Who would have thought that 2022 would be as full of as many unexpected, albeit different, events for the energy industry as 2020 when economies across the globe ground to a halt in the wake of the Covid-19 pandemic?
The single-most impactful event came with the Russian invasion of Ukraine in February 2022, which continues to ravage the country with estimates of 200,000 people killed, and the second front line, as Deputy Energy Minister Demchenkov describes it, having already destroyed half of its energy infrastructure leaving 10 million with no heat or power this winter. The spill over from this war was quick and is being increasingly felt across the globe—causing more uncertainty and disruption to an energy sector already struggling with the aftermath of COVID. High oil prices, record jumps in the prices of gas, highest inflation levels in decades, and economic crises.
One thing this war has pushed to the forefront, however, is the need to diversify sources of energy and the technologies used to produce it. Governments, especially in Europe, have since announced various measures to speed the rollout of various types of energy projects and initiatives, from nuclear to oil and gas, building on, or sometimes delaying, their net zero objectives and ambitions. Germany for instance, increasing coal production, reviewing its planned nuclear decommissioning policy, while impressively commissioning its first LNG terminal in record time, an FSRU-based import facility in Wilhelmshaven, operated by Uniper.
These efforts, together with existing project pipelines and plans around the globe, are creating opportunities for companies that are willing to export, diversify and grow into new businesses and unexplored geographies. Energy supply chain companies can only do that, however, with the right business environment, when there is more predictability and certainty around future energy structures, policies and funding, with business-friendly policies that cut red tape and stimulate growth.
Supported by higher energy prices, energy companies started to grow and plan further investments through 2022 but many across Europe have been, or expect to be, hit by windfall levies. In the UK for instance, the Energy Profits Levy raised taxes on profits to 75%, almost certainly hampering the prospects of growth for the country’s supply chain companies which had just started to invest after years of low activity that followed the 2014 oil crash.
While the 130 North Sea oil and gas exploration licenses the UK government plans to grant offer a ray of hope for the industry, an unfavourable tax environment risks the growth of the oil and gas supply chain, especially smaller and medium-sized companies which make up the majority of our members. This situation places them in an unenviable position where they could end up with not enough domestic business as operators reduce their investments in the North Sea. Remember, only 2% of the world’s energy market is in the UK.
This challenge is compounded by the UK government’s policy that limits the funding and support it will provide for oil and gas supply chain companies, hampering the willingness, ability and competitiveness of smaller companies to export.
One might say this is therefore the time for companies to diversify into renewable energy sectors. But that diversification strategy was tried by many between 2018 and 2020, and supply chain businesses soon found that renewable projects, tempting as they were given the need to meet net zero ambitions, had much lower margins than oil & gas, with only sporadic demand and lengthy delays. We are no further forward with a clear pipeline of projects today than we were then, and businesses are unable and unwilling to invest in the unknown.
At the EIC, as one of the world’s largest trade associations, we are always on the lookout for opportunities to help our members export, diversify, and grow across the globe, and the world is teeming with project pipelines across all energy sectors, although a lot of them call for ramped up capacity across the supply chain.
We participated in a delegation in November to North Carolina, which explored, among other things, export opportunities for the UK supply chain in the US offshore wind sector. This is an area where our supply chain members from around the world can look to export their products and services. The US is in fact among the world leaders when comes to floating wind power ambition, with California being one of the freshest markets available for entry in this area, having just awarded five lease areas off the state’s coast.
The ocean is vast when it comes to business opportunities for energy supply chain companies across the globe. But competition is fierce and the winning recipe for companies bidding for projects and subcontracts will be, as we learned from our 6th
annual Survive and Thrive Insight Report in 2022, a mix of competitive pricing (floating wind costs are expected to be on a par with fixed bottom wind turbines by the decade’s end), innovative solutions, and the capacity to deliver. Our data shows that more than 140 megawatts of floating wind turbine will be installed globally by 2035. This planned, steep production growth will grow even larger, as new leases and targets are expected to be announced around the world in 2023.
But this anticipated supply of floating wind capacity comes with its own burden. As we stand, no country has yet the infrastructure and the dedicated supply chain capacity for these projects, and there is already a shortage of fixed-bottom offshore wind supply capacity. Worryingly, the turbine manufacturers themselves are also loss-making, which raises red flags around their ability and willingness to fund their own capacity growth.
There is also a need to develop robust financing models that ensure the industry continues to thrive, especially as inflation and high interest rates affect operators, manufacturers, and smaller supply chain companies. Despite these challenges, we see plenty of opportunities coming up in 2023, with new auctions and tenders opening in Portugal, Germany, Norway, and other parts of the world.
Hydrogen is another area that’s driving a lot of supply-side investment and seeing a constant flow of announcements about new ambitions and targets around the world. There are currently more than 400 hydrogen production projects globally, all announced since the start of the pandemic, worth about USD$400 billion. 85% of them are for green hydrogen. But what our data shows is that we could see a hydrogen supply glut in the coming years, indeed as soon as in the next two years, if extra demand is not urgently stimulated by governments and the private sector.
Supply chain companies already working in hydrogen or planning to diversify into it will find multiple opportunities in green hydrogen, especially in Europe, the Americas, Australia, and Asia. In 2023, contracts are expected to be awarded in Oman and thousands of electrolysers used in producing green hydrogen will be manufactured over the next two years in the UK, Denmark, Spain, Germany, and China.
In nuclear, the UK government’s decision to invest £800 million in the Sizewell C nuclear plant as part of its drive to ensure sustainable domestic energy supply is an example of how investment stimulates business activity. This project go-ahead means that while the UK nuclear supply chain has always had capabilities and experience, they are now set to grow capacity that will allow them to deliver domestically and internationally, a real success story.
Government funding for the development and design of Small Modular Reactors (SMRs) and Advanced Modular Reactors (AMRs) also helps with building the capacity that will allow UK companies working in the sectors to bid for projects globally and venture into new markets. In the longer term, recently announced initial fusion success is starting the path towards what scientists hope will someday be a new, carbon-free power source.
This is an amazing time to be in the energy industry, with so many opportunities to invest and grow, with so many engineering and production challenges to be solved by talented teams, and with the world’s security and net zero goals relying upon ministers and industry bosses to collaborate and innovate now and over the long term.
This is at the core of what we do in the EIC. We help our members export, diversify, and grow, and we are proud of our proven heritage in doing this through our world-class data, insights, networks, and events that bring together the energy supply chain with key project decision-makers and government officials. Our 2023 calendar is already very busy with planned report releases, including on global OPEX opportunities, and events led by our flagship Energy Exports Conference, held on 6-7 June in Aberdeen.
We have also launched the 7th edition of our highly anticipated Survive & Thrive initiative, with the full report expected to be published in June 2023. Having already interviewed 250 industry bosses over the past six years, we are excited to learn about the very latest growth strategies being employed by our member companies in continued challenging markets, and what this will tell us all about the trajectory of our industry and its leaders therein.
If you are an EIC member, or want to be, register your interest to take part in the Survive & Thrive Insight Report 2023 by Friday, 17th February 2023 and be automatically entered into the EIC Awards in October 2023, in London, Dubai, Houston, Kuala Lumpur and Rio.
Stuart Broadley
CEO of The Energy Industries Council (EIC)