I recently visited the offices of Aberdeen and Grampian Chamber of Commerce. In the heart of the energy capital of Europe, ostensibly they should have much to be confident about.
Surrounded by companies developing the new energy technologies; home to one of the highest-skilled workforces in the world; on the edge of an oil and gas basin at the time of a boom in oil and gas production (earlier this year US oil and gas production smashed records, while surging prices saw producers across the world report record profits), Aberdeen and the North East of Scotland should be booming.
However, on my visit I was shown a quite terrifying graph illustrating the industry’s confidence in the UK Continental Shelf (UKCS) versus confidence in oil and gas worldwide.
Whereas for the last 20 years, net confidence in the UKCS has largely mirrored that in the global industry, over the past two years there has been a clear divergence, with confidence plummeting here as it grows overseas. So much so that over a five-year horizon, while confidence in overseas stands at +50pc, in the UK it sinks to -69pc.
Why is this? Recent fiscal instability, punitive windfall taxes (for which we Conservatives must take blame) and a negative atmosphere around business investment in oil and gas in Scotland (for which the SNP must take the flack) is being exacerbated by a Labour Government whose eco-zealotry will see our domestic oil and gas industry all but cease to exist.
This will not only impact the UK economically as the sector shrinks and provides less revenue to the Treasury, but will weaken our energy security and in an irony totally lost on our new Government, hamper our journey to a cleaner energy mix.
This might sound counter-intuitive, but let me explain. Globally, last year Shell posted profits of $28bn (£22bn), but only £1.4bn (that’s 5pc) from the North Sea.
The North Sea is a mature basin – operations are trickier and more expensive than in other fields. This is combined with a restriction on new drilling and exploration proposed by the new Government, an increase in the profits levy (Shell already pays $500m on its UK profits) and a removal of investment allowances which were brought in to encourage development in the North Sea in spite of a high taxation regime (such as Norway have).
It is very easy to see why energy companies – multinationals with headquarters in Houston, Riyadh or Abu Dhabi – are looking at the UK and concluding that the costs outweigh the benefits.
Harbour Energy and others have already done so – reducing their operations and cutting their workforce in the north east of Scotland. Capital is mobile and it will move to basins and countries with more welcoming and stable tax regimes and where exploration and drilling continues and increases.
But for the real negative impact of these decisions, you need to look beyond the producers. It is in the supply chain – those hundreds of companies based in around Aberdeen, employing some of the most skilled energy workers in the world, developing some of the most innovative new technologies to power the transition – that the damage will really be felt.
As the producers reduce their footprint here, the work for the UK-based supply chain will similarly decline. Companies based in Aberdeen are already seeing business overseas outweigh demand here in the UK. As this continues, there is nothing to prevent those businesses following their producer cousins in moving overseas.
This would be devastating to the north east of Scotland in particular, given the sharp reduction in high-wage, high-skilled jobs and investment in the region, as well as to the wider UK. It is acknowledged, even by the Climate Change Committee, that we will be reliant in part on fossil fuels for a significant part of our energy mix for at least the next 40 years.
So we will clearly have to increase our imports of these fuels vital to keeping the lights on. This increases the UK’s exposure to volatile prices and unstable regimes, and we don’t need to look far to see how quickly and effectively energy supply can be weaponised.
But the biggest irony of this entire move is the negative impact it will have on our transition to a cleaner energy mix. For it is the very companies, either producing, exploring, servicing or supplying the oil and gas industry in the North Sea today that are investing in new clean technologies, building new offshore wind farms, developing carbon capture and creating the jobs of tomorrow that will get us to net zero.
If we drive these companies from the UK, we suffer economically, we damage our security and we impact our drive towards a cleaner future.
The UK has led the world in development and deployment of new energy technologies. We have reduced our emissions by 50pc, the fastest of any G20 nation, while growing our economy. We have ended the use of coal for power generation. We have built the five largest offshore wind farms in the world. And we have done all this because of the foundations built by a profitable, successful and homegrown oil and gas sector.
To abandon it, to drive it out of the country, to throw it on the pyre of eco-zealotry simply because it makes a good slogan or placates the radicals you rely on for support, is short-term, closed-box thinking.
It’s time for some realism, some truths in this debate. Before it’s too late.
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