Managing the oil and gas development conundrum

If the industry’s focus in 2021 (especially leading up to the COP26 summit) was on climate change action, the story of 2022 has been how to balance energy transition with the need to ensure security and affordability of energy supplies.

Although the UK has increased the pace of development of technologies and projects to generate power from sustainable sources, the UK Government’s independent Climate Change Committee considers that fossil fuels will be required to meet domestic demand for decades to come. And while the intention remains to transition away from oil and gas, events like Russia’s continued invasion of Ukraine and the resulting energy crisis have demonstrated the extent of the challenge in achieving that balance.

Recently, and for the first time in at least six years, the UK received liquefied natural gas shipped from Australia to help secure adequate gas supplies.

Current and future oil and gas developments are likely to face a range of new requirements as regulators and government seek to resolve the ‘energy trilemma’ and enable an orderly and just transition to ‘net zero’ by 2050.

Future licences: Climate Compatibility Checkpoint

We already know that oil and gas developments will face new tests intended to ensure future oil and gas exploration and production licences are only granted where they are compatible with the Government’s climate change objectives and the ‘net zero’ target.

Earlier this year, the UK Government consulted on the design of a new ‘climate compatibility checkpoint’, proposing cumulative tests that must be met before any new licences are awarded.

The tests proposed included assessments of reductions in operational greenhouse gas emissions against previous sector commitments, and benchmarking against other oil and gas producing countries.

The proposed checkpoint cannot be viewed in isolation, and trade body Offshore Energies UK has called for it to be part of a “wider package of measures from the ambitious North Sea Transition Deal” that builds a stable regulatory environment to attract long-term investment in the North Sea and move the UK towards cleaner energies whilst simultaneously meeting energy security needs.

However, some see such a checkpoint as not going far enough and query whether issuing new licences can ever be ‘climate compatible’.

Some oil-producing countries like Denmark and France have gone much further and ruled out any new licences for offshore oil and gas exploration.

The UK Government has declined to take that approach although no new UK licences will be issued until the checkpoint is in place.

Existing licences: NSTA ESG Taskforce

Activities under existing licences will not be subject to the proposed checkpoint but they are subject to a consenting process managed by the NSTA.

It has placed a regulatory obligation on industry to manage its activities in such a way as to support achieving the ‘net zero’ target and confirmed in its 2022 Corporate Plan the objective to both support continued UK oil and gas production and ensure demand is met “as cleanly as possible”.

The NSTA now requires offshore licensees to “apply good and proper governance at all times”, which it considers includes establishing and embedding a culture of greenhouse gas reductions in licensee operations.

Further, it expects a licensee’s performance to be measured, reported and tracked against UK Government targets and industry standards.

In March 2022, the NSTA issued an open letter to all licensees urging them to focus on Environmental, Social and Governance (ESG) disclosure and reporting, setting out the NSTA ESG Taskforce’s current recommendations on minimum reporting standards and expectations, and announcing the extension of the Taskforce’s remit to consider whether more is required for optimal ESG reporting and tracking.

There are of course other measures in addition to the two mentioned here. Having appropriate scrutiny in place is important in ensuring the industry’s ‘social license to operate’ and balancing the challenges and opportunities associated with continued oil and gas development is quickly becoming ‘business as usual’ for the industry.