The North Sea could power the UK for decades, but a mix of windfall taxes and political uncertainty is driving away the billions of pounds of investments needed to maintain oil and gas production now and create low-carbon energy in the future, says OEUK’s Business Outlook 2023 report. The study describes how nine out of 10 of North Sea operators are cutting back investment, with the companies citing a mix of high taxes, political uncertainty and inflation as key factors in their decisions.

The cutback follows the windfall taxes imposed on North Sea oil and gas operators, under which their overall tax rate has risen from 40% to 75% in just 10 months. Offshore wind operators face a similar windfall tax, rated at 45%. Both taxes will remain in place till 2028 – even as prices drop and the ‘windfalls’ disappear.

Those tax rises make it much more difficult to finance new projects – as have the Labour Party’s additional proposals to backdate and raise the tax, remove most tax allowances, and restrict further exploration, should it win power, notes the OEUK.

The cuts in investment mean the UK’s potential oil and gas resources have immediately been downgraded, with 500mn barrels less likely to be produced – enough to support the nation for six months (or same as one year’s North Sea output), it adds.

However, the report shows that the UK’s overall reliance on oil and gas has actually increased. The UK got 73% of its total energy from oil and gas in 2020. That rose to 75% in 2021 and 76% last year, it says.

The report also:

• Finds that UK oil and gas output is shrinking. Since 2018 gas production fell by 7% and oil by 26%, due to falling investment and regulatory delays. Those declines would, it says, have been much steeper without earlier investment in new fields – which are now crucial to UK energy supplies. The report says: ‘Twelve new gas and condensate fields have started up over that period, which now provide 30% of the UK’s gas production. Without them the UK would have had to scramble to meet a wider import gap.’
• Warns that a continued lack of investment ‘could lead to overall production falling by as much as 15% a year by 2030, so output in 10 years will be 80% less than now’.
• Shows that OEUK’s member companies are progressing offshore wind projects which would almost double the UK’s capacity, spending £30bn by 2030. But decade-long waits for planning consent and grid connections, plus financial uncertainties linked to windfall taxes, are holding them back.
• And suggests that the UK is off-track for reaching its 2050 net zero target, linking this to long-term political inertia over cutting demand for oil and gas, especially from heating and transport.

On a positive note, the report also finds that offshore operators and their supply chain companies are rapidly moving to embrace offshore wind and other low-carbon technologies.

‘The ongoing diversification of oil and gas companies is accelerating and will be crucial in building future capacity,’ says the OEUK. ‘Companies expanding from oil and gas have plans to support the development of over 8 GW of UK capacity, and up to £20bn in capital investment, by 2030. In total OEUK members, including companies solely focused on wind projects, have plans which support 13 GW and £30bn respectively. Together, these could cumulatively power over 14 million homes in 2030.’

However, the OEUK warns that regulatory and technological barriers are undermining progress, as are the impacts of the Energy Generator Levy – a 45% windfall tax imposed on larger renewable power providers for the next five years, which has shaken investor confidence just as the energy profit levy did with oil and gas operators.

The UK now has 2,700 turbines installed with 14 GW of capacity – enough to power up to 18 million homes when the wind is blowing, says the OEUK. However, the government’s target is to expand this to 50 GW by 2030, meaning installing more than 40 new wind farms – or one large turbine every day for the next seven years. That rate would be several times higher than now. The report says that the marine engineering skills of oil and gas companies will be essential to achieving this ambition.

Floating offshore wind powers up Scotland’s energy transition
Meanwhile, Crown Estate Scotland – the body which manages seabed leasing for offshore renewables in Scotland – has announced the results of what it claims is the world’s first leasing round designed to enable offshore wind energy to directly supply offshore oil and gas platforms. Some 5.4 GW of new capacity has been offered leases under the Innovation and Targeted Oil and Gas (INTOG) offshore wind leasing process.

Aiming to attract investment in innovative offshore wind projects in Scottish waters, as well as help decarbonise North Sea operations, INTOG allows developers to apply for seabed rights to develop offshore wind projects that either reduce emissions from the North Sea oil and gas sector, by supplying renewable electricity directly to oil and gas infrastructure (TOG) or consist of small-scale innovative (IN) projects of 100 MW or less.

There were 13 successful bidders out of 19 applications, including BlueFloat Energy/Renantis Partnership, Simply Blue Energy, BP Alternative Energy Investments, ESB Asset Development UK, Floatation Energy, Cerulean Winds, TotalEnergies and Harbour Energy.

When added to existing Scottish projects such as ScotWind, Scotland now has a pipeline of over 36 GW, including 22.5 GW of floating offshore wind, over 30% of known global floating projects, according to the Scottish Offshore Wind Energy Council (SOWEC).

The five IN projects total 448 MW of capacity split across five sites, and will ‘help grow the Scottish supply chain, test new market approaches, grow green hydrogen and support cost reduction in floating offshore wind’, reports SOWEC. The eight TOG projects total 4,967 MW of capacity split across five large wind farms plus three single turbines alongside three different oil platforms. ‘These sites will help to decarbonise Scottish oil and gas operations and potentially help to establish Scotland as a future green hydrogen hub,’ it adds.

Norwegian competition
In other news, the Norwegian government has taken a big step towards its ambition of allocating areas for 30,000 MW offshore wind by 2040, by announcing its first competition for offshore wind in two areas on the Norwegian Continental Shelf (NCS) – Sørlige Nordsjø II and Utsira Nord.

Norway’s Ministry of Petroleum and Energy anticipates awarding the project areas later this year, with the government planning a new announcement of offshore wind areas in 2025.