Can we deliver Energy Security and still go Green using North Sea Gas?

The UK once thrived on its own gas production, fuelling the nation while providing jobs and economic stability. Today, we still consume large amounts of energy, but the environmental impact of fossil fuels and the decline of domestic gas production have left us hunting for sustainable alternatives.

As we pivot towards renewable energy, we face the challenge of balancing affordability with the unpredictability of these green sources, raising crucial questions about the true cost of our energy future.

In 2004, the UK achieved full energy security by meeting 100% of its energy demand locally. But now we import over half of our gas, even though we have plenty of our own reserves.

This dependence on imports has several drawbacks, including higher costs, diminished energy security, the loss of skilled jobs, lower tax income. and an increased impact on the environment.

Here, we explore why the UK could benefit from prioritising utilising its own gas resources, and how doing so in-fact aligns with the government’s 2050 net-zero goals.

What is the historical context for the UK as both an importer and exporter of gas?

In the 70s, the UK was a net importer of energy. However, discoveries of oil and gas from the North Sea, combined with the price hikes associated with the 1973 Oil Crisis led to a rise in the domestic production of crude oil for the UK.

Then, in the 1980s, the UK became a net exporter of energy. However, as a result of the Piper Alpha disaster in 1988, oil production fell, meaning the UK had to once more revert to importing energy.

In the mid 1990s, the UK once again became an exporter of energy as production in the North Sea grew, but after hitting its peak in 1999, production in the North Sea slowed and since 2004, the UK became and has remained a net importer of fuels.

According to UKOOG (UK Onshore Oil and Gas), the UK now imports over 50% of its gas needs from countries like the United States, Norway, and Qatar. And, with 87% of a typical household’s energy being sourced from gas, it is clear that this resource is an indispensable part of the UK’s overall economy, but imported gas remains generally more expensive due to transportation and additional handling costs.

What are the economic implications for the UK importing its gas?

Importing gas costs more. Transporting gas across long distances involves substantial costs, which includes shipping, storage, and distribution. These costs are ultimately passed on to energy customers, leading to higher bills at a time when electricity and gas prices are at record highs.

Were the UK to tap into its North Sea reserves, such additional costs could be avoided, helping to make energy more affordable for both households and businesses alike.  

What are the economic disadvantages of relying on domestic oil and gas production?

Currently, companies operating in the North Sea pay four separate profit-related taxes on oil and gas production: ring fence corporation tax (RFCP) (30%), supplementary charge (10%), petroleum revenue tax (PRT)(permanently 0% since January 2016)  and the energy profits levy (35%), resulting in some companies paying up to 75% in taxes, and leading to negative cash flows. The House of Commons forecasts receipts from these taxes to be £3.8 billion for the 2024/25 financial year.

When compared with the USA – where energy producers pay the standard corporation tax of 21% - it is easy to see how this asymmetry in taxation, coupled with stringent licensing requirements has discouraged investment in domestic gas production.

Many would argue that under these current conditions, domestic production of gas offers little to no benefit to either gas and oil producers. However, an increased dependency on imports means greater vulnerability to higher consumer prices, as well as job losses. And, with the introduction of the Energy Profits Levy, taxes paid by gas producers will go towards restoring public finances and help to contribute to cost-of-living support.

Were major reforms to the tax regime made, as well as a streamlining of the licensing process, the UK could not only retain jobs in the sector but grow them, as well as attract investments into the North Sea.

What is the energy profits levy?

First introduced in May 2022, the Energy Profits Levy is designed to help fund more cost-of-living support for UK families.

The UK government states that since gas prices reached unprecedented levels following COVID and the Russia-Ukraine conflict, both prices and profits are expected to remain high among oil and gas producers for the foreseeable future.

The levy places a 35% charge on these profits, helping to ensure oil and gas producers pay their “fair share”.

Does a reliance on importing gas impact the UK’s energy security?

Yes. The UK’s current reliance on imported gas makes it vulnerable to geopolitical tensions and supply disruptions. With around half of the gas consumed in the UK today being imported, any change in global gas prices will have more impact on the UK than most other advanced economies.

For example, in the immediate aftermath of the Russian invasion of Ukraine, global gas prices rose 13-fold, and, although prices have somewhat stabilised, they are expected to settle somewhere between double the historical average for at least the next few years.

The UK has now cut its gas imports from Russia to 0 (previously 5%) but has increased its imports of liquid natural gas (LNG) from the USA by 405 and Qatar – a country designated by the UK as an ‘authoritarian regime’ - by 230% in 2022.

And it’s not just Qatar. In 2023, UK imports from other authoritarian petrostates including Kuwait, Saudia Arabia, and the United Arab Emirates (UAE) topped £8bn, showcasing that efforts to end the purchasing of oil and gas from Russia, resulted in a surge of relying on imports from other authoritarian regimes.

Consider also that between the year 2000 and 2019, the UK has raised its share of net imports from -17% to 35%, and that despite the share of renewable energy increasing 11-fold over this same period, the share of gas and oil in energy consumption has remained stable at around 73% owing to declines in coal and nuclear power.

However, something to consider is that oil and gas extracted in the North Sea is done so by privately-owned companies, meaning that it will be sold on the international market, leaving the government with little-to-no say in how much can be designated to the UK.

What is the environmental impact of domestic gas production compared to importing?

At the beginning of the year, then Prime Minister Rishi Sunak, announced the issuance of 100 new drilling licenses for the North Sea. This decision sparked significant debate at the time, with environmental groups and opposing political parties criticising the decision, arguing chiefly that it would undermine the UK’s commitment to achieving net-zero emissions by 2050.

The contention is that, investing in new fossil fuel projects delays the transition to renewable energy sources, and only serves to prolong dependence on fossil fuels. This, they claim, contradicts the urgency of reducing greenhouse gas emissions to mitigate the worst impacts of climate change. Additionally, there are concerns that new drilling projects could divert resources and attention away from developing and scaling up renewable energy technologies.

However, the North Sea Transition Authority (NSTA) argues that providing energy security through domestic production and aiming to reach net zero goals go hand-in-hand, with their research indicating that domestically produced gas is, on average, almost four times cleaner than importing gas in LNG form.

This they say, is because of both the way the gas is transferred and, in some cases, the methods of extraction. Norway has the lowest carbon intensity of all LNG imports at 33 kgCO2/boe, and Peru the highest at 90, with the average coming to 79, while UK gas has a carbon intensity of only 21 kgCO2/boe.

Carbon intensity is the amount of carbon dioxide (CO2) emissions created per barrel of oil equivalent (boe) produced. The primary causes for the vast difference in emissions are the process of liquefaction – turning the gas into liquid for transport - then transportation via shipping, and finally regasification, turning the liquid back into gas so it can be used.

Will the issuance of new drilling licenses mean net zero targets are delayed?

The argument that new drilling licenses delay net-zero targets hinges on the notion of carbon lock-in. Carbon lock-in occurs when investments in fossil fuel infrastructure commit a country to higher emissions for decades, making it harder to transition to cleaner energy sources. Critics of the new drilling licenses argue that each new project represents a long-term commitment to fossil fuels, thereby delaying the necessary shift to renewable energy.

Moreover, the focus on fossil fuel expansion can potentially slow down investment in renewable energy infrastructure. Financial and human resources are finite, and prioritizing one energy source can often lead to the neglect of others. By continuing to invest in oil and gas, the UK risks not developing its renewable energy capacity at the necessary pace to meet its climate targets.

Can domestic gas production be integrated with renewable energy?

While the concerns about delaying net-zero targets are valid, it is also important to consider how domestic gas production can complement renewable energy development.

Natural gas is the cleanest-burning fossil fuel, emitting 50 to 60% less carbon dioxide (CO2) than coal and oil. For this purpose, natural gas can serve as a “bridge fuel” – being able to continue help powering society with the least environmental cost in the short to medium term, while the UK continues to develop and deploy renewable energy sources.

Opting for domestic gas production can further support this transition by serving as a relatively low-carbon source of energy, reducing the need for higher-emission alternatives. Additionally, tax revenue generated from North Sea gas production could potentially be reinvested into renewable energy projects, speeding up the transition to more sustainable energy infrastructure.

Is there anything the UK government should be doing in order to make domestic oil and gas production more appealing?

To fully realize the benefits of domestic gas production, the UK government could consider taking a number of policy measures, including:

1. Tax Reform: Reducing the tax burden on North Sea gas producers would make domestic production more economically viable, encouraging investment and boosting output.
2. Streamlining Licensing: Simplifying the licensing process for gas exploration and production would attract more companies to invest in the North Sea, increasing competition and efficiency.
3. Place more investment in infrastructure: Upgrading and expanding infrastructure for gas production and distribution would enhance the efficiency and environmental performance of the domestic gas industry.
4. Support for Technological Innovation: Providing funding and incentives for research and development in the oil and gas sector would drive technological advancements, improving the efficiency and sustainability of domestic production.
5. Integration with Renewable Energy: Promoting the integration of natural gas with renewable energy sources would support the transition to a low-carbon economy, ensuring a balanced and reliable energy mix.