Conflict in Iran is exposing the true cost of North Sea decline

Telegraph

6 hours ago

For years, Labour's proposed ban on new drilling in the North Sea has been one of the party's most eye-catching policies.
The pledge not to issue new oil and gas licences is based on 'science', according to Ed Miliband, the Energy Secretary, amid projections that licensing any new fields globally would be incompatible with net zero targets.
In its election manifesto, Labour also argued that allowing more extraction from the North Sea 'will not take a penny off bills, cannot make us energy secure and will only accelerate the worsening climate crisis'.
It was a premise that was questioned by some experts but won praise from others, as well as from environmental campaigners.
But now, with a fresh conflict raging in the Middle East the policy is coming under scrutiny again, with critics warning that it leaves Britain more exposed to geopolitical crises.
Energy security
It's no secret that the North Sea is in decline. Whether Labour presses ahead with a ban on new licences or not, Britain's oil and gas output will continue to fall.
But while that fall is inevitable, the rate of decline is not.
The independent Climate Change Committee estimates that there will be demand for between 13bn and 15bn barrels of oil and gas in the UK over the next 25 years.
Under current policies, less than one third of this overall demand is expected to be met by domestic production. That is equivalent to about 4bn barrels, with an estimated 3bn that could be exploited left underground.
The balance would come from foreign imports.
Mr Miliband has said boosting production would bring no material benefit to consumers because oil and gas prices are set by international markets and the output of the North Sea is too small to make a difference.
But while many economists agree up to a point, some say this argument misses the importance of energy security.
'As long as you are a big importer, it doesn't make sense to reduce your production,' says Bjarne Schieldrop, analyst at SEB Research.
'What you need to do is to reduce your consumption as fast as possible. Energy has become more politically sensitive in recent years, with Russia using energy as a weapon.
'So actually, security of supply is extremely important. It's not just about the price.'
Simon French, chief economist at Panmure Liberum, adds that if Britain and Europe produce more oil and gas collectively, they will be less dependent on supplies shipped from the Middle East in a crisis.
In a global supply crunch, it is still unlikely that the UK would be at risk of shortages given its ability to outbid poorer countries for shipments when prices rise.
However, French adds: 'Why would you leave yourself so exposed to doing that, when you potentially have the opportunity to divert your own domestic supply and give yourself more strategic resilience?'
Fiscal firepower
Producing more oil and gas domestically also brings other benefits in a crisis.
In a scenario where the Iran-Israel conflict spreads, one of the biggest worries will be the prospect of shipping in the Strait of Hormuz seizing up.
Around one fifth of the world's oil passes through this vital trade artery. 'If it's disrupted for any protracted period of time, then either global demand needs to fall substantially – which means a pretty deep recession – or the price of oil has to go up to ration it,' says French.
In such a time, Britain would face higher oil and gas prices like every other country. But as a producer, it would also benefit from higher tax revenues, giving the Government more firepower to boost the flagging economy.
For example, when the invasion of Ukraine sparked an energy crisis across Europe in 2022, the UK's tax take from company profits also jumped from £2.6bn to £9.8bn, providing valuable cash for schemes to support households with their bills.
'If the Exchequer feels that it needs to cap the price of energy, as it did previously, it rather helps if you're getting higher corporation tax receipts from the North Sea,' adds French.
Decommissioning costs
Another factor to consider is the impact the Government's windfall tax and licence ban will have on decommissioning, the process of safely retiring spent or uneconomical oil and gas wells.
Analysts at Wood Mackenzie and Stifel have both argued that Labour's policies will speed up the rate of closures.
This could make life harder for Rachel Reeves, the Chancellor, because oil and gas firms can offset decommissioning costs against their corporation tax bills.
As a result, squeezing the North Sea may deal a double whammy to tax receipts by cutting output and accelerating decommissioning.
This is partly because oil and gas firms continuously drill new wells alongside old ones to improve the economic viability of their portfolios as a whole. Without the ability to keep drilling new wells, it becomes harder to continue drilling old ones economically.
'If you were to continue to licence, then that extends the life cycle of some fields, and therefore decommissioning comes later in the fiscal horizon,' says French.
'So you would start to rebuild more fiscal headroom than you might otherwise have – and one thing the Chancellor definitely needs, going into the autumn, is more fiscal headroom.'
Carbon emissions
Mr Miliband's claim that cutting domestic oil and gas production is good for the planet may also be in doubt.
This is because unless Britain also slashes demand for these fuels substantially, it will simply have to import larger quantities from abroad.
And that could actually end up generating higher carbon emissions overall, if we continue to rely on larger and larger amounts of liquefied natural gas (LNG) from the US and the Middle East.
According to Rystad Energy, LNG can be up to 10 times more carbon intensive than pipeline gas. This is because while the emissions from burning it are the same, it requires energy to cool LNG to -160C and transport it by ship around the world.
The analysis, reported by the BBC, found that piped gas from Norway generated around 7kg of CO2 per barrel, compared to an average of 70kg for LNG imported to Europe.
Economic benefits
Accelerating the decline of the North Sea may mean the UK also ends up with fewer green jobs.
Academics at Robert Gordon University warned that oil and gas jobs were disappearing faster than new clean energy roles were being created as a result of the slower-than-expected deployment of wind farms.
Whereas the offshore wind sector may only generate 29,000 jobs by 2030, some 58,000 disappear from oil and gas in the worst-case scenario.
Paul de Leeuw, director of the university's Energy Transition Institute, said earlier this month: 'You have to wait pretty well to the back end of this decade before there's enough capacity in the renewables sector to take all the people coming out of oil and gas.
'It's a timing issue.'
To avoid heavy job losses, researchers said Mr Miliband needed to either attract a larger share of turbine manufacturing to the UK or reverse his ban on new North Sea drilling licences to temporarily boost oil and gas production.
For example, the report found that even if Mr Miliband hits his clean power targets, he could boost the number of green jobs in 2030 by boosting oil and gas production.
Production of 500,000 barrels per day leads to just over 150,000 jobs – whereas production of 700,000 barrels creates around 200,000 jobs.
The Department for Energy Security and Net Zero is consulting on a plan for the North Sea and says it envisions large numbers of jobs coming from offshore wind as well as more nascent industries such as carbon capture and hydrogen production.