Oil and gas sector still has a key role to play in our energy mix

The UK’s energy landscape is changing quickly. The drive to net zero means we are moving away from fossil fuels and into a new age of renewable and low-carbon energy. The future, it is clear, will look very different to the present.

By 2050, if all goes according to the government’s net zero plan, the UK will be powered by a diverse mix of energies, including offshore wind, nuclear, and solar with transport increasingly based on electric and hydrogen-powered vehicles.

Oil and gas, however, will not disappear. These fuels currently supply 75% of the nation’s total energy. That proportion will diminish but they will play a significant role for decades to come.

Gas is predicted to still be meeting  15 per cent of UK energy needs by the net zero target date of 2050 (2045 in Scotland), with oil still accounting for 7 per cent.

That represents a radical drop on current consumption - last year gas met 43 per cent of the UK’s energy needs, with oil accounting for 32 per cent - but the future energy mix will certainly still include hydrocarbons. Natural gas, for example, is likely to become a major source of the UK’s hydrogen fuel supplies. The CO2 generated in turning it into hydrogen will be captured and stored deep underground.

This diversification of the UK’s offshore industries into new and cleaner energies  is reflected in the decision by Oil and Gas UK, the leading trade body, to expand its remit and change its name to Offshore Energies UK earlier this year.

The organisation has broadened to include low carbon energy sources including offshore wind, carbon capture and storage (CCS), mass hydrogen production and new emerging technologies.

“The energy system is changing, and our members are changing too, though there is still an enduring need for oil and gas”, explains Ross Dornan, the organisation’s Market Intelligence Manager and author of its new Business Outlook 2022 report.

“Companies that have so far been focused on oil and gas are now using their skills and experiences as well as their technologies and finances to diversify into other energy areas. By bringing together their different knowledge and expertise  in a more integrated manner, we will see energy systems develop in a more coherent, structured, efficient and ultimately quicker way.”

The UK is lucky, he adds, in that it already has a diverse supply of energy. The North Sea, for example supplies the UK with resources including oil, gas and offshore wind. “It’s important to make the most of that diversity and to invest in it. We must build real stability in the future.”

Oil and gas are good for this stability, Mr Dornan adds. And their production is becoming cleaner: these hydrocarbons can now be produced with a lower level of emissions than in the past.

At the same time they continue to make a major contribution to the exchequer - operators will provide more than £23 billion in production taxes between 2021 and 2027. They will also support employment, particularly in Scotland, where most of oil and gas activity continues to be based.

“Yes, we know that oil and gas use is going to fall, but that doesn’t mean that we won’t use these fuels. We will use them in a different way. They are still going to be a core part of the energy mix as we move towards net zero.”

Over the next 30 years, about half of the UK’s energy needs will still be met from oil and gas, he adds.  “Even by 2050, it is still likely to account for between a fifth and a quarter.

“However, the emissions will increasingly be captured and stored or maybe used to be formed into hydrogen as a low carbon fuel.” Hydrocarbons, he continues, will also continue to be used in sectors of the economy that are difficult to decarbonise, such as plastics, chemicals and cement production.

The oil and gas sector is working to make an active contribution to the energy transition - it agreed a landmark deal with the UK Government last year - and is planning to reduce its own emissions, sometimes in imaginative ways.

Most of these emissions come from power generation – offshore platforms usually have their own onboard power stations to generate the energy they need and these tend to be fired by gas or diesel.

“We can reduce emissions through the electrification of those platforms , using offshore wind power instead. It’s a great potential example of integration and of why we have increased the scope of our organisation to include energy sources other than oil and gas.”

The recent ScotWind round of licensing for offshore wind, awarding 25 gigawatts of new capacity, has demonstrated how companies involved in the production of hydrocarbons recognise and are reacting to the need for change.

“About 40 per cent of this planned capacity is backed by companies transitioning from the oil and gas sector”, Ross Dornan says. “There are severalthings driving that change.

“These companies are looking to the future and broadening their businesses. They are moving to become energy supply companies. Some of them are household names such as BP, Shell and Total Energies. What they are doing is using their heritage to drive the low carbon solutions we are going to see more of in the future.

“Wind energy companies are also involved in hydrogen, carbon capture and storage across the UK. It’s yet another example of the energy transition.”

Mr Dornan points to the emerging floating wind sector which will allow turbines to be placed in deeper waters further from the shore, so harvesting more wind. Technologies developed and used in oil and gas production, he adds, will also be essential here.

“The technologies for floating wind will be lifted directly from floating structures within oil and gas. It’s another example of the synergies and shows why we are helping support our members on their journeys towards the net zero landscape.” Companies in the supply chain are also diversifying their businesses away from oil and gas, he adds.

Mr Dornan says that the consensus is that consumption of hydrocarbons in the UK is likely to fall by 3-5 per cent a year in the future. The UK’s own production is also in a natural decline. “So it’s not really about growth. It’s about management of output.

“If we don’t invest in domestic production opportunities, then it’s likely we will see UK production  of oil and gas fall by about 15 per cent per year. That’s obviously a much faster rate than the expected drop in demand.

“That would expose the UK to the international import market. We would become increasingly reliant on other countries for our energy – including countries like Russia. That isn’t good for our energy security. Continuing investment isn’t about growing our oil and gas production - it’s about intelligent long-term management of decline.”

The future is bright for the whole UK energy sector, he adds, but it is bright for oil and gas as well. “However, it’s different from the way it was in the past. It’s about integration and bringing things together to advance the low carbon future we all want to see.”

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It's time to shore up UK supplies

When Russia invaded Ukraine in March, it provoked a global energy crisis. This has concentrated minds within the energy sector on the critical importance of security of supply.

According to Deirdre Michie, CEO of Offshore Energies UK, (pictured below) energy security is now a matter of national security. The Ukraine conflict has thrown into focus the problems of volatility and uncertainty and thrown a new light on the importance of being able to produce energy from domestic sources.

The North Sea oil and gas  sector can play a critical role in making the UK energy market less volatile 

Becoming more reliant on areas of the world such as Russia and organisations like OPEC now had more serious implications for security of supply than ever, Ms Michie said in a recent speech to the sector.

The UK Government recognised this reality and saw the importance of investment and of putting resources into the industry, she added.

“We must continue to invest – and that means in oil and gas, in CCS, in hydrogen and in wind. 

“Investing in all our energies for the long term and investing in the future of the UK.”

While the government recognised the need for stability and support for the sector, she added, there was still an “elephant in the room” in that political and business investment cycles rarely synchronised with each other.

“So while we think about our business in terms of years or even decades, we need the same to happen when it comes to related energy policy development and implementation.”

There needed to be a consistent consensus across all parties and all four nations of the UK in order for progress towards net zero goals to be optimised.

“We can only keep supplying the UK with diverse energy if we have the right environment in which to invest. I think we have that now, but we need to see it sustained. And that means an alignment of regulations, fiscal politics and political ideologies.”

Policymakers needed to think in the long term as well as the short term, planning ahead and making appropriate interventions.

“Doing this will bring certainty to the transitioning sector, its companies, its supply chain and its people. 

“We need to do it now. Our country’s 2050 net zero ambitions are almost three decades away. 

“It’s a commitment that all our politicians have agreed to align around – but they need to understand that it is inextricably linked to energy.”