Could Shell’s Cambo pull-out spell the end of North Sea oil?

Anglo-Dutch oil firm Royal Dutch Shell took a landmark decision earlier this month to walk away from the Cambo oil field in the North Atlantic but questions remain as to whether it is too early to write off North Sea and other similar mature offshore provinces.

The UK’s tougher climate agenda is prompting oil companies to retreat from the ageing basin, say energy experts.

For decades, supermajors such as Shell and UK-based BP have been major investors in the North Sea and – despite reducing their presence in the basin in recent years – the region has until recently been considered as central to their future in oil and gas.

Shell’s withdrawal came just weeks after a British regulator rejected its plans to develop Jackdaw, another North Sea gas field.

In a statement announcing its decision, Shell declined to point the finger at the UK’s tougher environmental regime for its pullout from Cambo, blaming instead the “economic case for investment,” which it said was not strong.

However energy analysts say the economic case for Cambo was undermined by the British government, which had made clear the development would need to meet certain “climate concessions” in order to win its approval.

“The optics on Cambo were not great. The project had become a lightning rod for environmental activism and protests,” Jane Rangel, a crude analyst at London-based research firm Energy Aspects, told Gas Outlook.

“The UK did not offer companies the same sort of temporary tax incentives that, for example, Norway did during the pandemic to help firms who were struggling in the low price environment,” she added.

Critics say the position of the British Government vis-à-vis oil and gas development is nonetheless unclear, particularly after the UK backed away from supporting the newly-established Beyond Oil and Gas Alliance that aims to halt new oil and gas drilling.

The alliance, set up by Denmark and Costa Rica in September, includes as its members: France, Greenland, Ireland, Sweden, Wales and the Canadian province of Quebec.

North Sea opportunities remain

Shell’s Cambo withdrawal has brought work on the project temporarily to a halt. In a statement, Jonathan Roger the CEO of Siccar Point – the 70% owner of Cambo – said: “We are in a position where the Cambo project cannot progress on the originally planned timescale. We are pausing the development while we evaluate next steps.”

The licence for the Cambo project, which is located north-west of the Shetland Islands, is due to expire in March.

When contacted for additional comment on whether the pause at Cambo was likely to be permanent or if Siccar will look to find another partner to take on Shell’s 30% stake in the oilfield, Siccar declined the request.

Shell, which was asked to comment on what its pull-out was likely to mean for the future of fossil fuels development in the North Sea, referred Gas Outlook to an earlier statement, which said that the “North Sea – and Shell in it – have a critical role to play in the UK’s energy mix.”

However, in recent years, many big listed oil companies including ExxonMobil, JX Nippon and BP have reduced, or are in the process of reducing, their presence in the North Sea, by selling off assets. Those left behind are relative minnows that could lack the wherewithal to develop a field the size of Cambo.

“What we have seen over the last few years and I expect this to continue is a greater share of North Sea output being produced by private companies that are less constrained by ESG requirements,” said Rangel.

But is it too early to write off North Sea and other similar mature offshore provinces? It is worth noting that the death knell has been sounded for the North Sea many times before. Indeed, just a day before the announcement by Shell of its pull-out the UK Oil and Gas Authority (OGA) released its second Wells Insight report, which painted a fairly upbeat picture of the North Sea and its prospects.

Although the OGA refused to comment directly to Gas Outlook on the ramifications of the Shell decision, it reaffirmed the view contained in its report that there were “significant opportunities remaining in the Basin.”

As of the end of 2020, 51 wells were planned for 2021 or around half of those drilled in 2020. However, the OGA forecasts, “a rebound in drilling activity with Central North Sea and Northern North Sea leading the way in the years following 2021.”

Total development drilling spending also remained high in 2020, at £2.1 billion. This was largely because of the more complex developments, such as high-pressure, high-temperature fields.

Green pressure mounts

But the optimism expressed by many environmentalists – that Shell’s Cambo pullout may yet spark an exodus of oil companies from the North Sea – is not entirely without foundation. For a start, the investment climate for new offshore oil and gas projects is described by some in the industry polled by Reuters, as being nothing less than “toxic.”

Meanwhile, the Paris-based International Energy Agency (IEA) recommends that no new oil and gas projects should be developed in order to restrict global warming to 1.5 degrees Celsius. And in the UK, a case against the government and its OGA commenced its judicial hearing at a High Court in London earlier this month to determine whether tax breaks for oil and gas producers are legal. A ruling is expected to take weeks or months.

In comments sent to Gas Outlook, Philip Evans, oil campaigner at Greenpeace UK said: “This really should be the deathblow for Cambo…The truth is rejecting the permit is the only practical option. Anything else would be a disaster for our climate and would leave the UK consumer vulnerable to volatile fossil fuel markets.”

Sam Chetan-Welsh, a political campaigner at Greenpeace, said: “The world’s top energy experts have made it clear that we can’t afford any new coal, oil or gas if we want a chance to avoid catastrophic climate change.”

Yet the last word on the matter may still go to the UK treasury. There are already fears that the cost to British business and energy consumers of Shell’s decision to pull out of the Cambo oil and gas development could be enormous. Energy bills could well surge as could inflation, which is already forecast to rise at 5 per cent in 2022.

In addition, the UK will have to import more oil from potentially unstable countries in West Africa and the Middle East, increasing the carbon footprint globally and making the UK’s energy supply less secure. The latest OGUK research shows in the year to June, the UK paid almost £20 billion to foreign countries for oil and gas imports.

Job losses are also a major concern, said Gary Smith, the General Secretary of the GMB union, telling Gas Outlook that Cambo’s shutdown is “throwing energy workers under the bus.”

 “It’s meant to be a transition to a low carbon economy, not a surrender of the national interest,” he added.