From the Editor: Mixed messages continue [Gas in Transition]
The energy crisis has led to mounting calls for increased indigenous oil and gas supply in Europe. But while politicians, fearful of upsetting voters burdened by soaring energy costs, have stressed the need for greater energy security and affordability, some of their policies continue to undermine investment. The upstream industry continues to get mixed messages.
This problem is all too clear in the UK. The Conservative government resumed offshore oil and gas licensing last year, after the North Sea Transition Authority (NSTA) halted them in 2020, stating that it needed to assess whether its policies conflicted with the UK’s strategy for reaching net zero. The new licensing round has been hailed as a success, attracting 115 bids for 258 blocks and part-blocks from 76 companies.
“It’s fantastic to see such interest from industry in this round, with the awarded licences set to play an important role in boosting domestic energy production and securing the UK’s long-term energy security of supply,” UK energy minister Graham Stuart said in a statement in mid-January.
However, the very same government imposed a 25% windfall tax on oil and gas company profits in May last year, on top of the 40% headline tax rate that the industry already paid. That tax was later raised to 35%, and extended from 2025 to 2028. While companies can deduct some investments in new oil and gas projects from the tax, the industry warns that the policy will still endanger future upstream development.
And then, mere days after the results from the latest licensing round were announced, the opposition Labour leader Keir Starmer announced that, if his party won the next election, expected in 2024, there would be no investment in new North Sea fields.
“What we’ve said about oil and gas is that there does need to be a transition,” Starmer said, speaking on a panel at the World Economic Forum in Davos. “Obviously it will play its part during that transition but not new investment, not new fields up in the North Sea, because we need to go towards net zero, we need to ensure that renewable energy is where we go next.”
The comments were panned by oil and gas producers’ association Offshore Energies UK (OEUK), who said Starmer was damaging investor confidence.
“About 24mn homes (85% of the total) rely on gas boilers for heat and we get 42% of our electricity from gas. We also have 32mn vehicles running on petrol and diesel,” OEUK said in a statement. “So, we need gas and oil. The companies providing those fuels are the same companies that are investing in the [energy] transition.”
Highlighting the need for greater gas supply, the UK’s National Grid on January 26 asked coal-fired power plants to be warmed up, in order to serve as a back-up option for power generation, amid expectations that cold weather would drive up demand.
Even if more gas can be obtained abroad, this supply is more likely to be more costly and even clean, given the emissions associated with transport and production in countries that may have a less than stellar record on limiting upstream emissions.
Over in the US, president Joe Biden has likewise faced criticism for sending mixed messages to the oil and gas industry. The White House has urged producers to drill more as the energy crisis continues to push gasoline prices higher. The administration has also floated a windfall tax on industry profits.
As Daniel Turner, the founder and executive director of non-profit organisation Power The Future, wrote in a commentary in this issue of Gas in Transition, Biden “has aggressively attacked American fossil fuel production at every turn.”
“Government-issued leases are at the lowest level since before World War II, and Joe Biden continues to tell people ‘no more’.”
The American Petroleum Institute (API) has called on lawmakers to lift restrictions on natural gas and oil development in federal waters to meet rising demand. It also notes that the US Department of Energy takes about 25 times longer to approve permits for US LNG projects designated for non-free trade agreement (FTA) countries than those set to deliver gas to FTA countries. Permitting delays have held up around 29.9bn ft3/day of non-FTA permit applications, according to the API.
The API has warned that political rhetoric from the Biden administration is also sapping investment.
“They don’t believe we’re going to need oil and gas in 10 years … Why would someone build a new facility if the government is saying that we’re not going to need these facilities in the future,” the institute has said.
Such confusion will need to be addressed if future energy crises are to be averted. Current gas prices are on track to fall within a few years, as fortunately, investment in global supply is picking up. But as they decline, the risk is that discussions about energy security are once more drowned out by talk of sustainability, potentially to the detriment of both.