The Press and Journal (Inverness, Highlands, and Islands)
Political posturing over energy issues has to stop
While 2023 was, overall, disappointing for M&A activity due to continuing economic uncertainty and high interest rates, the energy sector bucked the trend.
Our Aberdeen-based team had its best year since 2014.
A number of factors contributed to that:
● Favourable sector dynamics, resulting from a stable $70-plus commodity price and ever-growing energy demand.
● The continued revival of and positive outlook for the subsea industry.
● The impact of the high interest rate environment, which focused investor minds on profits rather than hype.
Meanwhile, the apparent awakening of the public, politicians and media to the importance of energy security, and the true economic and social implications of the transition resulted in a welcome change of sentiment.
The industry finally found its voice in articulating the need for oil and gas to provide a secure supply of energy for decades to come.
Nevertheless, in contrast to those heady days of 2014, when the oil price averaged almost $100 per barrel, the EPL (energy profits levy) didn’t exist and we were still called Simmons & Company, 2023 was still a buyer’s market.
A protracted downturn followed by the pandemic meant long-held, private equity-owned businesses needed to be sold.
Many other business owners had deferred exits and retirement plans.
As confidence in the sector grew in 2022, the rush to sell led to a somewhat saturated market in early 2023, with more sellers than buyers. Much of this over-supply unwound in 2023 and, with trade buyers more active and a return of some private equity investors, we began to see more competitive processes in the second half of the year.
Looking ahead to the rest of 2024, I expect this to continue. With improving earnings, a long-term positive outlook and strong management teams, there are lots of reasons for optimism.
But in a year dominated by general elections, here and in the US, we cannot underestimate the influence politics will have on the industry and, as a consequence, on M&A.
The UK has an advantage of natural energy resources, but for some time I’ve been concerned we could become the only place to throw it all away on the altar of virtue.
With energy security at the forefront and greater honesty about the real cost of net zero, if not the timetable, there’s been a softening of the political rhetoric against fossil fuels.
There is also general recognition of the need for a responsible, affordable energy transition.
Despite the nonsensical EPL, I was feeling somewhat reassured our politicians were beginning to understand the industry and, just as significantly, the implications their words and actions have on investor confidence.
But, as I was writing this and beginning to muse that all parties were converging on more sensible policies, along came Labour with their latest proposals for “a proper windfall tax” on oil and gas companies – a 78% tax rate and an extension to the completely arbitrary 2030 deadline.
When will politicians start acting like economic grown-ups and not student activists?
It seems the ability to signal their virtue trumps any desire to understand the consequences of their actions.
In recent years, as politicians have rushed to appease Greta (Thunberg) and the green lobby, their anti-fossil fuel rhetoric has had serious, farreaching consequences.
This is most notably so in relation to the EPL and availability of capital.
There is no doubt the EPL is biting and having a significant impact on our long-term energy security plans. Who regards $70 oil as a windfall anyway, and why has the oil and gas industry been singled out?
Others, such as PPE (personal protective equipment) contractors and online shopping giants, enjoyed a genuine windfall from government policy during Covid lockdowns.
The real issue is that UK oil and gas operators have quietly bitten back, deliberately choking investment in the North Sea in the face of the enormous tax burden and investing in more stable geographies. This puts the longer-term future and tax generation of the UK industry at risk.
The true picture of production decline in the North Sea is scary. This ought to be known and understood by our politicians – but is clearly not.
Their political games impact investor confidence, which is harder to shift.
Hence, access to capital and, in particular, debt is the biggest single challenge for the industry today as many banks and financial institutions remain caught in the “oil and gas is bad” phase that reflects political comments from COP26.
The lag between evershifting political views and the longer-term decisions of investors will need to close rapidly if we are to retain our place on the global energy stage and be at the forefront of a balanced transition.