In February I wrote about the challenges and opportunities of the energy transition, prompted by a speech by Oil and Gas Authority chairman Tim Eggar.
He announced the MER UK strategy update and challenged the industry to become “the leader in developing some of the solutions to tackling climate change, rather than continuously being seen as the problem or the blocker” .
The last six months have seen significant developments showing the commitment of both regulators and industry to work towards those solutions.
In March the OGA launched its consultation on revisions to the MER UK Strategy which, if implemented as proposed, will make supporting the government’s net-zero target part of the central obligation binding on industry players.
In the second report from its Energy Integration project, published in August, the OGA shows the scale of the opportunity, concluding that energy integration of the UKCS has the potential to contribute as much as 30% of the country’s overall net-zero target. This would involve a combination of platform electrification, carbon capture, usage and storage (CCUS) and blue and green hydrogen. Another 30% of the 2050 target could be met if these technologies supported the further expansion of offshore renewables.
To realise the vision of the UKCS as a critical enabler for net zero, the OGA recommends:
· Accelerating progress on selected pioneering energy integration projects.
· Leveraging oil and gas assets and capabilities essential for CCUS.
· Enhancing regulatory co-ordination to address regulatory barriers and streamline the approach where there are gaps or areas of overlap.
· Improving data availability, quality and access through co-ordinated efforts across government and relevant industries to enhance visibility of cross-industry opportunities, accelerating planning and regulatory activities.
Emissions associated with UK offshore oil and gas production currently account for 4% of the UK’s total greenhouse gas (GHG) emissions, of which power generation accounts for around 70%.
Replacing thermal generation with power from shore or offshore renewables will therefore make meaningful cuts to the sector’s overall GHG emissions. The OGA calculates that applying electrification to existing assets with more than 15 years of remaining life and to half of future greenfield projects would lead to around a 20-30% reduction in these emissions.
The industry has even more ambitious targets. Oil and Gas UK (OGUK) launched its Pathway to a Net-Zero Basin: Production Emissions Targets in June, committing the sector to emissions reductions of 50% by 2030 and 90% by 2040, against a 2018 baseline. Each year, OGUK will publish progress against these commitments. Much of the initial 50% reduction will come from natural decline and decommissioning, but there will still be operational improvements, reductions in flaring and venting and, particularly after 2030, significant capital investment in offshore electrification, and developing CCUS.
According to the OGA’s report, CCUS is critical to achieving net zero. The UKCS has sufficient potential storage capacity to fully support UK needs for hundreds of years, and oil and gas infrastructure which can be reused. Around 26 carbon dioxide offshore storage sites would be needed. To reach this, it would be critical to deliver two pilots by the mid-2020s and three commercial projects by 2030. Again, the industry is moving to implement these targets. CCUS projects are progressing near Peterhead (Acorn), Humberside and Teesside, among others. The concern with CCUS has always been whether it is commercially viable. In 2019 BEIS launched a consultation on CCUS business models.
The response to both consultations was published in August. It confirms the government’s intention to have a separate support model for carbon dioxide transport and storage (T&S) versus the carbon dioxide capture elements of CCUS projects and to use a Regulated Asset Base (RAB) model for T&S network assets.
The RAB model has historically been used in privatised regulated industries such as the utilities and rail. The RAB model would consist of a regulated revenue stream paid to the T&S company (T&SCo) during operation by users of the T&S network, determined by an economic regulator.
Notably, the cost and risks of the T&S infrastructure in construction would be for the T&SCo to bear. The devil is in the detail and the response is also silent on details such the ownership structure for the RAB or the level of government support which might be required, as well as the frequency of the periodic price control reviews, or how the T&S fee would be paid to T&SCo, particularly if the T&S infrastructure is built to service a number of emitters but initially serves only one.
The government has tabled plans for a suite of developments and updates to be published by the end of the year which will require sustained and in depth engagement with the industry over the coming months as well as testing of the proposals with the wider investment and financing community.
Throughout my career in the oil and gas industry, I have never ceased to be amazed at the adaptability and ingenuity of the people who work in it. The challenge of the energy transition cannot be denied, and some may argue that this should have been begun much sooner, but changes are now afoot, at scale and at pace, and I am convinced the industry is genuine in its commitment to see them happen.
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