INTERVIEW: North Sea regulator eyes licensing round supply boost, urges windfall tax rethink

An imminent revival of North Sea licensing could see new fields brought on stream as soon as 2024, helping boost gas supply in particular, but discussions are needed on improving a tax regime that has dented investor confidence, the head of regulator the North Sea Transition Authority, Andy Samuel, said in an interview.

Speaking Sept. 28, the organization's CEO confirmed plans for an accelerated 33rd licensing round after a pause of more than two years to introduce a climate change "checkpoint" in the process. He said the round would be open for just over 90 days, starting in early October and closing early in 2023.

It comes as the UK's oil and gas sector, known for the Brent and Forties crude grades and still a major gas provider, has struggled to find its feet following the pandemic, with production starting to recover after plunging in 2021, but an abrupt tax hike in May reviving worries over the investment environment.

Calls for further windfall taxes combined with political uncertainty continue to unsettle the sector, even as Europe faces an energy crisis following the curtailment of Russian supply.

However, Samuel said the NSTA was "definitely seeing an appetite" to get back to exploration, and some companies were looking to move straight to development work without drilling new exploration wells in areas already explored but relinquished by earlier operators.

This is particularly the case in the gas-prone southern North Sea, Samuel said, while noting stringent environmental controls in the area.

"We've identified...some development-ready areas where we won't expect people to have to go through drilling, appraisal wells — going straight into development," he said. "We've already had some consortia approach us, saying we'd love to get our hands on this license with this development because we think we can do it very quickly."

"We'll work with the environmental regulator, again not cutting corners, but highlighting the strategic priority, so that hopefully we can get those licenses in the hands of developers in the second quarter [2023] and some of them could potentially get straight into activity later that year, and potentially bring on production...back end of [2024]."

"A lot has to come together, but that's the prize," he added in the interview on the sidelines of the Association of International Energy Negotiators' International Energy Summit.

Meanwhile those planning exploration drilling may also, if successful, be able to move quickly to production, benefiting from nearby pipeline infrastructure and potentially converting exploration wells into production wells, Samuel said, adding discussions were underway with potential investors on some well-understood prospects.

UK exploration activity has hit rock-bottom levels since the pandemic, with just five wells drilled in 2021 and a similar number expected in 2022.

"Some exploration can move forward to production quite quickly," Samuel said. "This is exploration very much around [infrastructure] hubs. You can potentially drill a well, preserve it for recompletion as a development well, put in some subsea kit and bring it on pretty quickly."

Tax instability

Samuel, who stands down from his post at the end of 2022, acknowledged the issue of UK tax instability, saying the so-called "energy profits levy" announced in May had left some "concerned," even as others were encouraged by investment incentives.

Companies understand the need to contribute more tax at a time of high prices, but a mechanism is needed for such payments to be predictable, perhaps involving pre-set adjustments under conditions of extreme prices, whether high or low, he said.

What he called a "genuine" windfall tax "shouldn't scare the horses in the same way because investors should still be able to anticipate returns on their investment decision," he said.

"One example people talk about is [the windfall] kicking in at the super-high prices — just the revenue above that level, not the whole deck, just the bit above that and apportioning that more fairly."

"Investors could still make an investment knowing in a normal price bracket it works as intended. I think there is room for a conversation with the Treasury in a more strategic way...I would urge that rather than another short-term tax that could put investment off at a critical time."

Transition progress

Samuel reaffirmed UK emissions reductions targets for the upstream industry, which entail halving emissions from operations by 2030 compared with 2018 levels. He said he expected progress before the end of 2022 on a number of "electrification" projects that would see installations source their power needs from low-carbon sources — via national grid connections or offshore wind turbines, for example.

A number of smaller North Sea operators are already incorporating such plans in their projects, and Equinor envisages its Rosebank project in the UK West of Shetland area having a potential low-carbon electricity link.

"We're already seeing concepts coming to us...They're not yet at the Final Investment Decision, but they're in the Front End Engineering and Design phase. That is encouraging," Samuel said.