If UK bans new oil & gas exploration licences, what energy games are left to be played?

The saga about the Labour Party’s plans for Britain’s oil and gas industry seems to have come to a softer stance, based on the recently disclosed decision to halt new exploration licences in the UK waters, as part of a raft of measures to turn the UK into a clean energy superpower. As this will not impact the energy players’ activities on the existing licences while the tide keeps turning in favour of low-carbon and green energy, the decision is not seen as a big deal by some while others believe it would undermine the country’s energy security.

It is no secret that Labour’s energy roadmap – if the party wins the elections – envisages making the UK a clean power by 2030 with the help of marine and tidal energy, offshore and onshore wind, solar, and nuclear power. However, when news about plans to block all new North Sea oil and gas developments started making the rounds, they spurred outrage in certain circles over potentially exposing the UK to more costly imports. These plans were expected to be unveiled in all their glory by Sir Keir Starmer, Leader of the Labour Party of the United Kingdom, within his net-zero energy policy.

Even though most agree that investing more in low-carbon and renewable sources will boost the UK’s energy security and bring it closer to its net-zero goal, some fear that such proposals would throw Britain at the mercy of wind in particular, which entails the risk of becoming over-reliant on this power source in the renewables’ arsenal of green energy. In addition, many are of the opinion that the turn to renewables should be a gradual shift in investment rather than moving away from new oil and gas developments right away.

Recently, a new analysis from the Energy and Climate Intelligence Unit (ECIU) found that the production in 2030 would be 15 per cent or 30 terawatt-hours (TWh) lower if an end is put to new North Sea gas fields. This is perceived to be equivalent to an amount that could be produced by just one offshore wind farm.

Jess Ralston, Energy Analyst at the ECIU, outlined: “There is an opportunity cost in providing tax cuts to oil and gas companies in that you’re not providing those tax cuts elsewhere in the economy. Even with the windfall tax in place, the oil and gas companies are generating record-breaking profits. Meanwhile, renewable investors are warning that they plan to put their money in the U.S. and EU thanks to tax credits on offer there, so the UK is at risk of missing out on private sector cash.

“With more wind farms in place, gas plants will switch on less often meaning the UK needs to find and pay for less gas and is more energy secure. Plans to accelerate offshore wind farms could balance out a moratorium. According to the industry itself, North Sea output will continue to decline in the coming years. Jobs will disappear whatever happens. The question for the industry and government is how best to transfer those valuable skills into a growing sector like wind away from one that’s in decline.”

During the speech in Leith to launch the Labour Party’s national mission on clean energy, Starmer underscored: “Make no mistake, we are living in an increasingly volatile world. The twin risks of climate change and energy security now threaten the stability of nations, so we’ve got to ground everything we do in a new insight – that clean energy is now essential for national security.”

Furthermore, Labour’s leader also recognises that fossil fuel energy plays “a huge role” in the economy, as communities and jobs depend on it, however, he is adamant that the moment for decisive action has come since the opportunities this change can bring will pass by if nothing is done until North Sea oil and gas runs out.

Starmer claims that “if the energy security relies on a volatile fossil fuel market, that leaves you exposed,” thus, he does not intend to accept “a situation where our planning system means it takes 13 years to build an offshore wind farm. I’m not going to let slow connections to the National Grid hold back £200 bn worth of projects, and I’m not going to allow other countries to build the British infrastructure of tomorrow when those jobs belong in our country.

“No, we’re going to throw everything at this: planning reform, procurement, long-term finance, R&D, a strategic plan for skills and supply chains, a new plan for a new settlement, a clear direction across all four nations, pulling together for a simple, unifying priority. British power for British jobs.”

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Therefore, Starmer has come up with three steps to be undertaken in the first year of the next Labour government, which include harnessing what he deems to be “the bounty of clean energy” and doing what in his opinion the Tories failed to do with North Sea oil and gas, a new National Wealth Fund, which is anticipated to “crowd-in investment for the projects that are critical for growth, the battery giga factories, the clean steel plants, the ports that can finally handle large offshore wind parts and crucially, will give the British people a stake in the returns and businesses the stability they need.”

The Labour Party’s leader underscores that the UK has “the second largest offshore wind capacity in the world – a close second only to China, yet across the North Sea in Denmark, they’ve got three times as many jobs,” thus, he plans to transform the way the price for investors is set in clean energy while setting up a national champion, Great British (GB) Energy, which will be publicly-owned.

“It’s offshore wind in Scotland yes, but also in Teesside, North Yorkshire, Grimsby, all the way down our East coast. It’s tidal energy here and in South Wales. It’s clean hydrogen energy in Yorkshire, Merseyside and Grangemouth. A national institution, a common cause, that’s the benefits of clean energy: owned by the British people, shared by the British people,” highlighted Starmer.

In response to Labour’s energy plans and the proposed ban on new oil and gas exploration licences, Offshore Energies UK (OEUK) emphasises that Britain needs policies that build on its strengths, not undermine them, as this ban will put at risk the UK’s energy security, jobs and attempts to reach net-zero. Following Starmer’s speech in Edinburgh on 19 June 2023, where he set out his party’s vision to make the UK a clean energy superpower by 2030, Offshore Energies UK’s chief executive welcomed the recognition of the key long-term role that oil and gas would play in the UK economy to net-zero and beyond.

OEUK’s boss also pointed out that the industry strongly supported the UK government’s and Labour’s commitment to making the UK carbon neutral by 2050. Through the North Sea Transition Deal (NSTD) agreed with the UK government, the energy sector has agreed to invest up to £16 billion (over $20.3 billion) in low-carbon energy, including developing new technologies such as carbon capture and storage, and mass hydrogen production.

David Whitehouse, OEUK Chief Executive, remarked: “We do welcome Sir Keir Starmer’s recognition of the critical role of oil and gas, and of the offshore industry, and its 200,000 workers in delivering energy security and net-zero. Everyone is clear that the energy system must change. But Labour’s proposed ban on new exploration licences is too much too soon. It would be damaging for the industry, for consumers and for the UK’s net-zero ambitions. 

“The figures are clear.  The UK has 283 active oil and gas fields but 180 will shut down by 2030. If we don’t replace them with new ones, then production will decline much faster than we can build low-carbon replacements. It means the UK will become increasingly reliant on imports. UK energy operators produce 40 per cent of our gas and 60 per cent of our oil.”

Moreover, OEUK reminds not only that the sector supports over 200,000 UK jobs, 90,000 of them in Scotland, but also that the Climate Change Committee’s data shows oil and gas will still meet 50 per cent of the UK’s energy needs in the mid-2030s and that even by 2050, oil and gas will still provide 22 per cent of Britain’s energy needs. 

The UK consumed about 77 billion cubic metres of gas last year with about 40 per cent coming from UK waters and 61 million tonnes of oil with UK production equating to 67 per cent of that total. As about 24 million homes rely on gas boilers for heat, the UK gets about 76 per cent of its total energy from oil and gas. Bearing this in mind, OEUK warns that new licenses remain an important tool for the UK to protect affordability, support jobs, cut emissions and accelerate the transition. 

“We have 24 million homes reliant on gas boilers and 76 per cent of our total energy comes from oil and gas. So North Sea supplies are essential to energy security – and we need new licences just to slow the natural decline in current levels of production while we build the low-carbon systems of the future. As we build that future there is no simple choice between oil and gas on the one hand and renewables on the other. The reality is that to keep the lights on and grow our economy, we need both,” urged Whitehouse.

According to Wood Mackenzie, Starmer’s recent announcement about banning new oil and gas exploration licences, if he gains power at the next election, will be viewed as “a largely symbolic gesture” with “minimal impact,” as all activity on existing licences will be allowed to continue.

While indicating that Starmer’s announcement could even be interpreted as a softening of Labour’s previous position, Greg Roddick, Wood Mackenzie’s Principal Analyst Upstream, stated: “Labour has said changes would only impact the offer of new licences. Opportunities in existing licences are more material and, in recent years, exploration drilling has already dropped to historic lows.” 

With this at the forefront, Wood Mackenzie estimates that the UK has yet-to-find prospective resources of just over 1 billion barrels of oil equivalent, which is mostly located on existing exploration licences, as the last new acreage to see a commercial discovery was awarded in 2012 while the previous two licencing rounds failed to deliver any drilling commitments and the first exploration well from the round in 2020 is only expected to be drilled this year. 

“In short, the industry has long had the opportunity to secure the most prospective UK acreage and has largely already done so. There is no guarantee that new, commercial discoveries will be found. Those that are will likely be small and are unlikely to reverse the trend given the maturity of the UK Continental Shelf. Given the challenging environment in the UK, open acreage would be considered much higher risk and is unlikely to attract the attention of the industry’s leading explorers,” added Roddick. 

In light of this, Jessica Brewer, Wood Mackenzie’s North Sea Oil & Gas Analyst, confirmed that Labour’s decision to stop new exploration licences would not impact future investment decisions as much as other factors.  

“The introduction of a windfall tax (the Energy Profits Levy) and the uncertainty around the Labour Party’s fiscal proposals will be the biggest hurdles facing investment in new oil and gas projects in the UK,” elaborated Brewer.  

Additionally, Wood Mackenzie’s estimates show that almost five billion boe are set to be produced from on stream and approved UK oil and gas fields while the potential from pre-final investment decision (FID) projects, reserve growth and existing discoveries adds up to a further three billion boe. 

“Pre-FID greenfield projects [which add up to nearly 2 billion boe] are the most obvious development candidates, given many are ‘sanction ready.’ Labour has indicated new developments on existing licences will be respected. The outcome of fiscal policy will have a greater bearing on projects in the longer term,” concluded Brewer.

At a time when the UK’s windfall tax hike on oil and gas producers’ profits is pushing multiple players to contemplate downgrading their UK portfolio or even exiting the North Sea, political tensions and uncertainties over the sector’s future are perceived as additional roadblocks to investment in domestic oil and gas. This played a part in forcing Parkmead Group’s hand to abandon its intention to develop one of the North Sea’s largest undeveloped oil projects.

Therefore, striking the right balance between energy security and the green shift is seen as crucial to avoid undermining the UK’s energy security, as a recent report warned that Britain might need to import 80 per cent of its oil and gas by 2030 without new investment in domestic production.

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