20 December 2022

Fining firms for ‘producing too much oil and gas’ is bureaucratic lunacy


Given that the UK is in the midst of an energy crisis, specifically caused by a shortage of gas, you’d expect the Government to be doing everything it could to extract more of the stuff. You wouldn’t expect them to be raising random taxes, banning production, introducing new regulations and enforcing existing ones as harshly as possible in order to hit invented and low impact environmental targets, would you?

Unfortunately, it is crystal clear from recent decisions that the priority for Parliament is to please hysterical activists, not ensure security of supply. In the latest example, the North Sea Transition Authority (NSTA) – a modern regulator exercising Soviet-era command and control policies – has decided to fine three companies, including the Norwegian state oil company, over £250,000 for ‘producing too much oil and gas’.  What a dotty investment message to send when a growing number of firms have already signalled they may be pulling out of the North Sea.

To be clear, the ‘Seaweed Stasi of Doggerland’ are not doing anything wrong or incompetent, just enforcing rules developed for them by virtue signalling ministers, who sincerely believe they can change the energy system with 30-year plans, micromanaging molecules through targets.

In this case the issue is flaring – the burning of excess gas that cannot be used or reinjected, with fines issued for any excess.

Now, flaring and venting (unignited gas) is a problem. It releases greenhouse gases without any direct benefit, such as fuel for heat and power. But it is also a necessary and unpredictable technique for safely moving vast quantities of high pressure liquids and vapours from sub-surface to well. It prevents the dangerous build up of pressure, and removes product unfit for affordable use, due to chemical composition or lack of infrastructure to remove it. Flaring is better for the environment than venting, as methane has 25 times the warming potential of CO2. We should also note that production sites, at least in the environmentally conscious West, do it only as a last resort, and the technology for avoiding the waste keeps improving.

There is no climate impact difference between gas that is flared and gas that is used, let alone between a permitted and unpermitted flaring. It is not clear, for example, why over 14,500 tonnes of natural gas that Enquest was permitted to flare in 2021 is just fine, while the 262 tonnes of excess was a matter for a year-long investigation, 14-page report, and a £150,000 fine. (Indeed, the amount of time and resource put into that investigation may well have exceeded the fine itself). Nor is it clear why Equinor was fined less than Enquest, even though it flared more gas. Equally baffling is the £50,000 fine handed to Spirit for ‘over-production’, whatever that means during a supply crisis.

And it isn’t at all obvious that these kind of production errors should elicit such a response. One firm’s error was due to bad data in a spreadsheet, another to an error in monitoring. The scale of the fines seems like incredibly excessive punishment for what are rounding error differences to global emissions – emissions that are unavoidable until we have credible alternatives to drilling oil and gas. Yet trigger the green blob and you become an easy target for made-up emissions reduction plans.

The alternative is to set a carbon price and let the market decide on the correct level of flaring, in turn incentivising the investment in alternatives, rather than penalising errors to create jobs for regulators. These kind of interventions in themselves may be trivial, but they add up to a government chasing firms away from the North Sea and the UK energy sector at the worst possible time.

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Andy Mayer is Chief Operating Officer and Energy Analyst at the Institute of Economic Affairs.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.