The UK treasury has benefited for over 50 years from windfall tax revenues from the discovery of oil and gas that has enabled successive UK chancellors to balance the budget more easily than had such reserves not been found. To find and deliver these natural resources takes massive upfront investment and investor confidence that profits will be made. I use the word profits deliberately, without profits there is no enterprise, it is not a dirty word. Long term investments need trust, stability and fairness in the government’s policies to balance risks, especially given the volatility in oil price over the years and the uncertainties in the size and recoverability factor of any reservoirs found.  In other words, investment requires a stable fiscal regime which the UK has on the whole enjoyed until recently.

Three factors have come into play in recent years that seem to have changed public opinion regarding the oil industry’s contribution to economic development, climate change and ultimately upset the balance between risk and reward.

1. Climate change and the desire to achieve carbon net zero.  Whatever your politics a transition from fossil fuels to greener alternatives is called for, but there is a gap between our ability to switch from hydrocarbons to be able to make up the balance reliably from alternatives such as wind, wave, solar and nuclear options. This transition is much needed as oil and gas will ultimately run out but until demand for hydrocarbons in the UK declines we should minimise our need to import and retain our own production (and refining) capacity for energy security, especially in these uncertain times. A key phase here is “mind the gap” in terms of energy supply security, stable grid operation and jobs. Given recent announcements regarding offshore wind developments the UK master energy security plan (assuming there is one?) needs to be updated especially if reliable alternative energy cannot be accelerated then the decline of domestic oil and gas production (and gas storage) needs to be thwarted, and production intentionally extended to fill this gap. We know that the oil and gas sector can deliver security of supply, well paid jobs and profits that can be taxed, will the same be true from alternative energy sources that are currently heavily subsidised and facing major challenges in investment, material supply, grid connections and project delivery schedule?

2. Drilling restrictions. In the UK by restricting further drilling and overtaxing North Sea revenues we are accelerating the demise of “Our Industry”.  Without further drilling, production from existing oil and gas fields declines more rapidly and the net effect is that many pipelines are now becoming increasingly uneconomic to operate, and the tariffs charged per barrel equally uneconomic. We are seeing a domino effect, one that will be hard to stop now, impossible in the future if this decline is allowed to continue. To anyone who works in the sector it is unfathomable why a government would allow our own domestic oil and gas production to fall, losing all the jobs and economic benefits a healthy industry is proven to deliver in favour of imported hydrocarbon fuels, hurting our balance of payments deficit and at a higher net carbon footprint. We are not reducing our Nation’s carbon footprint, we are increasing it due to the fuel used to transport oil and gas to our shores and the fact is that in many regions of the world gas flaring is widespread, so every barrel of oil imported is tainted with carbon burnt at source, often with highly damaging impurities to the atmosphere.

3. Integrity. The integrity of governments to not apply punitive tax grabs during the periods when due to the upside of oil price fluctuations, oil companies are making substantial profits.  They can also make substantial losses and have to take the rough with the smooth. The Energy Profit Levy (EPL) was applied during such a period with oil prices inflated to over $100/bbl largely due to the Ukraine war. This was an ill-conceived breach of trust in the fiscal regime and has remained in place despite oil prices dropping back down to around £64/bbl, below pre-EPL levels. This was the upside oil companies, and their investors depend upon to help offset periods of low oil price, the downside remains unprotected so now it’s all risk. Investors and oil companies can and will look to other more stable, more profitable regions of the world and many highly paid UK workers will be driven overseas to follow the work. If I were a cynic I might suggest that EPL was a knee jerk tax grabbing measure to fill the decommissioning black hole that successive governments had forgotten to accrue for and having been reminded of this liability were now seeking the same industry to pay for a second time!

So why now or never? That’s all about integrity too. Most of the UK’s oil and gas current and future production potential comes from the tying back of new developments to existing oil and gas pipelines and platforms. Many are already operating beyond their original design life and require significant investment to keep them safe and reliable.  Asset integrity is essentially about managing the risk from corrosion as materials erode and corrode over time. Allowances for erosion and corrosion are made during the design phase of projects based on a stated design life expectancy of the facility, typically 25 years. Many assets are now operating well beyond their original design lives so managing integrity is a key daily focus to process and transport hydrocarbons safely, validate the safety case and maintain their essential licence to operate. As production is now being forced into premature decline the cost per barrel of such field life extension works become prohibitive, so assets are being retired early and the cycle of decline continues.

Finally, we need to consider resources, right now we have a concentration of competent people and an experienced supply chain able to deliver complex offshore projects safely, that probably won’t ever be true again at any time in the future. The workforce is aging and because of the fact the industry now lacks a viable future in the UK, fewer young people are joining the industry and learning how to develop projects rather than just maintain what’s there (keeping the lights on) before those still left that actually built the North Sea structures we rely on today finally retire. Please don’t think alternative energy projects will provide similar well-paid jobs, building and maintaining an offshore windfarm is nothing like finding and developing a reservoir, drilling and completing complex wells and building and operating an oil and gas platform.   As an analogy, compare building the same Lego set with 20 pieces 100s of times compared to building a hundred different ones each with 2,000 pieces and far more moving parts.

Government policy has created the perfect storm; no drilling less oil, less oil less profits and a higher operating cost per barrel leading to early cessation of economic production and an accelerated decommissioning programme. This tsunami of failures in policy is leading to irreparable damage to the domestic oil and supply chain and UK workforce. Net result, lower oil and gas revenue to the treasury, a lose-lose for no environmental benefit. The UK is still using as much oil and gas as we would anyway with our own thriving, buoyant domestic oil and gas sector, only without the UK jobs, without the tax revenues, without the domestic new project (CAPEX) spend in the UK supply chain and for a higher carbon footprint as we increase our reliance on imported products at a time when energy security is an increasing risk, crazy!

Now the final sting in the tail, decommissioning. Successive governments appear to have forgotten that in return for all the hydrocarbon tax revenues received they agreed to share the cost of decommissioning, meaning that HM treasury has a massive billion-pound tax refund liability.  This cost to the exchequer is being accelerated as fields are becoming uneconomic faster and shutting down earlier than expected or necessary, a real own goal that could and should be avoided.   In addition, there is a big question over to what extent full decommissioning is even necessary given the whole “rig to reefs” debate that no-one in the UK appears to want to explore.  In a nutshell, post the Brent Spa fiasco and OSPAR regulations a clear seabed policy is generally expected at the end of an oil and gas development project.  Wells have to be plugged and abandoned safely, no argument there. However, pipelines are being removed and massive structures brought ashore at huge expense and considerable HSE risk with no financial business case to do so. There is no environmental one either, just legacy policies written with good intention that now need to be challenged in light of new ecological evidence with billions of pounds in UK taxpayers money to be saved.

Despite significant ecological evidence on the benefits of reefing platforms from other regions of the world, and support from many UK environmental groups we continue down the path of full decommissioning whilst in parallel we are spending millions looking at the ecological argument to allow reefing of cleansed oil and gas facilities. My personal fear is that future generations look back at what the UK spent on clearing the seabed and think we were nuts in light of the true cost to the voting UK taxpayers and ecological benefits lost by full removal that they will then be privy too once these long-term studies are published, too late.  Naturally there needs to be consultation with our domestic fishing industry already under intense pressure and squeeze due to growing MPA and wind farm restrictions, but if these reefs and closures result in a bounce back of fish stocks so they can catch as much or more sustainably despite having smaller licenced areas within which to operate using less fuel and less time at sea then surely that’s a win-win? Given water depths, many reefed facilities could be trawled over safely with a margin of safety and bottom trawling itself is already deemed questionable at best from both an ecological habitat destruction and carbon footprint perspective. Joined up thinking and impact evidence is required here.

I have deliberately left out any numbers so that time is not wasted arguing the precise figures (irrelevant) so readers focus on the argument for action. The do-nothing option means we lose the ability forever to produce economically significant hydrocarbons in the UKCS for another 20-50 years. This represents an avoidable loss of massive taxable production revenues to the UK exchequer that will probably never be produced until the incredibly high cost to rebuild oil and gas infrastructure at scale is no longer a factor. This could arise if we are at war starved of imports and desperate, or if all other cheaper energy sources have failed to deliver energy security and we have frequent power cuts as experienced in other parts of the world like New Zealand. They also went down the path of banning new drilling and have recently had a change of heart/policy; we need to follow suit. Hopefully, the days of frequent power outages in the UK experienced in the 1970’s will never come back so let’s produce every drop of oil we can while we still can!

The previous oil and gas industry mantra of maximising economic recovery (MER) from the UKCS needs to be facilitated and supported in parallel with efforts to minimise continuous background flaring. Flare gas recovery on assets in decline with a short future is not viable, breathe new life into those facilities and the business case becomes much stronger. Back to basics and dare I say it, drill baby drill and keep the hydrocarbons contained in the pipes.

In conclusion, I believe there is an overwhelming argument to save our domestic oil and gas industry by removing the punitive EPL immediately and also lifting any restrictions on drilling or new licences. The oil and gas industry already has proven consultation methods to assess the environmental impact of proposed projects, and these will help ensure that any new developments maximise the opportunity to support ecological and net zero objectives as we progress the transition towards long term energy independence from hydrocarbons for power generation.

If this was to happen what could we expect?:

1. A rapid upturn in UK oil and gas investment creating jobs and reinvigorating the UK supply chain. But only if investors, operators and their supply chain believe that any government support is genuine, long term and dependable. Trust has been lost and must be rebuilt else the drill rigs simply won’t come back to our sector, game over.
2. An increase in declared reserves and domestic production helping the UK’s balance of payments deficit and increasing traditional petroleum tax receipts to HMRC coffers.
3. Increased confidence in the UK’s fiscal stability presumably reducing the UK government’s cost of borrowing as we have a robust revenue stream reinstated.
4. Delays in economic cessation of production (CoP) of existing platforms and pipelines leading to infrastructure being available for satellite tieback and infield drilling campaigns in the years ahead.
5. Pipelines running at higher rates reducing transportation costs per bbl again leading to critical infrastructure being commercially viable to maintain and operate well into the future. This will make some future new developments economic that would otherwise never get sanctioned if they are too remote from operating facilities and pipelines with sufficient life expectancy to meet project timelines. (“satellite tie-back life of field export route planning”).
6. Deferral of massive HMRC decommissioning cost liabilities and time to assess if rig to reefs could save the treasury several billions of pounds and help restore marine habitat.  No doubt those involved in facilities decommissioning will be impacted by any deferral in the decommissioning programme achieved but they have the option to pivot back to whatever they were doing before decommissioning raised its ugly head and benefit from all the new CAPEX project work cancelling EPL would trigger that actually has a solid business case for UK plc.
7. A reduction in the UK’s carbon footprint and balance of payment deficit from not importing oil and gas to meet domestic demand.  (Until demand tapers off and whilst we have domestic reserves and the skills and infrastructure to deliver it safely).
8. Further reductions in UKCS gas flaring and stack emissions as by pushing back cessation of production dates flare gas recovery and electrification projects become more viable, supporting UK jobs and supply chain activity.
9. A recovery in the local economy within Aberdeen and other regions of the UK that are in decline due to the depressed oil and gas sector.  More people back in well paid work, more commercial properties let paying rates, more footfall in shopping centres, higher consumer spend leading to more VAT receipts, lower benefit payments and a recovery in house prices and stamp duty returns.   What’s not to like from a government perspective?

Rachel/Kier/Ed we have never met but please read this and consider carefully whether you want to drive the last nail in the coffin of the UK oil and gas sector or want to be the heroes that put it firmly back on its feet. A shield and many many billions of pounds into the UK coffers over the next 20-50 years is at stake here. The floor is yours.

Steve Wright