British Prime Minister Liz Truss' plans to spur new North Sea oil and gas production and lift a ban on fracking will test investor appetite for new fossil fuel projects, but are unlikely to ease the current energy crunch.
Truss, who took office on Tuesday, has made Britain's energy security a central pillar of her new government's objectives as the country faces soaring energy bills. On Thursday she announced a cap on consumer energy bills for two years and plans to funnel billions into propping up power companies.
A new round for more than 100 oil and gas North Sea exploration licenses will be announced next week as part of the wider plans, Truss said.
Britain and other countries across Europe have been forced to pushing through multibillion-euro packages to prevent utilities from collapsing and protect households amid soaring energy costs triggered mainly by the fallout from Russia's invasion of Ukraine.
Truss also said she would lift a moratorium on fracking, which involves extracting shale gas from rocks by breaking them up with water and chemicals at high pressure, a practice that has faced fierce local opposition in the UK after causing earth tremors.
But none of these measures will have an immediate impact.
It typically takes five to 10 years from exploration until oil and gas is produced from a new field, requiring a significant commitment from companies involved.
Investment in new oil and gas projects in the ageing North Sea basin has slowed in recent years, with Britain committed to a legally binding target to meet net zero emissions in 2050. Several oil and gas majors are in the midst of diversifying their companies to meet energy transition goals and cut their own emission footprints.
"A new licensing round is not going to have an overnight supply impact," said Jon Clark, oil and gas strategy and transaction leader at EY.
A 25% windfall tax imposed on North Sea producers by the previous government under Boris Johnson has also weighed on boards' appetite to invest as they focus on shareholder returns after the slump in the wake of the coronavirus epidemic.
Banks have cut back their investments in fossil fuel projects to meet their own emission-reduction targets.
Britain's domestic oil and gas production has fallen by two-thirds in the past 20 years, according to the industry body, Offshore Energies UK (OEUK).
SECURITY FIRST
War in Ukraine and a curb in energy exports from Russia leading to record high prices has led countries to focus first and foremost on security of supply and reducing reliance on foreign imports of vital fuels.
OEUK said this week that without new investment, Britain will have to import around 80% of its gas by 2030, and around 70% of its oil, up from around 60% and 25% now respectively.
"To sustain and rejuvenate the UK North Sea it requires continued exploration drilling. This requires predictable and regular licensing rounds to allow UK North Sea companies to develop prospects and build out drilling plans," Investec analyst Nathan Piper said.
"Overall a clear supportive political backdrop should help UK North Sea investment levels with Harbour Energy and Serica Energy likely to be active participants," he said, referring to two oil and gas companies that have significant operations in the North Sea.
Serica Energy said it would consider participating in licensing rounds that fit with its business model and "is always looking at investment opportunities."
Harbour Energy did not immediately respond to requests for comment.
Shell did not reply directly to a query on whether it would be active in the new licensing round, but said:
“We are ... working hard on the challenge of maintaining security of energy supplies for the UK. This includes accelerating renewable technology like offshore wind and making best use of the UK’s domestic oil and gas, which we believe is fully consistent with the country’s net zero targets."
BP did not respond to a request for comment.
OEUK said new opportunities could generate 26 billion pounds ($30 billion) in capital investment in the oil and gas sector by 2030.
FRACKING
Lifting the moratorium on fracking, in place in England since 2019, is unlikely to spark a rush of investment in the practice with question marks remaining over how much gas could be recovered.
"It’s one thing to lift a ban on fracking, and quite another to get industry to invest at scale, particularly in a resource which is likely to be slow, contentious and limited," said Michael Grubb, professor of energy and climate change at University College London.
Cuadrilla, 96% owned by Australia’s AJ Lucas, has the most advanced fracking wells in Britain and found a natural gas resource but the rules around earth tremors meant that neither of its two wells could be fully flow-tested.
"This is an entirely sensible decision and recognises that maximizing the UK’s domestic energy supply is vital if we are going to overcome the ongoing energy crisis," Francis Egan, Cuadrilla CEO said.
Cuadrilla said it could restart its operations in a matter of months.
Chemicals and energy giant INEOS renewed an offer it made earlier this year to develop a shale gas test site in Britain to demonstrate to the government that extraction by fracking can be performed safely.
“The country needs gas for at least the next 30 years. It is patently obvious that we should be using our own gas instead of shipping it in from abroad,” Tom Crotty, a director of INEOS, said.
Before leaving office Prime Minister Johnson said last week he did not believe “fracking would be the panacea some suggest” to the energy crisis.
Green groups have said the drive for new hydrocarbons is at odds with the country’s legally binding climate target to reach net zero emissions by 2050.
Critics also say that producing more gas may not reduce prices because prices would be largely determined by global markets.
“It will not lower bills. It will not make us less dependent on volatile gas markets. It will not reduce our carbon emissions,” Georgia Whitaker, oil and gas campaigner for Greenpeace, said.
(Reuters - Reporting by Susanna Twidale; Editing by Susan Fenton)