What’s at Stake for UK North Sea as Labour Government Sets Out Its Energy Policy

(Bloomberg) -- The UK’s newly elected Labour government has laid out its plans to boost clean energy, but questions remain about the future of North Sea oil and gas. 

Petroleum production in the waters between the UK and Norway peaked some 20 years ago, with no prospect of getting back to previous highs regardless of government policy. Yet the offshore industry still supports more than 200,000 jobs and adds billions of pounds to the nation’s GDP, giving it serious economic weight even in its twilight years. 

A year ago, the Conservative government estimated that out of the 283 then active UK North Sea fields, about 65% will have ceased production by 2030. Then-Prime Minister Rishi Sunak sought to prolong the industry’s life by handing out fresh drilling licenses, but Labour’s Ed Miliband, the new secretary of state for energy security and net zero, is focused on delivering a “clean power mission” that favors greener alternatives. 

What does this policy shift mean for UK oil and gas production, and the nation’s carbon emissions?

License to Drill

Since the 1960s, companies seeking to explore for oil and gas in the UK North Sea have needed a drilling license from the government. To get this, they must bid in an auction for a block, which costs £9,000 ($11,700) whether they get one or not. If successful, they then have the exclusive right to the area for a set amount of time, while paying rent and an annual levy to the government, depending on the size and age of the license.

Since late 2022, when the Conservative government launched the first new licensing round for several years, these drilling permits have been the focus of the debate about the future of the UK’s offshore industry.

Sunak’s government routinely argued that new oil and gas licenses were crucial for UK’s economic and energy stability, offering hundreds of additional blocks and seeking to mandate further annual auctions. The move met with both internal and external opposition, with Tory Member of Parliament Chris Skidmore quitting in protest that the country was backing away from its climate commitments. 

The entrance of a Labour government this month brings an end to the Tory plan for annual auctions, but new Prime Minister Keir Starmer’s pledge not to revoke existing drilling permits is set to leave intact the dozens of new oil and gas licenses offered by Sunak. 

In May, North Sea Transition Authority completed the final tranche of the 33rd oil and gas licensing round, which opened in late 2022, offering companies 31 permits. That followed 27 licenses offered in October and 24 in January.

After the change of government, only a “handful” of applications from the 33rd round have yet to be decided, according to the NSTA. 

Windfall Tax

Sunak’s government imposed a windfall tax, called the Energy Profits Levy, on the North Sea oil and gas industry in May 2022 as companies’ earnings surged alongside fuel prices following Russia’s invasion of Ukraine. Labour pledged to extend the levy until the end of the current parliament and increase the rate from 35% to 38%, bringing the total headline rate of tax on oil and gas profits to 78%. 

The party also vowed to tighten up the rules around investment allowances that companies can offset against their tax bills, which it described as “unjustifiably generous.” It estimated these changes would raise a further £1.2 billion in annual revenue from the industry. 

North Sea Production

Assuming the Labour government sticks to its licensing pledge, what does the future of UK oil and gas production look like? 

Even if the new licenses are drilled and result in discoveries that are commercially viable for development, they would only serve to slightly slow the North Sea’s long decline. UK production would remain at just a small fraction of its peak. 

The NSTA estimated that the licenses offered in the 33rd round could allow for a further 545 million barrels of oil equivalent to be developed in the North Sea by 2050. 

UK Energy Security

The UK accounts for 0.7% of global oil production and 0.8% of natural gas, according to the Extractive Industries Transparency Initiative, an international watchdog. The country’s output has little influence over major benchmarks such as Brent or West Texas Intermediate crude, so it will remain at the mercy of swings in international energy prices regardless of how much can be squeezed out of the North Sea in its final years.

When it comes to energy security, the impact would also be minimal. About three quarters of UK energy comes from oil and gas, 40% of which is currently imported, according to Offshore Energies UK.

Carbon Emissions

Supporters of greater restrictions on North Sea oil and gas licenses argue that it would set an important example to the rest of the world, securing the UK’s place at the spearhead of emissions reductions. 

“An end to UK exploration would send a clear signal to investors and consumers that the UK is committed to the 1.5C global temperature goal,” said the Climate Change Committee, a think tank. 

But with countries like China emitting carbon at rate as much as 30 times greater than the UK, an end to North Sea drilling would make little real difference to the pace of global warming. It could even lead to more emissions if the UK replaced domestic production with more carbon-intensive imports, such as liquefied natural gas.

“Evidence on new UK oil and gas production is not clear-cut,” according to the Climate Change Committee. “The UK will continue to be a net importer of fossil fuels for the foreseeable future, implying there may be emissions advantages to UK production replacing imports.” 

(Updates with details of the government’s North Sea tax plans.)

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