As COP26 climate talks conclude, energy price spikes are delivering a harsh message about Europe's continued dependence on fossil fuels, and giving the oil and gas sector an opening to reassert its role in regional energy security.
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Concern has grown in recent weeks about the risk to economic recovery in Europe and beyond from surging prices, with soaring input costs hurting heavy industry, and energy providers struggling to manage the situation, and in some cases going out of business.
While some recent volatility reflects transitory factors such as maintenance, the oil and gas sector has pointed to price spikes as evidence that a rushed switch away from fossil fuels will cause sustained problems, as North Sea production declines and European dependence on high-cost energy imports increases.
UK oil output has fallen by 60% since 2000 and Norwegian and Danish output by 45% and 80% respectively over the same period, while the UK has gone from being able to meet all its own gas needs to covering barely 50% from indigenous sources.
Tax revenue from the UK upstream sector has declined even more quickly, reflecting reimbursements for the cost of decommissioning offshore oil and gas facilities, with this year's tax take expected to be GBP1.4 billion ($1.9 billion), or just 3% of corporation tax receipts.
The industry, however, has been arguing for its continued relevance, not only as a source of high-paid work, with some 200,000 UK jobs supported by the sector, but of nascent technologies such as carbon capture and storage, which may help clean up other industries, and new fuels such as hydrogen, a potential game-changer for heavy goods transportation.
Ahead of COP26, Phil Kirk, Europe head of North Sea producer Harbour Energy, told an industry event that government backing for carbon capture and storage was not a "sop" to the oil and gas sector, but about saving British and Scottish jobs as storage of CO2 under the North Sea would underpin the survival of industries such as steel and fertilizers. "I see some hope that the government understands that," he said.
Shell CEO Ben van Beurden, whose company is in the firing line over plans for a new UK oil project, Cambo, pointed to recent price volatility as evidence of the need for gradual change, while he outlined plans to switch the Netherlands' Pernis refinery to produce greener fuels, in a BBC interview.
Energy transition "means that you go from the current system to a new system [but] if you just say you should stop, that's not a transition, that's... an energy truncation, you get really bad outcomes, which is a little bit what we are seeing at the moment," van Beurden said.
Behind the scenes there is frustration within the sector at what some view as a tendency for the government to pander to environmental ideals without working out where affordable, low-carbon energy will come from. Industry chiefs note even the government's Climate Change Committee foresees a need for oil and gas for several decades on the path to net-zero.
Scotland's pro-independence devolved government, while arguing for carbon capture and storage and hydrogen investments, has added to what some see as hostility toward the sector by calling for a reassessment of projects such as Cambo, a field located in Atlantic waters west of the Shetland Islands and thought to hold some 500 million barrels of recoverable oil. Shell is working alongside the operator, independent Siccar Point Energy, on the project.
The industry has broadly welcomed government announcements on Oct. 19 backing to two carbon capture and storage projects, combined with hydrogen production. The award of "Track-1" status to a BP-led project in Northeast England was widely anticipated, while the second award to a project in Northwest England raises the profile of Italy's Eni, a company that has been more on the sidelines in the UK.
But there is anger at the sidelining of a project in eastern Scotland known as Acorn and based on previous projects that failed to make headway; critics accuse the London government of politicized decisions that prioritize North of England voters.
Shell argues Acorn is a vital part of its efforts to direct more gas from newly developed North Sea fields through its revamped Shearwater offshore gas hub to petrochemical facilities in Fife, north of Edinburgh, and points to forecasts that petrochemical demand will remain strong even in a low-carbon economy.
Similarly, gas and chemicals giant Ineos views the Acorn project as part of its plans for the future of the Grangemouth refinery and petrochemical facility. "Scottish manufacturing relies on government support" for the Acorn project, Ineos told Platts. "The Acorn project meets the government's eligibility criteria and performed to a good standard [during the government's evaluation]. We hope the... government will re-consider."
Such complaints come against a backdrop of the government having suspended exploration licensing ahead of COP26 to ensure the process is aligned with net-zero goals, a move that risks strengthening impressions of a less stable regime compared with other North Sea nations; Norway remains on a course of long-term oil and gas extraction while trying to minimize emissions.
As things stand, the UK can rely on some goodwill from neighbors such as Norway; Norwegian producer Equinor has been investing in UK projects from heavy oil to wind power, loads its Ekofisk crude oil at Teesside, and retains close ties to oil major BP. Such ties would likely remain vital for the devolved Scottish government in the event of it winning its push for independence.
But critics argue government ambivalence risks sidelining technically challenging projects that require long-term certainty such as Cambo or Equinor's Rosebank, another big project on the drawing board.
"Developing anything from scratch in the UK is going to be very tough," one industry insider told S&P Global Platts. "The comparison with the Netherlands is marked -- the Netherlands are moving more quickly toward repurposing [offshore] infrastructure than the UK."