As hosts of COP26, ministers have been firm on the need to tackle climate change by transitioning away from fossil fuels. But the recent energy crisis, driven by the global rise in the price of gas, has led to calls for expanding domestic production, including in the North Sea.
Indeed, the energy crisis has become a hot political topic. The chancellor has announced a package of measures to ease the burden on households following the rise in the energy price cap. He has so far resisted calls from Labour and the Lib Dems, as well as some of his Conservative colleagues, for a windfall tax on energy companies operating in the North Sea.
With energy bills expected to remain high for some time the problem isn’t going away anytime soon. The appropriate policy response is still being debated at the top level. It was discussed at the cabinet meeting last week, and featured at Prime Minister’s Questions too, with Boris Johnson indicating a change of rhetoric (if not yet policy) in backing gas and North Sea producers.
Margaret Thatcher famously sold off ‘the family silver’ in the early eighties, including allowing nationalised North Sea assets to be bought by international conglomerates, such as BP and Shell. It is important to remember that these private companies are run in the interest of their shareholders, not UK households. Our domestic energy retailers are competing to buy the oil and gas extracted in the North Sea from these companies. The market dictates where the fuel is sold, not the UK government, which is why despite the gas crisis in Britain last September, there were record exports of gas to Europe.
Today, the debate is less about privatisation versus nationalisation, but about transition. The North Sea Transition Deal agreed between the oil and gas sector and the UK government aims to smooth the pathway to net zero, whilst protecting jobs. In Scotland, the SNP-Green coalition government has called for a crackdown on North Sea extraction on the back of COP26 and the IEA is calling for “no new exploration” to reach net zero. Instead of following suit, Conservatives have jumped on the opportunity to say that jobs are safer under their leadership. They know all too well how politically toxic job losses can be from the days of uneconomic coal mines, but politicisation of the North Sea is in danger of leading to poor decisions.
Whilst it’s right to learn lessons from the 1980s, it shouldn’t be at any price. Funding extraction-based activities in a mature basin with high costs and declining reserves is not financially prudent. Investment in retraining and helping to fund an expansion in offshore wind capability is where the smart money is going.
In a new Green Alliance report set to be published this month, we argue that it’s no longer economic to extract more oil and gas from the North Sea. The UK government is skewing the market, tipping the scales in favour of more extraction through tax reliefs and subsidies. In 2019, the UK government received less than $2 per barrel of oil in tax, compared to nearly $22 per barrel in Norway. In the same year, BP’s North Sea operations paid an effective tax rate of minus 54 per cent. One might reasonably ask: what happened in other years? In total, since 2015, the UK government has made net payments to ExxonMobil, BP and Shell totalling £1.25bn. These are startling figures, but it is set to become a trend with declining reserves.
As ministers scrabble to find solutions to the current energy price crisis, subsidising more drilling by international companies in the North Sea is the wrong approach. Not just because it won’t help bring down prices in the short-term, but it will be economically painful in the long-term.
According to the National Audit Office “reserves are running out, with the remaining oil and gas becoming harder to find and extract”. This being the case, the government should better shield the UK taxpayer from the risk of stranded assets and take a more market-based approach. New fields in the North Sea require on average 28 years from being granted a licence to beginning production, meaning licences granted in 2022 would come online in 2050. As we transition away from fossil fuels, the returns are diminishing. Granting new licenses now, under the existing tax regime, is excessively scraping the barrel, throwing good money after bad.
The current energy crisis is part of a long-term trend of highly volatile fossil fuel prices. Continued reliance on oil and gas will repeatedly expose UK households to soaring energy bills, and as our report points out, taxpayers too. The answer is to reform our tax and subsidy regime and move away from fossil fuels towards cheaper, domestic renewable energy. Not only will this help improve our energy security and tackle climate change, but it will also put an end to taxpayers footing the bill for oil and gas extraction.
This post was originally published on Business Green.