The Oil and Gas Authority (OGA) was established in 2015 to maximise economic recovery (MER) from the North Sea. Five years later, it launched its net zero strategy.
The agency is now walking a fine line.
On one side, there are calls for no new production capacity to be approved in the UKCS. NGOs cite the International Energy Agency’s (IEA) Net Zero Energy pathway where, “Beyond projects already committed as of 2021, there are no new oil and gas fields approved for development”.
On the other side, the historic approach to upstream regulation seeks to maximise output but this has not addressed the resulting greenhouse gas emissions.
The middle ground is not comfortable, but the OGA has to stick to it.
Even at a theoretical level, the IEA approach only works on a series of potentially contestable assumptions.
Denmark, for instance, has cancelled future licensing rounds. It has not said it will stop approving development under existing licences.
It will be harder and harder for the industry and regulators to not take end-use emissions into account, whether considering new licences or development plans for existing assets. Regulatory regimes may choose to curb emissions by preventing developments locally but, in a global market, higher prices will demand new production elsewhere.
To govern (or to regulate) is to choose. There is no point pretending there will not be winners and losers, whatever path is taken. But where there isn’t clear and robust policy, the industry as a whole (and with it, sectors like floating offshore wind that rely on its capital and expertise) will suffer.
The OGA is focused on minimising emissions from production. The government is working on a “climate compatibility checkpoint” and a new environmental assessment for future licensing. It has not proposed a tougher line on end-use emissions in the context of existing licensees’ development plans.
With several development plans awaiting approval, this is a key point. We agree that the UK should show “climate leadership”, but we do not think distinguishing between new and existing projects should be rejected out of hand or, for that matter, new exploration that can meet the checkpoint criteria.
In every plausible energy scenario, the UK will consume a material amount of oil and gas for some time. Reduce domestic output and imports will rise – quite possibly from jurisdictions where the upstream industry’s carbon footprint is heavier.
The OGA has already made the point that UKCS gas has a lower carbon footprint than imported LNG. We would want to avoid the worst of both worlds where we import hydrocarbons that have a larger carbon footprint, while having exported upstream jobs and investment.
And at a global level, the most promising mechanisms for encouraging the transition from fossil fuels to clean energy rely on discouraging investment in assets that are at risk of becoming stranded as demand for their output falls, or they become uneconomic because of rising carbon prices.
Those approaches are likely to be weakened rather than strengthened by taking regulatory decisions that retroactively strand assets in which considerable sums have already been invested.
There is a lot of difference between changing the rules of the game for new participants and changing the rules part-way through a match for those already on the pitch.
And, ultimately, the best way to regulate end-use emissions is on the demand side. The least likely “net zero by 2050” scenario is one that is achieved without steadily increasing carbon pricing that reflects the full environmental and social costs of emissions.
Ideally this would be set globally. In practice, much can be achieved by unilateral action that incorporates a carbon border tax, to incentivise exporting emitters in other jurisdictions to clean up.
A healthy political debate about climate policy is essential, but regulatory decision-making needs to be transparent, predictable, consistent – and grounded in realism.
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