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North Sea Oil Expansion: Why is it Controversial?
On July 31st, 2023, former UK Prime Minister Rishi Sunak reaffirmed the issuance of over 100 North Sea oil and gas licences, aimed at increasing domestic fossil fuel extraction. The licensing round was initially announced by the North Sea Transition Authority in October 2022, however, Sunak’s announcement signalled a growing concern that the UK Government may be weakening its resolve on climate change issues.
However, with a new UK Labour government, led by Keir Starmer, picking up the reins, there is hope for a renewed focus on climate change and a potential reevaluation of these policies. Labour's commitment to a greener future suggests that the new administration may take a different approach to fossil fuel extraction and prioritise sustainable energy solutions.
👉 In this article, we'll explore the implications of former UK Prime Minister Rishi Sunak's decision to expand licences for North Sea oil and gas exploration and extraction.
An overview of the history of North Sea oil and gas
The North Sea is home to the vast majority of Europe’s oil reserves and is one of the largest non-OPEC producing regions in the world. Its oil wealth is concentrated mainly in the waters of the United Kingdom and Norway, however, reserves can also be found in waters belonging to Denmark, the Netherlands and Germany.
North Sea oil discovery
North Sea oil and gas was first discovered back in the early 1960s, with natural gas being brought ashore in the UK in 1967 and oil in 1975. However, challenging conditions and complex and expensive production methods meant that it wasn’t until the 1980s that North Sea oil extraction became economically viable.
👉 By the early 1980s, the United Kingdom had become a net exporter of oil, achieving the same status for gas by the mid-1990s.
Peak production
The 1990s and early 2000s marked a golden era for North Sea oil production, with the region reaching its peak of 6 million barrels of oil a day in 1999. Natural gas followed suit, reaching its height in 2001.
The production of oil and gas in the North Sea resulted in the creation of thousands of new jobs in various capacities, including exploration, drilling, production, and related services. The prosperity of the sector also translated into considerable revenue for the UK government.
However, the UK Government's management (or mismanagement) of oil and gas income has led to debate over whether the funds were appropriately managed for long-term benefits.
The UK Government’s mismanagement of North Sea oil and gas income
The UK's handling of the North Sea oil boom stands in sharp contrast to that of Norway, casting a spotlight on the differences between their revenue management and state control. In 2020 for example, the UK saw a comparatively small intake of £0.2 billion in revenue from North Sea oil, a figure dwarfed by Norway's £9 billion. This large difference boils down to Norway's decision to maintain state ownership of its oil and gas industry, compared to the UK's privatised approach.
Tracing back to the Thatcher era, the UK's missteps in managing North Sea oil began with a wave of privatisation. Critics say that this move allowed the income of the oil boom to flow disproportionately into the pockets of the wealthy, inflating house prices and creating social inequalities.
While the UK channelled its wealth into tax cuts and consumer indulgences, Norway took a long-term view, channelling profits into a sovereign wealth fund, which is now worth over $1.3 trillion, making Norway one of the wealthiest nations.
As the UK looks to the future, the consequences of its approach to North Sea oil are beginning to manifest. With the decommissioning cost of rigs and infrastructure expected to reach £51 billion by 2065, and tax allowances for oil and gas companies predicted to exceed £19 billion, the financial burden continues to escalate.
The discovery of new oil and gas fields in recent years adds complexity to the situation, with concerns over environmental impacts being weighed against the UK’s potential treasury windfall from these resources.
The decline of North Sea oil production
“The North Sea has served as a significant source of oil and gas for the UK over several decades. However, in recent decades, the region has faced a decline in production due to factors such as ageing infrastructure, maturing fields, and dwindling reserves. These challenges have made it increasingly difficult for companies to extract oil and gas in a cost-effective manner.”
Following the 1999 high, oil and gas production across the North Sea gradually declined. The UK Continental Shelf (UKCS) witnessed a steady decrease, plunging from its peak of 4.5 million barrels of oil equivalent per day (boe/day) in 1999 to a mere 1.4 million boe/day in 2014 (note that barrels of oil equivalent incorporates both oil and gas extracted, whereas when we refer to barrels of oil this only accounts for liquid oil produced).
But despite declining production in the North Sea, according to official UK Government reports, the region still holds significant levels of petroleum oil reserves. The NTSA (North Sea Transition Authority) estimates that proven and probable UK continental shelf reserves amount to 4 billion boe, though research suggests that waters off the coast of the UK coil hold enough oil and gas to provide 15 billion barrels of oil equivalent.
Though the question is not whether or not we can extract more oil from the North Sea - it’s whether we should extract more oil, given the growing climate crisis that we face.
North Sea Oil Licensing in the UK
In the United Kingdom, oil and gas exploration and production licences are regulated by the North Sea Transition Authority (NSTA - formerly known as the Oil and Gas Authority). Prior to this, licences to extract oil and gas were administered by the Department of Energy and Climate Change (formerly the Department of Trade and Industry - DTI).
The UK continental shelf (UKCS) is split into quadrants, with each quadrant being further divided into 30 blocks. Some of these blocks may be further subdivided into part blocks where sections have been relinquished by previous licence holders.
The UK releases licences for North Sea oil and gas extraction via annual licensing rounds. Though the licensing rounds were temporarily put on hold between 2019 and 2022 while the UK Government carried out a ‘climate compatibility check’.
The licensing round resumed again in 2022 when the UK Government made the decision to begin the process of allocating over 100 different licences covering 900 different locations for exploration. The UK claimed that reopening the licensing for oil and gas exploration and production would help with long-term energy security in the UK - something that has become a growing concern in recent years.
Energy security in the UK
Like many countries around the world, the United Kingdom is grappling with the difficult task of reshaping its energy policies, a matter made all the more urgent by global tensions such as the Ukrainian crisis.
The UK’s dependency on fuel from countries such as Russia has underscored the need for a shift towards self-reliance in energy. However, the challenge is complex: coupled with the desire to be energy independent is the need to eliminate greenhouse-gas emissions by 2050, requiring a complete overhaul of the UK’s energy infrastructure. This includes replacing traditional power sources with cleaner, electric alternatives for everything from home heating to transportation.
Complicating matters further is the immediate need to control energy costs, particularly in light of recent spikes in gas prices that are severely impacting household budgets. It's a complex situation that demands innovation, investment, and careful balancing of environmental goals with economic realities.
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Rishi Sunak’s decision to expand North Sea oil production
In July 2023, former Prime Minister Rishi Sunak announced the UK government's intention to issue more than 100 new drilling licences in the North Sea as part of a strategy to maximise domestic oil and gas production. This policy, described as "maxing out" the country's fossil fuel reserves, has faced strong criticism from environmental organisations and some political figures, including members of his own party, for conflicting with the UK's climate goals.
However, Sunak argued that the plan aligns with the country's commitment to reach net-zero emissions by 2050, stating that domestic production is more efficient than importing oil and gas.
Critics have expressed concerns that the plan could jeopardise the UK's climate commitments at a critical time. They argue that the focus should be on transitioning to a low-carbon economy and investing in renewable energy sources. Former minister Chris Skidmore, who led the UK’s net zero review, called out the decision, stating that it’s “the wrong decision at precisely the wrong time”.
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Does the UK really need more oil and gas?
The UK's dependence on fossil fuels remains significant, with the energy source meeting about 75% of the country's total energy demand. This is largely due to the use of gas boilers in homes and petrol or diesel in vehicles, as well as gas plants generating a significant proportion of UK electricity.
👉 To learn more about the UK’s electricity supply energy mix, why not check out our article.
Yet, the country's domestic oil and gas reserves, particularly in the North Sea, are dwindling rapidly. Despite this, industry insiders argue that some level of exploration is necessary to prevent a rapid industry collapse, which could increase the UK's dependence on imports and negatively impact the country’s economy and employment.
The geopolitical situation, particularly Russia's invasion of Ukraine, has also raised concerns about the risks of depending on foreign energy supplies. While the UK imports gas from Norway, Europe, Qatar, and the US, the carbon footprint of these imported supplies can be significantly higher than those of domestically produced oil and gas.
However, research purports to show that new oil and gas fields being considered in the North Sea would provide only a minimal impact on the UK's energy security, supplying enough gas for merely a few weeks a year between 2024 to 2050, and around five years of oil demand. Campaigning group Uplift conducted the study, which also highlights that around 60% of the UK's current gas production is exported to the highest bidder, and 80% of North Sea oil is exported.
The decision also goes against advice from the International Energy Agency which has advised against new oil and gas exploration, stating that it’s vital if we are to have any hope of limiting global temperature rises to 1.5°C above pre-industrial levels.”
👉 To learn more about the pros and cons of fossil fuels, take a look at our article which explores potential alternatives.
How bad for the environment is the decision to grant new North Sea oil and gas licences?
The carbon impact of the 100 new licences for oil and gas production in the UK is likely to be relatively small, with many of the licences granted not actually proceeding to full development. And despite the move by the UK Government, the North Sea oil and gas industry is still on a steady decline, with industry projections forecasting a significant drop in production by 2050. This means that even with new developments, the UK will likely remain a net importer of oil and gas.
However, the UK Government’s recent enthusiasm for oil and gas development is raising international concerns. Some view the push for new oil and gas as a challenge to the nation's climate credibility.
Climate activists are also expressing frustration over the UK's stance on fossil fuels, believing the nation could lead in moving away from oil and gas. This discontent is magnified by the UK's apparent wavering position on other climate commitments, including improving energy efficiency in rental homes, phasing out petrol and diesel cars by 2030, and fulfilling its £11.6 billion climate aid pledge.
Together, these factors contribute to a growing sense that the UK may be weakening its resolve on climate change issues and undermining what could be an opportunity to take a world-leading position in environmental responsibility.
👉 Head over to our article on Rishi Sunak’s environmental track record to learn how he shaped UK climate policy during his tenure as Prime Minister.
What does Sunak’s decision mean for the future of North Sea oil and gas?
Former Prime Minister Rishi Sunak's support for granting new exploration licences in the North Sea underscores his business-focused approach, prioritizing UK economic interests ahead of climate considerations. This decision raised concerns about the UK Government's commitment to transitioning to cleaner energy sources.
One potential solution that has been floated is the idea that oil and gas revenue could be better utilized this time around and could help fund climate change mitigation efforts. The Office for Budget Responsibility projected a substantial increase in revenue from oil and gas, reaching £11 billion in the fiscal year 2022-23. This influx of funds could potentially be used to bolster efforts in preparing the UK's infrastructure for a shift toward electric vehicles and heat pumps. Additionally, investments in upgrading the energy efficiency of homes and industrial sites through improved insulation would help reduce carbon emissions.
However, there are concerns that this approach could be seen as a short-term fix, delaying more decisive actions toward a sustainable, low-carbon future. Critics argue that relying on oil and gas revenues might undermine the urgency needed to accelerate the transition to renewable energy sources and achieve ambitious climate goals.
Labour's new direction: A greener future
The recent UK general election marked a significant shift in the nation's political landscape, with Keir Starmer leading the Labour Party to a landslide victory, ending 14 years of Conservative rule. This historic win sets the stage for potential transformative changes, particularly in the realm of environmental policy.
Keir Starmer's environmental stance
Keir Starmer and the Labour Party have consistently emphasised a more environmentally friendly stance compared to their predecessors. Central to Labour's manifesto was the commitment to rapidly build up Britain's renewable power infrastructure. This includes ambitious plans to increase taxes on the oil and gas sector, a move aimed at funding the transition to greener energy sources.
Implications for North Sea oil and gas
One of the most controversial aspects of Labour's environmental policy is the promise to end the issuance of new licences for oil and gas exploration in the North Sea. Industry leaders have expressed concerns over this approach, fearing it could lead to a rapid decline in output and revenue. David Whitehouse, Chief Executive of Offshore Energies UK, warned that these policies could threaten jobs and undermine the decarbonisation of the UK economy if not managed properly with industry input.
The existing windfall tax on energy producers, which stands at 35% and is set to run until 2029, will be increased by 3 percentage points under Labour's plans. This brings the total tax burden on producers to 75%, one of the highest in the world. Labour also intends to scrap the investment allowance, which exempts most profits reinvested in oil and gas production. Critics argue that without clarity and careful management, these measures could lead to a drop in investments and taxes from the sector, ultimately harming the local industry and leading to greater reliance on imported fuels.
A vision for renewable energy
Despite the concerns from the oil and gas sector, Labour's vision is to turn the UK into a leader in renewable energy. By redirecting funds from fossil fuel revenues, the Labour government aims to accelerate the development of renewable energy projects, enhance energy efficiency in homes and industrial sites, and invest in infrastructure for electric vehicles and heat pumps. This approach not only aims to address the climate crisis but also seeks to create green jobs and stimulate economic growth.
Challenges and opportunities
Starmer's government faces the dual challenge of implementing these ambitious environmental policies while managing the economic implications for the traditional energy sector. The transition to a low-carbon economy is fraught with complexities, but Labour's commitment to environmental stewardship and sustainable development positions them to potentially lead the UK towards a greener future.
The election results have given Labour a strong mandate to push forward with their green agenda. However, they must navigate the concerns of industry stakeholders and ensure that their policies are economically viable and socially equitable. The next few years will be crucial in determining whether Labour can successfully balance these competing interests and deliver on its promise of a sustainable and prosperous future for the UK.
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