Truss’s North Sea oil reforms will not switch off power crisis
New British wells would eventually boost energy security but take years to build, writes
Adecision by Shell late last year seemed to sound the death knell for the North Sea. Under pressure from a newly climate conscious SNP, the oil major pulled out of the large Cambo oil field, the latest sign that the glory days of the UK hydrocarbons sector were long gone. Little seemed possible to stem a decline that saw production halve in two decades and the industry become a net drain on taxpayers in the worst years.
Just a few months after Shell’s decision, however, Vladimir Putin’s invasion of Ukraine offered an unlikely lifeline to the North Sea as it sparked a scramble to secure energy supplies.
Shell is still planning to pull out of Cambo but new life could be blown into the North Sea by the next prime minister. Liz Truss is planning to throw her weight behind efforts to boost production from the basin. The frontrunner to be the new PM will back plans to issue as many as
130 licences in a new licensing round drawn up earlier this year by Kwasi Kwarteng, the Business Secretary and favourite to become her new chancellor.
“The answer to an energy shortage and sky high prices is more supply,” said John Redwood, a Tory MP tipped to be in Truss’s Treasury team if she wins.
“[It is] good news that Liz Truss plans to get more gas out of the North Sea to ease the squeeze.”
While the drive is winning over those in the Conservative ranks, experts are more sceptical that it is a silver bullet for Britain’s energy crisis. Energy security may be bolstered by the plans but the payoffs are years down the line and even then still hostage to movements on global markets.
Mike Tholen, sustainability director at Offshore Energies UK, says “the North Sea could keep supporting the UK well into the 2040s” if the industry is enticed with stable taxes and regulation.
OEUK estimates the UK continental shelf has 15bn barrels of oil equivalent left to be extracted with the country’s annual consumption at 1bn barrels. The US Energy Information Administration estimates the UK produced 934,000 barrels of oil and 1.1 trillion cubic feet of natural gas last year.
However, the UK will have to convince some oil giants it can be a reliable source of investment after bowing to pressure for a windfall tax – a one-off raid some now want expanding following the latest price surge.
“There is a lot of oil and gas still under our waters to support us during the transition to lower carbon energy,” says Tholen.
“The Ukraine conflict shows the risks of relying on other countries for energy. Our North Sea reserves mean the UK can protect itself – provided we invest – during the transition to a low carbon future.”
Even if the new PM swings their weight behind efforts to revive the North Sea, oil and gas majors may not find the UK an enticing prospect in the long term.
As well as the threat of more tax raids, oil giants face some of the highest operating costs in the world in the UK.
Rystad Energy, the researcher, says Britain has the second highest operating costs per barrel of the top 30 oil producers in the world, making the industry less enticing to profit-seeking majors.
At over $17 per barrel in 2021, it is more than double the cost in Norway and five times higher than Iraq and Saudi Arabia, the cheapest producers.
Sonya Boodoo, vice president of upstream at Rystad Energy, says a new licensing round will “pave the way to bolstering” the UK’S energy security. Higher production will also boost tax revenues from the North Sea – money that can be put back into boosting renewables or household
‘There is a lot of oil and gas still under our waters to support us during the transition to lower carbon’
support if prices are still high. But she warns discoveries will be “harder to find and smaller in size” given the basin’s maturity.
Some oil companies may also doubt how committed the UK is to the industry in the longer term. The Ukraine crisis may be over by the time the new oil fields come online and governments could be clamping down on hydrocarbons again in the race to achieve net zero.
Boodoo says supplies from the licences up for grabs would not come online “until the latter half of the 2020s”.
“[It] is unlikely to positively impact short-term production, primarily due to the lead time required from licence acquisition to exploration to development and finally commencement of production. Generally, this process can take many years to complete.”
While the oil and gas that does eventually come online could help to bolster energy security, it will do little to solve the heart of the crisis: soaring prices.
The price of fossil fuels extracted in the UK will still be at the mercy of global markets with oil above $100 per barrel and gas hitting new record highs in recent weeks. More North Sea supply is a drop in the ocean on global energy markets as Russia turns off the gas taps to Europe.
Jess Ralston, analyst at Energy & Climate Intelligence Unit, says it is “wishful thinking” to hope new North Sea production can lower prices.
“We’re so tied to what’s happening with international gas prices. A little bit more from the UK isn’t going to make a dent in the prices that we pay and that’s because what’s happening is just so much bigger than the UK.”
Experts say boosting the production of renewables is a better bet on resolving price pressures in the longer term.
Wind energy, for example, is not as beholden to the volatile movements on energy markets as it cannot be transported globally with Boris Johnson’s administration wanting to quadruple capacity to 40 gigawatts by 2030.
“Every wind turbine that we build reduces the amount of gas we have to import from somewhere else,” says Ralston.
“New renewables are about £35 per megawatt hour, gas at the moment is trading about £200 per megawatt hour. It’s so much cheaper now to look to our homegrown renewables.”
The scramble for energy supplies could breathe new life into the North Sea. But many are doubtful that a production boost can alone solve Britain’s energy price crisis.