As we noted in our recent overview of the OEUK Business and Supply Chain Outlook 2024 , Offshore Energies UK (OEUK) commissioned Rystad Energy to undertake an independent review of the UK oil and gas supply chain's capability and transferability. This in-depth report focuses on an examination of the UK supply chain at present as well as exploring opportunities and assessing each "new energy vertical".
These verticals are:
- Fixed-Bottom Wind;
- Floating Offshore Wind;
- Hydrogen, and
- Carbon Capture and Storage (CCS).
The Report reiterates the urgent requirement for strategic direction to assist supply chain companies to achieve their potential "of a projected 4% yearly increase in spend (real terms) across offshore and onshore activity." Major growth is anticipated between 2023 and 2040 within the Wind, Hydrogen and CCS energy verticals. Rystad Energy have outlined the success of these new verticals will only be achieved if the existing oil and gas supply chain delivers into them. This message rings true to the observations included in the 2024 Outlook.
There is crucial data contained in the Report that will no doubt contribute to the planning of a successful energy transition. What is clear is that governmental action is urgently required to resolve the decline in investment in the UK energy sector, which is a contributory factor to the reduction in capital expenditure in engineering and fabrication. The UK Government is yet to outline their ambitions post 2030, however, the Scottish Government has outlined a target of 25GW renewable hydrogen by 2045. To achieve this, it appears that focus must be on bolstering the supply chain and supporting investment.
The UK is experienced in controlling high pressure, volatile liquids and gases, and there is opportunity for these skills to be utilised in the new energy verticals including CCS and Hydrogen. The UK's existing capability has the potential to support 84% of CCS projects and 80% of hydrogen projects, as well as supporting 57% of Floating Offshore Wind projects. This should be a good news message in terms of the "homegrown energy transition" that the governments and industry bodies alike are referencing.
In terms of CCS, the North Sea is anticipated to store the majority of Europe’s offshore storage capacity, with Norway and the UK at the forefront. In the UK, it is expected that storage will be offshore in both the Irish and North Sea given the geological make up of depleted reservoirs and the deep knowledge and understanding held by the oil and gas sector. This is likely to attract significant emitters from Continental Europe to seek to store their captured CO2 in the UK waters. However, bi-lateral agreements will be required to enable cross-border transportation between countries, as well as suitable subsea and onshore infrastructure (such as in ports) to accommodate the requisite transportation and storage requirements.
Some may view the requirement of these bi-lateral, cross-border legal documents as an obstacle for CCS projects and unnecessary red tape. However, establishing an understood and fit for purpose regulatory and legal matrix will be absolutely paramount to facilitating a successful transition into these new energy verticals as projects gain momentum, and domestic and international policy refresh the impetus on the energy sector to diversify into renewable alternatives.
Rystad Energy's research details that, with the correct investment environment, it is possible for the UK's offshore energy supply chain to benefit from the export market globally in these new energy verticals. The accumulated projected spend from 2024 to 2040 for hydrogen is projected to be in the region of £590 billion, and £470 billion for CCS. These two verticals are anticipated to carry a greater weight than the Floating Offshore Wind market, projected to generate £100 billion.
If the supply chain secures the necessary investment, it bears substantial design and engineering capabilities, which if utilised, could achieve £125 billion of export opportunities over the same period. However, hydrogen production is described as a capital-intensive industry whereby half of the total expenditure is required before production commences. Investment is required in design manufacturing and construction of the main plant. Added to this initial investment cost is the usual business expenses of selling, general management and administration costs associated with energy production, plus with feedstock expenses. The UK has a breadth of suppliers who have the capacity to deliver small scale hydrogen compressor packages, however, at present these lack the capacity to deliver larger packages. The cost of entering the hydrogen vertical will be front and centre in the minds of UK entities seeking to diversify into this market, as they would need to ensure financial backing was established to realistically achieve success.
The findings of the Report reiterate the urgent requirement for the UK supply chain to grow to meet domestic demand, which is substantial. In addition, the reinforces the requirement for policy that supports supply chain investment, as eloquently address by Katy Heidenreich, OEUK's Supply Chain and People Director:
"This report outlines the exciting opportunities a homegrown energy transition offers UK firms and their workforce to drive economic growth. It’s a reminder to policymakers and industry that if we can unlock supply chain investment, we can build world-leading businesses for the new markets that will underpin the low carbon energy systems of the future."
It is crucial that the capability and capacity that exists in the workforce who have long driven the UK's oil and gas industry to be retained for this to be utilised in the CCS and Hydrogen verticals, in turn allowing the UK to compete both in domestic and international markets. Consideration must also be made to the financial outlay required for hydrogen projects to ensure their success.
Moreover, further work is required to positively transform the narrative regarding the perceived legal and regulatory "red tape" in respect of CCS transportation, as it is crucial that the transportation of these new energy verticals receive the same level of legal understanding and protection as more traditional energy sectors.
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