UK Government Vows to “Max Out” the North Sea With Hundreds of New Oil and Natural Gas Licenses

The North Sea is fast becoming the political battleground of choice in the run-up to the next UK general election. As competing energy security and net-zero agendas pull politicians in different directions in the United States and beyond, UK politicians are scoping out North Sea oil and natural gas as a core campaign issue. But will the Conservatives’ latest attempt to win back the oil and gas industry be enough to convince stakeholders that the North Sea is back open for business?

In January 2015, the North Sea was the world’s most active offshore drilling region, with a rig count surpassing the Gulf of Mexico and other resource-rich offshore basins. But a combination of persistent low oil prices, regulatory challenges, and the COVID-19 pandemic caused production in recent years to slow. Now, as interest in offshore drilling projects surges amidst a global energy supply crunch, North Sea oil and natural gas production is back in the spotlight as both a real solution and as a proxy for the country’s larger debate around energy security, cost of living, and climate goals.

Sunak’s Plans to “Max Out” the North Sea

As previously covered by Energy In Depth, the UK Labour party has proposed a block on all new domestic oil and gas developments, if they defeat the Conservatives in the next election. Now, the Conservative government has announced plans for “hundreds” of new oil and gas licenses, directly opposing Labour’s plans and marking a significant change in government messaging on domestic fossil fuel production. While the White House stalls on issuing offshore leases in the Gulf of Mexico, the move by UK Prime Minister Rishi Sunak signifies a decisive endorsement of UK oil and natural gas – but one that hinges on victory in a tightly contested election.

Last week, Rishi Sunak outlined his commitment to future oil and gas licensing rounds, with “hundreds” of new licenses set to be granted in the UK starting in fall 2023. During his trip to Aberdeenshire, the Prime Minister also unveiled new carbon capture utilization and storage (CCUS) clusters. The development comes a week after UK energy minister Grant Shapps indicated that the government’s stance was shifting, as he told the Financial Times the Conservatives intend to “max out” the North Sea.

Sunak’s government is now focused on shoring up the UK’s energy security, in tandem with achieving net-zero goals. Speaking to the BBC, PM Rishi Sunak argued that awarding new licenses is “entirely consistent” with the UK’s net-zero plan.

In the government’s official press release, the Prime Minister commented:

“Even when we’ve reached net zero in 2050, a quarter of our energy needs will come from oil and gas. But there are those who would rather that it come from hostile states than from the supplies we have here at home.”

Windfall Tax Burden Persists

This marks a notable departure from Conservative policies such as the Energy Profits Levy, which was widely criticized by industry for harming energy security goals and disincentivizing investment. As EID has previously explained, the levy (or windfall tax) was introduced in May last year and increased from its initial 25 percent to 35 percent in November.

The government recently dialed back on the windfall tax, introducing a price floor mechanism. As EID has outlined, while the price floor was welcomed, its impact is expected to be limited. With the latest announcement of new licensing rounds, North Sea oil and natural gas operators may find themselves asking the same question – is this too little too late?

The promise of new licenses will go some way to restoring confidence in the North Sea, however the government must also focus its attention on reforming the fiscal regime currently imposed on North Sea operators. So while key industry representatives have welcomed the announcement on the whole, there remains the sense that new licensing is just one piece of the North Sea puzzle.

Writing in Forbes, David Constable, a Fellow at Johns Hopkins Institute, argues that policy uncertainty still clouds UK oil and natural gas production:

“The question now is how much will the oil companies wish to pay the British government for the right to drill in the North Sea when they don’t know what their tax situation will be on their anticipated forthcoming profits?”

The UK government is taking small steps towards correcting the damage done by the windfall tax. In June, the government announced a review of the current tax regime for the oil and natural gas sector and called for input and participation from industry stakeholders in a bid to develop a predictable, long-term fiscal regime that supports jobs and investment.

Bottom line: Additional policy developments around permitting and tax reform will determine whether last week’s licensing announcement falls flat on encouraging new investment and reversing the damage done by the windfall tax.

We’ll be following the UK government’s review of the oil and gas tax regime closely for any developments.

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