The challenges and opportunities presented by the transition to net zero emissions are the most significant facing both Aberdeen and Scotland.
That's according to Willie Watt, chair of the Scottish National Investment Bank (SNIB), who gave a keynote speech at yesterday's Insider Business Breakfast event, sponsored by law firm CMS.
He told the audience at the Ardoe House Hotel, just outside Aberdeen, that the development bank is committed to working with the oil and gas sector on making that transition, while also investing in the offshore wind supply chain and emerging technologies such as green hydrogen production and carbon capture and storage (CCS).
Watt pointed to last year's winners in the ScotWind offshore wind licensing round as one of the key parts of Scotland's renewables push, but warned that investment is required now - ahead of contracts - to ensure the nation's supply chain companies benefit.
"Floating wind is a unique opportunity - those that can build a business in low carbon energy servicing can export that across the world, as we’ve done across the oil and gas sector previously," he stated, pointing to the Aberdeen South Harbour extension - which SNIB invested in last year - as a "farsighted" project, due to work beginning on it around a decade ago.
While renewable energy may be the long-term future for the north east coast of Scotland, Watt - and the event's panel of experts - was quick to point out that it is the traditional energy companies that will keep the lights on until wind, wave and solar power can take over with consistency.
"I feel for the management teams of businesses trying to navigate their way through investing in renewable technologies, while continuing with their existing oil and gas business that provide current revenues.
"We’re here to help, because getting the balance right is not easy; it’s going to evolve difficult decisions around capital allocation, with implications for the wider workforce."
Among the other panellists was Maggie McGinlay, chief executive of Aberdeen's Energy Transition Zone (ETZ), which is working to reposition the region as a globally-recognised renewable energy hub.
She too was cognisant of the difficulties managing the shift over the next decade, commenting: "We must support companies involved in the supply chain - both oil and gas and renewables - particularly with the timing of opportunities to manage the tricky transition; continuing to get revenue, while planning for the future.
"We’ve got the skills and experience in offshore construction, complex project management and knowing how to get things done in really harsh environments," McGinlay continued, adding: "But we need to keep the big energy companies here, investing in people and tech."
Event host Rona Dougall asked why oil and gas firms wouldn't ditch the Scottish North Sea, especially given recent statements from the Scottish Government and the UK Government's windfall tax.
McGinlay responded: "They’ll stay here because the projects are here - things like the Acorn CCS project and ScotWind - and I wouldn’t underestimate the benefit of having the workforce here already; although we can’t be complacent and must fight hard to keep those companies here."
She added: "We can’t underestimate the important that signals from government give to investors - the series of recent announcements are at risk of creating an adverse environment, so we need to continue to make the case that this region is well positioned to drive the net zero goal ambition; there are just differences of opinion about how we get there."
Taking up this point during the panel discussion, Frank Fowlie, corporate partner in the Aberdeen office of CMS and a member of its energy and climate change group, argued: "It’s not just our government, it’s a widely-held western political view, and increasingly the prevalent investor sentiment too.
"There has been a drying up of private equity money coming into oilfield services of late - a really astonishing destruction of value in the sector over the last couple of years.
"Oil and gas will be here for the next 30 years, so it’s important to support these companies - I’d like to see SNIB to do more like its investment in Elasmogen, but in offshore floating wind - getting long-term patient capital anchoring these services in Aberdeen."
Watt responded positively, but noted: "It’s surprising the way some of the companies can’t raise money", referring to some of its recent Aberdeen-based investments, pointing out North Star when stating "the moron premium was a particular problem at the time".
He added: "Industry has to try harder to get the message across about how hard the transition task is - then the broader challenge is working with the oil and gas sector to make it happen - there's no magic wand to wish it out of existence."
Fowlie said: "One of Aberdeen’s failings is that not enough companies are anchored here, in recent years there's been too many sold off."
The other panellist was Adam Maitland, a director at advisory firm Hutcheon Mearns, who picked up the point about dwindling private equity investment in the sector.
"The landscape is hard, there's really only a few investors left, and while it [oil and gas] will be a key part of the transition, political and investor sentiment has been changing things rapidly.
"2014 was the last real uptick the market, so something's got to give, and that will probably be valuations, as buyers are taking more of a focus on things like deferred considerations."
As for the renewables space, he pointed out that there's actually not yet much of a market for hydrogen, but that hasn't prevented a lot of investment and "toppy multiples" in companies developing the technology.
Maitland added: "Oil and gas isn’t going anywhere soon, so we need to be careful with the balance between the social and environmental aspects of the transition."
As for the wider Scottish deal-making landscape, he stated that after a strong year for mergers and acquisitions in 2022, things tempered somewhat towards the end of the year, partly due to economic uncertainty and political unrest.
"Buyers are looking to wait and see, given recession fears and rising interest rates, they're really leading the charge now, with more robust due diligence and genuine pre-sale preparation becoming a necessity.
"There's still a strong pipeline of activity though, with rebalancing of revaluation multiples," Maitland continued. "Locally, private equity-backed businesses are coming to market, with investors looking for a return on their capital."
Watt also addressed how SNIB sees the market in 2023, stating that there is increased demand in scale-up size range, with businesses worth between £10m and £100m needing that crucial boost.
"We can be the provider foundational capital to get the ball rolling, or be the final piece in the jigsaw, providing a something like a subordinated loan layer."
He concluded the event by answering a question from the audience about the importance of grid connections and battery storage to meeting renewable energy capacity demands in the future, pointing out that the likes of SSE's transmission arm are willing and able to invest significant amounts on this.
"There's no undersupply of capital, but some of the issue is with the role of Ofgem in the process - it's effectively a retail regulator, protecting consumers from big utilities, but its role in the strategic roll-out of the electricity network is not as developed as it could be.
"It's important that the UK Government and the regulator are both thinking about pricing mechanisms and investment requirements that are aligned with ScotWind timescales.
"It's a big challenge that I’m not comfortable we’re anywhere near like ready for."
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