition zone in Aberdeen, said the survey “lays bare the scale of the challenge” for the Granite City as a global energy capital.
She added: “It has demonstrated what many have suspected in recent months – that sector confidence in UKCS (UK continental shelf) is on a downward trajectory.
“With the majority of businesses pointing to the EPL as having had the most negative impact on business, there is also a loud message there continues to be a need for policymakers in both Scottish and UK governments to provide a clearer vision going forward so that the sector can regain vital confidence in order to deliver the transition.”
Windfall tax
North Sea operators are currently taxed at a 75% headline rate, following updated EPL legislation in November.
Trade body Offshore Energies UK (OEUK) confirmed in February that 90% of operators had cut spending as a result, despite a 91% investment allowance mechanism returning 91p for every £1 spent on new developments.
Harbour Energy, the UK’s largest producer, blamed the policy for its decision to cut 350 jobs, the brunt of which are expected to fall in Aberdeen.
Other warnings have been made around the viability of spending on green energy projects like carbon capture and storage as money is diverted to taxation in the UK.
The survey seeks a price floor for the EPL, a key ask of industry for months, where the levy would be removed altogether if oil and gas prices drop to a certain level.
In other findings from the survey, nearly two-thirds of those questioned believe none of the UK’s political parties are delivering the best policies for delivering energy transition and security.
Governments respond
Energy Minister Gillian Martin said: “Decarbonisation of our energy system is central to Scotland’s journey to a net-zero economy.
“It is critical we take the right decisions now to capitalise on the enormous opportunities this transition offers our economy, our people and our climate.”
A UK Government spokeswoman said: “The energy profits levy helps fund £26 billion in cost-of-living support from excess profits, while encouraging investment in order to bolster the UK’s energy security.
“We have been clear that we want to encourage reinvestment of the sector’s profits to support the economy, jobs and our energy security – which is why the more investment a firm makes into the UK, the less tax they will pay.“
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