The policy contradiction facing Britain's energy sector

When my brother took a selfie with Ed Miliband at the Glastonbury music festival in 2022, the fate of the British oil business may have been far from his mind. But Mr Miliband, now the Secretary of State for Energy Security and Net Zero, has plunged into the morass. A core legacy industry is in trouble from climate on one side, and from government policy on the other.

In May 2022, the previous Conservative government imposed a “windfall” tax on oil and gas production, in response to the spike in energy prices caused by Russia’s invasion of Ukraine.

In July, the Labour government boosted the overall rate of petroleum tax to 78 per cent – a number deliberately chosen to equalise it with neighbouring Norway – which will remain in place until at least 2030. More seriously, the government said it would take away allowances for investment – which Norway retains.

Last month, the government said it would not oppose a legal challenge by two environmental groups, Greenpeace and Uplift, against the approval of two new oil and gas fields, Rosebank and Jackdaw. Earlier this month, it was confirmed that Grangemouth, Scotland’s only oil refinery, would close next year with the loss of 400 jobs.

The British government will not issue new exploration licences. And last week, a report from consultancy Wood Mackenzie indicated that UK oil and gas production would halve by 2030 under current tax proposals. The next government budget is due to be revealed on October 30.

These events reveal a profound policy contradiction, both for the new Labour government, and for the UK energy sector in general.

The fallacies shaping this energy and climate policy are as follows. First, that petroleum production is now irrelevant to the UK economy. Second, that the UK’s own oil and gas industry is too small to be relevant for energy security. Third, that it is helpful to “net zero” carbon commitments to wind down remaining production quickly.

On the first issue, oil and gas production accounts for less than 1 per cent of the UK's gross domestic product, after hovering around 2 per cent before 2014’s price crash. That is not large, but not nothing, especially as the country has struggled to grow for years, with falling petroleum output a drag on productivity.

The windfall tax is intended to end early if both oil and gas prices fall below defined levels for a sustained period of six months. Currently Brent crude is hovering around the $74 per barrel trigger, but gas prices for delivery at the National Balancing Point, at about $11 per million British thermal units (mmbtu), are still well above the hurdle of around $7.6 mmbtu. But oil accounts for one and half times the revenue of gas, so it makes little sense to tie its taxation to that of gas.

Furthermore, the price thresholds are too low – corrected for inflation, oil prices have averaged $88 a barrel this century, and UK gas $9.74 mmbtu. Companies are paying a “windfall” tax on a windfall that doesn’t exist.

Investment bank Stifel calculated that the tax would raise another £4 billion ($5.3 billion), but lose £11 billion over five years because of lower investment and hence production.

The UK offshore, as a mature and declining basin, is one of the costliest places to produce oil and gas. New fields are relatively small. Yet the government’s proposals would tax it more heavily than Nigeria or Norway, and almost twice as heavily as the US.

On energy security, the UK extracts at home about half its consumption of both oil and gas. It is still by far the biggest producer in Europe after Norway. Its production is too small, and freely traded on international markets, to influence prices for domestic consumers directly. But it contributes to tax revenue, employment, and to the balance of payments and hence to the strength of the currency.

If the UK reduces its output, the gap will simply be filled by increased production and imports from the US, or, indirectly, from unfriendly countries, notably Russia.

The climate question also hangs on whether it is better for the UK to produce as much of its own oil and gas needs as possible, or import it. A Supreme Court ruling in June on an onshore oil project in Surrey said that the environmental assessment should consider not just the impact of the field itself, but the emissions from burning its oil and gas.

Judges know the law, but what about energy and economics? The consumption of petroleum, in the UK or globally, is not constrained by the amount in the ground that can be extracted, but by policy and technology above the ground. Even on a net-zero track by 2050, Britain will still use some oil and, especially, gas.

The Surrey ruling might be used to stop the development of Rosebank and Jackdaw, two much larger fields. Yet UK domestic production has a lower carbon footprint than imports. The UK industry is seven years ahead of target for reducing methane releases, and four years ahead on overall emissions.

If offshore platforms shut down prematurely, it won’t be economical to restart them. This prevents their reuse for low-carbon technologies, while carbon capture and storage, geothermal energy and hydrogen will remain crucial for centuries, as a paper last month by Durham University professor Jon Gluyas argues.

The Labour Party did well in Scotland in the last election, and boosting industrial jobs and employment outside London is a key part of its task. Norway has built its petroleum technological skills into successful export industries.

A successful net-zero transition is compatible with a measured move to lower-carbon industries such as offshore and floating wind, building on 60 years of marine technological expertise. Energy Minister Michael Shanks acknowledged as much in his speech at an offshore energy conference last week.

The right approach would be to encourage full use of the nation’s remaining resources, but to require that a growing share of oil and gas produced in – or imported into – the UK should be produced and used in a zero-carbon manner, or fully offset with robust carbon dioxide removals.

The new government has inherited a pretty dismal economic situation and at best a half-hearted environmental legacy. It will not help itself by multiplying policy contradictions. With a constructive approach on the petroleum industry, Mr Miliband can still harmoniously resolve economics, employment and environment.

Robin M. Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis

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