UK oil and gas sector warns of steep output decline without political consensus backing industry

The UK needs a political consensus on supporting the oil and gas industry, including from Scottish politicians, or it risks North Sea investment collapsing and a surge in import dependence, with potentially 80% of its gas being imported by 2030, industry group Offshore Energies UK said March 29.

The group previously known as Oil & Gas UK said the country had in 2021, for the first time, imported more gas from Norway than it produced amid steep falls in domestic output.

It welcomed Prime Minister Boris Johnson's recent shift in energy policy toward "self-reliance" and backing for the North Sea, but said there had to be a consensus across political parties on the need to avoid windfall taxes and the importance of continued drilling.

It said 62% of UK gas consumption had been from imported gas in 2021, while UK oil output dropped by 17% to under 900,000 b/d.

UK crude oil blends Brent and Forties are central to the Platts Dated Brent price benchmark. However, the UK suspended the North Sea licensing process in 2020 pending a review, while companies complain of slowness in regulatory decision making.

OEUK reiterated its commitment to low-carbon projects such as carbon capture and storage, but said oil and gas would remain part of the UK energy mix and the alternative was increasing import dependence.

In light of Russia's invasion of Ukraine "energy security is now a matter of national security," OEUK CEO Deirdre Michie said in a speech in Aberdeen.

"The UK government has absolutely rallied around the sector... We must continue to invest and that means in oil and gas, in CCS, in hydrogen, and in wind," she said. However, "we need a consistent consensus from policymakers across all parties and all four [UK] nations so that we can continue making progress toward our net-zero goals."

"We can only keep supplying the UK with diverse energy if we have the right environment in which to invest. I think we have that now. But we need to see it sustained and that means an alignment of regulations, fiscal policies, and political ideologies."

OEUK forecast broadly stable oil and gas production in 2022-23 as around 10 new fields come online to early 2023, with a combined peak output of 250,000 b/d of oil equivalent, but warned production in the medium term could fall by 15% per year if operators shied away from investing.

It said there were 10 new oil and gas projects that could get approved by the industry this year, but only if companies were confident of the political environment.

UK ministers in London have signaled a shift toward ensuring security of supply alongside net-zero goals in the wake of the Ukraine invasion, raising expectations for regulatory changes and a resumption of licensing suspended ahead of COP26 climate talks. Exploratory drilling activity has dropped to record lows in recent years.

Presenting a new industry outlook document, OEUK forecast a 27% drop in upstream oil and gas investment to GBP4 billion ($5.2 billion) in 2022, compared with 2019 levels. Among multiple causes, "the UK's complex regulatory environment, plus the political disagreements around issues like climate change and windfall taxes are all factors deterring investment," it said.

On the production outlook, it said: "Based on current expectations the annual rate of decline could be about 7%-10%... But in a full investment case, where new... projects under consideration are advanced, this decline rate could be reduced potentially by at least half. On the other hand, if no new investments are unlocked in the short-term, the decline could be as high as 15%/year," it said.

Scottish opposition

"Political risk is as high on the agenda of investors as the price environment is," OEUK market intelligence manager Ross Dornan said, playing down the idea that recent price spikes would spur new investment.

"We don't have [consensus] at the moment across the political divide," he said, referring to calls for windfall taxes in response to surging consumer bills.

OEUK also criticized the skepticism toward the industry expressed by Scotland's devolved authorities. In 2021, the Scottish National Party had spoken out against Cambo, an oil project backed by Shell and independent Siccar Point Energy, which Shell subsequently dropped.

"We need stable long-term regulatory policies, clear and predictable fiscal policies and improved political alignment across all the countries and parties of the UK," Michie said.

"We... look forward to supporting the nation's transition to a lower-carbon future and providing safe and secure energy throughout that transition, but that transition will only happen if our policymakers can create and sustain the right environment for long-term investment across all forms of energy production."