UK North Sea Energy Review April 2022

The oil and gas authority’s name change to reflect efforts in the energy transition, the state of the North Sea offshore industry in the wake of the Russian invasion of Ukraine, and a number of field development updates featured in the UK North Sea oil and gas news flow this past month.

The UK Oil and Gas Authority changed on 21 March its name to the North Sea Transition Authority (NSTA) to reflect its evolving role in the energy transition. The NSTA will continue to play a vital role in ensuring energy security as the body which stewards the oil and gas industry, both on and offshore, with energy transition issues already playing a significant and increasing role in the organisation’s day-to-day activities.

“Investment in the North Sea is therefore vital, but the increasingly polarised debate shook industry confidence, putting billions of pounds worth of capital expenditure at risk,” said Dr Andy Samuel, Chief Executive of the North Sea Transition Authority.  

“The UKCS can still attract investors and is open for the right business. We are stewarding a good number of oil and gas developments in line with our net-zero test, ensuring cleaner production, while bolstering energy security and giving the UK options,” Samuel added.

The UK’s underwater industry generates revenues of £7.8 billion, 43% of which are attributable to exports, and directly and indirectly employs 45,000 people. Emerging sectors such as offshore floating wind, CCUS, and hydrogen production offer future growth potential and opportunities to support the UK’s energy transition and net-zero ambitions, the Global Underwater Hub said in a white paper in March. A significant contributor to the UK economy, the industry directly supports £11 billion of gross value add (GVA) per annum.

“With its market leading position, the UK’s underwater industry is arguably one of the country’s biggest opportunities for growth over the next 15 years, and one that can help accelerate our net-zero ambitions,” the paper reads.

“The UK’s underwater supply chain SMEs, the backbone of innovation in addressing industry demand, are driving forward capabilities which are highly transferable into marine and offshore renewables and other sectors,” according to the paper.

Flaring in the UK North Sea fell by 19% in 2021, building on a 22% decrease the previous year, new analysis by NSTA showed in early March. Production facilities cut their flaring by 6 billion cubic feet (bcf), to 26 bcf, a reduction equivalent to the annual gas demand of 130,000 UK homes.

It means that offshore flaring volumes dipped to their lowest annual level on the authority’s records, while an all-time monthly low was set in June 2021.

“As we transition, the UK needs a stable supply of domestic oil and gas to minimise reliance on imports and bolster energy security. To ensure that production is as clean as possible, the OGA is holding the sector to account, including on flaring and venting, through close monitoring and benchmarking and proactive stewardship,” NSTA’s Samuel said.

Offshore Energies UK (OEUK) warned in its Business Outlook 2022 that production would fall by up to 15% annually unless there is rapid investment in new infrastructure.

“This decline is much faster than the predicted reduction in UK energy demand so, if there is no such investment then, by 2030, we will be reliant on other countries for at least 80% of our gas and 70% of our oil. That gap will have to be filled by imports, meaning the UK will become ever more dependent on other countries,” OEUK said.  

The report revealed that for the first time, Norway has become the UK’s primary source of gas – supplying the UK with more gas than came from the UK Continental Shelf in 2021.

The energy transition “will only happen if our policymakers can create and sustain the right environment for long-term investment across all forms of energy production. To achieve that we need stable long-term regulatory policies, clear and predictable fiscal policies and improved political alignment across all the countries and parties of the UK,” CEO Deirdre Michie said in the introduction to the outlook.  

In response to calls for the First Minister to support increased oil and gas production as the impact of the Russian aggression in Ukraine is expected to lead to rising gas prices, compounding the cost of living crisis, OEUK’s Michie commented:

“If we are going to deliver a fair and managed transition that also ensures security of energy supply, we need both rapid investment in renewable energy plus investment to sustain the production of oil and gas.”

UK North Sea production continues to decline, and without fresh investment, the country will only increase its reliance on oil and gas imports while it goes through the energy transition, she added.

“The UK offshore industry is changing and is already investing in renewable fuel and technology to harness power from wind and hydrogen to help decarbonise energy in the medium to long term. But in the short term it remains the case, whether we like it or not, that 85% of UK homes are reliant on gas, while 32 million vehicles on the road continue to require petrol and diesel for transport needs,” Michie noted.

OEUK also responded to calls for a windfall tax on the UK’s energy providers, warning that such a tax risks adding a UK supply crisis to a global price crisis.
 
“The Europe-wide gas shortages are a stark reminder of why the UK should safeguard its own offshore sector – otherwise we risk heaping a supply crisis on top of an existing price crisis,” OEUK’s Michie said.

Capital expenditures in the North Sea have slumped in recent years, falling by more than 90% since 2014.

“If that lack of investment in platforms, pipelines and other infrastructure, were to continue, then production would decline in coming years – just when we most need our own oil and gas supplies,” Michie noted.

“It means a windfall tax would actually be the worst thing for consumers because it would discourage energy companies from making all those vital investments. That would reduce our energy security and make us even more dependent on imports from places like Russia and the Middle East,” she added.

The UK’s offshore energy industry welcomed a speech by Prime Minister Boris Johnson warning that it would be “crazy” to shut down North Sea oil and gas production in the face of global shortages and price spikes.

“So we welcome the prime minister’s comments and would ask his government to work with us on the practical steps needed to encourage energy companies to invest in new fields and wells on the UK’s continental shelf,” OEUK’s Michie said.

Commenting on Chancellor Rishi Sunak’s Spring Statement and forecasts by the Office for Fiscal Responsibility, Michie said that “Our industry needs long term confidence in the UK, allowing us to make major investment decisions in both oil and gas production and the new low carbon technologies including Carbon Capture and Storage, hydrogen and offshore wind.”

In response to Vladimir Putin’s illegal invasion of Ukraine, the UK will phase out imports of Russian oil by the end of the year, the government said on 8 March.

“This transition will give the market, businesses and supply chains more than enough time to replace Russian imports – which make up 8% of UK demand,” Business and Energy Secretary Kwasi Kwarteng said.
 
A week before that, the UK banned Russian ships from UK ports, including any vessels owned or operated by anyone connected to Russia and authorities will also gain new powers to detain Russian vessels.

In company news, Shell said it plans to invest £20 billion to £25 billion in the UK energy system over the next 10 years. More than 75% of the investment – which is subject to board approval and supporting policy – would go to low and zero-carbon products and services, including offshore wind, hydrogen, carbon capture utilisation and storage (CCUS), and electric mobility.

“Shell cannot act alone. Investing this money requires urgency of action across government to deliver the enabling policy and business case frameworks. These must address both the supply and demand side of the energy transition (in areas such as hydrogen and CCS, for example),” Shell UK Country Chair David Bunch said.
 
Centrica, the owner of British Gas, is exiting gas supply deals with Gazprom and other Russian firms “as a matter of urgency.”  
UK gas developer IOG plc is backing out of a gas sale agreement with Gazprom Marketing & Trading Limited (GM&T) with immediate effect. Last year, IOG signed a gas sale agreement with the Gazprom unit to sell its equity production from the Elgood and Southwark fields in the North Sea up to October 2023.  

A few days later, IOG said it had executed a new gas sales agreement with BP Gas Marketing Limited for its equity gas from all of the Saturn Banks Phase 1 fields (Blythe, Elgood, Southwark), plus the Nailsworth and Elland fields which are part of Phase 2, on a long-term basis with break clauses after September 2023.  

Commenting on IOG’s final audited results for 2021, CEO Andrew Hockey said in mid-March:

“Last year saw an immense effort by the whole IOG team to progress towards production, culminating in the safe and successful delivery of First Gas from the Blythe and Elgood fields on 13 and 15 March 2022 respectively.”

Neptune Energy announced on March 1 its aim to go beyond net-zero and store more carbon than is emitted from its operations and the use of its sold products by 2030.
 
International energy logistics provider Peterson has signed a new contract with Shell to provide supply base services from the Port of Lowestoft. The new contract follows the expiry of a 7-year-old contract and strengthens the long-term partnership between Peterson and Shell in this region.  

Serica Energy said on 17 March that production had restarted from the Rhum field following the successful operation with a Diving Support Vessel to replace a faulty component in the Rhum Subsea Control Module which had necessitated a temporary shutdown of Rhum production.  

Harbour Energy plc expects its 2022 production at 195,000-210,000 boepd, which would be some 15% higher than in 2021, the company said in its 2021 results release. Harbour Energy’s production stood at 219,000 boepd to the end February.

Waldorf Production has entered into a binding agreement with a wholly-owned subsidiary of MOL Hungarian Oil and Gas Plc for the acquisition of some of MOL’s UK subsidiaries comprising their entire UKCS business. The key UKCS assets being acquired include non-operated interests of 20% in the Greater Catcher Area, 50% in the Scolty and Crathes fields, as well as 21.83% in the Scott and 1.59% in the Telford licences.

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