The UK Energy Transition - political uncertainty having an impact

Away from the noise of Westminster and the ongoing political shambles, there is also plenty of noise right now in the UK oil and gas sector as the government grapples with the ever increasing challenge of the energy trilemma, balancing energy security, affordability and sustainability against the backdrop of Russia's invasion of Ukraine, the resulting energy price crisis and the obligation to take steps towards climate change goals, including the UK's own net zero by 2050 legal commitment.  

Without doubt, a difficult conundrum and, of course, it is not just the UK seeking to address its energy policy to meet the challenges of the energy trilemma but countries around the world. Here are just a few recent UK sector developments:

33rd Offshore Oil and Gas Licensing Round

The North Sea Transition Authority (NSTA) launched on 7 October 2022 the 33rd offshore licensing round inviting applications for 898 blocks and part-blocks in the North Sea which could lead to over 100 new licences being awarded. The round includes four Southern North Sea priority areas in which the combination of identified discoveries and close proximity to infrastructure is expected to lead to earlier production opportunities. The NSTA data indicates that the average time between discovery and first production is close to five years but that this is falling. The application window will close on 12 January 2023 and first licence awards are anticipated from the second quarter of 2023. In a further announcement on 14 October 2022, the NSTA added a further 34 blocks in the Central and Southern North Sea following consultation with the Ministry of Defence.

UK Oil and Gas Reserves and Resources Report

Just ahead of launching the licensing round, the NSTA issued its annual reserves and resources report, the headlines of which detail:

• total UK reserves at 4 billion barrels of oil equivalent (boe);
• discovered but undeveloped resources at an estimated 6.4 billion boe, much of which is in mature developed areas and under consideration for development and is considered by the NSTA to represent a significant opportunity for the continued development of the UK’s petroleum resources; and
•  estimated prospective resources of 11.2 billion boe in plays outside of mapped leads and prospects.

A total of 46.4 billion boe of oil and gas has been produced from the UK Continental Shelf between first production in the 1960s to the end of 2021 so the combined total of the reserves and resources in the NSTA's latest report is significant, even acknowledging that only a proportion of that might technically be capable of being produced. Putting aside technical constraints, the bigger issue is how much of this will be able to be produced whilst meeting our climate change obligations and goals. This is where carbon storage comes into play as one part of the equation.

Carbon Storage

On 22 September 2022, the NSTA announced that in the UK’s first-ever carbon storage licensing round 26 bids have been received from a total of 19 companies in respect of the 13 areas on offer, which are off the coasts of Aberdeen, Teesside, Liverpool and Lincolnshire. Licence awards are anticipated in early 2023. The government's stated aim is to achieve storage capability of 20-30 million tonnes of carbon dioxide (CO2) per year by 2030 and the licensing round is likely to be the first of many as it is estimated that up to 100 CO2 stores could be needed for the UK to meet the 2050 net zero commitment. There is significant commercial interest in carbon capture and storage (CCS) and the areas on offer have been selected based on geology, proximity to existing infrastructure and links to industrial clusters which are looking to CCS to meet their decarbonisation goals, often tied in to developing hydrogen projects under the UK Government’s new Hydrogen Strategy (launched August 2021). The issue of a storage licence is only one part of the CCS project jigsaw as a post appraisal storage permit is also required for a project to progress, as is a lease from The Crown Estate or Crown Estate Scotland, as applicable.

Shale Gas Moratorium

On 23 September 2022, Business, Energy and Industrial Strategy (BEIS) announced the lifting of the moratorium on shale gas production in England. BEIS revealed that the government will consider future applications for hydraulic fracturing consent, adding that developers will need to have the necessary licenses, permissions and consents in place before they can commence operations. BEIS highlighted that the decision to lift the shale moratorium comes alongside the publication of the British Geological Survey’s (BGS) scientific review into shale gas extraction, which was commissioned earlier this year. The BGS review recognized that we have limited current understanding of UK geology and onshore shale resources and BEIS have stated that more sites need to be drilled in order to gather better data and improve the evidence base. Jim Ratcliffe disagrees, recently saying in relation to INEOS's shale gas operations: "We investigated it for five or six years, spent £250 million and we are confident there are a lot of hydrocarbons beneath the UK."

There remains a proviso that shale gas extraction will only take place in areas "where there is local support” so it will be interesting to see where, if anywhere, that comes from, although the ongoing energy price crisis may have changed the public perception somewhat. Time will tell. The Commons vote on Labour's motion to ban fracking certainly hastened the demise of Liz Truss whilst not, for now, stopping fracking in its tracks.

Rough Gas Storage

On 30 August 2022, the NSTA granted the required approvals and consents to Centrica Offshore UK Limited for Phase 1 of the Rough gas storage site off the East Coast of England in the Southern North Sea. Prior to being decommissioned in 2017, the facility was by far the UK’s largest gas storage resource, accounting for 70 per cent of all capacity and capable of holding 3.3 billion cubic metres (bcm) of gas – enough to supply the entire country for about nine days.  The UK is heavily reliant on gas to produce electricity, but unlike other European countries such as the Netherlands and Germany, does not have large reserves held in storage to see out the winter months.

Industry figures suggest that storage levels at the Rough facility currently stand at just 0.12 billion cubic metres (bcm) and are unlikely to reach more than 0.5 to 0.6bcm by December – after which rising gas prices are likely to make further injections into the reservoir uneconomic.  Consequently it doesn’t look as though Rough will provide much of a buffer if there are supply shortages this winter (see below).

Other News

On 3 October 2022, Ofgem warned that the UK is facing "a significant risk" of gas shortages this winter which could lead to supplies being cut to the gas-fired power stations which generate between 40% and 60% of the UK's electricity.

Hot off the heels of that, on 7 October, it was reported that Liz Truss (now ex-PM of course) has ruled out launching an energy-saving public information campaign designed to help people save up to £300 a year with recommendations such as lowering the temperature of boilers, turning off radiators in empty rooms and advising people to turn off the heating when they go out. Business Secretary Jacob Rees-Mogg is believed to have backed the £15 million campaign this winter but the Times has reported that the idea was blocked by No 10 as being too interventionist. An odd decision one might think given that energy efficiency is very much part of addressing the energy trilemma – greater efficiency reduces the supply burden and makes a positive contribution to sustainability – yet seems to feature very little in energy policy. Even odder perhaps when the government expects to borrow at least £100 billion to pay for its energy cap plans but won't back a £15 million energy-saving campaign which itself would help alleviate some of that burden.

Reaction

The licensing round decision is stated to be at odds with the views expressed by international climate scientists who say fossil fuel projects should be closed down, not expanded. They say there can be no new projects if there is to be a chance of keeping global temperature rises under 1.5C.

The UK government says the new exploration will boost energy security and support skilled jobs. In addition, supporters of new exploration, such as Offshore Energies UK, insist that emissions from newer fields will be far less than in older fields due to new installations being designed to minimise the leakage of gas and avoid routine flaring or venting. OEUK also claim that North Sea gas already has less than half the carbon footprint of imported LNG.

Both campaigners and the oil industry do agree, however, that the reserves will not be large enough to have a significant impact on the prices consumers pay for energy in the UK and, of course, neither a new licensing round nor the lifting of the moratorium on shale gas are a fix to any immediate supply concerns.

Conclusion

Oil and gas currently contribute around three quarters of our domestic energy needs and official forecasts show that, even as demand is reduced, hydrocarbons will continue to play an important role. Around 85% of UK homes rely on gas boilers for heating and whilst the UK has been a world leader in renewable power generation, it lags behind many countries in the electrification of heating. The result is that one way or another the need for gas is going to continue in the UK for the foreseeable future and we face a stark choice between an increasing reliance on gas imports and trying to reduce that reliance by producing as much gas domestically as we can.  That is unless those who campaign for an immediate cessation of oil and gas operations have an immediate answer to the energy trilemma conundrum. The reality is that it's a fine balancing act between continuing to produce fossil fuels for so long as we need them (and using all technological means available to reduce the carbon intensity of those operations) whilst accelerating the new energy technologies that will replace fossil fuels as soon as possible into the future.