Firms behind Rosebank oil field plan win North Sea licences

They raise fresh questions about the credibility of the SNP Government’s energy strategy, which recommends a presumption against exploration in the North Sea. This is based partly on claims that the chances of firms making more big finds off Scotland are slim.

The enthusiastic response to the round also leaves industry leaders’ claims that the windfall tax introduced last year would spark an exodus from the area sounding hollow.

Following the apparent vote of confidence in the North Sea from the oil and gas industry, prime minister Rishi Sunak has included plans for an annual licensing round in today’s King’s Speech.

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The results of the 33rd Oil and Gas licensing round which were released last week were keenly awaited amid uncertainty about the outlook for North Sea activity.

The round was the first completed since 2020. It was launched in October 2022 five months after the UK Government imposed the windfall tax after the surge in oil and gas prices fuelled by Russia’s war on Ukraine helped firms to generate bumper profits. The following month the Conservative Government increased the rate of the Energy Profits Levy before going on to declare it wanted to ‘max out’ the North Sea’s reserves to boost energy security in the UK.

The move sparked outrage among industry leaders who warned firms would slash North Sea investment.

However, the 33rd licensing round appeared to generate huge interest. The North Sea Transition Authority said it received 115 applications from 76 companies representing the highest participation since 2016/17.

After spending months assessing the applications, the regulator offered 27 licences covering areas off Scotland, including West of Shetland.

The exercise showed a wide range of firms see potential to make commercial finds or to develop existing discoveries on the acreage concerned.

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The 14 groups offered licences include Shell, which applied successfully to enlarge its extensive holdings West of Shetland. The company has completed huge oil field developments West of Shetland with BP in recent years.

Norway’s Equinor and Israeli-owned Ithaca Energy were offered licences, weeks after giving the go-ahead to the huge Rosebank development off Shetland.

Significantly, successful applicants included firms that have been vocal in their criticism of the windfall tax, such as TotalEnergies and Serica Energy.

TotalEnergies said it would slash investment in UK North Sea oil and gas projects by 25 per cent after the tax was imposed.

In September Serica Energy chief executive Mitch Flegg said the firm shared widespread concerns within the sector about the health of the UK's offshore upstream industry given the current fiscal regime and future uncertainties.

Serica said then that it generated £266 million cash from operations in the first half helped by the £370m acquisition of North Sea-focused Tailwind Energy in December.

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The interest shown in the licensing round may partly reflect the value of the investment allowance that was introduced alongside the windfall tax, to encourage exploration and development activity.

This allows firms to get a tax saving of around 90p for every pound of qualifying expenditure.

As the term of the windfall tax is currently due to end in March 2028 some firms may have applied for exploration acreage in the expectation the levy will have been dropped before finds they make are brought onstream.

However, the NSTA noted the licences offered are focused on areas containing prospects and existing finds that could be developed fairly quickly. There is lots of production infrastructure in place in the areas concerned.

Serica’s award covers the Kyle field, which it hopes to redevelop.

Environmentalists were furious about the licence offers, which they claimed would fuel the climate crisis without helping to cut household energy bills. These have soared amid the fallout from the war in Ukraine.

“Handing out new oil licences is a despicable decision,” said Friends of the Earth Scotland’s climate and energy campaigner Caroline Rance.

Industry champions note that demand for oil and gas is expected to remain strong in the UK for years. They claim new North Sea developments could help to reduce the UK’s reliance on imports.

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While the response to the licensing round provides further evidence that fearmongering about the consequences of the windfall tax was overdone, trade body Offshore Energies UK insists the levy unfairly penalises the industry.

It notes that prices have fallen some way from the peaks reached last year meaning that it is wrong to say that firms are enjoying a windfall.

But Shell and BP both showed last week how much money firms are making at current price levels.

Shell made $6.2billion (£5bn) profit in the third quarter, up from $5.1bn in the preceding months. In Q3 last year it made $9.5bn. The company said it expects to distribute $23bn to investors this year, through dividends and share buy backs.

In its results announcement Shell highlighted the strong performance achieved by its core oil and gas operations amid the group’s efforts to develop low carbon operations. It said notable developments this year have included the redevelopment of the Pierce field in the North Sea.

BP made a $3.3bn third quarter profit, up from $2.6bn in Q2. It made $8.2bn profit in the third quarter last year.

The company yesterday announced that its “resilient hydrocarbons” division had started production from the giant Seagull field east of Aberdeen.

The trading prospects for Shell and BP’s North Sea businesses look good. Analysts have predicted that oil prices could top $100 per barrel before the end of the year following moves by Saudi Arabia to cut production. The Gaza crisis has provoked concerns about potential disruption to supplies.

Brent crude is selling for around $85 per barrel. The price topped $130/bbl in March last year.

The strong response to the licensing round also poses difficulties for the SNP Government in Scotland.

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In the draft energy strategy released in January following delays, the Government said there should be a presumption against new exploration in the North Sea on environmental grounds.

At the same time, it said Scotland should reduce its reliance on the North Sea industry and speed the transition to green energy because it was unlikely that more big finds would be made off Scotland.

The response to the licensing round suggests firms with multi-billion investment budgets think differently.

The “Just Transition” promised by the Scottish Government may be harder to achieve amid disagreement between first minister Humza Yousaf’s team and UK ministers about how to encourage investment in renewables.

Mr Yousaf has said the UK Government should increase the support provided for energy firms under the Contracts for Difference programme, which householders foot the bill for.

His decision to launch a £500m offshore wind supply chain fund last month underlined how little the Scottish Government has done to date to support the development of the required infrastructure.

Ministers might note that US regulators this month rejected bids by BP and Equinor to increase the prices chargeable for renewable energy generated off New York.

BP took a $540m hit to third quarter profits after cutting the valuation of the assets concerned, underlining the value of the profits it generated in the North Sea oil and gas business.