The United Kingdom’s Energy Security Balancing Act
Volatile policy could undermine oil and gas, decarbonization push
When the Conservative government adopted the British Energy Security Strategy in April 2022, it re-confirmed its commitment to continued development of the country’s hydrocarbon resources with the prospect of favorable investment climate going forward. However, full-blown cost-of-living crisis (driven by high energy prices and supply-chain disruptions) as well as political and public pressures compelled the government to introduce the Energy Profits Levy (EPL), a 25% windfall tax for oil and gas companies. The move put an end to six years of fiscal stability and re-injected uncertainty in the upstream sector. In the meantime, the resignation of Prime Minister Boris Johnson and policy swings under the leadership of Liz Truss cast doubts over the Conservative government’s ability to deliver on its decarbonization plans over the near-term.
Shale gas won’t be a magic pill
Hydraulic fracturing (fracking) has always been and is likely to remain a contentious issue in the UK. The concerns about seismic safety, ground-water contamination, and the potential contribution of shale gas extraction to the UK’s carbon footprint are the main drivers of political and public opposition to the technique. A 2.9-magnitude tremor at Cuadrilla Resource’s shale site in Lancashire in August 2019 prompted the government to suspend and subsequently ban fracking operations in England in November 2019 (devolved administrations already had different restrictions in place). In an attempt to encourage domestic production and boost energy security, the government formally lifted the ban in September 2022. However, the decision is unlikely to mitigate the ongoing energy crisis and will not have an impact on near-term production, but is likely to encourage environmental activism.
Litigation, protests, road blockades, and even deliberate damage to equipment at shale exploration sites are likely to remain among key risks to project development. In addition, the lack of consensus among the members of the Conservative Party about fracking and the Labor Party’s strong commitment to ban the technique will fuel policy volatility and signal an elevated risk of renewed restrictions in case of a change in government.
Offshore licensing will test the UK’s international attractiveness
The ongoing energy crisis has encouraged the government to re-open access to the prospective North Sea acreage following an almost three-year hiatus, resulting from the pandemic and the review of the licensing regime to account for the 2050 net-zero target. In early October, the North Sea Transition Authority (NSTA), the UK’s upstream regulator, announced the 33rd licensing round, which is due to close on 12 January 2023. In addition to energy-security considerations, the NSTA’s decision to hold the round was based on the recently published climate compatibility checkpoint, a series of tests to bring the offering in line with the country’s greenhouse (GHG) emissions reduction targets.
Successful bidders in the current round could potentially capitalize on the EPL’s accompanying 80% Investment Allowance, but the window of opportunity is expected to be narrow, given the legislated timeframe until 31 December 2025. The primary beneficiaries of the allowance are likely to be the operators of the four cluster areas on offer in the Southern North Sea, where the NSTA is planning to expedite regulatory approvals to ensure earlier production start. Activist groups are likely to challenge the plan on climate grounds and seek judicial reviews of fast-tracked permits. However, the UK courts’ reluctance to intervene in energy policymaking over the past three years suggests a relatively low risk of project delays and/or cancellations as a result of legal actions by civil society groups.
Still, elevated fiscal volatility and uncertainty following the introduction of the EPL from 26 May 2022 could weaken the relative international attractiveness of the UK’s offshore acreage. Moreover, the latest government’s U-turn on the plan to abolish the 45% top rate of income tax as part of the mini-budget indicates a higher risk of erratic policy moves under the new Conservative government, which could erode investor confidence across the economy, including the hydrocarbon industry. Weaker Conservative leadership also paves the way for the Labor to mount a solid electoral challenge: fresh YouGov opinion poll (October 11–12) shows that the Labor Party is 28% ahead of the Conservatives in voting intentions. Although Liz Truss has time to improve her cabinet’s track record until scheduled general elections in 2024, failure to do so could lead to snap elections, increasing the chances of the Labor Party’s victory. Such an outcome is likely to protract the period of uncertainty in the oil and gas sector, when the extension and or/higher rate of the EPL could be on the table.
Decarbonization policies are on track, but delays are increasingly possible
Over the past nine months, the UK has announcedseveral initiatives, intended to encourage emission-reductions on the UK Continental Shelf (UKCS) and advance decarbonization projects. In July, the government submitted to parliament the Energy Bill that would facilitate the development of the regulatory framework for blue hydrogen and carbon capture, utilization and storage (CCUS). The framework is also expected to include business models, which would de-risk blue hydrogen and CCUS projects, potentially bolstering the UK’s competitiveness relative to other major decarbonization players. While the government targeted the passage of the bill before the end of 2022, it is currently at the committee stage in the House of Lords, and it remains unclear whether it will be adopted over the next two months, given the ruling party’s focus on the ongoing economic and financial challenges.
Separately, Scotland announced the Innovation and Targeted Oil and Gas (INTOG) offshore wind leasing process in August, expected to facilitate the allocation of prospective acreage for wind farms that would power oil and gas platforms. The electrification of offshore facilities is likely to be the main driver of emission reductions on the UKCS, and the removal of regulatory barriers coupled with streamlined approval procedures will be critical to expediting the electrification of oil platforms. Any delays to regulatory reforms as a result of political volatility would impede the deployment of electrification solutions and limit the industry’s progress in cutting operational emissions.
In addition, in mid-September the NSTA closed the UK’s first carbon storage licensing round, receiving 26 applications from 19 companies for 13 offshore areas on offer. Such a relatively strong interest likely indicates the country’s attractiveness for CCS investment, particularly given the government’s commitment to provide financial support to the emerging sector from the GBP1 billion CCS Infrastructure Fund, established in 2020. In late 2021, the government selected two low-carbon clusters — the East Coast Cluster and HyNet — that will receive the funding, and the licenses from the latest round are expected to participate in the next stage of competition over the medium-term. Continued financial support and the finalization of business models coupled with a clear regulatory framework are likely to be major factors in generating investor interest in any future carbon storage license offerings.
