The North Sea is a watery frontline in the UK’s transition to a low-carbon economy. Electricity generation from offshore wind and plans to store carbon dioxide beneath the seabed highlight its growing significance for achieving net zero. These developments alone are not enough, however, to accelerate energy transition. Action is needed to undo half a century of policy and regulation designed to promote offshore oil and gas extraction. Maximising offshore fossil fuel extraction remains a primary regulatory objective, despite the UK’s net zero ambitions. Reversing this objective is necessary to align UK oil and gas policy with the demands of a climate emergency.
Regulatory Challenges and Climate Goals
The current regulatory objective for oil and gas – enshrined in the 1998 Petroleum Act – is to maximise economic recovery (MER) of hydrocarbons from the North Sea. MER is the central obligation of the oil and gas regulatory authority, which manages access to offshore resources. MER creates an institutional and legal presumption in favour of new oil and gas development that is out of step with international climate science, national legislation, and the demands of environmental campaigners. A welter of scientific studies and reports by international agencies confirm that new fossil fuel extraction is incompatible with keeping global temperature increases well below 2°C. They have been joined more recently by financiers and business, concerned about the risks of “asset stranding” as renewables become cheaper than fossil fuels.
Four aspects of our research, undertaken as part of a project on Fraying Ties? Networks, Territory and Transformation in the UK Oil Sector, show how the long-standing regulatory objective of MER no longer serves the public good.
Political Landscape and Licensing Debates
First, the complex geographies of fossil fuel extraction are at odds with populist claims for the benefits of ‘home grown energy’. Our research shows that most oil and gas companies operating in the UK North Sea are foreign-owned and/or funded and under no obligation to sell their product to the UK. Most oil extracted from the North Sea does not serve domestic demand for transportation fuels, power generation and heating but is directly shipped into international markets, notably Europe, China, and South Korea. UK oil refineries use mainly imported oil from overseas – Norway and the US are currently the main suppliers – with less than a quarter coming from the North Sea. New offshore oil fields, then, do little to boost UK energy security or lower bills for consumers. The geographies of gas are different, as the bulk of offshore production is tied to supplying UK demand via pipeline infrastructures. Yet this has not insulated UK consumers from price surges as gas produced in the UK is sold at international prices. The Climate Change Committee recently concluded that increasing domestic gas extraction would have “at most, a marginal effect on the prices faced by UK consumers” and that reducing gas consumption is the most effective way of reducing exposure to volatile international gas prices.
Second, efforts by the regulator to accommodate climate goals alongside MER are inadequate. In 2021 the Oil and Gas Authority acquired a new net zero obligation and changed its name to the North Sea Transition Authority (NSTA). Its focus has been on reducing operating emissions by, for example, running drilling platforms on electricity from renewables and reducing gas flaring and venting, and promoting carbon capture, use and storage. However, this approach leaves unaddressed the emissions associated with burning oil and gas, which amount to over 75 per cent of the total emissions associated with each barrel. It flies in the face of advice from the Climate Change Committee and the International Energy Agency that there is no place for new oil and gas extraction if the goals of the Paris Agreement are to be met, and recognition at COP 28 that transitioning away from fossil fuels is an urgent task.
Third, the problem of offshore oil regulation has moved centre stage ahead of a General Election. However, the focus of the Westminster parties on licensing is overly narrow and leaves MER untouched. Licensing is how the UK government grants companies exclusive rights “to search and bore for, and get, petroleum.” Regular licensing rounds have been held since 1964 with companies invited to apply for access to areas on the UK Continental Shelf. Labour has committed to end new offshore licensing rounds while the Government used the King’s Speech to announce its intention to increase their frequency (a proposal for yearly licensing rounds, amending the Petroleum Act is now progressing through Parliament via the Offshore Petroleum Licensing Bill). This fixation on new licensing, however, misses an important point: much of the North Sea is already licensed, and most of the remaining oil and gas is in these already licensed areas. The pace of oil and gas extraction, then, is set not by the availability of new licenses but by the process of field development approval administered by the NSTA and strongly shaped by MER. A serious reform of offshore oil and gas policy needs to start with abandoning MER.
Fourth, comprehensive regulatory reform is possible, although turning around fifty years of promoting offshore oil and gas extraction will be a substantial task. The North Sea itself offers a hand here, as a mature hydrocarbon basin in which production has declined by around two thirds since peaking at the turn of the century. Abandoning MER would make it possible to embrace these dynamics and actively manage decline. The aim of regulation has to be to avoid economic, environmental and social harms in the context of a climate emergency. It requires, at the very least, a revised notion of what is socially necessary and beneficial, including action to rapidly reduce emissions while also reducing exposure to volatile prices. There are tentative signs within the regulator, too, of how MER is increasingly subject to societal pressures. A recent draft plan to reduce greenhouse gas emissions from oil and gas operations on the UK continental shelf suggested that operators who failed to respond to demands for full platform electrification and low carbon power by 1 January 2030 “should in principle have no expectation that the NSTA will issue any further consents for that asset.” This is significant because, for the first time, it suggests there may be circumstances where (limited) climate concerns trump MER within the NSTA approval process.
Moving Towards Comprehensive Regulatory Reform
Offshore oil and gas have become a party-political football at Westminster. There is an opportunity to accelerate transition offshore by adopting new policy and regulatory objectives fit for a climate emergency and directed at actively phasing out hydrocarbon production. This will require reforming the Petroleum Act, which places a primary obligation on the oil and gas regulator to maximise the economic recovery of oil and gas. A substantive reform of current regulation will not be easy. But, to have a chance, the current focus of party politics on the narrow question of offshore licensing needs to evolve and grasp, not duck, the issue of MER.