OEUK Business and Supply Chain Outlook 2024 – key considerations

Offshore Energies UK (OEUK) published its Business and Supply Chain Outlook 2024 (the 2024 Outlook) on 26 March 2024 which aims to provide "an incisive insight into the health and potential of companies in the UK offshore energy industry."

It looks at 7 key areas:

1. Business environment;
2. The UK's energy system;
3. Developing sustainable supplies;
4. UK supply chain strengths;
5. Responsible production of oil and gas;
6. Scaling up of offshore wind; and
7. Kick-starting CCS and hydrogen.

Addressing these areas is crucial in delivering a "homegrown energy transition" to meaningfully harness the UK's potential and expertise, while also securing domestic energy security. In this article we provide a whistle-stop summary of the key points addressed in the 2024 Outlook.

Business environment

The 2024 Outlook identified that energy prices are returning to pre-crisis levels, indicating greater stability, and windfall conditions have passed (despite the profits levy continuing). Political policy could encourage investment in the UK's energy system, increasing investor confidence and raise finance whilst discouraging supply chain resources from moving abroad. OEUK's Supply Chain Principles aim to create an enhanced commercial environment and emphasise "contractual risk and reward, payment performance and openness to innovation". However, since publication of the 2024 Outlook, with a general election looming, there remains uncertainty around the political policies impacting the oil and gas industry in the short term.

The UK's energy system

The UK remains heavily reliant on energy imports with production at a record low as oil and gas output is falling more quickly than alternatives are rising. As the UK is operating in a global energy market, primarily for liquified natural gas (LNG), it is essential to encourage investment across UK energy resources to enhance energy security and help to stabilise prices. However, it is not all doom and gloom.as the 2024 Outlook also identified opportunities and key strengths for the UK oil and gas market.

Developing sustainable offshore energy supplies and new supply chain opportunities

The 2024 Outlook acknowledges the UK's energy production continues to evolve, at present the UK is producing 60% of domestic demand. Since 2000, production has fallen by two thirds and energy demand has fallen by one third, changing the UK's status from net exporter to net importer, but there is significant investment opportunity. Previous OEUK findings have identified around £200bn could potentially be invested this decade (with £160bn of that remaining), but there is an investment prediction of £450bn by 2040 with the energy focussing widening to include greater renewables opportunities. To achieve this, the UK must become more competitive in its approach which is one of the themes identified..

Hydrogen could contribute 5% of the UK energy output by 2030 if the 10GW target is achieved. Hydrogen and CCS will grow rapidly over the next decade, predicted to become a £2bn market annually. Presently, the UK supply chain can cover over 80% of CCS project demand, and over 90% for CO2 transport and storage.

UK supply chain strengths

The 2024 Outlook focuses on retaining key oil and gas capabilities to secure scale of new energy opportunities early on in the development timeline, including:

• Engineering;
• Material and metals;
• Fabrication and construction of onshore facilities;
• Subsea production systems and subsea umbilical risers and flowlines;
• Subsea installation and survey; and
• Major equipment.

Engineering capabilities from offshore oil and gas projects can be redirected to other offshore projects such as CCS, hydrogen and floating wind. However, there are onshore opportunities such as fabrication, skilled labour is required for hydrogen and CCS plants. With 90% transferability between oil and gas and these new energy sectors, this places the UK supply chain in a unique and strong position to drive forward the transition.

OEUK have commissioned Rystad Energy to undertake an independent review of the UK oil and gas supply chain's capability and transferability, due to be published in April 2024.

Responsible oil and gas production

There is still mileage in new oil and gas developments albeit that the progress is on a longer timeframe due to increased compliance requirements in pursuit of net zero targets. The Victory Field was approved in January and the Buchan redevelopment and Anning & Sommerville Fields have both begun the regulatory approval process. However, political uncertainty is heightened in the industry and, paired with frequent tax changes, is dissuading companies from investing in the UK market. The supply chain companies' power to retain capacity is affected which consequently impacts their ability to utilise such capacity for offshore wind, CCS and hydrogen projects.

Scaling Up of Offshore Wind

The UK government has promised decarbonisation of the power sector by 2035, which is possible if offshore wind development continues.

OEUK identifies that, after China, the UK has the world's largest wind power operating capacity. However, it faces challenges, notably Allocation Round 5 was unsuccessful in attracting any offshore floating wind bids last year with OEUK stating this was due to the UK government failing "to recognise the scales of challenges being faced" by the industry. The 2024 Outlook recognises the government has taken steps to try to ensure the success of Allocation Round 6, but uncertainty remains around sufficiency of funding support.

Kick-Starting CCS and hydrogen

The UK has the largest potential for carbon storage in Europe but, to meet its net zero target, CCS technologies must be successfully introduced. The NSTA is set to publish its decarbonisation plan for the UK's offshore energy industry as part of the 2050 UK net zero target and CCS is expected to form a material part of said plan with the UK government currently backing four CCS clusters (Hynet and the East Coast Cluster as Track 1 Projects, and Acorn and Viking as Track 2 Projects). The UK government's CCS vision paper, published 20 December 2023, outlines the goal for the CCS sector to evolve from subsidy-based to self-sustaining from 2035, but the 2024 Outlook identifies that while there has been significant progress there needs to be poly developments to underpin and support the success of the CCS sector.

Similar to CCS, low-carbon hydrogen plays a crucial part in achieving the UK's net zero targets. Positive strides are being made, with 11 projects being successful in the first allocation round under the Hydrogen Production Business Model, with first projects becoming operational in 2025. There are also set to be first allocation rounds under the Hydrogen Transport Business Model and Hydrogen Storage Business Model at the end of 2024. The next step is to ensure transportation and storage networks are available to connect producers and offtakers.

Key takeaways from the 2024 Outlook

While it is not all good news in the 2024 Outlook, there are clear positives to take away from it and a resounding message that the UK is uniquely placed in respect of new and renewable energy sources in support of net zero targets, both domestically and globally.

The geography of the UK, coupled with its supply chain capacity and capability, has all the requirements to significantly develop floating offshore wind, CCS and hydrogen, but its potential downfall is the ability to retain resources, primarily caused by project uncertainty. Certainty is required to encourage supply chain companies to invest in the UK specifically concerning the timing of projects, and the 2024 Outlook is a clear message to the government that policy needs to support the diversifying energy sector if the UK is to secure economic growth, jobs and emissions reductions.