UK agrees oil and gas sector green transition deal

Out-Law News | 25 Mar 2021 | 10:25 am | 4 min. read

Details of how the government will support the UK oil and gas industry in transitioning to green energy while preserving jobs have been published.

The North Sea Transition Deal, agreed between the government and industry, proposes to channel the industry's existing skills, infrastructure and private investment potential into new and emerging technologies, including hydrogen production, offshore wind and carbon capture usage and storage (CCUS). It incorporates new emissions reduction targets and commitments to support the supply chain, backed by up to £16 billion in government and industry investment.

The government is not proposing to end oil and gas exploration and production at this stage. Instead, it intends to introduce a 'climate compatibility checkpoint' before each future oil and gas licensing round which will award licences based on domestic demand, availability of clean energy supply and progress by the industry and the UK as a whole towards their wider climate objectives.

The checkpoint will be designed and implemented in such a way that if the evidence suggests that a future licensing round would undermine the UK's climate goals or 2050 net zero target, it will not go ahead, the government said. It intends to have the checkpoint in place by the end of this year.

Warner Rachel

Rachel Warner

Legal Director

Traditional licensing rounds for the oil and gas industry are a thing of the past: going forward, licensing rounds will face greater scrutiny through the climate compatibility checkpoints just to 'get off the blocks'.

Business and energy secretary Kwasi Kwarteng said that the government "will not leave oil and gas workers behind in the UK's irreversible shift away from fossil fuels".

"Through this landmark sector deal we will harness the skills, capabilities and pent-up private investment potential of the oil and gas sector to power the green industrial revolution, turning its focus to the next-generation clean technologies the UK needs to support a green economy," he said.

Oil and gas sector expert Rachel Warner of Pinsent Masons, the law firm behind Out-Law, said: "The deal recognises where the UK is in its transition journey".

"Traditional licensing rounds for the oil and gas industry are a thing of the past: going forward, licensing rounds will face greater scrutiny through the climate compatibility checkpoints just to 'get off the blocks', and successful applicants in any licensing round are very likely to have to demonstrate a commitment to developing any discoveries in a way that works towards meeting the new production emissions targets. This, together with the OGA's Asset Stewardship Net Zero Expectation – through which the regulator will actively encourage companies to reduce emissions for both new developments and existing ones – and the announced government support packages puts the industry on a clearer path towards net zero," she said.

Extracting oil and gas from the UK Continental Shelf is directly responsible for around 3.5% of the UK's greenhouse gas emissions, according to the government. The UK has set a legally binding target of net zero emissions by 2050. The transition deal contains sector-specific emissions reduction targets of 10% by 2025 and 25% by 2027, along with an existing commitment to cut emissions by 50% by 2030. Market regulator the Oil and Gas Authority (OGA) already benchmarks industry emissions, and has set its own net zero obligation for operators.

The £16bn investment set out in the paper includes previous commitments to invest in CCUS and low carbon hydrogen production, first contained in last year's Energy White Paper. The government intends to deliver a business model that will enable CCUS and hydrogen production at scale. The government also set aside up to £27 million to develop a green energy hub in Aberdeen and up to £5m additional funding for underwater engineering opportunities in the city as part of its recent budget announcement.

Collins Stacey Nov_2019

Stacey Collins

Partner

It's great to see so much guidance and ambition from the government in the net zero space, but there's a lot of detail needed to give companies confidence in the best way to embrace decarbonisation.

Stacey Collins of Pinsent Masons said that the commitments in the deal "keep up the momentum around the decarbonisation of industrial clusters" following recent publications by the government on industrial decarbonisation and the sequencing of CCUS project clusters. The government is expected to publish a clean hydrogen strategy in the coming months, and a wider net zero strategy document later in the year.

"It's great to see so much guidance and ambition from the government in the net zero space, but there's a lot of detail needed to give companies confidence in the best way to embrace decarbonisation," he said.

"It's not surprising that CCUS and low-carbon hydrogen are key aspects of the deal, as the government is betting heavily on those technologies in terms of its net zero commitments. The oil and gas sector is already developing significant projects based on such technologies, and the deal recognises that the sector has the skillset to benefit from the substantial growth of CCUS and hydrogen that the government is expecting," he said.

"However, the key barrier to such projects is likely to be financial, rather than technical. Deploying CCUS and low carbon hydrogen at scale in the UK will require a huge amount of investment from both the government and private sector investors. As a result, much will depend on the detail of the CCUS and hydrogen business support models that are to be developed and finalised throughout this year and into the next. The hope is that these models will be sufficient to give investors the confidence to invest in the necessary development of these relatively new markets," he said.

The government intends to appoint an 'industry supply chain champion' to support the coordination of job and supply chain opportunities in sectors such as CCUS and offshore wind. The sector has committed in the deal to achieving 50% 'local content' for all related new energy transition projects by 2030, as well as for oil and gas decommissioning projects. The commitments in the plan, when combined with those in the government's 10-point 'green industrial revolution' plan, will support 40,000 jobs in decommissioning, CCUS and hydrogen.

Industry expert Shirley Allen of Pinsent Masons said: "In the last 12 months, the sector has lost a significant number of quality personnel, so the commitment to support 40,000 jobs signals a real effort in attracting recent leavers back into the industry and encouraging new graduates".

"The skills the industry already has will be transferred into the development of cutting edge technologies and ambitious low carbon projects, building strong skill sets that can be exported globally in years to come," she said.