The UKCS oil and gas industry has weathered some tough times in its past, but the last two years have been perhaps the most challenging, and the most critical in terms of shaping its future.
The sector initially grappled with the physical and logistical issues caused by COVID-19 and Brexit, the huge impact on oil and gas prices worldwide and the cancellation or delay of projects globally. This led to lower global gas supply, with a 250% rise in wholesale UK prices – a sharp hike that has resulted in significantly increased gas and electricity prices for consumers, and tough trading conditions for energy suppliers, causing many to go into administration.
But perhaps most significant of all is the increasing social and political focus on oil and gas production, heightened by a desire for sustainable recovery from the pandemic and an accelerated path to net zero. In the UK this was brought into even sharper focus through the hosting of COP26.
COP26 resulted in a wide spectrum of next step commitments; with some nations signing up to an international alliance aiming to end new oil and gas projects, others committing to a partial or temporary ban on new project licences, and others – the UK included – acknowledging an ongoing, albeit gradually lessening, need for oil and gas while focusing on the ramping up of renewable energy capacity.
So what does that mean for the UKCS going forward? Efforts to accelerate the transition process are expected from across the industry with support from regulator the Oil and Gas Authority and industry body Oil and Gas UK. With supermajors BP and Shell committed to achieving net zero emissions by 2050, it is likely that we will see others review their strategies to move away from solely oil and gas production and/or make significant, strategic investments in low-carbon technologies. Those producing oil and gas in the UKCS will be required to comply with increasingly stricter environmental targets so that hydrocarbons are produced with as few emissions as possible. Environmental social and governance criteria already sits high on the agenda for many investors, particularly in private equity, and so will be a key consideration for operators and suppliers alike as they contemplate their next steps and the attractiveness of their businesses to interested parties.
While some have called for an immediate end to oil and gas exploration and production, the reality is that we need to continue to produce oil and gas in this country as part of an orderly energy transition. It will take many years to invest in large scale renewable energy projects and the infrastructure required to support them, in order to achieve net zero. We have started the energy transition journey – but it is a transition and clean energy cannot replace hydrocarbons overnight. Even in the most optimistic scenario, the need for fossil fuels will continue for the foreseeable future.
The answer to whether we will develop our own resources responsibly and with as few emissions as possible – or rely on imports from countries with less stringent environmental regulations – will become more apparent as government comes under pressure to make clear leadership decisions. What is needed is a known and stable regulatory framework for continued investment and dealmaking. Continued confidence and investment in the UKCS is necessary for us to achieve a smooth energy transition, maintaining control over the carbon efficiency of hydrocarbon production, making the most of our infrastructure to enable hydrogen production and CCS projects, and developing transferable skills in the workforce.
A low-carbon future is inevitable and there are many opportunities for both operators and their supply chains to not only survive energy transition, but emerge as global market leaders. The oil and gas sector has innovation at its core, and its resilience throughout periods of significant uncertainty is due in no small part to its ability to adapt, pivot and create new technology and opportunities.
The North Sea oil and gas sector has a huge opportunity to leverage our many advantages – the concentration of energy companies, entrepreneurial spirit, a skilled workforce, oil and gas infrastructure, land, sea and natural resources – and apply these to renewable energy development, including carbon capture and storage (CCS) and hydrogen projects, as well as wind and tidal developments. The journey has begun, and there is much for us to do in 2022.
Clare Munro is a partner in energy and infrastructure at Brodies LLP, and an expert on oil and gas
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