UK offshore oil and gas: continuity or transition in a ‘net-zero basin’?

15 Apr 2021

 

UK governments have promoted the exploration and production of oil and gas on the UK Continental Shelf for over half a century. Maximising Economic Recovery (MER) is the most recent iteration of this policy objective, adopted in 2016 following the Wood Review and designed to reverse a decline in investment and production in the basin. Efforts to promote new oil and gas production have, over time, increasingly come into tension with the need for rapid and deep decarbonisation and the obligations of the Climate Change Act. Whether this tension can be resolved on the UK Continental Shelf – and if so, how – has been unclear for some time.

With Britain scheduled to host COP26 in November, and the oil and gas sector receiving additional government support during the pandemic, the UK’s policy of inviting firms to maximise oil and gas production offshore is now in the spotlight. Recent decisions in Denmark and Ireland to suspend offshore licensing for oil and gas have fed anticipation that, after fifty years, offshore oil and gas production in the UK may shortly draw to close.

Repurposing the UK Continental Shelf

The Energy White Paper – together with the subsequent Strategy document published by the Oil and Gas Authority (OGA) in February 2021 and the North Sea Transition Deal agreed between BEIS and the oil and gas sector in March 2021 – outline how the UK government proposes to address the tension between promoting oil and gas production and meeting its climate change targets. An emerging policy approach is now clear, centred on enabling oil and gas production while facilitating a transformation of the UK Continental Shelf into a ‘net zero basin’ by 2050.

The broad vision for the UKCS in these documents is one of ‘repurposing’ – operations, infrastructures and jobs currently dedicated to oil and gas production are to be reallocated over time to renewable energy, hydrogen production and carbon capture, use and storage. Significantly, however, the OGA’s obligation to maximise economic recovery of oil and gas continues, and attracting investment into the sector remains a central policy objective. The Energy White Paper makes this goal explicit, arguing that attracting global capital into UK oil and gas is necessary to “secure an orderly and successful transition away from traditional fossil fuels.”

Squaring the circle: a net-zero obligation

How does current policy propose to make promoting new domestic oil and gas exploration and production compatible with climate change goals? The effort to square this circle rests on a new ‘net-zero obligation’ now imposed on the Oil and Gas Authority which issues licenses to explore for and develop offshore oil and gas. How and where these two obligations interact is worth further scrutiny. It is key to understanding why the package of policies for the UKCS has been welcomed by the oil and gas sector, and roundly condemned by many in the environmental community.

Released in February 2021, the amended OGA Strategy sets out a dual mandate for the OGA, both to “secure that the maximum value of economically recoverable petroleum is recovered from the strata beneath relevant UK waters” and, in doing so, “to take appropriate steps to assist the Secretary of State in meeting the net zero target.” Like the Energy White Paper, it exemplifies a policy of ‘cake-ism’ with regard to the UKCS – both having and eating it. This seeks to align promoting oil and gas production with climate change mitigation in three main ways.

First, it mobilises two understandings of net-zero, one for upstream oil and gas production and the other for the basin as a whole. Net zero for upstream oil and gas is defined narrowly as emissions from production, such as flaring, venting and power generation (which currently account for 4% of UK total emissions). Achieving net zero here means reducing these Scope 1 and 2 emissions to 50% by 2030 (from a baseline of 19MtCO2e) via electrifying offshore platforms, integrating renewable energy and reducing venting and flaring, and reducing them further to 0.5 MtCO2e by 2050. For the basin as a whole, however, the Strategy defines net zero more broadly, explicitly acknowledging the downstream fate of combusted fossil fuels (i.e. Scope 3 emissions) and identifying a role for the oil and gas sector in delivering these carbon capture and storage services.

Second, in support of carbon capture, use and storage, it extends an existing asset stewardship obligation on oil and gas producers to consider whether infrastructure in the basin can be re-purposed to contribute to the net zero target. Here, as in the Energy White Paper and North Sea Transition Deal, the stated aim of repurposing the UKCS is clear enough. But with no proposed end date for oil and gas production, and a commitment to attract new investment into the sector, the policy is more likely to see renewables, hydrogen and CCS supplement rather than replace fossil fuel production.

Third, the OGA strategy sets out a new ‘Net Zero Stewardship Expectation’ on oil and gas producers. This takes the form of action plans and benchmarking processes by which offshore operators can demonstrate improvement in reducing greenhouse gas emissions across the life cycle of upstream projects, from new development and production to eventual abandonment and decommissioning. The OGA Strategy proposes using these demonstrations of stewardship to inform its decision-making around consents on development plans and operations. It remains unclear, however, how the process for awarding production licenses will incorporate these criteria.

The UK operates a discretionary allocation system for licensing, in which a company must submit a work programme addressing a set of prescribed technical and financial criteria in order to receive a license. Over time, a growing range of requirements has been placed on operators as a condition of licensing. As it stands, however, the net zero stewardship expectation is not formally embedded in the regulatory mechanism for allocating new licenses. The North Sea Transition Deal proposes to introduce a ‘climate compatibility checkpoint’ before any new licensing rounds are brought forward. The OGA will weigh up national demand for oil and gas and the sector’s progress towards emission reduction (amongst other things) before deciding whether to issues new licenses. Key details are to be worked out later this year.

Continuity for oil and gas?

The Energy White Paper identified the strategic goal of a ‘net zero basin by 2050’ but left the shape of this transformation unclear. The OGA Strategy and North Sea Transition Deal now bring important features of the emerging offshore regime into focus. Fundamentally, these policies are designed to ensure the UK Continental Shelf remains a space for investment in new oil and gas production while facilitating substantial investment in renewables, hydrogen and carbon management services. The final paragraph of the OGA Strategy makes clear the priority of investor confidence in petroleum exploration and production. It affirms that any conduct required by obligations in the strategy (including the net-zero obligation) that would deliver benefits to the UK should not be carried out if they are “outweighed by the damage to the confidence of investors in petroleum exploration and production projects in relevant UK waters.”

The new policy regime for offshore oil and gas introduces a new emission reduction challenge to the sector and requires offshore operators to adopt new ways of working. But it also leaves fundamental elements of the UK’s offshore oil and gas promotion policy unchanged. Output from the UKCS may have halved over the last two decades, but the UK remains the second largest oil and gas producer in the European area (after Norway) producing around 1% of the world’s oil and gas. Much of this is combusted in transport, heating and power generation without abatement, while the bulk of oil produced on the UKCS is exported and plays no direct role in national energy security (the situation for gas is different).

The emerging net zero policy regime on the UKCS offers hope to investors and workers in the oil and gas sector, in both the medium and longer term. However, promoting new oil and gas production as part of climate change mitigation raises strategic risks for climate leadership, particularly when action on climate change is shifting from emissions reduction to constraining fossil carbon at source. We can expect the credibility of government and industry plans for a ‘net zero basin’ to come under increasing scrutiny ahead of COP26.