However, as we near the halfway point of the year, Russian sanctions have led to the demand for oil and gas exceeding supply, driving prices up significantly. Given inflation rates continue to sit at record highs, everyone has felt the impact.
Grant Thornton’s latest Business Outlook Tracker revealed that just under one in three businesses in the Scottish mid-market have already increased their prices to cover the impact of inflation, with another 25 per cent having plans in place to do so in the near term.
In May 2022, a new Energy Bill was outlined in the Queen’s speech aiming to deliver the transition to cheaper, cleaner and more secure energy, in a bid to move the UK towards a self-sufficient future.
This offers the UK a window of opportunity to prioritise investment into renewables while securing its long-term energy supply.
This movement is well underway in Scotland. In January, it was reported that billions would be invested in Scotland’s transition to net zero, with 17 new offshore wind projects – and the collective potential to generate 25 gigawatts of clean energy – given the go ahead.
These projects have put Scotland at the forefront of global offshore wind development, with the country possessing 25 per cent of Europe’s entire offshore wind potential.
In addition, the developers of these offshore wind projects have committed to invest in the Scottish supply chain, meaning secure, green jobs for decades to come.
However, these figures are based on fulfilled potential – a point that Scotland is not at yet.
In the interim, the oil and gas industry has been given a boost. The UK Government is driven to make more of the country’s existing oil and gas reserves to reduce third party reliance in the short and medium-term.
It is expected that, following the Energy Bill, it will be easier to gain consent for offshore activity from the oil and gas authority – that has been newly renamed North Sea Transition Authority (NSTA) – with plans already being made to increase offshore operations and drilling activity, with the UK Government pushing for more production and exploration.
Although this may seem like a step backwards from Net Zero, the oil and gas industry is pioneering initiatives such as offshore electrification to help de-carbonise existing operations and the increased oil and gas activity is delivering a much-needed boost to the supply chain and an improved short and medium-term outlook.
This is also creating a window of opportunity for North Sea companies to use cash flows from oil and gas activities to transition to greener energies such as hydrogen, offshore wind, carbon capture and storage.
Access to finance could however be increasingly challenging. A recent Grant Thornton survey of 40 key UK-based lenders to understand their ESG lending showed that 85 per cent of them, when assessing credit risk, are now influenced by a company’s ESG status or its ability to transition to net zero.
Energy security has undoubtedly improved the outlook for the UK's oil and gas industry. However, the fundamental issue of climate change and reducing emissions has not gone away. The industry must use the time and cash flow presented by this opportunity to reduce emissions from on-going operations so that oil and gas can be produced cleanly, while also delivering fundamental change and transitioning to greener energies in the longer term.
Barry Fraser, Director at Grant Thornton UK LLP in Scotland