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Diversification: The Changing Face of the Energy Mix

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25 April 2019

Diversification: The Changing Face of the Energy Mix

By Derek Petrie, director, audit and accounts

The effects of the slump in North Sea production – and the associated drop in the price of oil – continue to reverberate across the Granite City.  For many, it’s been a long and tortuous road to recovery, but those first green shoots of regrowth are now firmly within their grasp.

It’s well known that oil and gas production is cyclical in its nature: any businesses operating in Aberdeen since the birth of the industry will have seen at least three crashes and recoveries. But this latest downturn, with major cutbacks on exploration spend that may never recover, has forced many firms to think smart.

Rather than riding out the storm only to have to run for cover when the clouds once again start gathering, energy-focused companies are looking at how they can use their existing knowledge and experience to diversify into different fields.

They now understand that their talent pool can apply skills gained over many years in oil and gas to a wide range of energy projects, from on and offshore wind generation to carbon capture. This not only makes them less exposed to fluctuations in the price of oil, but safeguards against losing key members of their workforce.

In my experience, it’s often the smaller companies leading the charge on diversification. They may lack the financial muscle in comparison to the global majors, but they more than make up for it with their ability to be nimble, adaptable and more open to a complete shift in mindset.

However, the financial argument for branching out into new markets can be a testing one, especially when a company may have spent the last couple of years fighting to balance the books in a stagnant marketplace.

But that’s where we come in. Accountants are not just there for the year-end: they should be trusted advisors who can help you develop a business plan and a strategy for growth. Would your new activity, for example, be eligible for support under the government’s Research and Development scheme? If you are involved in improving technology, tax breaks are available to help offset the cost of adapting it for a new market.

How scalable is your product? Like many other firms in the North East, you may want to target offshore wind, but the scale of mechanical and civil engineering required is significant – you could have 120 turbines and 240 cable ends to be tied in and terminated. It’s very different to the oil and gas supply chain, so if you only produce in small quantities, you need to consider whether you can realistically find economies of scale in producing hundreds of units.

These are just two questions that you should be asking yourself and your accountant. You can only make decisions when you understand the bigger picture and the risks associated with moving into a completely new field of business.

Some of my clients have asked those questions and have found that the financial arguments don’t stack up. But the story doesn’t need to end there. Diversification is not only about finding opportunities in the energy mix, it’s about identifying new geographic markets for services, skills and products.

For example, the North Sea has always been considered the front-runner in subsea activities, with decades of experience. We’re now seeing opportunities opening up for subsea activities in the Middle East, where there is demand for sectoral know-how on the back of Red Sea exploration projects.

Similarly, research points towards nations in the Asia Pacific region being the biggest drivers of energy consumption up to 2040. These countries are known to rely heavily on coal and oil – but they must now move towards cleaner and greener sources.

The key element of any successful diversification is to carefully assess the opportunities and the risks: consult with your trusted advisors to look at the arguments for and against, and whether there are ways to reduce or eliminate financial risks.

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