Offshore licensing isn’t the point, major reform of oil and gas regulation is needed – Inside track

Offshore oil and gas licensing has moved to centre stage. Environmental campaigners have mounted legal challenges to the government’s expressed support for it. Now, Labour and the Conservatives have turned an otherwise arcane administrative process into a battleground ahead of the general election. The government used the King’s Speech to up the ante, declaring its intent to introduce annual licensing rounds for oil and gas and giving it top billing, along with increasing economic growth and bringing down inflation. Yet, regardless of whether one’s goal is to stop fossil fuels or expand oil and gas production, licensing is – in many ways – a red herring.  Focusing on licensing distracts from the more fundamental need to reform the underpinnings of offshore regulation to accelerate energy transition.

Offshore licensing is how the UK government grants companies exclusive rights “to search and bore for, and get, petroleum”. Companies are invited to apply for access to areas on the UK continental shelf which are pre-selected by the regulator (in consultation with industry). Regular licensing rounds have been held since 1964. During the 33rd and most recent licensing round, which opened in October 2022, 115 bids were received from 76 companies, with 27 licences awarded by the time of writing. The government claims that guaranteed annual licensing rounds will encourage oil and gas production in UK waters.

It’s questionable whether annual licensing rounds will revive interest in what has long been a declining basin. Handing out licences on its own is insufficient to attract investment and is unlikely to restore offshore oil and gas jobs that have been steadily lost over the years. There is growing recognition among financial analysts of the risks of stranded assets in oil and gas. Shell’s withdrawal from the Cambo oil field northwest of Shetland in 2021 showed licence holders are willing to withhold their final investment decision if deemed economically or politically expedient.

Furthermore, the bulk of remaining resources are in areas that are already licensed. It will be regulatory approval of field development plans that will allow these existing licences to actually start producing oil or gas. The recent decision to approve Rosebank (an oil field first licensed in 2001) is a case in point.

Maximising fossil fuel extraction still guides regulationAwarding new licences is, however, in line with the current regulatory objective – enshrined in the 1998 Petroleum Act – to maximise economic recovery (MER) of oil and gas from the North Sea. For a quarter of a century now, the MER objective has sought to prolong the life of North Sea oil and gas by attracting new investment into the basin. MER is the central obligation of the oil and gas regulatory authority, which is required to “secure that the maximum value of economically recoverable petroleum is recovered from the strata beneath relevant UK waters.”

MER is integral to the dedicated regulatory body, established in response to a perceived crisis in the offshore identified by the Wood Review, commissioned by the coalition government in 2013. Wood diagnosed fragmented fields, ageing infrastructure and international competition as key obstacles in maintaining the North Sea extractive basin’s viability. It recommended a new kind of regulator – conceived as being ‘arm’s length’ from government with expertise that could match that of oil majors, as well as the capacity to influence and promote –  to ensure an affective alignment between government and offshore operators and drive further production.

As the North Sea’s role in the energy transition has grown, the regulator has rapidly taken on additional responsibilities. In 2021 it acquired an obligation to assist the secretary of state in meeting the UK’s net zero ambitions and changed its name from the Oil and Gas Authority to the North Sea Transition Authority (NSTA). It launched the UK’s first carbon capture and storage licensing round in 2022, and is expected to also take on licensing offshore hydrogen infrastructure.

MER remains the core objective, but there is recognition within NSTA that credible measures to reduce greenhouse gas emissions are necessary if the industry is to maintain its ‘social licence’ to operate. A draft plan to reduce greenhouse gas emissions from oil and gas operations on the UK continental shelf is now under discussion. It suggests that operators failing to respond to demands for full platform electrification and low carbon power by 1 January 2030 “should in principle have no expectation that the NSTA will issue any further consents for that asset.” This is significant because it suggests, for the first time, that achieving the NSTA’s net zero obligation may potentially constrain its central obligation to MER. It is unclear, however, whether this recommendation will survive the consultation.

A reversal of direction is requiredThe regulator may appear to be flexing its muscles around net zero, but its assessment of climate impacts ignores around three quarters of the emissions arising from the production and consumption of oil and gas. The NSTA’s net zero work focuses on reducing direct and indirect operating emissions (known as Scope 1 and Scope 2 under the Greenhouse Gas Protocol) by, for example, running drilling platforms on electricity from renewables and reducing gas flaring and venting, as well as investing in carbon capture, use and storage. Focusing on the emissions intensity of production leaves unaddressed the emissions associated with burning oil and gas (Scope 3 which cover the supply chain and customer use of products) which amount to over 75 per cent of the total emissions associated with a barrel of oil. Ignoring the consequences of combusting hydrocarbon products makes it possible to consider expanding oil and gas production as a route to net zero.

The strains of trying to accommodate both MER and net zero goals within NSTA are beginning to show. And the NSTA is subject to wider societal pressures too, from ‘stopping oil’ to mitigating soaring energy costs. This points to a more deep-seated problem: the regulator’s guiding objective fails the public good test: regulation aims to avoid economic, environmental and social harms, to deliver collective benefits and uphold socially desirable ideals. Piecemeal adaptation has left the central obligation of MER untouched, and the definition of net zero does not address the consequences of continuing to extract fossil fuels which are destined to be combusted. This is at odds with the climate emergency. What’s more, existing licensed fields – some of which, such as Rosebank, are substantial – escape the weak scrutiny embodied in the climate compatibility checks to be applied to decisions about future licensing rounds. 

More fundamental reform of regulatory objectives in response to the climate emergency would probably require rewriting or unmaking the Petroleum Act. This might allow for the creation of a new integrated regulator charged with a threefold aim of minimising hydrocarbon recovery, accelerating renewables developments, as well as supporting actions that remove CO₂ from the atmosphere to offset residual emissions. It will require, at the very least, a revised notion of what is socially necessary and beneficial, based on an evaluation of the economic risks as well as the environmental and social (including health) costs associated with lifecycle emissions from oil and gas.

This is a step more profound and more laborious than the pragmatic decision to stop licensing altogether. But it will invite a more extensive public debate, which is overdue, about reversing direction around North Sea oil and gas.

This post is by Gisa Weszkalnys, associate professor at the Department of Anthropology, London School of Economics and Political Science, and Gavin Bridge, professor of geography at Durham University and fellow of the Durham Energy Institute.

Photo credit: Dean Brierley on Unsplash