Special report: Is East Anglia’s energy sector facing a crisis?
- Credit: Archant
The challenges facing the region's energy industry were brought into sharp focus yesterday when business leaders gathered at Norwich City Football Club for the East of England Energy Group's (EEEGR) summer conference. Business editor Ben Woods explores the difficulties facing the industry – and how it might recover
Why is it such a difficult time for the region's energy sector?
The falling price of oil has triggered a dramatic shift in the state of the global energy industry. Up until 2014, the cost of single barrel of brent crude had remained fairly stable at around $110 per barrel.
This price not only provided energy companies with a good return on their investment, but it was consistent, remaining largely unchanged since 2010.
However, in June last year, the picture changed. Increased production in America – coupled with high production levels in the Middle East – created a glut of oil which sent prices crashing.
At $50 per barrel, the big oil majors, which were used to getting plenty of bang for their buck, were now facing much higher costs. As a result, these companies began to cut back on exploration and drilling projects which they no longer deemed viable.
Big contracts were cancelled, wages were slashed and fewer people were needed to carry out the work. This spelled bad news for supply chain companies in Norfolk and Suffolk, which compete for servicing contracts on these giant projects. The oil price has since strengthened to about $57 per barrel, but it is nowhere near the $110 mark of last year.
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But East Anglia's energy sector is mainly focused on gas, so why has it hit Great Yarmouth and Lowestoft?
This is true. Unlike other energy producing regions, a large part of Norfolk and Suffolk's energy sector is focused on Southern North Sea gas. However, this doesn't mean the region has been shielded from the falling oil price.
While the value of gas is not as directly linked to the oil price as it used to be, it has still been affected by the sharp drop in the value of oil. Since July 13, the UK gas price has plunged 35pc from 68p/th to 45p/th. This change has caused serious headaches for energy sector companies in East Anglia. It is widely understood that the gas price needs to be at least 50p/th for a company to make a decent return on an exploration investment.
What's more, many energy service companies working on gas contracts also work on oil projects. Gas may be a little closer to home, but with many energy firms in the region operating on a global stage, a fall in the oil price hits them just as hard.
So how damaging has the oil price fall been?
It is hard to gauge just how deep the damage has been, both Great Yarmouth and Lowestoft have show signs of struggle in recent months. Hundreds of jobs have already been lost as a result of staff cut backs and business failures. Companies once associated with bringing growth and prosperity to the region are no longer operating on the same scale as before.
Anecdotal evidence also suggests that the pain is far from over. With oil price still remaining stubbornly, there could still be a bumpy road ahead for some of East Anglia's energy sector firms.
Does that mean unemployment has increased in a key area like Great Yarmouth?
On the face of it, no. A look at the claimant count numbers points to a drop in the number of people signing on for Jobseeker's Allowance in Great Yarmouth. In January 2015 the number stood at 2,160, it has since fallen to 1,550 in June. There maybe a number of reasons for this. There has been a concerted effort from the robust businesses within the region's energy sector to hoover up the workers and apprentices which lost their jobs. Meanwhile, the claimant count number does not reflect the sub-contracted workers who left the region to find positions in other energy producing regions in the UK or overseas when their jobs were cut. Although this trend may have prevented a rise in unemployment, experienced workers leaving the region only widens the skills gap, causing problems for employers in the future.
So what does the future hold for production and exploration in the Southern North Sea?
Despite the doom and gloom, there is still a strong future for East Anglia's energy sector. According to Nautilus Associates, in the east of England offshore oil and gas will be worth £3.3bn towards 2020, with offshore wind contributing £5bn and oil and gas decommissioning – the deconstruction of redundant offshore sites – providing £3.7bn.
However, each of these industries faces its own challenges. The high costs of decommissioning continues to hamper the sector's ability to get into full swing. Offshore wind presents huge opportunity for the region, but with no wind turbine manufacturing site in Norfolk or Suffolk – and companies elsewhere in the UK and abroad looking to capitalise on the opportunities presented by East Anglia's giant offshore wind farms – there is concern that if the region's businesses do not take the right action, then this economic prize could be taken from under their noses.
But what about the here and now? What can done to help businesses facing difficult times in the short term?
During a breakfast meeting at the EEEGR conference, business leaders chewed over the options of how best to fight against the current challenges facing the energy sector.
John Best, head of sustainable energy at James Fisher & Sons, said the region's energy sector must push its decades of skills and experience towards the global market and not just rely on the fruits of the Southern North Sea.
'We need to make sure that we don't limit ourselves to the geographic focus of the region, because the region can work with the world,' he said. 'There's a hub of 50 years' worth of experience and that hub can work globally. We need to think how do we use that experience to make the pie bigger.'
Some business bosses in the 100-strong meeting called for Sir Ian Wood – who carried out a comprehensive review of the oil and gas industry to stoke up further investment – to revisit his findings in light of the oil price fall.
There was also a discussion as to whether an 'early warning system' should be set up to highlight troubled businesses which may need support. The proposal would see advisers from within the industry offering support to troubled firms facing redundancies or closure. It was met with scepticism by some who questioned how the adviser would act if he or she knew a business was going into administration and could cause financial damage to other firms – would they have a duty to reveal that information.
Mark Goodall – a businessman and leader of the New Anglia Local Enterprise Partnership's oil and gas taskforce – believes there is merit in the service, as long as the discussions remained confidential between the adviser and the firm.
'The difficulty is that we are only finding out when it is too late to do anything,' he said. 'If companies can be given the right to ask for help through a confidential process it could find solutions for them.'
Mr Goodall said that the New Anglia LEP's taskforce could still have meaningful action helping firms, despite the oil price fall being a macroeconomic issue which was out of the industry's control.
He added: 'If the New Anglia LEP does nothing then that doesn't help anyone. To demonstrate that there is somewhere for people to go where they can learn about a more intelligent way forward than simply doing nothing and hoping the problem will go away. I don't want to keep picking up the newspaper or watching broadcasts about companies going to the wall.'
PwC analysis: Seven steps for shoring up the energy sector
In the 1980s to 2000s, four heavy engineering based industry sectors - aerospace, automotive, chemical, and rail - dealt with a similar range of challenges to the energy sector.
This analysis capture the seven fundamental steps used to cut their cost base and more effectively manage performance.
• Building leadership teams with a strong, compelling vision for cultural and operational change that can engender trust inside and out.
• Treating operations as a strategic asset that can provide the basis of competitive advantage rather than simply a cost of doing business.
• Addressing the dilemmas by defining and building world-class capability and collaborating with organisations best placed to help.
• Boosting performance management by understanding and measuring what is important and using the data to drive change.
• Developing an innovation culture and managing change effectively
• Encouraging sector wide collaboration between firms and across the supply chain will not only eliminate duplication, create scale and reduce costs, but will ensure the industry is able to swiftly react to future opportunities as they present themselves.
• A progressive regulator in helping firms implement best practice and successfully address market shifts, something that has been prevalent in driving change within the automotive, aeronautic, chemical and rail industries.
Andy Grimbly, PwC Norwich office senior partner, said: 'There is no one silver bullet that can solve the range of issues currently facing the oil and gas industry - instead there are seven that we believe can transform, modernise and re-energise operations across the UKCS.
'These seven fundamental steps are pragmatic lessons that have been transformational in other major industries and are highly relevant to those firms working in the North Sea.
'The alternative approach is the status quo - acknowledging a short lifespan of the UKCS and an acceleration towards decommissioning.
'Personally, I believe this industry can have a sustainable future but we need to take a more strategic and integrated view if we are to extend the life of the North Sea for everyone involved and for future generations. It's time to act.'
'As this basin is faced with being competitive in a global marketplace, it is essential industry acts quickly and determinedly to address its cost and efficiencies challenges.
'If this sector is to thrive for decades ahead, cooperation and relationship optimisation will be key.'
Market analysis: Commercial property remains robust
The state of the commercial property market can often act as an important barometer when administering a health check on the state of a region's economy.
But despite a number of business failures hitting Great Yarmouth and Lowestoft in the wake of the oil price crash, demand for property in theses areas has not bottomed out and there has been not noticeable upsurge in the amount of warehouse and industrial buildings coming onto the market.
James Allen, a senior partner at Norwich-based Roche Chartered Surveyors, believes there is a three-fold reason for the commercial property market's robust performance in these two towns.
'The impact of the varying fortunes of different industry sectors on the local economy is highlighted by the effect of the declining oil price on activity levels in Great Yarmouth and Lowestoft,' he said. 'This invariably feeds through to demand for commercial property. However, the reaction is a slightly delayed one and, whilst the recent round of insolvencies and possible closures is undoubtedly disappointing, there has been no significant slump in the commercial property market as yet. Demand may not be what it was six months ago but there is no over-supply of property at present.
'There are multiple reasons for the apparent robustness of the commercial property market. Firstly, the reaction is a delayed one which takes time to feed through to property availability. Secondly, after several years of improved activity, partly primed by the incentivised Enterprise Zone status [an area where tax breaks are offered to encourage business investment], availability of commercial property has been relatively low, especially in the case of industrial and warehouse premises. This in turn is partly a result of the third reason, the fact that other industries have slowly emerged from the recession, providing evidence that Great Yarmouth does not have all its eggs in the energy basket.'