UK pledges annual oil and gas licensing rounds to slow output decline

The UK government on Oct. 7 pledged to enshrine in law the holding of upstream licensing rounds on an annual basis, part of a policy shift in favor of greater energy security ahead of impending national elections.

The pledge to return to annual licensing rounds, following a hiatus of more than two years, came in a ceremonial speech by King Charles III, and was accompanied by a government assurance that UK oil and gas output is still expected to fall faster than the global decline rate compatible with international climate goals.

The government is perceived as doubling down on the energy security issue following price spikes over the winter of 2022-23 as Russian gas supplies to Europe collapsed in the wake of the invasion of Ukraine. The issue of whether to encourage greater North Sea investment is seen as a defining one ahead of national elections, setting apart Prime Minister Rishi Sunak and his Conservative Party from the more equivocal stance of the opposition Labour Party.

"New oil and gas licenses will slow the decline in UK supply rather than increase it above current levels... Even with continued licensing, [UK] production is projected to decline at 7% annually... faster than the average global decline needed to align with the Intergovernmental Panel on Climate Change's 1.5-Degrees pathways," the government said in an explanatory document.

"The new Offshore Petroleum Licensing Bill will help to safeguard our energy independence and security by backing North Sea oil and gas extraction, supporting hundreds of thousands of jobs. Alongside this, we are working to secure record amounts of investment in renewable energy sources -- building on the UK's record for decarbonizing faster than other G7 economies," it added.

UK North Sea oil output fell by 9% year on year between January and August to 736,000 b/d, with a slightly steeper drop if crude is counted without natural gas liquids. Output has plummeted by around a third since 2019, reflecting a combination of natural decline and a lack of major new projects coming on stream, in turn stemming from the 2020 oil price shock and an investment environment viewed by many as unfavorable.

However, UK crude grades such as Forties are still a significant source of export earnings, with BP bringing on stream a new field in recent days, Seagull, that will contribute additional volumes.

Light sweet grades such as Forties are constituents in the Platts North Sea benchmark Dated Brent; Dated Brent was assessed at $88.10/b on Nov. 6, up 8 cents on the day.

The North Sea is also a significant gas producer for the UK, with a gentler decline rate than for oil in recent years; the government estimated UK gas production had met 50% of domestic demand over the last five years.

The "King's Speech" pledge of annual licensing rounds follows a hiatus that accompanied the UK hosting COP26 climate talks in Glasgow in 2020, and an associated review of the licensing process, before the 33rd offshore licensing round was launched in October 2022.

Industry reaction

The measure was welcomed by the industry, but comes amid a febrile political atmosphere and expectations of a change of government, meaning high levels of uncertainty. The UK is obliged to hold parliamentary elections by Jan. 28, 2025, with the vote seen as likely by the end of 2024.

"The UK must not just become a good place to do energy business, it must become irresistible," said David Whitehouse, CEO of industry group Offshore Energies UK, welcoming also plans to upgrade the country's electricity grid. "The industry needs the churn of new licenses to ensure no cliff edge in domestic production ... Without fresh investment, the UK will be reliant on oil and gas imports for 80% of its needs by 2030."

There was no mention by the government of other legislative measures sought by the sector, particularly to alleviate the impact of punitive upstream taxation. The UK has "some of the highest tax rates on fossil fuel producers" in the world, the government noted in its policy document, adding the sector has paid more than GBP33.7 billion ($41 billion) in taxes since 2010, and is expected to pay "around GBP50 billion in tax over the next five years."

The upstream industry is particularly urging the government to strengthen a notional price floor applying to the 2022 "Energy Profits Levy," which the government itself has said is unlikely to have any effect under its current structure.