Why Scotland and the UK importing more oil and gas is not the answer to decarbonisation by Scottish Energy Forum President, Gabriel Mynheer

It is evident that the future of the UK’s oil and gas industry has become a highly politicised issue and has come to the fore in this general election campaign.
The UK used to produce enough energy to be self-sufficient. Today, our oil and gas consumption is double that of domestic production, with more than 40% of our total energy consumption now imported. We are becoming increasingly reliant on energy imports to meet our everyday needs. If we don’t continue to invest in indigenous oil and gas production then it is expected that we’ll be forced to import more than 80% of our energy needs by 2030.
While the UK’s renewable sector is gaining momentum, it’s not accelerating fast enough. A lack of enabling policy, compounded by the UK’s permitting and approval process, is hindering progress. Meanwhile, transitioning oil and gas too quickly from the economy without sufficient new energy replacement could expose the UK to all sorts of major issues. Gas backup is crucial for the reliability of intermittent renewables such as wind and solar. Fundamentally, without a healthy UK gas sector, the future of renewables will be jeopardised. So, import more gas?

The intensity of emissions associated with domestic gas production is on average 7.5 times lower than that associated with liquified natural gas (LNG) imports, while the carbon footprint of homegrown oil production is around three times lower than imported barrels. In essence, we would end up importing more carbon-intensive volumes from countries with much weaker governance. While the UK could proudly say that it is reducing emissions associated with its own production, our contributions towards Global emissions will increase considerably!

Increased energy imports will also increase the risk of power outages which, in a worst case scenario, could lead the Government to revert to coal as a back-up. This is not an impossibility given the possible shutdown of the Rough Storage Field off the east coast of England, which accounts for 50% of our storage capacity. What is not widely communicated is just how little our gas storage capacity is. At just 12 days, UK gas storage is considerably lower than the European storage average of 98 days making us much more sensitive to gas market conditions during peak winter demand periods. Not fixing our gas storage system exposes us to LNG purchasing trends from Europe, China and India.

What is evident is that whichever party is in government, it needs to prioritise the development and enactment of a coherent energy policy and supportive tax framework. Such measures should incentivise investment while enhancing energy resilience. The plan needs to recognise that all energy sources play an important role but acknowledge that ambitions and how the sector is constituted will change over time. It needs to facilitate an effective energy transition aimed at meeting net zero targets, but not at the expense of energy security.

How can this be achieved? The UK has an abundance of energy sector opportunities waiting to be unlocked. But unless there is a stable fiscal mechanism in place to incentivise companies to exploit these, we will continue on the economical self-destruction path that we have begun.

Currently, the UK’s oil and gas tax system is considered one of the most unstable fiscal systems in the world, having experienced four changes in the last two years alone. In 2021, the oil and gas sector was taxed at a rate of 40%. Following a dramatic increase to energy prices the Government implemented a windfall tax which saw the overall tax rate increase to 75%. Ironically, when prices fell to record lows during the Covid period, and companies struggled to cover their overheads, governmental support was nowhere to be seen. Yet, without complaint, the sector continued to produce the barrels and molecules that the UK so desperately needs.

The Labour Party intends to increase taxation on the sector to a rate of 78%, naively claiming that this would align the UK with Norway. But the fiscal mechanisms could not be more different. The current UK fiscal mechanism is much harsher on a full-cycle basis than Norway’s, as it lacks the carefully constructed investment allowances designed to encourage exploration and development activities.

A fiscal mechanism that boasts a high tax rate and disincentivises new investment will accelerate production declines which will ultimately accelerate the economic need to abandon maturing fields. Lower production means lower net tax receipts for the Government, meanwhile accelerated field abandonment results in large payments made to the oil and gas companies by the taxpayer. This means there are considerably less revenues available to the Government, thereby actually costing the country more.

Naturally, lower investment levels would also negatively impact employment levels. There are 200,000 people in the UK working both directly and indirectly in its offshore sector. But 95,000 energy jobs will be at risk if investment does not increase significantly.

If ministers were to incentivise investment in the sector then the benefits are huge. A recent Wood Mackenzie study suggests that developing Rosebank and Cambo alone would generate gross value additions of more than $40bn dollars, including $4bn in its peak year. That equates to about 2% of Scotland’s GDP. It will reduce our emissions and will also enable employment for 1,000 people per year for 30-plus years.

Concerningly, the results of a recent survey by the trade body Offshore Energies UK showed that most UK operators are now looking to reduce their investments in its oil and gas sector over the coming years, because of diminishing investment returns, increased taxation, greater political risk and overall basin declines.

Such sentiment may also impact the renewables sector. Jon Fitzpatrick of Gneiss Energy said “Energy supermajors have all but exited the North Sea basin and my concern is that this dwindling confidence will affect offshore wind investors – many of whom are exactly the same energy majors – too”. He added “investors want certainty, or at least confidence in a stable regulatory and fiscal regime. Confidence that their projects will receive a Contract for Difference at a reasonable price (and that allows for home-grown content), certainty that future grid charges will be stable and certainty that offshore wind schemes will not become cash cows in the years ahead”.

Regardless of ones political preferences, we find ourselves at a critical juncture where some urgent decisions need to made. Government needs to understand that the UK’s energy transition will not happen unless we invest in oil and gas production today. We can have a green agenda but still produce hydrocarbons. Government needs to be pragmatic and work with the experts to implement a sensible policy to deliver the UK’s twin targets of energy security and decarbonisation.

By Gabriel Mynheer, President of the Scottish Energy Forum.

The Scottish Energy Forum, is an impartial organisiation that seeks to promote better communication and understanding between industry and policymakers across the entire energy spectrum, so as to contribute to a better informed UK Energy Strategy. We welcome any opportunities to host, or contribute to, any similar fora in future, whichever aspect of energy policy is concerned. Please do get in touch for more information via https://scottishenergyforum.org/contact/