As UK pledges more oil & gas licensing opportunities, calls emerge to supercharge renewables instead

Even though the UK’s energy industry is increasingly showing a change in stripes, it is still heavily dependent on oil and gas. As a result, Britain’s government is putting the wheels into motion to embrace more hydrocarbons with open arms by opening new licensing opportunities to ensure energy security while hoping to unlock more green investments in the process, propelling the country’s energy transition plans forward and inching closer to net-zero aspirations. However, climate campaigners and environmental activists do not agree with the reasoning used to arrive at that conclusion and are urging the government to pursue more renewable energy investments rather than additional oil and gas drilling activities.

The UK government is convinced that new licensing opportunities will enable it to support the transition to net zero, thus, it is taking further steps in – what it deems as –  “a pragmatic, proportionate and realistic way” to mandate annual oil and gas licensing to bolster Britain’s energy security and reduce dependence on imports from overseas. This certainty on future licensing is anticipated to help secure 200,000 jobs and billions in tax receipts while supporting lower carbon emissions. According to the government, the licensing rounds will be contingent on specific tests to transition to net zero, as the country is actively developing green and low-carbon sources of supply.

Rishi Sunak, UK’s Prime Minister, commented: “I am proud that the UK is a world leader in reducing emissions, and of our new plan to transition to net zero without adding undue burdens on households and securing the country’s long-term interest. Domestic energy will play a crucial role in the transition to net zero, supporting jobs and economic growth, while also protecting us from the volatility of international markets and diversifying our energy sources. The clarity and certainty that our new legislation will provide will help get the country on the right path for the future.”

The legislation to be set out later this week in the King’s Speech is expected to come with requirements for the North Sea Transition Authority (NSTA), which will invite applications for new production licenses on an annual basis. The UK believes that this will provide “certainty and confidence” to investors and the industry. This change in policy comes at a time when many industry experts continue to point out that the United Kingdom has the highest tax rate with tax changes on oil and gas production threatening to drive out investors and drive up imports, leaving consumers increasingly exposed to global shortages. 

As the UK oil and gas industry is still facing considerable challenges to safeguard the jobs of its 200,000-strong skilled workforce, ensure homegrown energy security, and power the transition to net zero and beyond with domestic oil and gas rather than imports, more action is needed to get to grips with these challenges. Bearing this in mind, the UK made a move recently towards awarding the first set of licenses for 115 applications received in the 33rd offshore oil and gas licensing round with the offering of 27 licenses in areas that have the potential to go into production more quickly than others, aiming to strengthen Britain’s energy security. More blocks are also on the North Sea oil and gas horizon, subject to additional environmental checks.

Among those who have hailed this announcement as a step in the right direction to bolster homegrown energy security and jobs while the sector continues its expansion in wind, hydrogen, and carbon capture and storage (CCS) is Offshore Energies UK (OEUK). The UK trade body believes that new oil and gas licenses reduce the rate of declining supplies, rather than increase it above current levels, as the data from the NSTA shows the country only replaced 3% of production with new reserves in 2022, meaning that it only invested in 1 new barrel for every 33 existing barrels produced.

David Whitehouse, Offshore Energies UK CEO, stated: “The UK needs the churn of new licenses to manage production decline in line with our maturing basin. A predictable licensing process with transparent checks will support the highly skilled people working in the sector, while ensuring the granting of new licenses is compatible with energy security and net zero. We all recognize that our energy system must change, and the offshore energy sector is committed to delivering on the climate goals of the UK. While we continue to use oil and gas, we should prioritize our homegrown production to support our energy security, our economy, our jobs, and our world-class supply chain that will be the foundation of our low-carbon future.”

The data published by the Climate Change Committee shows that the UK will continue to rely on oil and gas to help meet its energy needs even when it reaches net zero in 2050. With this at the forefront, the government is adamant that encouraging domestic gas production, rather than importing higher-carbon emitting liquified natural gas from other countries, means lower carbon fuels for Britain and also benefits families and businesses. The combined oil and gas industry adds about £16 billion to the UK economy annually. 

Claire Coutinho, UK’s Secretary of State for Energy Security and Net Zero, remarked: “The UK has cut its emissions faster than any of its peers. But as the independent Climate Change Committee acknowledges, we will need oil and gas even as we reach net zero in 2050. As energy markets become more unstable it’s just common sense to make the most of our own homegrown advantages and use the oil, gas, wind and hydrogen on our doorstep in the North Sea. Rather than importing dirtier fuels from abroad, we want to give industry the certainty to invest in jobs here and unlock billions of pounds for our own transition to clean energy.”

Many are convinced that the UK’s oil and gas industry has an important role to play in the country’s energy transition journey, as it is believed that the production from new gas and oil fields in the North Sea can be much cleaner than producing hydrocarbons from older existing fields, reducing the emissions impact of future production. Therefore, domestic production is being perceived as a tool to unlock green investment, drawing on the key role the oil and gas industry plays, and driving forward investment in clean technologies that are needed to realize Britain’s net-zero targets. 

“We are reducing our vulnerability to imports from hostile states, leaving us less exposed to unpredictable international forces. This will ensure we have a more secure and diverse energy system and as we make progress on renewables and new nuclear, our more robust energy mix will help to lower household bills in the long-term. Each annual licensing round will only take place if key tests are met that support the transition to net zero,” outlined the UK government to explain the logic behind its decision.

Moreover, the first key test to enable each annual licensing round states that the UK needs to be projected to import more oil and gas from other countries than it produces at home. The second emphasizes that the carbon emissions associated with the production of domestic gas need to be lower than the equivalent emissions from imported liquefied natural gas. If both of these tests are met, the NSTA will be required to invite applications for new licenses annually. The legislation is part of King’s Speech that will prioritize the long-term decisions to safeguard the UK’s prosperity. 

Jon Butterworth, CEO of National Gas, said: “Gas is the backbone of our nation’s energy system – and it is vital we make the most of the abundant resources we have to keep the lights on, homes warm and businesses running. That’s why National Gas are delighted to see the government give their firm backing to the UK’s gas sector today – maintaining the security of our energy supply and ensuring we can continue to power the country as we transition towards net zero. By backing gas today and embracing hydrogen for the future – we can create jobs, secure energy independence, deliver net zero, and keep costs down for households and businesses.”

Furthermore, the UK is committed to delivering on its climate goals and achieving net zero by 2050, as demonstrated by its greenhouse gas emissions reductions and the scaling-up of renewable energy supplies, including wind, solar and nuclear. Renewables generated 48.1% of Britain’s electricity in the first quarter of 2023. The country’s dependence on fossil fuels (75%) is similar to other advanced economies. In line with this, Japan gets 85% of its energy from fossil fuels, the United States 81% and Germany 76%.

With climate change pushing the need to transform the energy system into a more sustainable one to the top of the global climate action agenda, the gap continues to widen between those pushing for a swift end to fossil fuels and the ones who are calling for the further development of oil and gas. However, natural gas and LNG are still expected to play a crucial role during the transition journey to a renewable and clean energy future, despite the opposition from environmentalists.

Considering the new oil and gas licensing opportunities, a Global Witness analysis reveals that UK refineries will be unable to process up to half of the North Sea oil by 2035, even though the country has pledged to double down on domestic drilling. According to the study by this NGO, conducted using Rystad data, 25% of the oil the UK currently produces is classified as heavy. In the coming decade, as new licenses are activated, this figure is expected to rise to 50%.

Currently, Britain’s refineries largely use light oil, which is more expensive to buy, but cheaper to turn into products like petrol. This is due to refineries being old while global competition is strong. As these refineries are not well equipped to use heavy crude, they generally process light oil, according to a Wood Mackenzie study, having been built before North Sea production started.

With the UK already exporting over 80% of the oil produced in the North Sea, Global Witness concludes that this figure is likely to increase, as the UK produces more oil it cannot use. The findings in this analysis suggest that Britain’s energy needs cannot be met by North Sea drilling, thus, campaigners are calling on the government to supercharge the investment in renewable energy, retrofit homes and expand onshore wind, which are perceived as a better route to energy security for the UK.

Alice Harrison, Fossil Fuel Campaign Lead, Global Witness, highlighted: “Rishi Sunak’s obsession with oil in today’s King’s Speech is a red herring. The UK can’t process the oil we produce, and fresh analysis today shows the situation is only getting worse. Drilling and exporting more planet-wrecking, expensive fossil fuels will do nothing for the UK’s energy security or household bills, and will only line the pockets of a small handful of fossil fuel firms.”