Following a week in which climate activists marched in Edinburgh as part of a global day of action against the ongoing use of fossil fuels, and Prime Minister Rishi Sunak announced a major change to the government’s approach to green policies, everyone should have pause for thought.
The activists were protesting that new oil and gas exploration licences had been handed out in July and – at the time – the North Sea Transition Authority’s consideration to allow drilling in the largest undeveloped oilfield in Scottish waters – the Rosebank field – off Shetland.
Elsewhere the expectation for the UK to be net zero by 2050 is increasingly seen as ambitious, prompting the PM’s amendment of deadlines on the road to net zero such as pushing back the ban on the sale of new petrol and diesel cars from the current 2030 to 2035.
Wherever you fall on the political spectrum, the uncomfortable truth is that the UK oil and gas tap is not going to be turned off overnight, or anytime soon, for numerous global reasons. The UK is not alone in undergoing an energy transition and this transition will take time and investment – importantly, investment – if targets are to be met. As it stands, Scotland has committed to a target of net zero emissions of all greenhouse gases by 2045 ahead of the UK government’s target of 2050.
Tarred with the O&G brush?
Much has been said about the exploration and production companies and their investments into greener projects, particularly offshore wind. The profits being generated from oil and gas can be pumped into these renewable projects – and they are doing so in spite of the impact of the Energy Profits Levy, or windfall tax.
The same cannot be said for the service sector though, and it needs investment. Many service sector businesses are adapting their offerings and product lines to transition into renewables but they need time and, crucially, access to capital, in order to support their transition.
These service sector companies will help support the UK, and global, transition agenda but they are struggling to attract the investment they need at this stage because of their oil and gas revenues.
Oil and gas has become a taboo sector for investors and banks to support, with these institutions needing to satisfy their own stakeholders and ESG agendas. Investors are under huge pressure from their own stakeholders to move away from fossil fuel investments, with an enormous amount of social, environmental and political pressure to do so. However, are they moving away too quickly and is that hindering the transition ambitions for many businesses?
On the service sector private equity side, where we advise businesses looking for new capital to grow, we have seen very competitive M&A processes for fully renewable businesses but far less appetite for businesses with a portion of their revenues deriving from oil and gas related activities – perhaps surprisingly, even traditional oil and gas businesses that already have already begun their transition journey and have a decent portion of revenue from renewables.
Investors should be encouraged to think about the ultimate net zero goal and the realistic timeline to get there. They play an important part in providing the capital to assist the UK in achieving those goals, by supporting the companies that need it the most at the moment, in order to step up the speed of transition.
Could we be seeing innovation, which this sector is so famously known for, stifled because of reluctance to invest in a business with oil and gas revenue?
We must remember that this is a “transition”, not a switch. Let’s not forgot that the oil and gas tap cannot be switched off overnight. These raw materials are used in, and are critical to, so many aspects of our lives and that sector still needs to be served – and it remains profitable. Profits that can then be invested into supporting the transition.
If the government’s approach to green policies is being revisited, then surely investors should be part of the transition story, and there should be capital available to support businesses in their transition path and to reach the UK net zero targets. These businesses play such an important role in the UK transition agenda, that their struggle to secure investment should not be ignored.
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