In September 2020, the UK’s Oil and Gas Authority (OGA) finalised offers to oil and gas companies covering 113 licence areas for new offshore projects in the North Sea. Following a consultation process that opened in July 2019 and closed that September, the licences, comprising 260 blocks and part-blocks, were granted to 65 companies as the OGA looks to encourage further development in the country’ offshore sector.

Any ‘further development’ must, however, be understood within an overall context of declining production. A report from the Economics Observatory predicts that daily hydrocarbon production at existing oil fields could fall from 1.6 million barrels of oil equivalent in 2019 to below 200,000 by 2036. Indeed, much of this production is set to be financially unviable, with the report finding that, of the 8.3 billion barrels of oil equivalent set to be produced by 2050, only 3.7 billion barrels of oil equivalent would generate a profit for producers.

Profit therefore depends on significant numbers of new licenses being developed; however, a familiar challenge remains for these potential new projects, that of balancing financial reward with environmental responsibility. The OGA has claimed that it will manage the steadily declining production of UK oil and gas as the country moves towards a cleaner energy mix, but the group is caught between the dual pressures of the pandemic, which has created a demand for short-term stability, and broader environmental concerns, which continue to highlight the importance of long-term sustainability.

New licenses and continuing improvement

The continuation of the licencing round means, at least in the short-term, business as usual for an offshore industry that is accustomed to investment and expansion. Ross Dornan, market intelligence manager at Oil and Gas UK (OGUK), the leading industry body, calls the round “a crucial element in unlocking the new investment that will help continue to meet UK energy needs and sustain jobs across our sector”.

“Whilst facing the headwinds of Covid-19, it is more critical now than ever that the UK continues to explore and develop new resources that will help provide secure and affordable energy,” Dornan continues. “Achieving this means we can continue to anchor our world-class expertise in the UK as our sector positions itself to play a key role in the transition to a lower carbon future, as outlined in industry’s Roadmap 2035.”

The roadmap is the OGUK’s blueprint to ensure strong financial and environmental performances up to 2035. The ambitious targets laid out include a plan to increase the value of exports from the oil and gas sector to £20bn a year and increase the number of firms involved in the oil and gas supply chain who are exporting goods by 50%.

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Similarly, the industry is aiming to be net-zero by 2050, which will involve the dramatic cutting of its greenhouse gas emissions. Oil and gas companies will aim to reduce total emissions from 14 million tonnes of carbon dioxide equivalent today to just 0.5 million tonnes of carbon dioxide equivalent by 2050. Dornan thinks that the latest licencing round has been conducted in such a way as to help continue this positive trend.

“Our industry was one of the first major sectors to embrace the UK’s net-zero ambitions and we believe our commitment to reaching net-zero carbon emissions by 2050, along with our industry-leading objectives laid out in Roadmap 2035, position the UK Continental Shelf as a positive, forward-thinking, and investable basin,” says Dornan.

“[The industry] also helps ensure that the skills, capabilities, and infrastructure that will be crucial to advance net-zero solutions remain anchored in the UK.”

Business as usual amid instability

This licensing round will be particularly welcome for the oil and gas sector considering the disruptive impacts of the Covid-19 pandemic, with the awards providing a semblance of familiarity in uncertain times. Dornan noted that the continuation of long-established licencing processes helps ensure some stability amid the pandemic.

“The recent awards come at a time when our industry, and the wider economy, is facing huge pressures [and] it is encouraging that our basin continues to demonstrate its attractiveness to a wide range of companies,” says Dornan. “This is an industry that has a bright future, through providing secure and affordable energy and helping to provide the solutions required as part of the transition to a lower carbon economy.”

However, the prospect of financial uncertainty has triggered a temporary shutdown in some OGA processes, with the authority suspending what would have been its 2020-21 annual licencing round, highlighting a hesitancy to invest in large-scale projects amid the pandemic.

There is also a more pressing concern that the pandemic could trigger a sudden contraction in the sector, accelerating and exacerbating the long-running decline in the UK’s oil and gas production. OGUK estimated that up to 30,000 jobs could be lost in the industry by the end of 2020, while the Economics Observatory found that those involved in supply chains supporting the industry, particularly those working in the exploration sectors, could stand to “particularly suffer”.

This contraction also has environmental and social impacts, with the decline of a well-established industry presenting both opportunities and challenges for workers and the environment.

“The industry requires a managed decline and the workers and communities that currently depend on fossil fuels need and deserve a just transition,” explains Charlie Kronick, senior climate finance advisor at Greenpeace. “That means support for training and investment in what is likely to be a hugely successful renewable energy industry, requiring a redeployment of many of the same skills now employed offshore for oil and gas.”

Environmental challenges

Financial gain often comes at the cost of environmental protection in the oil and gas sector, and this is a fact that the OGA is aware of, and eager to avoid. The body has completed a series of thorough environmental reviews for all of the blocks offered in its latest licencing round, concluding that for all three regions of the North Sea where the blocks are located, the grant of licences “will not have an adverse effect on the integrity of the relevant sites”.

In addition, these reviews all conclude that individual blocks may need to be subject to specific habitat regulations assessments to determine the impacts on unique habitats, suggesting that the OGA is open to the idea of future environmental assessment on a more local scale, should it be necessary.

However, the licensing shows continued UK commitment to oil and gas production, in spite of the country’s lofty climate change goals to reach net-zero emissions by 2050. While carbon dioxide production fell by 2.9% in 2019, driven in part by a 29% reduction in coal use, the UK is not decarbonising quickly enough. Government projections made in 2018 predict that carbon dioxide emissions will fall by 10% by 2030, while the UK would need to cut such emissions by 31% by this date to stay on track for its 2050 targets.

However, these measures are incongruous with the governments plans to reach net-zero emissions by 2050 as, despite the planned downturn in domestic oil and gas production, the sector could still contribute considerably to emissions over the next three decades.

“There is a clear disconnect between what the government and the Oil and Gas Authority say they’re doing about climate change and actual delivery,” says Kronick. “The refusal of the OGA to acknowledge any link between the ongoing development of oil and gas in the North Sea and the government’s 2050 net-zero target leads to the issuing of licences to extract more fossil fuels than we can ever burn if we want to avoid catastrophic climate change.

“The collapse in demand brought on by the pandemic, dramatic as it has been, and the rapidly approaching peak in oil demand … won’t be enough to meet the targets of the Paris Agreement without more leadership from governments,” he continues. “OGA simply cannot keep issuing licences for new oil and gas exploration and be taken seriously on climate.”

Ultimately, neither assessment is incorrect, as the Covid-19 pandemic has shaken up traditional operating processes to the point where significant change is all but necessary. The tension remains with regards to what to do with this opportunity for change: expand the UK’s oil and gas industry to new areas, or overhaul the country’s reliance on fossil fuel production.