UK government will seek to give certainty to North Sea producers to prevent early departures

With energy firms reconsidering their commitment to North Sea oil and gas as the economics fail to stack up, the UK government must balance the unpopularity of its recent licensing U-turn against the likelihood of early decommissioning.

The UK government will have to grapple with a knotty issue in 2024, as it attempts to balance public disapproval for continuing to issue new North Sea oil and gas licences, while giving certainty to energy firms considering whether they should relinquish existing licences and retrench from North Sea production.

While there is considerable public pressure to reduce reliance on fossil fuels, the government also has to address energy security and the spike in energy prices driven by the Russia-Ukraine war.

Against this backdrop, the policy of raising the tax burden on North Sea producers via the Energy Profits Levy, while attempting to persuade producers to keep up supply in the short-term, is starting to backfire.

Ironically, the sanctions legislation that is geared towards policing the activities of companies operating in the North Sea is becoming increasingly attractive to energy firms as a route to exiting oil fields that are considered no longer economically viable. Energy companies will look to re-deploy investment to jurisdictions where the tax regime is more favourable.

Despite the need for the North Sea Transition Authority to flex its muscles in response to public and political pressure, the threat of drilling licences being removed has lost its teeth as more companies consider exiting North Sea production.

There is a growing risk that more of the independent oil companies (who have been the principal entrants to North Sea energy in the past 20 years) lose respect for the British government and regulatory regime and head for the exit, while new investors are simultaneously dissuaded from entering the market.

A further driver of potential North Sea exits is the impact of inflation on overall costs. Decommissioning a project is typically a highly capital-intensive process that can cost billions, and is potentially getting more expensive, year-on-year, as inflation rises. This, coupled with higher taxation, is persuading more firms to cut their losses and bring forward the decommissioning of projects.