Can Osborne’s 2014 Budget Stave Off UK Energy Security Concerns?

Chancellor George Osborne said the United Kingdom would review the whole tax regime to foster indigenous production, in a moment its energy security is put at risk by the standoff in Crimea and the closure of coal-fired power plants. His intervention was welcomed by the industry, with some market movements indicating that the new measures gladdened investors’ hearths. But the real problem of the United Kingdom remains the midstream and the downstream.

OSBORNE ANNOUNCED TAX BREAKS

“We will take forward all recommendations of the Wood report. And we will review the whole tax regime to make sure it is fit for the purpose of extracting every drop of oil we can,” Osborne said during the Budget 2014 speech, calling North Sea’s oil and gas one “key British export.”

The report commissioned by the government to Sir Ian Wood suggested that the British economy could deeply benefit from the UK Continental Shelf’s oil and gas recovery maximisation, with a ‘£200 billion boost over the next 20 years.’ The report also stated that oil and gas production can be increased by one third, reversing the 40% decline occurred in the last 3 years. 

Arguing that Scotland would not be able to equally support the industry, Osborne added on Wednesday that the government would immediately introduce a new allowance for ultra high pressure, high temperature fields. The measure, which was highly expected by analysts, introduces a tax allowance as a percentage of total capital spending. In this sense, the government will promote exploration, appraisal and development of the most complicated fields.

On the other hand, Osborne mentioned shale gas just once during his speech, not unveiling new details of the British strategy to foster the unconventional industry. But that is nothing particularly new. The Chancellor did indeed show several times he is a mild supporter of unconventional gas. While recognizing potential positive contributions to the economy, he did dismiss the possibility of lower household gas bills in case of large-scale fracking. Among the people at the helm of the country, Osborne has traditionally been the most cautious about shale gas‘ potentialities.

MEANWHILE, OMV BUYS ASSETS IN THE UK

As already mentioned, the industry embraced the measures announced by the Treasury on Monday. A first indication came on Monday, when Austria-based OMV strengthened its position in West of Shetland, acquiring four licenses including the Cambo field and the Blackrock prospect.

"This transaction further strengthens OMV’s portfolio of assets in our UK focus area, West of Shetland, where we are consistently executing our strategy of unlocking value from our investments by taking larger stakes and more projects with operatorship within our upstream portfolio," OMV CEO Gerhard Roiss commented in a note released early in the morning. 

OMV, which holds interests in 22 licences in West of Shetland, openly asked UK authorities an intensified cooperation to “unlock the substantial potential in the area.” The Vienna-based company will also take over operatorship from Hess to cement its position in the Cambo area. 

‘OMV UK has a unique position in the Cambo area offering potential valuable synergies, with the adjacent OMV-operated Tornado discovery and the Suilven discovery. There are also further prospects with tie-back potential to develop Cambo as a valuable area hub. With this transaction, OMV will acquire 60 mn boe of recoverable hydrocarbons, mainly in the field Cambo which is under appraisal, with further exploration and appraisal potential for USD 50 mn. Depending on future developments, a contingent payment of up to USD 35 mn is possible,’ reads the communiqué. 

Other companies equally sounded enthusiastic. EDF Energy cheerfully supported the measures announced to stimulate investments in the UK.

'Even after today’s temporary adjustments are made to this measure, the Government has shown that it remains committed to its long term energy policies. EDF Energy welcomes the continuing support for this stable and long term approach,' reads a note released on Wednesday. 

Also the energy intensive industries had reasons to be happy. According to an analysis by Edelman, ‘the he winners of the day were indisputably Britain’s energy intensive industries, which have argued forcefully that rebuilding the economy is dependent upon their sectors remaining competitive.’ The £7.5bn package does indeed include a freeze on the Carbon Price Floor from 2016 to 2020 and other advantages for industrial sectors. 

RENEWABLES, ENERGY SECURITY: MIDSTREAM, DOWNSTREAM 

The measure introduced by the government will alleviate the on-going tensions with companies active in the UK, but it will not solve all the issues. Energy security is not just a matter of investments in the upstream.

In September, British ministers decided not to boost gas storage capacity, saying that supplies are large enough and the system does not require a £750 million investment over 10 years, dismissing industry’s requests. 

In this sense, the government is betting on the market, believing that security of supply can be delivered more cheaply in this way. “It is up to industry to get on and invest in building gas storage,” Energy Minister Michael Fellon said six months ago.

Industry and politicians got stuck in the blame game about infrastructures. Consequently, the situation did not change in the last years and the United Kingdom cannot do anything but remain the European country with the lowest storage capacity as percentage of national demand (4%) along with Belgium. All the other big European countries stored between 12% (Spain) and 29% (France) of the national demand.

This alarming figure, mainly due to the fact that the UK heavily relied on the UKCS in the past, is just the first piece of jigsaw. The British government, which branded itself the “greenest government ever” at the beginning of the legislature, has to face even higher hurdles.

According to Bloomberg, the UK risks power shortages ‘because utilities may react to Europe’s toughest carbon emissions rules by closing plants without replacing them.’ It comes as little surprise that Britain is the worst country in Western Europe also in terms of electricity available over peak demand.

That is even more scary considering some expected developments in the next years. By 2019, coal-fired plants supplying about 25 million British homes could close, following the trend of the last 15 months. According to EDF, the closure of coal-fired plants would negatively impact on long-term security of electricity supply in the country. 

Limited investments in renewables are the cherry on the top. The country is just before Luxembourg, Cyprus and Malta in terms of proportion of electricity generated from renewable sources. According to the last available statistics by Eurostat, the other 23 EU countries are all performing better.

In this sense, the measures announced by Osborne are definitely positive, but nobody could even imagine that the energy problems will be over any time soon. As long as the industry and the government will continue their blame game, the solution will be as likely as having two people with four aces in the same round of poker.

Sergio Matalucci