Jon Fitzpatrick
Managing Director at Gneiss Energy

The UK's approach to energy companies has been poor, but a new strategy hints at future promise.

In my last post, I urged the de-politicisation of energy as a means of supporting a sustainable transition to a more balanced and less carbon-intensive energy mix. Over the intervening period, politicians the world over have shown us that the prospects of such a disconnect are slim. As Russian oil and, to a lesser extent, gas supplies have become subject to restrictions by European governments and the US, those same administrations have rushed to encourage Middle Eastern nations to increase oil output and divert LNG cargoes to fill the gap.

With OPEC producers in the Gulf remaining unified and resisted these advances and gas giant Qatar unable to cover much of the shortfall given that its gas is sold on long-term contracts, these advances have fallen on deaf ears. This is not surprising given the success of the OPEC+ policy on production restraint in refilling state coffers after a sustained period of low oil prices, while Doha is unlikely to turn its back on years of rapidly growing gas sales to Asian customers.

Here in the UK, while only receiving a minor share of our energy mix from Russia, skyrocketing utilities prices could turn out to be a boon for our sector in the medium-term with a new British Energy Security strategy providing a ray of light after years in the cold. The policy outlined plans for new wind, solar, nuclear and hydrogen projects as well as newfound support for domestic oil and gas production.

Meanwhile, with Prime Minister Boris Johnson calling for a new lease of life for the North Sea, Business Secretary Kwasi Kwarteng penned a letter to the industry in late April, which was supportive though less enthusiastic than “drill baby, drill!”

“In return for the UK government’s ongoing support for the sector, the prime minister, the chancellor and I want to see a very clear plan from the oil and gas industry to reinvest profits in the North Sea and, importantly, in the clean energy technologies of the future.”
- Kwasi Kwarteng

While there is relief that the government is recognising the importance of North Sea production to the transition and to UK energy security, there is a sense of irony in calling on producers to come to the rescue after years of ostracising them. Indeed, having only recently sought to encourage upstream investment, the government now appears to be demanding greater North Sea spending upon pain of windfall tax. While neither Chancellor of the Exchequer Rishi Sunak nor Kwarteng seem to be pushing for the levy which both have warned could further disincentivise investment, they are facing increased parliamentary pressure to milk the oil company cash cow as firms declare large profits.

With the demand though, Chancellor Rishi Sunak is, at least in part, preaching to the converted, with BP and Shell having already committed to around £40bn to UK energy over the next decade. It’s not just the super-majors that are taking investment decisions with Neptune planning to spend £800mn over five years, and the North Sea Transition Authority (NSTA) anticipating projects targeting 890mn boe could be sanctioned in 2023.

Meanwhile, the industry is further buoyed by news of plans for a UKCS licensing round in Q3.

In order that we continue to attract investment into the North Sea, balancing sustainable and orderly transition with supply security that avoids over-reliance on imported energy, policy-makers would be best served by keeping their carrots and sticks in equal balance.

I look forward to discussing these and other issues related to the future of the North Sea on June 23 when I will be taking part in the Petroleum Economist North Sea Investment Forum 2022 in London.

KeyFacts Energy Industry Directory: Gneiss Energy