Public funding 'critical' to plug £3bn investment shortfall in UK oil and gas sector

Industry will struggle to meet green targets after sharp drop in offshore activity, think tank warns

The Total Culzean platform in the North Sea, east of the Aberdeen. Production may decline further this year and next, following a 5 per cent decrease in 2020, according to a new report from think tankShow more

Britain’s oil and gas industry will struggle to achieve its energy transition goals unless the government can plug an investment gap of £3 billion ($4.17bn) after the pandemic caused a sharp decline in offshore activity levels, according to Oil and Gas UK (OGUK).

The think tank said public funding in the sector is “critical” if the country wants to realise its net-zero future, after investment levels dropped during the Covid-19 crisis along with offshore activity.

Production may decline further this year and next, following a 5 per cent decrease in 2020, OGUK said in a report published on Tuesday. That follows a plunge in development and operations spending in the sector, which slumped 23 per cent year-on-year to £11.6bn -- the lowest since 2004 in real terms.

OGUK chief executive Deirdre Michie said £3bn worth of investment “has been deferred from company plans in 2020 and 2021,” with the Covid-19 fallout "really" hurting energy communities through rising unemployment and a slump in activity, in turn placing the UK’s climate-friendly future at risk.

“This is an industry which continues to play a critical role in the economy, supporting hundreds of thousands of jobs in industrial heartlands across the nation, generating affordable energy for millions and providing billions in value to the economy,” Ms Michie said.

“But we cannot continue on this trajectory without vital support. Companies are in a fragile state. We need the recognition that our industry is a key player in a successful energy transition – one which won’t be possible without the inclusion of our sector.”

Global oil demand fell by nearly 9 million barrels per day in 2020 to the lowest level since 2014, as countries imposed restrictions such as banning international travel to restrict the spread of coronavirus.

British oil producers, which have seen output slump more than 60 per cent over the past two decades as fields have aged, took another big hit from the pandemic. Only seven exploration wells were drilled last year, the lowest number since 1965, according to OGUK, and thousands of jobs were lost.

The sector is also under increasing pressure as the government seeks to move the country away from fossil fuels, with Prime Minister Boris Johnson pledging last year to ban sales of new petrol and diesel cars from 2030 to help the country become carbon neutral by 2050.

Ministers are even considering an end to issuing new oil exploration licenses in the North Sea in 2040, according to media reports over the weekend.

However, with the UK "leading the way on green technologies,” any licensing constraints would only increase volumes of imported fuel, OGUK said.

Thousands of jobs are likely to have been lost in the sector because of constrained operations during the pandemic, OGUK warned, with the impact of lower investment clearly reflected in offshore activities.

Drilling activity fell by half while project approvals were at their lowest level on record, as companies responded to the collapse in oil prices at the start of the pandemic by reducing staff levels by about a fifth to help manage their exposure to the crisis.

“Overall the industry spent 23 per cent less last year – a fall of some £3.4bn” OGUK said.

Despite the challenges the industry faces, the UK’s gas and crude production of 1.61 million barrels of oil equivalent a day still managed to safely meet around 70 per cent of the country’s oil and gas needs in 2020, something that demonstrates “the continued need for an indigenous supply,” OGUK said.

As the energy transition ramps up, there are still some positive signs for the sector, OGUK said, with almost £2bn of new acquisitions taking place this year as new investors continue to be attracted by the remaining potential of the North Sea.

However, the organisation stressed that to achieve the country’s climate goals and ensure energy remains affordable, government policy and regulation must continue to prioritise domestic production over imported energy.

“A climate-friendly future needs significant investment in indigenous opportunities so companies right across the sector can continue to develop low-carbon solutions,” said Ms Michie.

The lobby group has collaborated with the government on a transformational North Sea Transition deal that aims to reduce emissions and encourage investment in climate-friendly projects focused on carbon capture and storage, hydrogen and low-carbon projects across the UK.

A range of projects being considered for investment approval this year and next could unlock 700 million barrels of resources, OGUK said.

“But they are contingent on greater market stability and continued regulatory and government support,” the lobby group added.

Looking ahead, OGUP said total expenditure in the sector will remain constrained this year at between £11.4bn and £12.4bn.