30 October 2023

Hurrah for new North Sea oil licences!


Pragmatists who recognise that there is no chance whatsoever of the UK weening itself off oil and gas by 2028 have welcomed the approval of 27 new drilling licenses in the North Sea. The enthusiasm with which companies like Shell have snapped up the new licenses is surely a riposte to worries that the 75% windfall tax on energy companies would undermine investment. The diversification of supply will reduce our dependency on imports, improve our energy security, and create revenue for the Treasury, which in turn can be used for purposes like investment in a lower carbon future. Win-win-win.

However, not everyone is happy. The usual suspects have been out in force, as they were last month over the Rosebank approval, to claim that negligible differences to global oil supply are simultaneously an existential threat to life on earth, and so trivial as to not be worth doing. Meanwhile, representatives of a corporate caste of Net Zero rent-seekers from the City are determined to present any alternative to a legally binding national plan to boost their bottom lines as a moral crusade. For example, the CEO of Aviva, Amanda Blanc, darling of Labour’s 2022 Business Conference, is ‘worried that UK climate action has stalled this year’ and that our climate targets are ‘under threat due to a lack of practical and detailed plans’. This, apparently, ‘puts at clear risk the jobs, growth and additional investment the UK requires to become more climate ready’. The spectacle of anti-capitalist activists campaigning for policies that help nationalise the commercial risks of companies like Aviva by underwriting risky investments on the grounds they sound greener is now so normal that we fail to see the self-parody. Some credit though is due to the government in standing firm against the moaning – albeit much of the confusion has been created by their own policy inconsistency.

There is also some sleight of hand in the good news. These are projects that will have been in consideration for more than a year, pre-dating the windfall tax. The entire opportunity in the ‘33rd North Sea licensing round’ is far larger than this initial tranche. It is claimed that the easiest projects have been bought forward, and the full impact of last year’s tax decisions on investment are yet to be felt. However, that development projects can be bought forward in over-regulated, build-nothing, climate-doom Britain, should give us all some hope. There is also some sense that developers do not believe that any future Labour government would make it worse, despite firm promises of even higher taxes and back-dating.

Part of this apparent investor confidence in North Sea oil and gas may down to the promise, enshrined in the Energy Security Investment Mechanism, to disapply the windfall tax if prices fall below normal levels for six months – meaning $71.40 for a barrel of oil and £0.54 for a therm of gas. The level is not generous, and current government forecasts do not suggest this test will be met before the tax was due to expire in 2028. But as a hypothetical safety valve it does remove some downside risk. It’s also a step towards a predictable tiered system of rates linked to prices that might survive changes of government and periodic hysterical over-reaction to headline rates.

The pipeline of projects created may also give any future Labour government pause for thought on implementing their proposed rise in the headline rate [to 78%] with backdating and no allowances. Whoever governs in 2024, the public finances will not be in great shape, and it seems unlikely hard choices will have been made about reducing public spending. Pressing ahead with policies rooted in Ed Miliband’s populist ravings about banning his way to a Xanadu-Britain powered by rainbows and tantric chanting will do real damage to national income and energy security. The more projects commissioned the harder the choice. The government then should continue to play hardball with the self-serving alliance of interests demanding this aspect of British energy industries are sacrificed to Gaia to please the wind gods. It’s not either/or for the transition to net zero, it’s both.

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Andy Mayer is Chief Operations Officer at the Institute of Economic Affairs.

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