Legal Review: Converting to a low-carbon economy is not without its challenges

Within the energy sector, oil and gas remain vital, with the offshore industry meeting 45 per cent of the UK’s overall energy needs.

Climate change march Edinburgh residents marched the foot of the Middle Meadow Walk in The Meadows to Holyrood Park to demand action on the climate. By Neil Hanna.

But with climate change higher up the news agenda than ever before, renewable energy clearly has a bigger role to play.

Over the last year, school pupils have been marching on the Scottish Parliament demanding action on the climate, environmental campaigners from Extinction Rebellion have been staging demonstrations and First Minister

Nicola Sturgeon has declared a national “climate emergency”.

Scotland now aims to be ‘net zero’ by 2045. However, fossil fuels are still in demand and will remain so for the foreseeable future as more energy is required across the world.

The Economic Report 2019 from trade association Oil & Gas UK (OGUK) stated: “Global energy demand has increased by two-thirds since 1995 and most scenarios show this continuing to grow in the decades to come.”

Investors remain interested in the industry. In Scotland, the largest deal recorded for any sector in the first half of this year was in oil and gas, with North Sea operator Ithaca Energy’s purchase of Chevron North Sea for £1.6 billion.

Clare Munro, energy and infrastructure partner and expert in oil and gas at Brodies law firm, says: “With global concern around both climate change and plastic use at higher levels than ever, both the public and the oil and gas sector need to better understand the sector’s role in transitioning to a lower carbon economy.”

She says Brodies regards this as more of an opportunity than a threat, as it believes oil and gas will play a role in the energy mix for many years to come.

She adds that the oil and gas sector has been performing reasonably well, with Brent prices relatively stable in the $55 to $70 range. But, while pricing is stable, upstream M&A activity is good and upstream development activity is ongoing, Munro notes that things remain difficult for the service sector and she expects to see continued innovation with contract structuring and ‘alliancing’-type arrangements.

Norman Wisely, partner at law firm CMS, agrees the oil and gas sector has been performing better in recent times. He points to relatively stable prices and a “painful” cost-cutting process since 2014 that have helped stimulate deal flow within exploration and production (E&P).

He says: “Production is at its highest since 2011, competitive costs are being sustained and there is building momentum around exploration, with more new opportunities being drilled and the largest two conventional discoveries for a decade made in the second half of 2018.”

However, looking ahead, Wisely warns that challenges remain across parts of the supply chain, as pressure on revenues and margins continues and cash flow is stretched. He says that if capabilities and resources are to stay anchored in the UK, there must be a competitive proposition for supply-chain companies to invest in.

Alasdair Green, head of E&P strategy at Anderson, Anderson & Brown, an accountancy firm that works with lawyers in the energy sector, says E&P is now performing better and deal activity has increased.

“We are seeing more investments with exits of larger, typically American, majors and supermajors leaving the UK to go back to the US,” he explains. “That’s creating opportunities for other companies and organisations to come in. So we’re seeing a lot of private equity investments within the UK.”

He says that there is also a large amount of investment coming from outside the UK, which he describes as a very strong message, particularly at the moment with Brexit uncertainty: “It seems that the North Sea, the energy sector, is still a very attractive destination for investment from all over the world.”

But while he expects demand for oil to continue to grow for decades, he believes some investors are being put off oil and gas. “I’ve heard that companies are finding new investment trickier than it has been,” he said. “You can see from share prices of oil and gas companies that this is going to be something that is an increasing concern going forward.”

With such concerns around fossil fuels, is Scotland’s renewables sector in a situation to meet growing energy demands? Experts point to the inevitable detrimental impact on the sector of the decision by Westminster to end subsidies to onshore wind farms from 1 April, 2016.

Nick Jones, partner and head of the energy group at MacRoberts law firm, explains that the sector has done “reasonably well” in difficult circumstances with its performance hampered by two main reasons. “One is the subsidy withdrawal which has really decimated the sector in terms of developers, people in support and in the supply chain. There are far fewer players in the industry,” he notes. “The other thing that is affecting those still in the industry and trying to proceed is the massive uncertainty we have at the moment. It is making investors beyond cautious, they are just not lending. Developers are finding it hard to get money to fund the projects they want to take forward.”

He believes potential inward investors are attracted to Scotland’s natural resources but are being deterred by Brexit and, beyond that, the prospect of another independence referendum.

Jones is concerned that in the longer term there is a risk that Scotland, and the UK as a whole, will lose ground when it comes to market share to other parts of the world.

But he adds that, on a more positive note, the current action on climate change, such as recent protests in London, is raising awareness of the need to move to renewable energy. “That must be a good thing for the sector,” he says.

Chris McGarvey, renewables specialist at CMS, says that while work on greenfield new renewable projects onshore in Scotland has reduced since the withdrawal of subsidies, this has been offset by secondary market acquisitions and refinancing of existing projects.

“We remain extremely positive for the sector,” he adds.

Finally, according to Keith Patterson, partner in projects, energy and infrastructure at Brodies, offshore wind has performed well, but other areas of the sector have faced considerable challenges.

“The outlook for offshore wind is undoubtedly positive,” he notes. “Onshore wind and solar are seeking to develop new business models to enable deployment of new projects, which we believe will emerge. However, the level of deployment will depend upon policy support.”

This article first appeared in The Scotsman’s Scottish Legal Review 2019. A digital edition can be found here.