From the editor: Energy crisis did not move the needle on Western upstream policy [Gas in Transition]

One might have expected the global energy crisis to bring an end to Western antipathy towards domestic natural gas development. Three years on, the restrictive policies that led to the crisis largely remain in place. In some cases, governments have clamped down even further, sapping investment and undermining energy security.

UK conditions worsen

The UK introduced a windfall tax on oil and gas profits in 2022, to raise funds to cap the soaring cost of energy for households and businesses. The Labour party’s landslide election victory this month may be welcome for those hoping for an end to the economic turbulence that marred the recent years of Conservative rule. But unless Labour changes course, the North Sea oil and gas industry faces a further increase in the windfall tax, of three percentage points, bringing the overall profit tax to 75%, which is among the highest in the world. It will also get rid of loopholes that allow operators to deduct investments from their tax burden.

North Sea producers say the levy, which is due to remain in place until 2029, has scuppered investment plans and will accelerate the decline in the country’s production. This is not to say a Conservative win would have been celebrated by the industry, as they had no plans to scrap the levy.

The result of these policies will be higher costs from increased energy imports for years to come. It can be argued that such a high tax was justified when gas prices soared. Prices are still elevated versus historic norms, but ten times lower than they were at the height of the energy crisis in the summer of 2022. Yet the tax remains.

And if more tax is justified when oil and gas companies are making “heinous” profits on the back of a market in short supply, then surely tax breaks are justified when those same companies are booking record losses during a market downturn. But unlike neighbouring Norway, the UK offered no such support when oil and gas prices tanked during the COVID-19 pandemic.

Equally concerning, Labour intends to call time on oil and gas licensing. The party says it will not revoke any existing licences because “oil and gas production in the North Sea will be with us for decades to come, and the North Sea will be managed in a way that does not jeopardise jobs.” But by preventing the issue of new licences, that production will fall more rapidly and jobs will be lost.

In Norway, on the other hand, there has long been political consensus across the major parties that oil and gas licensing should continue for years if not decades to come – fortunately for Norwegians and Europeans in general.

Environmental activists will also continue their campaigning against any oil and gas developments that have secured licences, whether through lobbying or seeking to block government approvals in the courts.

Elsewhere few changes

Elsewhere in Europe, most countries that adopted prohibitive upstream policies before the crisis have kept those policies in place, while those that are still eager to capitalise on their domestic resources, such as Romania, continue to be.

In the US, the big development this year was the Biden administration pause on approvals to LNG exports to non-FTA countries, to give the energy department time to reassess the environmental footprint of these supplies. The move does not affect projects due online in the near term but has major implications for those seeking to reach a final investment decision (FID) soon with the aim of launching towards the end of the decade. Under Biden, the government has also sought to limit federal leases.

Former President Donald Trump, currently leading in the polls, has vowed to do away with the LNG pause and any other restrictions on oil and gas development immediately. Unlike in Europe, though, oil and gas development was of course never under any significant restrictions.

In Australia, the government launched its Future Gas Strategy earlier this year that recognises the role of gas throughout the transition, and that the country cannot rely on past investments in supply alone to meet future demand, and so must spur exploration efforts. However, while the strategy has been welcomed by the industry, this can largely be seen as a continuation of existing policy rather than a change in course.

A reversal in New Zealand

A notable U-turn has taken place in New Zealand, however. The government plans this year to overturn a 2018 ban on new oil and gas exploration that was introduced by the preceding administration. Not only did the ban prevent the discovery of new fields but it also cut investment in further development of those already in production. Allowing further exploration is prudent, but the damage has already been done. Gas production is on the decline, posing a risk to security of supply. New Zealand lacks any LNG import capacity, although it is planning to build a terminal. In the meantime, there is no supplement to domestic supply, and shortages may force the country to fall back on more coal use.