What role for gas in the UK energy system?
Extracting gas from the North Sea to bolster the UK energy system will make it much more difficult for the British government to make good on its latest carbon budget.
The challenge of delivering a secure, affordable and sustainable source of energy is one that multinational energy providers have been wrestling with for some time. It is also a conundrum being pondered by energy ministers the world over. Take Grant Shapps, who heads the newly formed Department for Energy Security and Net Zero, for instance. His three main aims – ensuring the UK energy system has enough energy for next winter, lowering energy bills and accelerating renewables – are straight out of the Energy Trilemma playbook.
However, in tackling the Trilemma, Shapps first needs to decide how integral onshore and offshore fossil fuels are likely to be in shoring up the UK’s energy security. Currently the UK’s energy strategy is as confusing as it is contradictory. Last September the-then Prime Minster, Liz Truss lifted the moratorium on fracking for shale gas in England, only for Rishi Sunak to re-impose it a month later when he took office.
While experts hold the view that shale gas won’t be part of the UK’s future energy mix, the prospects for offshore North Sea gas look promising, despite MPs demanding “a clear date for ending new oil and gas licensing rounds in the North Sea.”
Last October, the North Sea Transition Authority (NSTA), an independent regulator, opened the 33rd Offshore Oil & Gas Licensing round, which invited applications to explore 898 blocks in the southern North Sea. When the application window closed in January, the NSTA confirmed it had received “a total of 115 bids across 258 blocks and part-blocks, from a total of 76 companies.”
The NSTA said that while the fields have been previously explored, they are as yet undeveloped. In particular, the NSTA has identified “four priority areas” which have been named as the Greater Cygnus Area, the Cotton Area, the Greater Pegasus Area and the Greater West Sole Area. The regulator said that “in certain cases production could be seen in as little as 18 months.”
If the agency’s calculations prove to be correct, to what extent could putting these gas fields into production ease domestic energy security concerns? And secondly, given that the International Energy Agency (IEA) has warned that developing new gas fields could jeopardise net zero targets, should fossil fuel extraction be part of the Department for Energy Security and Net Zero’s portfolio?
Higher tax rates
In regard to energy security and supply, Offshore Energies UK (OEUK), a trade association, points to data published by the NSTA which shows that the four clusters “could contain around 1,000 billion cubic feet of recoverable gas combined,” with the Southern North Sea “more widely estimated to have some 1.7 billion barrel of oil equivalent (boe) remaining.”
If the clusters are developed, Neivan Boroujerdi, Director of Research in Wood Mackenzie’s Upstream Oil and Gas unit, thinks they could produce over 200 million cubic feet of gas per day (mmcfd) at peak, which he says would help “meet around 3-4% of the UK’s yearly gas demand.”
However, it is by no means a given that the size of the actual gas reserves discovered matches the analyst’s estimations. Professor Jon Gluyas, the Executive Director of the Durham Energy Institute, understands North Sea licensing rounds better than most. In the 2000s, he was one of the first to spot the untapped potential of redeveloping abandoned and poorly developed oil and gas fields. Seeing it as a commercial opportunity, his company was granted permission by the UK government to breathe new life into abandoned fields.
He says, “The advantage that subsurface engineers have now is that they have a much better understanding of the geometry of the basin and architecture of the reservoirs within it. On the flipside, we are talking about a mature basin and much of the oil and gas has gone. “So, I think it is wishful thinking to expect the basin to continue to deliver production at historical rates. That is not to say that we won’t see significant discoveries, but it will be difficult for companies to keep finding new deposits to replace those produced.”
But, what impact in the long term, would it have on price? Boroujerdi, believes that none of these new clusters “are going to move the needle much” – in terms of pricing or volumes.
He adds, “The latest iteration of the Energy Profits Levy (EPL) means these volumes will now be coming onstream at a much higher tax rate than what would have been expected when the round was launched in October, so it remains to be seen what corporate appetite looks like…”
That said, Boroujerdi also notes that the UK is “so interconnected with the European market” that it will have “little impact on price” as the UK will continue importing LNG which “will be the marginal supply to set the price.”
Barriers to new production
And what of the NSTA’s claim that some fields could yield gas in 18 months. Is this really possible?
Wood Mac’s Boroujerdi is not so sure: “start-up in 2025 is possible but regulatory, fiscal and environmental uncertainties remain big barriers.”
OEUK, for its part, says that the average timeframe from licence award to first production is “six years”, and “four years and eight months” for exploration to production.
Ross Dornan, OEUK’s Market Intelligence Manager, says that the latest licensing round, however, did have “some additional focus on priority areas which are already known to contain hydrocarbons.” He says that those areas “can be rapidly tied back to existing infrastructure, and have the potential to be developed quickly.” However, he would not be drawn on specific timeframe. “It’s too early to make an assessment of whether these opportunities can be realised within that time scale, but the prioritisation of these blocks should lead to faster production,” he added.
Should oil & gas play a role in the UK energy system?
But extracting gas from the North Sea will make it much more difficult for the UK to make good on its latest carbon budget, which has set an ambitious target of cutting emissions by 78% compared to 1990 levels. Therefore, it begs the question as to whether oil and gas should play any role in the UK’s future energy strategy?
Gluyas, the Durham professor, says, “Recent geopolitical shocks suggest that the UK must invest in its energy security, and in the short term, oil and gas is the best way of securing our energy future. However, if you look at the findings of the Climate Change Committee, fossil fuels will remain part of our net-zero future until at least 2050. That said, in terms of extraction, much can be done to improve recovery and make the process carbon neutral. I believe we can produce both new and rehabilitate old gas fields and do it at carbon zero.”
Dornan of OEUK notes, “It’s far better for UK jobs, the economy, and our climate goals that we meet our own demand with our own resources. Otherwise, we will become even more reliant on imports and less accountable for our own emissions.”
But Charlie Kronick, Senior Climate Advisor for Greenpeace UK, counters, “Chasing every last cubic inch of oil and gas from the North Sea will not provide energy security as anything extracted will be sold to the highest bidder on the international market. To argue that a domestic supply of dirty fossil fuels is somehow more secure or less carbon intensive completely misses the point.”
Kronick, who has worked in environmental development for three decades, believes that “the only thing our addiction to fossil fuels can guarantee is unpredictable energy bills for consumers and climate chaos.”
He says that the International Energy Agency “is clear that there is no room for new oil and gas development if we are to remain on track to hit our climate targets” and notes that “the Climate Change Committee is also clear that new oil and gas is not the best way to protect consumers from rocketing energy prices.”
“Genuine energy security,” he opines, “lies in the rapid deployment of renewables, investment in storage and a smarter grid, as well as an upgrade to our cold, inefficient homes through the likes of insulation and heat pumps. The quicker we can kick our fossil fuel habit and maximise cheaper and cleaner technologies, the quicker we can achieve real energy security and meet our climate commitments.”