As recently as a few months ago it was tempting to predict a strong 2015 for the UK’s energy sector, with economic growth and investor confidence back on track and the Bank of England predicting sustained low interest rates.
But those calculations were quickly rendered redundant by the precipitous drop in oil prices. Brent Crude finished the year at a little over half the level at which it began 2014, turning the economic logic of many projects on its head.
Inevitably, the UK’s oil industry was hit first – and hardest.
Very few new North Sea oil projects are profitable with prices at below $60 a barrel. Both oil firms and their service providers have slashed their capital spending plans for 2015 and job cuts are already beginning to bite.
Things look brighter for the UK’s budding shale gas industry – for now. But the success of America’s shale gas players – who are due to start LNG exports in 2015 – has boosted global supply and begun to bring down prices.
Generous tax incentives should encourage Britain’s frackers to keep exploring, but if gas prices weaken further it may be some time until we see large-scale extraction begin.
Among the electricity generators, the knock-on effects of cheaper oil and gas are being felt most acutely by the renewables sector.
The business case for several offshore wind schemes eroded in 2014; the German energy giant RWE scaled back its UK offshore projects, and a planned extension to the London Array – the world’s biggest wind farm – was shelved.
However 2015 should see other renewables thrive. The Swansea Tidal Lagoon project – which would provide sufficiently large scale, predictable energy generation to compete with conventional power stations – could receive planning approval as early as spring.
“The knock-on effects of cheaper oil and gas are being felt most acutely by the renewables sector”
With demand growing steadily, reliability of supply is crucial – and one way of meeting the baseload challenge is the construction of power storage facilities.
UK Power Networks’ 6 MW ‘big battery’ in Bedfordshire – which went online in December and is the biggest of its kind in Europe – could be the first of many sites that will one day make the electricity network more efficient and enable more low carbon technologies to be connected into the existing grid.
At a projected construction cost of £24.5bn, the biggest energy sector project of 2015 will be Hinkley Point C – the first new nuclear power station to be built in Britain in a generation.
Once EDF Energy makes the final investment decision in spring, the race will be on to build the capability needed to deliver such a vast project.
Hinkley C is just the first of up to 10 new nuclear power stations planned across Britain, with five development sites already acquired. Building such a huge fleet of nuclear projects could leave the construction industry facing a serious skills gap.
In the short term contractors are likely to fill that gap by buying in capacity and expertise from abroad, but ultimately Britain’s nuclear sector must upskill by attracting graduates and school leavers, as well as skilled professionals from related industries.
While $60 a barrel oil will cause untold short-term pain to Britain’s oil producers, it will stimulate the UK economy as a whole and encourage the wider energy sector to press ahead with investment while investor confidence is high.
Energy will offer many opportunities to the construction industry in 2015.
But to make the most of them, all stakeholders, from the government to the energy companies and the contractors, must work in partnership to create the ‘collaborative win-win’ delivery model needed to achieve predictable outcomes.
Murray Rowden is head of infrastructure at Turner & Townsend and chairman of Constructing Excellence