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The future of North Sea oil and gas

business-articlesThe future of North Sea oil and gas

The North Sea fossil fuel industry has seen profits surge in recent months amid soaring global oil and gas prices.

But companies in the mature basin also face challenges (take a look at our article on challenges and trends for oil and gas in 2022), particularly as the UK seeks to advance its climate-neutral ambitions.

Against this backdrop of rising prices and net-zero pledges, we take a look at what the future may hold for the North Sea oil and gas industry.

A windfall tax on near-record cashflows?

In the near future, the North Sea oil and gas industry looks set for bumper profits. Despite Omicron putting a temporary dent in demand, experts expect oil and gas prices to remain elevated through 2022.

Last year’s surge in energy prices caused revenues to expand dramatically. Global chemicals company INEOS saw revenues increase by 87% in the third quarter of 2021, which was ‘driven primarily by higher prices and increased volumes’.

Ithaca Energy, which operates exclusively in the UK Continental Shelf, said that gas revenue per barrel nearly doubled in the third quarter. As the company increased output in response, its overall revenues from North Sea gas assets more than tripled over the same three-month period.

According to industry experts at Wood Mackenzie, the current financial year will likely see North Sea oil and gas companies report near-record cashflows of around $20bn (£14.9bn).

However, with the UK facing a cost-of-living crisis – fuelled in part by higher energy bills – there are calls for a windfall tax on those profiting from the surge in energy prices. These calls were amplified as Shell announced soaring profits and greater rewards for shareholders on the same day that Ofgem raised the energy cap by 54%.

The government has rejected a windfall tax – which faces opposition from the industry – but with the current political volatility in the UK, nothing is a done deal. The government has pulled a number of U-turns in recent months as the embattled Prime Minister Boris Johnson seeks to cling on to power.

And while a windfall tax could dent future investment, with the government pursuing its net-zero pledge this may not be as much of a deterrent as it once was. So, while unlikely, a windfall tax is still a possibility.

The end of major new projects?

One of the biggest blows to the North Sea industry last year was Shell’s withdrawal from the Cambo project, which saw Siccar Point Energy – the project developer – pause work on the oilfield.

While Shell said its decision to pull out of the project was because the ‘economic case for investment is not strong enough’, many believe the fierce environmental opposition to the oilfield played a significant part. There are also reports that the UK government wanted Shell to meet certain ‘climate concessions’ for approval of the project, which may have soured the deal somewhat.

Furthermore, Shell’s withdrawal came just weeks after an ‘unexpected’ decision by a UK regulator to reject the company’s proposed Jackdaw gas field.

Industry figures have said this could herald the end of new large-scale North Sea projects. One industry insider commented:

‘Companies will be thinking: if Shell can’t do it, can we? I just don’t see any truly large-scale projects being sanctioned in the North Sea any more. There will still be small developments around existing fields. But this is a death knell for major new projects in the UK.’

Large companies have reduced their presence in the North Sea in recent years, with smaller private companies less likely (and less able) to take on large-scale projects.

New developments also come with increasing regulatory and political risks. Prior to Shell’s withdrawal from Cambo, Nicola Sturgeon, First Minister of Scotland, said the project ‘should not get the green light’.

While some new fields may be developed, such as the £200m Abigail field (developed by Ithaca Energy), the investment climate will only grow more hostile. This could spell the beginning of the end for major projects in the North Sea.

In fact, Wood Mackenzie sees decommissioning costs rising above capital expenditure in the ageing basin by the end of the decade, as platforms are wound down, depleted fields abandoned, and fewer new projects go ahead.

Source: Wood Mackenzie

Legal battles

One particular risk affecting the investment climate in the North Sea – and the fossil fuel industry worldwide – is the growing number of legal challenges.

If the paused Cambo project really is a ‘death knell’ for major new developments in the North Sea, then perhaps there will be fewer high-profile projects for activists to target.

Or, maybe legal activity will actually ramp up. Environmentalists could see Shell’s withdrawal from Cambo as a victory, emboldening them to press ahead.

Legal and activist pressure may also build over time as the UK approaches its net-zero pledge date of 2050. Last year, the International Energy Agency (IEA) said there must be no new oil and gas fields from 2021 onwards if the world is to meet its climate targets.

Many have said this simply isn’t feasible. The world is reliant on fossil fuels, and a gradual transition is needed to ensure a safe and stable shift to a low-carbon energy system.

However, this argument will not pass muster as the years go on. If the UK nears its climate deadline having made insufficient progress, legal challenges against the oil and gas industry in the North Sea could be more effective than they are now.

One ongoing legal dispute is the case brought against the UK Oil and Gas Authority over the government’s effective subsidisation of the fossil fuel industry through tax incentives. The UK high court rejected these claims, but the claimants have said they will appeal the decision.

Push for energy transition

Of course, the fossil fuel industry is itself pushing for the energy transition, and this push will be a defining feature of North Sea operations in years to come. In fact, green offshore energy could overtake oil and gas in the North Sea by the end of the decade.

A Robert Gordon University study last summer found that by 2030 green jobs are likely to account for 65% of employment in the UK’s offshore energy industry, up from 20% at the time the research was conducted.

In addition, speaking at the Conservative party conference in October, Boris Johnson confirmed plans for fossil-free electricity generation by 2035.

The UK is already the world-leader in offshore wind, and the government’s ambition – paired with its Paris climate goals – means we could see increased investment in green North Sea energy production.

The oil and gas industry knows this is coming, with many companies already making the transition. Those who can do so swiftly and effectively will thrive, while those who fail to evolve fast enough will struggle to survive.

Fortunately, many of the skills and technologies used in the oil and gas sector can be transferred to green energy.

And while there may be no more major oil and gas projects in the North Sea, this doesn’t mean there won’t be any major new projects at all. Wide-scale platform electrification (ensuring oil and gas platforms are powered from the shore or by offshore renewables, rather than by fossil fuels) will be a huge project over the next ten years.

There are also ample opportunities in wind power, as mentioned, as well as carbon capture and storage projects and hydrogen projects, such as Acorn.

Unlike the North Sea fossil fuel industry, which is well past its heyday, the best is yet to come for the North Sea renewables sector. Demand is only likely to increase, along with investment and government funding. Costs will go down as technologies move from emerging to established, and profitability will go up.

North Sea oil and gas won’t disappear overnight. In fact, fossil fuels may have a place in the UK offshore industry for years to come. But the trajectory is clear. The North Sea industry is going green.

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