North Sea strategy shift in the pipeline as world goes green

The future of the North Sea oil industry is in doubt as politicians and investors look towards green solutions for energy

Oil
10m tons of carbon dioxide is emitted each 
year by rigs in the North Sea

The hulking outlines of oil and gas rigs in the North Sea are being overshadowed by slender rivals. Tall, rhythmic wind turbines are set to multiply now the Prime Minister wants them to be powering “every home” and electric cars.

More than 50 years after drillers struck oil at the Forties field, setting the stage for decades of booming oil and gas production, the North Sea industry is at a crossroads.

Already facing declining reserves and the oil price plunge triggered by the pandemic, it now has to find its place amid increasingly stringent global efforts to cut carbon emissions.

Oil and gas industry bosses are under pressure to couple up with carbon capture systems, hydrogen production and wind farms to help the country meet its legally binding target for net zero emissions – or risk being sidelined and censured.

“We are either the laggards or we find a way to take our skills and use them, and that’s what we are all about,” says Mike Tholen, upstream policy director for Oil and Gas UK, the trade body.

North Sea drillers have produced more than 45bn barrels of oil and gas since the Seventies, powering cars, factories and homes, and employing generations. With the basin now starting to dwindle and oil majors looking elsewhere, ministers and the industry have focused on wringing out what’s left. That priority now faces competition.

The Oil and Gas Authority, set up by the Government in 2015 to help maximise oil and gas recovery, is looking at changing its strategy to include “assisting the Secretary of State with meeting the net zero target” and cutting greenhouse gas emissions. Maximising oil and gas recovery is still at the top of the strategy, on which industry consultation has just closed.

North Sea oil rig owned by Ithaca Energy Credit: Ithaca Energy

But “the opportunity is to define the North Sea as an energy basin not just an oil and gas basin”, says Stuart Payne from the OGA, echoing attempts at redefinition by BP, Shell and other oil majors, who are branching out into producing wind and solar power, and hydrogen, as well as developing carbon capture systems.

They have little choice to do otherwise, given the pace at which attitudes over climate change are hardening among politicians, investors and the public, even though oil and gas will still be needed even under the most stringent climate-friendly scenarios.

The basin has several private equity backed players whose owners will want to exit their investments but could struggle to float given climate concerns among investors, industry sources suggested.

“The markets are closed,” said one industry source. “People who give investors money are saying, ‘we don’t want you investing in fossil fuels’. This has accelerated massively in the last 12 months. A couple of years ago, it was just, ‘we need to keep an eye on this’.”

Private equity backed Chrysaor, the North Sea’s largest producer, which is also helping develop carbon capture, is joining the stock market after agreeing a deal last week to reverse into listed Premier Oil. Shares in debt-heavy Enquest and Tullow Oil leapt on the deal.

Apart from the carbon emissions generated by oil and gas users, rigs in the North Sea emit about 10m tons of CO2 per year and flare about 3pc of gas production.

Mitch Flegg, chief executive of gas-focused Serica Energy, which bought wells from BP, says his company has cut flaring, and is keen to do more. “The carbon question is being discussed at all levels on the platform every day,” he says.

“A couple of years ago, this was not the case. No one wants to be part of the problem. Everyone wants to be part of the solution.”

But converting oil and gas rigs to run on renewable energy instead of fossil fuels is hugely expensive, at a time when budgets have already been hammered by the pandemic. Capital investment in the basin is already down by one-quarter.

As the Government explores ways to encourage investment into carbon capture and hydrogen, it is also working on helping the industry cut emissions via the so-called North Sea Transition Deal, promised in the Tory party’s 2019 election manifesto, and likely to include financial and practical support.

“I think we are looking to understand that the cost isn’t borne totally by industry but is shared by industry and government,” says Flegg.

“There also has to be the space for smaller companies who can add a lot of thinking but may not be in a position to contribute as much cash as a major.”

The financial framework will be key. The OGA’s proposed new strategy keeps an existing clause noting that compliance “will not lead” to any company investing in projects “where there is not a satisfactory expected commercial return”.

The industry supports more than 260,000 jobs and getting the strategy right could create thousands more. “But we know if we do nothing there will be a decline over time,” says Payne.

A Government spokesman said: “The North Sea oil and gas sector will continue to be needed for the foreseeable future as we transition to a clean energy future and meet our net zero carbon emissions target by 2050.

“To ensure the sector can take full advantage of the clean energy opportunities ahead, we will deliver a North Sea Transition Deal which will outline our plan to protect jobs and cut emissions over the coming years.”