03.31.2021 | Opinion Piece | By: Aidan Joy, Director and Energy Transition Lead
The North Sea, in all national sectors, is a mature petroleum basin. As both production and tax receipts slowly decline, Government agencies – led by the UK’s OGA – have increasingly sought to focus on the survival of both the basin’s physical infrastructure and their nations’ companies and professional competencies. This drive is exemplified by the UK’s 2016 Maximising Economic Recovery (MER) strategy, which has the force of law.
IN THE CONTEXT OF THE UK’S NET ZERO 2050 LEGISLATION, THE INFRASTRUCTURE HAS OTHER POTENTIAL USES – CCS, WIND, HYDROGEN – WHICH HAVE STARTED TO COMPLICATE THE VIEW OF THE FUTURE.
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The UK North Sea – a world class petroleum province
Offshore gas production in the UK commenced in 1967, almost 54 years ago, and the first offshore oil production followed in 1975, 46 years ago. So the title of this piece is broadly correct … the UK Sector has been producing oil and gas continuously for about 50 years. Over that time, to December 2020, the UK sector alone – not including the Norway, Denmark, or Netherlands sectors of the basin – has produced 27.7 billion barrels of oil and 100 trillion cubic feet of gas, for a total of 45.5 billion Barrels of Oil Equivalent (BOE). Equally important, over that time – together with the US Gulf of Mexico – the UK sector has both witnessed and enabled tremendous advances in all technologies currently deployed to discover and monetize offshore oil and gas, from 3D and 4D seismic data to directional drilling and smart well completions.
Administration of the UK Sector
The Oil and Gas Authority (OGA) was set up in 2015 in order to administer the UK oil and gas industry through its mature years in a more proactive way, following decades of “light touch” regulation by its predecessors. The OGA was launched with a clear mandate to prolong the life of the offshore sector, and in 2016 it issued a far-reaching policy statement aimed at Maximizing Economic Recovery (MER) from UK offshore fields. The driver was partly to prolong tax receipts both from employment and from corporate and petroleum-related taxes in the sector, and partly to reduce demands on the UK Treasury because the applicable tax arrangements mean that the government will fund well over 50% of the abandonment expenditures for offshore infrastructure.
MER obliges all stakeholders to maximize the expected net value of economically recoverable petroleum from UK waters. However the Energy Transition is underway, and in June 2019 the UK became the first country in the world to legislate for Net Zero, with a legally binding target of net-zero GHG emissions by 2050. This has led – to paraphrase the title of this article – to an unprecedented variety of energy-generating and related activities in the UK North Sea, representing departures from tradition when viewed from the regulatory standpoint.
These include:
Wind Energy
Some petroleum production platforms have been used as sites for wind energy generation, and over 2000 turbines have been installed elsewhere in the offshore sector. Meanwhile, the results of the latest licensing round for offshore wind energy project locations were announced in February 2021, with oil majors BP and Total having been conspicuously successful. The body which administered that licensing round was not the OGA but the Crown Estate, and the geographical boundaries of the awarded areas are not aligned with the boundaries of oil and gas concessions (which are based on latitude and longitude).
Carbon Capture and Storage (CCS)Plans are well advanced to transport carbon dioxide from a number of UK industrial centres to UK depleted offshore oil and gas reservoirs for CCS (e.g. Acorn in NE Scotland, Hynet in NW England, Net Zero Teesside and Humber Zero in NE England). CCS is administered and regulated by BEIS, the Department for Business, Energy & Industrial Strategy, in collaboration with the OGA and four other UK government-related bodies. The geographical boundaries of the CCS reservoir areas awarded to date are not aligned with the boundaries of oil and gas concessions.
Other North Sea Possibilities
In March 2020 the OGA released the results of a study investigating five offshore energy integration concepts, involving not only wind and CCS but offshore electrification, offshore hydrogen generation and integrated energy hubs.
Looking Forward In May 2020 the OGA commenced a consultation period which led to an amended version of the MER Strategy coming into law in February 2021. While the amended strategy attempts to cover the interactions between the different industry elements mentioned above, it has been criticised as insufficiently clear as to how differences between competing users of the UK North Sea are to be resolved without a single, over-arching regulatory body to resolve them.
More broadly, there is a risk that the UK Government’s Net Zero 2050 policy will result in “per barrel” CO2-related imposts on mature fields which as production declines will act as a regressive form of taxation, shortening those fields’ lives.
Summary
These various trends represent a balancing act for those bodies responsible for the regulation of the UK sector of the North Sea in the context of the UK government’s own competing priorities. With COP-26 in Glasgow scheduled for November 2021, the government wishes to show its early commitment to phasing out CO2-intensive industries or to replacing them with new ones. The risk, however, is that the “sticks” of CO2 taxes or limited CO2 permits will reduce investment in the sector and hasten the abandonment of critical infrastructure before the “carrots” of new forms of investment have had the chance to change and rejuvenate the UK North Sea’s business model.