What a difference an energy price crisis makes. In the last two years, we have seen Brent oil prices dip as low as US$18 per barrel and UK gas prices as low as 9 pence per therm, while the oil and gas industry has been repeatedly talked of decidedly in the past tense.
While the need for energy transition, and significant investment in renewable energy, are indisputable, it has remained abundantly clear that oil and gas are essential to keep the lights on until the renewables industry has sufficiently increased its capacity to replace the UK's longstanding dependence on fossil fuels.
The unpopularity of this fact, in a world struggling to deal with the effects of climate change, meant the role of the oil and gas players in the energy transition seemed to get lost.
Now, however, the UK hydrocarbons sector is very much back on the table. The uptick in global energy demand, fuelled by post-pandemic economic recovery, has corresponded with severe supply constraints, exacerbated by the conflict in Ukraine.
Consequently, Brent oil hit US$113 per barrel in March, the highest since 2014, and intra-day gas prices traded as high as £8 per therm, their highest level ever. UK National Balancing Point (NBP) prices are now routinely being quoted in pounds per therm, having historically always been quoted in pence.
Until recently, a price of 60 pence per therm would have been seen as upside in the economics of a gas field development project or M&A deal, given that the average nominal daily price between 2010-20 was 47 pence per therm.
Commodity markets are typically volatile, so terms like "unprecedented" are used sparingly, but for gas markets at least these really are extraordinary times.
It was against this backdrop that the UK government issued, on 7 April 2022, its long awaited energy strategy. Reactions to the strategy have been ambivalent at best, with most bemoaning the lack of focus on energy efficiency to reduce energy consumption and the missed opportunity to set targets for onshore wind to provide short(er)-term solutions to the energy crisis.
It is certainly true that the strategy is replete with long-term, lofty ambitions and targets but light on near-term solutions.
The strategy does however acknowledge the role of oil and gas in the energy transition – an admission that has been difficult to swallow for many firmly opposed to continued fossil fuel extraction. Yet recognition that oil and gas will inevitably play a part in meeting the government's aim of achieving net zero carbon emissions by 2050 will hopefully pave the way for a more sensible and ethical approach to fossil fuels.
It is self-evident that (a) maximising the use of domestic resources is a better answer to the energy trilemma of balancing security of supply, affordability and climate goals than over-relying on imported oil and gas (even though imports will remain part of the mix, as we are well beyond the days of self-sufficiency); and (b) the oil and gas sector has the offshore skills, resources and access to finance to support much-needed investment in transitional energy technologies.
As such, the announcement of an autumn oil and gas licensing round and new regulatory accelerators to speed up approvals of project developments, crucially appended by measures to further reduce sector emissions through platform electrification and flaring consent reductions, alongside CCUS and hydrogen initiatives, are positive steps.
Industry association Offshore Energies UK (OEUK) estimates the UK has capacity to permanently store 78 billion tonnes of CO2, equivalent to around two centuries of UK emissions, presenting major opportunities for blue hydrogen production (where emissions from hydrogen conversion are captured and stored).
Fracking, a hugely controversial issue, is also back on the agenda, initially in the form of three significant developments.
First, the government has commissioned a report from the British Geological Society (BGS) on the geological science of shale gas.
Second, the North Sea Transition Authority (NSTA), having instructed UK fracking company Cuadrilla in January 2022 to plug and abandon its two Preston New Road wells and Elswick well, the former being the only UK site to have been horizontally drilled and fracked, has now performed a U-turn and granted a 12-month stay of execution on these wells.
Third, chemicals giant INEOS has challenged the UK government to allow it to develop a fully functioning shale test site to demonstrate fracking technology can be deployed safely in the UK.
While the UK shale gas industry, if it develops, is at least two years off commercial operations (a fact pointed out by those who had opposed the 2019 fracking moratorium) and will not begin to approach the scale of US shale production, the government's decision suggests a more flexible approach to developing domestic oil and gas resources in all their forms.
Acknowledgements in the strategy that "gas is currently the glue that holds our electricity system together" and that "there is no contradiction between our commitment to net zero and our commitment to a strong and evolving North Sea industry", are sweeping statements that have provoked much debate, but will be welcomed by those who believe oil and gas can contribute positively to energy transition, provided the government's statements are backed by meaningful, well thought-out support measures.
This article was authored by Paul Stockley, Head of Oil and Gas at Fieldfisher.
Sign up to our email digest
Click to subscribe or manage your email preferences.