Will the UK’s huge new oil & gas project overcome the hurdles in its path?

In a bid to tackle the cost of living crisis, the UK recently opted to hike further the windfall tax on oil and gas profits. This coupled with the opposition from environmentalists and speculation about one of the partners contemplating pulling out of the project poses a potential risk to the development of one of the largest undeveloped oil fields in the UK.

Rosebank, one of the previously delayed energy projects, located West of Shetland, is now facing additional obstacles that may hinder its progress and delay the sanctioning yet again. Against the backdrop of a global energy crisis, which continues unabated, many governments have turned both inwards and outwards to strengthen their countries’ security of supply and enable diversification.

While the UK has taken such measures as well, the government also made a decision to increase the windfall tax on oil and gas producers’ profits to 35 per cent from its current rate of 25 per cent. The new rate will apply from 1 January 2023 until March 2028. When the rumours about the additional windfall tax hike first surfaced, Offshore Energies UK (OEUK) warned that the windfall ‘supertax’ proposal risked driving out oil and gas investments from the UK waters, which could hinder the UK’s energy security along with its transition plans for a low-carbon future.

After the windfall tax hike was confirmed, OEUK underscored that the UK offshore industry will be “hit hard” by these tax changes on oil and gas production, which threaten to drive out investors and drive up imports, leaving consumers increasingly exposed to global shortages. This is in line with Moody’s outlook, which indicates that the higher tax rate will result in lower projected positive free cash flow (FCF) generation, thus, the latest changes are credit negative for oil and gas companies with upstream activities on the UK Continental Shelf (UKCS).

While these changes were “largely expected” given the cost of living crisis, they still come just six months after the windfall tax was initially introduced by the UK government to help fund support for households struggling with soaring energy bills. Despite this, high inflation is “increasingly weighing on the UK’s economic performance,” says Moody’s.

After media reports indicated that Norway’s Equinor was considering abandoning its £4.5 billion investment in its Rosebank field, following the first hike in windfall tax, Equinor dismissed this as “speculation” in June 2022. A couple of months later, the Norwegian state-owned giant filed an environmental statement (ES) for the development of this field to the UK authorities, as one of the key documents laying the groundwork to sanction this project.

However, the possibility of smooth sailing for this project is further hampered by the opposition from environmentalists, who claim that the Rosebank field would be “almost three times the size of the controversial Cambo oil field, which was paused last year because of widespread public and political opposition,” as highlighted by the environmental activists.

In light of the global energy crisis, the UK government in late September 2022 decided to accelerate various energy projects, including five oil and gas developments as well as several carbon capture and storage (CCS), hydrogen, and offshore wind projects. The oil and gas projects on this list include the Combo project. The potential fast-tracking of these projects along with the UK’s plans to award new oil and gas licenses, did not sit well with activists who have been staging protests over the UK to stop this.

As the UK government considers approving the Rosebank project, the environmentalists under the campaign slogan #StopRosebank, are demanding a halt to this project, as “burning the oil and gas from Rosebank would produce more CO2 than the annual CO2 emissions of the 28 lowest-income countries in the world combined.” These activists are planning on convincing MPs to oppose the development of this project, as they did before with the Cambo oil field.

“Although the final decision on Rosebank will be taken by the UK government, MPs from all parties have the power and responsibility to influence this decision by taking a stand against Rosebank – and all new oil and gas in the North Sea,” the activists at StopCambo said.

Greenpeace backed the #StopRosebank movement, claiming: “The climate impacts of Rosebank would be catastrophic, and it won’t lower our bills or secure the UK’s energy supply. A project like Rosebank is designed to make oil giants even richer at our expense.”

The plot for the development of the Rosebank project thickens even further due to recent indications that one of Equinor’s partners, Suncor, is contemplating the sale of its UK assets in “a favourable market,” including the interest in the Rosebank field.

As this could present potential new challenges to the project’s sanctioning and development, when coupled with the increase in the windfall tax, Offshore Energy reached out to Equinor to seek more information. In response, a spokesperson for Equinor confirmed for Offshore Energy: “There’s no change to the Rosebank project,” adding that the final investment decision (FID) is still planned “in Q3 2023.”

With recoverable resources of more than 350 million barrels of oil equivalent, the Equinor-operated Rosebank field is a large undeveloped oil and gas asset in the UK. It is estimated that it will cost £4.1 billion to develop it and a further £3.6 billion in operating expenses. Moreover, the project will be developed with an already existing FPSO, currently known as Petrojarl Knarr, which recently worked for Shell on the Knarr field in the North Sea off Norway.

According to Equinor, the reuse of the FPSO, as opposed to building a new one, will avoid 250 thousand tonnes of CO2 emissions. This FPSO has a production capacity of 63,000 barrels of oil equivalent per day and a storage capacity of 800,000 barrels. If sanctioned, the Rosebank project would create £8.1 billion of direct investment – including the development, operation and decommissioning of the field – based on Equinor’s projections.

The Rosebank oil and gas field is located 130 kilometres off the coast of the Shetland Islands. The Norwegian giant’s partners in this project are Suncor and Ithaca Energy, which entered the project following the acquisition of Siccar Point Energy.

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