The Future For Oil And Gas In The UK

You could be forgiven for thinking that oil and gas have no future in the UK, given recent name changes. OGUK (or Oil and Gas UK), has this year undergone a re-branding, and is now called Offshore Energies UK. Its website describes it as “Proud champions of the UK offshore energies industry” and mentions of oil and gas are far from front and centre. The Oil & Gas Authority is now called the North Sea Transition Authority. It seems that there’s a whole lot of transitioning taking place in the North Sea just now.

Given all this, my interest has been piqued by a seminar to be held by Westminster Energy & Transport Forum (who I have mentioned before) on 2nd September 2022 under the heading “The future for oil and gas in the UK”. It is, after all, rather an important topic, especially given worries about fuel security and about the cost of gas and electricity just now. Or, as the email sent out to advertise the seminar puts it:

It will be a timely discussion, taking place in advance of the next oil and gas licensing round – set to begin this autumn – and amid heightened concern around energy pricing, energy security, and reaching net-zero targets.

Now there’s a heady mix, and a circle that can’t be squared – achieving reasonable energy prices, energy security and net-zero targets – though it won’t stop many people, including media pundits and politicians, from continuing to pretend that these three objectives are perfectly compatible.

North Sea Transition Deal

Given that it is of fundamental importance to “the future of oil and gas in the UK”, it isn’t surprising that the seminar will discuss progress on the North Sea Transition Deal, which was signed off in March 2021, presumably in anticipation of COP 26 taking place in Glasgow later that year. Those signing it off were Kwasi Kwarteng (Secretary of State for the amusingly-named Department of Business, Energy and Industrial Strategy); Deidre Michie OBE, Chief Executive of OGUK (as it was then called – see above); and Anne-Marie Trevelyan, who delights (or delighted) in the Ruritanian title of Minister of State for Business, Energy and Clean Growth, and UK International Champion on Adaptation and Resilience for the COP26 Presidency.

The way in which the North Sea Transition Deal document saw the world is out of date already, just 16 months after it first saw the light of day:

The UK’s offshore oil and gas sector has been severely affected by COVID-19. The pandemic led directly to the global collapse in demand for oil and resulted in a roughly 65% drop in the price of Brent Crude between January and April 2020. OGUK has estimated that the UK sector responded by cutting expected capital expenditure by around 30 to 40% and operating expenditure by around 10 to 20% compared with anticipated expenditure at the start of the year, while maintaining production levels.

If a week is a long time in politics (and for Boris Johnson right now it may seem like an eternity), then 16 months is a very long time in a fast-changing world. However, the world is not changing in quite the way anticipated by those who wrote the policy document. Although the price of oil has fallen back a little this week, it is still way ahead of where it was when the document was written, and the price of gas just keeps going up. As for this:

Much of the crude oil from the North Sea basin is exported, with the UK making extensive use of strong trading links to meet domestic refinery demand. Domestic production of natural gas still met 46% of the country’s supply of gas in 2019, with the vast majority of this supplied from North Sea offshore production.

Perhaps it’s time for a re-think? Energy security anyone? For once I might like to be a fly on the wall at a WEET conference, for it is to include this: “North Sea Transition Deal: One Year On – report from BEIS evaluating the progress made in the first year of the NSTD” I wonder if the speaker’s notes will have to be re-written now?

Energy Profits Levy

The conference notes also highlight as a relevant development the Energy Profits Levy, noting “HM Treasury announcing a 25% surcharge on profits made from oil and gas extraction to help fund more cost-of-living support for UK families”. Of course, as we now know, after some speculation that it might also extend to renewable energy companies, the Government backed away from that option. Now that the Chancellor of the Exchequer responsible for the levy has resigned (and the Government of which he was a member may fall, or at least be radically reconstituted), will this be re-visited?

After all, as the Guardian reported on 27th May 2022:

Shell has said Rishi Sunak’s windfall tax is a threat to investment in North Sea oil and gas as Britain attempts to ramp up domestic energy supplies…

…oil and gas insiders have reacted with surprise that the one-off levy will remain in place until “normal” conditions in the energy market return or until the end of December 2025.

A Shell spokesperson said: “We understand the worry for millions of people about how high energy costs are challenging their household budgets – and the need for support to help make ends meet.

But at the same time, we must sustain investment in securing supplies of oil and gas the UK needs today, while allocating future spend for the low-carbon energies we want to build for the future. [Blah, blah, blah].

However, in its current form the levy creates uncertainty about the investment climate for North Sea oil and gas for the coming years.

And, longer term, the proposed tax reliefs for investment don’t extend to the renewable energy system we want to drive forward in the UK and invest in very substantially. When making plans for the next decade and beyond, we need certainty.”

And “rival BP took a harder line. It said it would review its North Sea investment plans as the levy was not a one-off tax but a “multi-year proposal”.

Climate Compatibility Checkpoint

The Government (whoever forms the Government) has a dilemma: continued oil and gas production is essential for the purposes of UK energy security, yet all mainstream politicians support the “net zero” objective and heed the dire prognostications of the Climate Change Committee. The incompatibility of “net zero” and energy security derived from UK oil and gas production doesn’t prevent the powers-that-be producing increasingly desperate (and arguably deranged) methodologies to pretend that there is coherence in the country’s energy policy. The Climate Compatibility Checkpoint is the latest such gimmick.

This statement is from the consultation document:

In September 2020, the Secretary of State for Business, Energy and Industrial Strategy asked officials to conduct a review into the licensing of oil and gas in the UK. The main question of this review was whether the continued award of new licences for oil and gas exploration is consistent with the UK’s wider climate objectives. These wider objectives include carbon budgets, our nationally determined contribution (NDC), and achieving net zero emissions by 2050…

…The review concluded in March 2021 and found that continued licensing for oil and gas is not inherently incompatible with the UK’s climate objectives.

But then, in the very next sentence:

However, it was acknowledged that this may not always be the case in future.

And so:

To resolve this issue, it was recommended that a “checkpoint” be introduced, to ensure that the compatibility of future licensing with the UK’s climate objectives is always evaluated before a licensing round is offered.

And just when you think that perhaps pragmatism may prevail over dogma, so that oil and gas producers might proceed with a little more confidence, we are told:

Although the onshore sector is much smaller than the offshore sector, the department is minded to include onshore oil and gas licensing in the outcome of any checkpoint. This means that a future negative checkpoint outcome would also be taken into account in relation to onshore licensing rounds. Onshore oil and gas is a devolved matter, so this would apply only to England.

No doubt the SNP government in Scotland will do something different.

Conclusion

The future for oil and gas in the UK remains uncertain. Our politicians and policy-makers know that we need both, but can’t bring themselves to do anything to help the industry plan with confidence. Oh for some grown-ups in the room.

via Climate Scepticism

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July 5, 2022 at 03:18PM

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