INTERVIEW: Shell's North Sea oil plans threatened by UK tax but Cambo still in play: VP

Recent UK windfall taxes risk undermining Shell's role in the long-term "re-wiring" of the country's energy system, including North Sea oil and gas and low-carbon energy investments, Shell UK upstream vice president Simon Roddy said in an interview with S&P Global Commodity Insights.

Speaking Dec. 13, Roddy said the UK remained a "core location with continued potential" and Shell continued to evaluate new projects including the contentious Cambo oil development, which the company pulled back from in 2021 following environmental opposition.

However, two upstream tax changes in a year, the second of which in November raised the headline tax rate for oil and gas revenues to 75%, present challenges for both oil and gas and low-carbon investment, he said. Flagship energy transition projects for Shell include the Acorn carbon capture and storage project and two "Scotwind" floating wind farms alongside ScottishPower, a subsidiary of Spain's Iberdrola.

Roddy described as "constructive" talks on Dec. 9 between industry leaders and UK Secretary of State Jeremy Hunt on the latest hike in the "energy profits levy," but added: "We continue to emphasize the importance of fiscal stability, which, given the second change in a year, has been undermined."

He underlined his belief that Shell still has a role to play in the UK sector following an influx of smaller players and the departure of US majors Chevron and ExxonMobil.

The BP-operated Clair oil field, in which Shell is a partner, has "very substantial running room" in terms of resources, while Shell continues to build up the Shearwater gas hub in the North Sea with tie-in projects such as Jackdaw, he said.

West of Shetland projects such as Cambo could also be supported by plans to use low-carbon electricity to meet the power needs of offshore platforms in the region, he said, noting a recent agreement between BP, Equinor and Ithaca Energy to study West of Shetland "electrification."

Shell draws on years of North Sea experience and relevant learning from projects such as the Quest carbon capture and storage facility in Canada, Roddy said, adding that incoming CEO Wael Sawan had been a "big supporter" of the North Sea in his former role as Shell's upstream director.

But the government needs to maintain tax stability for projects that are often years in the making, Roddy said, pointing as an example to Penguins, an oil field redevelopment that Shell approved in 2018 and is approaching startup, with the platform currently traveling from a fabrication yard in China to Europe for commissioning.

What he called the "pay-back" from North Sea oil and gas projects "is over years, if not decades, hence why stability is such an important factor in this," he said, reiterating calls for a link to oil and gas prices to be built into the levy.

"Prices will go down as well as up, there are great uncertainties. When fiscal changes happen the investment stability is undermined and that gets more difficult, and I think that's what we're going through."

New projects

Roddy noted that Shell is evaluating a number of further projects for investment, including Victory, a 179 Bcf West of Shetland gas field to which the company acquired rights in 2022. It is also currently spudding the Pensacola North Sea exploration well.

Shell announced in December 2021 it was pulling out of Cambo, citing economic viability worries and the risk of delays. However, Roddy said Cambo remained in play, noting Shell retains its license stake and alluding to the government's shift in policy to prioritize energy security since Russia's invasion of Ukraine.

"We indeed didn't move forward at the time because the economics and the risk of delays at the time didn't work for us, but we are still part of Cambo and we are still evaluating our options," he said.

On environmental objections voiced by Scottish First Minister Nicola Sturgeon among others, Roddy said the UK and global energy transition would "not happen overnight" and was "the biggest change in the way we generate and consume energy since the industrial revolution."

Shell would "need to continue to make our case all the time with humility," however, energy transition projects would also require tax stability, and be funded partly from oil and gas earnings, Roddy said.

"Fundamentally we need to provide energy that the UK needs and we need to do that at lower carbon... But it will take time, there is no magic wand, it is a very significant rewiring of the energy system," he said.

"For a company like Shell and many others our ability to invest in the energy transition is a result of our cash flows from oil and gas, so again changes in the fiscal environment have an impact across the board."

"The history of oil and gas in the UK North Sea is helping to make floating offshore wind a reality -- we have the supply chain, the skills, colleagues who have moved from oil and gas to work in this project," he added.

CCS regulation

On the Acorn CCS project, which failed to gain track-1 status in a first round of regulatory approvals in 2021, Roddy said Shell awaited government guidance on next steps, but remained committed and continued technical planning on the project.

Developing the so-called "Scottish cluster" of industries that will send CO2 for storage means creating a "new industry," in turn requiring "a lot of effort," and Shell sees "a lot of commitment" on the part of the UK's Department for Business, Energy & Industrial Strategy, he said.

"We understood the logic of what the government is trying to achieve. There is a business model that is being put in place," Roddy said, adding that Shell and its partners "are working together all in support of taking Acorn forward."