License to drill – Stuart Paton
Last week, the UK government sanctioned one of the largest undeveloped oil fields in the UK- the Rosebank field with an estimated 300 million barrels of recoverable oil. A few weeks ago the government made the most significant changes in policy from a UK party with respect to climate change and energy changing commitments on the phase out of petrol and diesel cars and regarding home heating. Depending on your point of view these decisions are either cataclysmic- as we are on the edge of climate catastrophe- or sensible and pragmatic- given our reliance on oil and gas, energy security and the economy The new position does however align with the Conservative’s position on oil and gas licensing. This subject has had a lot press coverage in the last few months , with contrasting statements from each of the main parties. Key claims made by proponents of continued oil and gas field developments are that new licensing ensures the UK’s energy supply and that UK-sourced gas has a lower carbon footprint than imported gas. Both these claims are questionable, to say the least.
Of the major parties, the Labour Party has the clearest position: there will be no new oil and gas licences awarded, but the existing licenses (exploration and development) will be honoured. This message becomes slightly more nuanced to a Scottish audience, stressing the need for a ‘just transition’ and the number of jobs in the renewable sector. Labour has not made categoric statement on any specific projects and has not said they would revoke the Rosebank licence which will not be onstream by the next general election.
The Conservative Party seems to be in a position of maximising economic recovery, using the cover of the Climate Change Committee saying we can develop some oil and gas fields and that hydrocarbons will be an important energy source even by 2050. Despite the recent tactical change on onshore windfarms, the current UK government, despite their claims last week, seems less committed to Net Zero than the previous administrations led by Boris Johnston and Theresa May (who passed the bill committing the UK to Net Zero by 2050). The Rosebank development decision fits the increasing climate scepticism.
The SNP seems to be somewhat muddled, sort-of opposing some of the near-term developments, notably Rosebank and Cambo, but even then hedging its position. The party does not seem to have said anything definitive about future exploration licences apart from condemning Labour for planning a cliff edge for the industry. Of course, their coalition partners are vehemently opposed to any further oil and gas development.
But what does this all actually mean? And will ending or continuing licensing make much difference in reality?
The UK Government owns all oil and gas mineral rights in the UK, onshore and offshore. A company (or generally a group of companies) wanting to exploit oil or gas requires a licence from the UK government’s regulator, the North Sea Transition Authority, as this is not a devolved matter. In the case of offshore oil and gas the government has regularly held exploration licensing rounds since the early 1960s, with the 33rd round, which awarded 110 licences, announced recently. The initial licence is focused on exploration for a relatively short period (3-5 years). At the end of this initial period the operator can retain part of the area with further commitments. If exploration has been successful, then the next step is to develop the oil or gas field. The development requires the approval of the regulator (generally for a long period of 20 years plus) as do further stages of development and the final decommissioning of the field.
The early licensing rounds generally covered large areas of entirely unexplored sea-floor. As the decades progressed, much of the North Sea (and Irish Sea) has been very actively explored, with most areas which are geologically interesting previously licensed. The West of Shetland Area has been relatively less explored due to a more challenging environment. Most of the large, multi-billion-barrel fields (household names like Forties and Brent) were discovered in the early days. The North Sea is now considered very mature, with fields generally being small and often technically complex. However, as an area matures, smaller fields can be economic as the infrastructure of existing platforms and pipelines means that development costs are less. New large fields can also discovered if there are new technical or geological concepts.
Given this context, it is not surprising that UK oil and gas production has been declining for much of the last 20 years, with a reduction from 4.5 million barrels of oil equivalent (MMboe) to about 1.3MMboe in 2022, although the last few years have not seen a decline. The key reason that companies are not increasing production from the North Sea is that this is a very mature basin with very few large discoveries, rather than due to a lack of exploration activity. Even the high-profile discoveries such as Rosebank (300 million barrels), Jackdaw (75 Million barrels, peak production 40,000 barrels of oil per day) and Cambo (170 Million barrels) are tiny on a global scale. In comparison, ExxonMobil has discovered 11 billion barrels – 11 thousand million barrels – in Guyana since 2015 and will imminently be producing 1.2 million barrels per day.
Another aspect of a mature area is that discoveries are often complex due to the geology or geographical location, often leading to significant downgrading in reserves when further work is carried out. For example, Glengorm, which was discovered in 2019, was originally thought to contain approximately 250 million barrels but following further drilling the current estimate is 60 million. And each of the discoveries is challenging – Jackdaw is very high pressure and high temperature, Rosebank and Cambo are in the relatively remote West of Shetland at approximately 1,100m water depth. Fields also take a long time to get to production – the Seagull Field, which came onstream this year, was discovered in 1990 and is a paltry 19MMmboe; the Tolmount field came on stream last year, a mere 11 years after discovery. The two most high-profile potential developments, Cambo and Rosebank, were discovered in 2002 and 2004 respectively. And for clarity the timescale is not due to regulatory delays or approvals (as can be the case with large windfarm developments)- making the commercial decision to spend billions of pounds on a new oil or gas field takes many years of technical work.
There are two conclusions from the current state of the North Sea. The first is that while new fields could be part of the UK’s energy mix, it is hugely optimistic to think they will have a major impact on the amount of gas or oil we need to import. The second is that exploration licences granted this year are unlikely to be on stream and make a material impact in the next 20 years – very close to the 2050 Net Zero commitment of the UK government (and even more so the 2045 Scottish Government commitment). So, one could take a view that the Conservatives are correct: support exploration but actually this won’t in reality make much difference to our energy needs and Net Zero commitments. Or that Labour can easily make the commitment to stop exploration as it won’t actually matter all that much.
Another point made by the Conservatives and much of the industry is that UK fields have lower carbon emissions than overseas fields. This argument was queried in a recent More Or Less episode on Radio 4 which referred to a statement made by then Energy Secretary, Grant Shapps, on the Today programme. Mr Shapps claimed that ‘imported gas has four times the carbon than UK gas’. The North Sea Transition Authority makes a similar but subtly different claim on its website: ‘domestically produced gas is on average more than 4 times cleaner than imported LNG’. Setting aside the question of what ‘four times the carbon’ actually means, these statements are incorrect and misleading.
First, they only refer to the CO2 equivalent emissions from the production, transportation and processing of gas, and not the burning of the gas. Burning gas produces about 310kg of CO2 per barrel of oil equivalent of gas, irrespective of where the gas comes from. The production, transportation and processing adds about 25kg of CO2 from average UK gas, 79kg from Liquified Natural Gas but only 8kg from average Norwegian gas piped to the UK. In each case, as most people would assume, the burning of the gas is much more significant than the production, transportation and processing. Neither Mr Shapps nor the North Sea Transition Authority makes this point clear. Even when pressed by the interviewer, the Energy Minister did not clarify it.
Second, what both the Energy Minister and the NSTA fail to point out is that Liquified Natural Gas, from Qatar, the USA and elsewhere, is a small proportion of the UK’s gas supply. Last year, 50% of UK gas consumption was from UK gas, about 40% from Norway and other pipelines and only 10% from LNG. So, taking into account the weighting of gas imports, the lower CO2 impact of Norwegian gas and the small proportion of CO2 emissions related to production, transportation and processing, the minister and NSTA should be saying that ‘imported gas has the same carbon as domestic gas’. Now, I realise that UK gas production will decline and we are likely to increase LNG imports, although hopefully also decrease domestic consumption. However, making inaccurate statements like this does not help the case for domestic producers.
So, security of supply is essentially a red herring. The development of UK oil and gas fields will have at most a marginal impact on our supply, and the CO2 argument is questionable to say the least. This is not to say we can or should shut down the UK oil and gas industry overnight – far from it. However, we need to be realistic about the impact North Sea production will have on our energy supplies and also have a debate on the impact on our progress to net zero if we keep bringing new fields on stream. In the short term, and irrespective of the next election, a much bigger impact on oil and gas developments is the government’s tax policy.
Stuart Paton is an energy industry advisor and former Chief Executive of Dana Petroleum. He is also an associate of Reform Scotland