UK upstream industry faces the 'Cambo test'

The opposition to the development of the Cambo oil field off Scotland has had a leg-up from both the International Energy Agency (IEA) and the Intergovernmental Panel on Climate Change (IPCC), as well as from local politicians weighing in on the matter of climate change.

The final investment decision is expected later this year, which risks clashing with the COP26 climate talks in Scotland where the UK will be keen to display its leadership in the fight against climate change.

The upstream lobby group OGUK launched its annual economic report – coincidentally during another fortnight of demonstrations in the capital held under the Extinction Rebellion flag – September 1. But whether the predicted billions are invested in new oil and gas production in the coming years will depend more than ever on the so-called 'social licence to operate.'

If the UK is to be a leader in the fight against emissions, then it cannot also continue to bring new oil and gas fields on line, the false logic runs: stifling supply does nothing to stop demand, except perhaps by pricing the poor out of the market. It just helps the low-cost producers overseas.

Nevertheless, last month, Scotland's first minister Nicola Sturgeon urged the UK government not to approve the Cambo development, citing concerns over climate change. Also last month the IPCC's sixth annual report was described as a 'code red' for humanity if it did not make deep cuts in its emissions soon. And earlier in the summer, the director of the IEA said that no more oil and gas fields should be developed if global temperature rises were to meet the 2050 target.

The claims may all be questionable, given the huge range of uncertainty in climate change predictions, but this is the first time that a standard, offshore oil field development should arouse such hostility and this is ominous for the UK oil and gas industry as a whole. Other countries have already called time on new upstream licensing rounds. 

Launching the report, OGUK CEO Deirdre Michie said: “While the UK continues to use oil and gas, we should make the most of the resources we produce here. The North Sea Transition Deal reduces the need for imported energy, makes us more responsible for our own emissions and supports UK companies and people who are already investing in cleaner energy.”

But it is proving difficult to get this message across: apart from the money and the jobs that indigenous production brings to the economy, people still need to heat their homes, run industrial sites, manufacture plastics and so on. While OGUK may talk about an exciting story about low-carbon oil and gas, for many this is a contradiction in terms.

OGUK has also quoted the IPCC report approvingly, and indeed said that the 'code red' report endorsed oil and gas production as key parts of emissions mitigation. It would add fresh impetus to the transition to low-carbon energy, it said, pointing to declining oil and gas production and the transferable skill-set of the offshore supply chain.

It also cites the UK independent agency Commission for Climate Change (CCC) which says that by 2050 the UK will need 80bn barrels of oil equivalent, with the annual volume falling over time. For OGUK the question is about managing the indigenous decline to ensure that as much of that energy as possible is produced in the UK – within the prescribed emissions intensity limits.

It said at a press briefing August 31 that it expected £21bn ($29bn) to be invested in the UK continental shelf in the coming five years; a chunk of that will be on Cambo, assuming that it goes ahead. The field's development will have a low carbon footprint but the exact definition of that – the 'climate compatibility checks' each new field must undergo – is still being discussed at a government level.

The report comes after a record volume of gas – 56% of the total – was imported in winter, "underlining the need to manage the nation’s transition to green energy while minimising reliance on other countries." The prolonged cold spell saw very little wind, and gas met 35% of the power demand mix, ayear on year jump of about 7%.

The report also found that, overall, the UK still gets 73% of its total energy from gas and oil, with production from the UK Continental Shelf providing around 70% of this demand. Renewables met 42% of electricity demand in 2020 but electricity only accounts for 20% of the UK’s total energy use. 

OGUK CEO Deirdre Michie said: “Oil and gas provided nearly three-quarters of the UK’s total energy last year, and we will continue to rely on them to heat our homes, keep our lights on and create many of our everyday essentials from medicines to mobile phones to road surfaces. About 85% of UK homes are still heated by gas but imported gas hit a record high last year.”

A failure to invest in new oil and gas fields – to replace those in decline now – would mean the UK could meet only a third of its future needs, leaving the nation more reliant on imports.

The report also found that Between now and 2050, half the UK’s energy will still need to come from oil and gas. In 2021 the activity generated across the country by the industry – known as gross value added – is forecast to be £31.1bn.

“We all know that change is needed so the question is how fast we make that change. This report shows the reality that cutting off the domestic production of oil and gas faster than we can reduce demand risks leaving us increasingly dependent on other countries that often generate higher emissions," Michie said.