London — The UK government is unlikely to impose an "outright" ban on new exploration licenses in the North Sea basin, a person close to the matter told S&P Global Platts on March 15, after weekend reports that ministers were considering a moratorium on new drilling.
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The government is reportedly considering a moratorium on issuance of new licenses as part of a number of measures in the run-up to the UK hosting COP26 climate change talks in Glasgow in November, according to the Telegraph. The UK's North Sea produces about 1 million b/d of mainly light sweet crude that forms the backbone of the Dated Brent benchmark, which is used to price two-thirds of the world's oil.
"We think it's very unlikely the outcome will be an outright ban on these licenses," the source told Platts. The UK has committed to a net zero emissions target by 2050 and plan to ban the sale of internal combustion engine vehicles by as early as 2030 despite the oil and gas industry employing almost 300,000 people.
Reports of a ban on exploration coincide with proposals tabled by S&P Global Platts to add US crude to the so called Brent complex to shore up declining volumes.
The UK's top oil and gas industry lobby group also warned on March 15 that any moves by the government to prohibit drilling in the North Sea would increase fossil fuel imports and slow the energy transition, highlighting the industry's contribution to areas such as carbon capture and storage.
"Any curtailment of activity by licensing constraints risks impeding the UK's ability to deliver a net-zero future, damaging our domestic supply chain and increasing energy imports whilst exporting the jobs and skills," said Oil & Gas UK sustainability director Michael Tholen in a statement to Platts on March 15. "Our industry is leading the way on green technologies including the switch to hydrogen and long-term storage of CO2."
The UK industry is home to the Dated Brent benchmark. In addition to producing around 1 million b/d, the sector meets about half the country's gas needs, despite decline over the last two decades.
In September 2020, regulator the Oil & Gas Authority paused the UK licensing process to allow time for a more "coherent" set of awards in future, while the Department for Business, Energy & Industrial Strategy, or BEIS, announced a review of the licensing process to align it with climate goals.
Alongside the government's pledge of net zero emissions by 2050, the Oil & Gas UK industry group has pledged to halve the sector's emissions by 2030 en route to the 2050 goal. Exploration bans in territorial waters have already been imposed by Denmark and Ireland.
LICENSING REGIME REVIEW
Questions over the North Sea industry's future come as the sector has faced disruption due to the coronavirus pandemic and last year's oil price crash, which resulted in lower activity levels and spending. Exploration activity has suffered in particular, with a record-low number of exploration wells drilled last year. The OGA is now turning its attention to the operational emissions resulting directly from activity in the North Sea, which it estimates at 3.5% of total UK emissions, and last week claimed some success in reducing flaring of unwanted gas.
Tax revenues from the North Sea oil and gas industry have recovered somewhat after turning negative in 2015-17, a phenomenon that resulted from reimbursements for activities such as decommissioning aging facilities.
Lower tax receipts reflect both lower production and tax cuts introduced in recent years to spur companies to develop smaller hydrocarbon finds and maximize recovery rates from late-life fields.
BEIS did not directly confirm or deny the report of a possible ban on new exploration licensing, but noted the sector's contribution to employment and involvement in developing green technologies such as carbon capture and storage.
"Oil and natural gas are still required for heating, cooking and transport, and vital to the production of many everyday essentials like medicines, plastics, cosmetics and household appliances. This is likely to remain the case over the coming decades as the UK transitions to low carbon solutions," BEIS said.
"Our review into the future of the oil and gas licensing regime seeks to ensure it remains compatible with our target to reach net zero emissions by 2050. This commitment also forms part of the Energy White Paper published in December ," BEIS added.
"We will agree a transformational North Sea Transition Deal with industry in the coming months to create jobs, retain skills and deliver new business and trade opportunities to support the sector's transition to a lower carbon future."
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