Energy Transition Outlook 2019

Animated publication

ENERGY TRANSITION OUTLOOK 2019

TR & NSITION ENERGY

The UK oil and gas industry and the low-carbon future

TR & NSITION ENERGY

Energy Transition Outlook 2019

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The UK Oil and Gas Industry Association Limited (trading as OGUK) 2019 OGUK uses reasonable efforts to ensure that the materials and information contained in the report are current and accurate. OGUK offers the materials and information in good faith and believes that the information is correct at the date of publication. The materials and information are supplied to you on the condition that you or any other person receiving them will make their own determination as to their suitability and appropriateness for any proposed purpose prior to their use. Neither OGUK nor any of its members assume liability for any use made thereof.

Contents Foreword OGUK Energy Transition — Policy Recommendations

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Report at a Glance

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The UK Energy Landscape is Changing The UK Energy System and the Energy Transition Net-Zero Emissions, Investment and the Economy: The Great Challenge The UK Oil and Gas Industry’s Strategy for Net-Zero Progressing UK Oil and Gas Production on a Path to Net-Zero Developing a World-leading, Low-carbon Offshore Oil and Gas Industry Supporting and Deploying Emissions Mitigation Technologies

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OGUK's vision is to ensure the UK Continental Shelf becomes the most attractive mature oil and gas province in the world with which to do business. Read all our industry reports at www.oilandgasuk.co.uk/ publications

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Expanding Low-carbon Business Opportunities

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The Oil & Gas Technology Centre Accelerating technology for a net-zero future

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Energy Transition Outlook 2019

Foreword

M uch has changed since the launch of our first Energy Transition Outlook in December 2018 and has already been reflected in our work in developing the ‘Roadmap 2035, a blueprint for net zero’. In line with the Roadmap, this 2019 report goes beyond merely assessing the impact on our sector of the Energy Transition but sets out a clear description of how our members will be an integral part of the net-zero future. A key development in 2019 was the publication of the Climate Change Committee (CCC) report on achieving net-zero which concluded that an Energy Transition to net-zero in the UK by 2050 is affordable, achievable but challenging . As an industry, we support its recommendations. The passing of legislation by the UK and Scottish governments to set legally binding targets for net-zero carbon emissions is an enormous milestone for energy policy, although similar actions by other governments will be needed to achieve the Paris Agreement objectives. The UK is the first major nation to commit to ending its contribution to anthropogenic

climate change and the pace at which the economy needs to deliver solutions is set to increase. New policies to deliver these objectives are now needed. We stand ready to work with both governments to inform policy development. The oil and gas sector will have to earn its position in this new energy world . With the launch of ‘Roadmap 2035, a blueprint for net zero’ we were one of the first industrial sectors to formally support the 2050 net-zero emissions timeline. This work sets out how our industry will contribute progressively to achieving this goal during the crucial stages of the transition and underlines the support required for driving solutions across the economy. It is also clear from the CCC report that the transition will not mean immediate reductions in the need for UK produced oil and gas. Many energy users will still need liquid and gaseous fuels for the foreseeable future, for both energy and feedstock, including beyond 2050. New technologies and new sources of energy

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need to go beyond the incentives currently provided by carbon prices in order for new applications to develop and thrive . In the first section of this report we set out an outline of what needs to be provided for in the forthcoming UK government Energy Policy White Paper in terms of both the overarching strategy and outline legislation. The time for rapid action is now, to ensure that we transform our sector over the next 30 years whilst maintaining the competitive, secure, indigenous sources of energy the UK needs .

will increasingly emerge to co-exist alongside the oil and gas sector. We not only embrace the change but welcome the opportunities it presents. As well as working to reduce their own emissions, many of our operator and supply chain members already have direct involvement in developing and supporting the rapid growth in low-carbon solutions, from carbon capture (CCUS) to offshore wind, electric vehicles to biofuels and hydrogen. These new technologies need to be scaled up rapidly, particularly CCUS and hydrogen, as the CCC noted these technologies are essential if we are to achieve net-zero. We have a central role to play in these new sectors and are committed to helping tackle the impact of energy use in society by developing these into safe, reliable and affordable solutions . Delivering net-zero is a massive investment challenge for the UK. The test for governments, industry and regulators is to rapidly develop long-term supportive policies. These measures

Deirdre Michie OBE CEO, OGUK

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Energy Transition Outlook 2019

OGUK Energy Transition — Policy Recommendations

OGUK’s 2018 Energy Transition Outlook called for a clear government energy strategy to help reinforce the case for change and provide strategic direction. Since then, whilst the agenda has moved on significantly, the need for such strategic clarity remains. The adoption by the UK and Scottish governments of net-zero targets and the pathway set out in the CCC report has done much to catalyse the whole of the UK’s energy sector in which the offshore oil and gas industry is a key player. Governments now need to turn their attention to detailed policy development to build on the progress made so far. Such an approach has proved successful in the past within the energy sector; government action has shaped the industry we see today, including its role in the huge success of North Sea oil and the roll-out of natural gas heating from the 1970s, and indeed the support for offshore wind where the UK is now a global leader.

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An Energy White Paper, which is expected in early 2020, provides an opportunity to move forward with a more detailed outline including legislative proposals. These need to give a framework and incentive structure so that new low-carbon technologies can come to the fore, and to help unlock the required large-scale capital investment to be delivered for achieving net-zero heat and transport whilst recognising the ongoing need for gaseous and liquid fuels for a number of applications. Policy to support decarbonised gas is particularly important as, although electrification of transport and heat will increase in importance, it is also necessary to give households and business appropriate options to choose between low- carbon technologies for their individual circumstances rather than trying to impose one-dimensional solutions. In light of the net-zero commitment, the following policy initiatives are what we believe are needed to increase the pace of change and through which government, industry and society at large can work more closely together to deliver the energy transition in the years to come.

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Energy Transition Outlook 2019

Unlocking investment into Carbon Capture, Use and Storage (CCUS) at scale • For too long the UK has been contemplating CCUS. Development of this technology at scale is a fundamental requirement if the UK is to meet its net-zero obligations. • Five industrial clusters have emerged which will rely on material CCUS projects. Urgent action is now needed to support their trail-blazing efforts to decarbonise industrial activity in the UK. • Unlocking funding for FEED (Front-End Engineering and Design studies) is key to getting these CCUS projects moving. The government must move quickly to support these cluster projects via the Industrial Strategy Challenge Fund (ISCF) and Industrial Energy Transformation Fund (IETF) such that FEED on all five projects has commenced by Q4 2020. • As CCUS emerges as a business model, it is anticipated transport and storage infrastructure will be the common theme to a variety of capture and utilisation schemes. A specific contractual model is needed for transport and storage infrastructure, recognising the realistic potential for re-use of oil and gas assets. This may require scope for a revenue stream independent of oil and gas production with appropriate resolution of different regulatory responsibilities and interfaces. Pursue the opportunities that hydrogen offers the UK • Government should further develop a hydrogen market design, including appropriate support mechanisms, that recognises all sources of production and its versatility across a range of heat, transport, and feedstock applications. As well as the gas quality regime, this will need modified rules and processes and physical infrastructure. • As a first step, action is required to allow hydrogen to be injected into gas transmission and distribution networks. An increase in the permitted hydrogen limit in the gas grid from 0.1% to 2-3% should be initially addressed and then further increases contemplated over time.

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Work with the offshore industry in its commitment to deliver Roadmap 2035 • The offshore oil and gas industry is one of the first sectors of the economy to respond to the net-zero target with a clear plan, Roadmap 2035, in which we commit to reduce our own emissions and commit to help develop the technology essential to enable the UK to meet its wider aims. Our industry’s expertise and investment are needed as part of the solution. • More broadly, energy policy should continue to recognise the economic contribution being made by the oil and gas sector and its role in providing secure energy supplies during the energy transition. Government should avoid actions that will lead to disadvantaging the UKCS and other UK industries compared to worldwide competition. Impairing the UK’s production capabilities will simply lead to greater imports. Policies should rather focus on how oil and gas are used within an increasingly low-carbon context. • Meanwhile, carbon pricing will remain an important element of policy design. Post Brexit, the presumption is that government will look to continue with some form of pricing scheme, whether allowance or tax based. This scheme will need to provide large emitters, including the oil and gas sector, with both long-term price signals and suitable allowances to prevent the risk of carbon leakage (offshoring industry). Additional, more targeted carbon-pricing mechanisms, such as contracts-for-difference, will also be needed in specific instances in support of new technology development and implementation. • Government should respond to the National Infrastructure Commission’s recommendation to revise the statutory duties of economic regulators. Anticipatory investment is likely to be needed across a range of infrastructure in support of the net-zero objective. • The role of specialised, sector-specific, environmental and economic regulators, including the Oil and Gas Authority (OGA), should be retained. Horizontal bodies such as the CCC or the proposed Office for Environmental Regulation must support the role of specialised regulators in their decision making.

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Energy Transition Outlook 2019

Report at a Glance

449Mt CO 2

e

0Mt

Current UK GHG emissions:

compared to the current 2050 target of

3% 151Mtoe

(or 21% below peak in 2007) 206Mt 24Mtoe 57Mtoe and

Estimates suggest emissions including those embedded in imported products have only fallen

from 1997 to

of which around is for power generation

Oil and gas demand

is for transport

The UK oil and gas industry is in a unique position to lead in the development of CCUS , with 175Mt The CCC estimates that up to

of CO 2 /year will need by 2050 5 projects situated across the country currently being explored to be captured and stored in the UK

4.5 million homes with electricity when it comes into operation in 2023

Offshore wind remains a key part of the energy transition and the decarbonisation of many sectors. Equinor’s Dogger bank has the potential to provide

9.3GW with 4.4GW in construction and a further 7GW commissioned. The CCC note a target of 75GW by 2050 to support decarbonised power. The clearing prices for these projects currently stands between £39.650 per MWh and £41.611 per MWh.

Offshore Wind capacity

currently stands at

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Premier Oil has been trialling

OPT’s PB3 PowerBuoy at the Huntington field.

Whilst moored to the seabed, the Buoy uses wave power and an

emissions-free

energy storage system to power sensors and instruments and is

net-zero at 1–2 % of GDP

The CCC estimates the cost of achieving

every year

£20–25bn

Total annual energy sector capital investment will need to increase from around

to around

£40–50bn pa

3.5%

Scope 1 emissions

of UK total emissions

from the offshore Oil and Gas industry account for around

$18 trillion

Of the $120 trillion investment

required in global energy to 2050, will need to double in order to achieve a decarbonised economy is forecast to be needed in the oil and gas industry

UK energy sector investment

Typically, on average, UK household expenditure on energy products, including gas, electricity and fuels, has varied between

5–7 % of disposable income

10% of disposable

Around 1 in 10 UK households

income is devoted to energy bills

are in fuel poverty, which is defined as a situation where more than

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Energy Transition Outlook 2019

The UK Energy Landscape is Changing

Climate change policy has already had a significant impact on the UK energy mix following the introduction of the Climate Change Act 2008, whereby the UK was the first major country to commit to legally binding emissions reductions targets. These changes are set to continue following the adoption by the government of a net-zero objective by 2050. The figure on the right, which summarises the primary energy flows in the UK during 2018, demonstrates the scale of the changes that are required over the next 30 years to achieve that objective, even beyond the significant changes that have already taken place. From an oil and gas perspective, the demand in the heating and industrial sector (for gas) and the transport sector and feedstocks (for oil) are the most notable features.

Summary of UK Energy Flows 2018

PRIMARY SUPPLY

GAS

COAL

BIOENERGY & WASTE

ELECTRICITY

NUCLEAR

WIND, SOLAR & HYDRO

PETROLEUM

OTHER

55.7

38.7

1.7

13.4

14.1

6.5

Domestic 130

96.7

44.5

6.8

4.3

1.8

Imports 154

0.4

0.3

0.2

7.2

73.2

- Exports 81

Marine bunkering

and stock change

3

Energy Industry use and losses

Transformation and conversion losses

15

34

Total: 203 mtoe

57

41

23

21

10

TRANSPORT

INDUSTRY

SERVICES

DOMESTIC

MISC.

2.5

2.5

3.3 7.2 1.3 8.3 0.3

8.5

9.1

1.3

1.0

1.5 8.0 0.7

26.6

0.4 2.4

55.2

9.0

0.3

FINAL CONSUMPTION

*All values in million tonnes oil equivalent (mtoe)

1.4 0.4

151 mtoe

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Power sector and energy efficiency have driven reductions to date UK greenhouse gas (GHG) emissions have fallen by over 43% since 1990 as government climate policies have increased the cost of emissions-intensive activities, whilst subsidising low- carbon energy generation. 1 main sources: lower carbon electricity supply, including coal-to-gas switching, driven by carbon prices and support for renewable sources; increased energy efficiency and improved domestic appliances supported by the setting minimum standards; and a more general economy- wide move away from energy- intensive manufacturing to the lower-intensity service sector. The latter has meant reductions from UK manufacturing have to some extent been offset by increased emissions elsewhere in the world. Emissions reductions have been achieved by three

This still means that the UK has met its commitments under the current climate agreements since emission accounting is carried out on a territorial basis. However, some estimates suggest that, measured on a consumption basis including the emissions embedded in imported products, UK GHG emissions fell by only 3% between 1997 and 2016 2 (or 21% below peak in 2007). Five significant technology trends driving emission reduction to 2019 Phase out of coal for electricity generation – replaced mainly by renewable capacity and some gas 1

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Reductions in gas demand for heating as a result of improved housing stock, insulation and mandated condensing boilers Lower electricity demand resulting from roll out of LED lighting and more efficient appliances Falling electricity generation costs from wind towards broadly the same level as gas-fired power generation Reduction in share of industrial production in the UK with corresponding growth in imported manufacturing products

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4

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The UK tracks the progress of its emission reductions via successive carbon budgets whereby the CCC sets out the required targets many years in advance, based on the goals set out in the Climate Change Act. The first (2008–12) and second (2013–17) carbon budgets were met and the UK is on track to achieve the third (2018–22) budget. However, on the current trajectory, it will not meet the fourth carbon budget (2023–27) by some margin. The fifth and sixth carbon budgets for the period 2027–37 are likely to be significantly toughened as a result of the new net-zero target.

1 2018 UK Greenhouse Gas Emissions, Provisional Figures (BEIS) 2 UK’s carbon footprint 1997–2016 (DEFRA)

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Energy Transition Outlook 2019

The UK Energy System and the Energy Transition

Whilst some of the changes to the way we produce and use energy are underway, significant developments are yet to be made. Some key areas such as electricity generation and use are already transitioning to lower carbon alternatives, but areas such as heat and transport are immature.

Electricity Generation The phasing out of coal in the electricity generation mix is almost complete in the UK. The combined effect of EU ETS and the carbon floor price have already made coal generation less economic. Government has announced plans to complete the phase out of coal-fired generation by 2025. Support for low-carbon alternatives (wind, biomass and solar) being granted large-scale government contracts for difference (CFDs) has also led to significant growth in those energy sources. Renewables now provide around one-third of electricity generation. The cost of offshore wind generation has fallen significantly, with turbines having increased in size from around 2MW to 12–15MW in the latest projects. Overall GHG emissions for power generation are only one-third of 1990 levels. The latest round of offshore wind CFDs will add a further 7GW of capacity, taking the total to 18GW. Meanwhile, the UK aspiration of 75GW by 2050 would mean up to 300TWh of electricity being produced from this renewable resource.

Transport

Residential Heating Generally, a large part of heating of homes and commercial spaces is met in the same manner now as in 1990, through the combustion of natural gas. Energy efficiency measures have reduced demand for gas by around one-fifth since 2000. 4 The main policy instrument has been government requirements in building regulations to install higher efficiency condensing boilers and support for insulation. Meanwhile the share of renewables in the heat sector has remained relatively low at about 8%. Further incremental improvements may result from additional measures of this type. Achieving further reductions require fundamental changes in the way heat is provided. But many consumers will continue to require heating systems based on gaseous fuels. For these users, combustion of hydrogen can be a key enabler of low-carbon energy systems, allowing a roll out to some existing properties at lower cost and footprint than other alternatives and with hydrogen-ready boilers currently under development.

Transport emissions are 3% lower than in 1990. These improvements are largely the result of improvements in combustion engine efficiency with fuel consumption per km having fallen by around one-third in that time. However, motor vehicle traffic reached a new high in 2017 and there has not been a large transition in relation to fuel types or technology. Renewable energy used in transport is only 5%, mainly from biofuels. 3 Achieving a zero-emission sector requires, in particular, expansion in the capacity of power networks and charging infrastructure in anticipation of future demand. If this is possible, reductions in battery storage costs should allow for expansion to many passenger and light commercial vehicles. For heavy duty vehicles and for marine and aviation transport, liquid and gaseous fuels offer an important alternative based on hydrogen fuel cells. As with electric vehicles, government commitment is required to support this, particularly with respect to the development of infrastructure.

3 Transport Statistics Great Britain 2018 (DfT) 4 Digest of UK Energy Statistics (BEIS, 2018)

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Prospects for the next five to ten years suggest a continuation of some existing trends while the scope in some areas is becoming exhausted. With just 30 years until the net-zero emissions target must be met, there is a clear need for investment to be started for long lead time items and innovation in heating, transport, and industry, whilst keeping those UK industries competitive.

Business and Industrial Processes Industrial GHG emissions have reduced by nearly half since 1990; however, most of this reduction had taken place before 2010. Meanwhile the non- industrial business sector has seen a 40% reduction in GHG emissions. Decarbonising industry’s use of gas for high-temperature heating is a significant challenge for the UK’s energy policy. Reducing emissions whilst maintaining industry in the UK will prevent moving the issue elsewhere. The CCC estimates overall abatement costs of £120/tCO2e for industrial processes. Decarbonised gas through hydrogen production may provide a cost-effective solution, although carbon capture applied post-combustion may be suitable in some applications. There will also remain a significant ongoing demand for oil and natural gas for feedstock. These will not be affected by climate change policies (e.g. when used for vital plastics in hospitals, everyday goods, lubricants etc). Although further restrictions on single- use plastics are likely, these will have minimal impact on feedstock demand.

Energy Extraction, Refining and Transport The production and transformation of energy and fuels is, in itself, a significant proportion of energy demand and emissions in the UK. Oil and gas production produces around 14.6 million tonnes of CO2 emissions per annum in the UK and the figure for refineries is similar. generated offshore, separate to the main electricity grid. Electrification of offshore oil and gas installations and further efficiency improvements in the refining and treatment of oil and gas at refineries and terminals will further reduce emissions in the sector. For oil and gas production, most emissions are from electricity Meanwhile oil and gas production and the transportation of natural gas can also lead to emissions of methane, another GHG. However, UK methane emissions from the sector are relatively low compared to global estimates and shorter transportation links help further lower the impact. More widely global oil and gas producers are proactively seeking to reduce emissions from their own operations.

Land Use and Agriculture (LULUCF) There has been limited change over the period since 1990 with a gradual shift from a net positive effect on emissions to a net negative impact. However, GHG emissions from agricultural and land use sectors is largely in the result of methane and NO2 emissions and these are equivalent to around 50MT CO2. A large proportion of these are associated with meat and dairy production and so emissions from agriculture are closely associated with food and diet choices. Land use also provides considerable opportunities to absorb GHGs. The CCC estimates that alternative land use could lead to a net reduction in emissions of up to 40MT CO2e5 through a combination of: the adoption of healthier diets; reduced food waste and increased grazing intensity; increased land area for afforestation and bioenergy of up to 2.7 million hectares by 2050 which would increase woodland cover from 13% of UK land area currently to 17–19%; reduction of grasslands and rough grazing area by 3.8–4.5 million hectares; and Peatland restoration of an additional 0.7–1.1 million hectares by 2050.

5 Land use: Reducing emissions and preparing for climate change (CCC, 2018)

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Energy Transition Outlook 2019

Net-Zero Emissions, Investment and the Economy: The Great Challenge

The reduction in UK GHG emissions achieved since 1990 has already required significant investment across a range of technologies. The largest investment has been in power generation. Meanwhile investment in energy efficient appliances has also been significant. Yet achieving net-zero will require further step changes in the way we produce and use energy in the UK. Additional capital expenditure equivalent of 1–2% of GDP on an ongoing basis is expected across a range of technologies in support of a decarbonised economy. This could increase total annual energy sector investment from around £20–25bn to around £40–50bn. These rates of investment are an increase on past levels but are considered achievable with the correct regulatory frameworks. It is important to note that the UK will still require continued oil and gas investment alongside renewable and other low-carbon technologies. This will maintain the UKCS as a competitive basin providing a significant share of energy needs and continuing to make a strong contribution to the UK economy both during and after the transition period, in terms of gross value added and employment in

both operators and the supply chain. Without continued investment into oil and gas, UK production would quickly decline and cease, and be replaced with imports. Both at global and UK level, projections consistent with the Paris agreement underline a continued requirement for oil and gas investment and production, albeit at lower levels than today. The indicative projections in the CCC report include a reduction in crude oil consumption of three-quarters by 2050, although this figure does not include ongoing demand for oil as a feedstock. By contrast, gas consumption remains at around two-thirds of current levels in 2050, albeit with most of this being used in decarbonised form. Overall, in this scenario the share of oil and gas in primary energy supply would need to fall from around three-quarters today to one-third by 2050. Changing these inherent demands will not be a simple task and government policy will need to work with individual consumers’ needs to be successful.

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5.23%

UK Energy Industry GDP Contribution (%) Despite significant falls in UK energy investment in the 1990s, oil and gas extraction has continued the sector’s strong contribution to GDP. With much of the required investment to reach net-zero focussed on the energy sector, expect significant growth here in respect to other industries. 3.18%

5.23%

3.18%

1990

1995

2000

2005

2010

2015

UK Greenhouse Gas Emissions (CO2e) UK Greenhouse emissions are 43% lower than they were in 1990 (38% for CO2), due primarily to the switch from coal to gas, and renewables for electricity generation and the offshoring of energy intensive industry.

Net Energy Imported (Mtoe) Through the boom years of the North Sea oil and gas industry, the UK was a net exporter of energy; however, more recently it has relied on international exports, reaching 36% import dependency in 2018.

1990

1995

2000

2005

2010

2015

794.36

72.83

448.53

5.09

1990

1995

2000

2005

2010

2015

-51.50

1990

1995

2000

2005

2010

2015

Low-carbon Electricity Generation (TWh) Low-carbon electricity generation (largely renewables and nuclear) has increased significantly since the start of the decade. Nuclear outages and shutdowns of an ageing fleet increased reliance on gas in the power generation mix, a trend set to decline as offshore wind and solar PV increase share driven by climate policy.

Energy Ratio (Toe per £1m GDP) The relationship between energy consumption and economic activity has fallen steadily over the period of 1970–2018. This is primarily due to improved energy efficiency, a shift from energy intensive to service industry and improved domestic appliances.

117.24

190.55

64.94

94.69

1990

1995

2000

2005

2010

2015

1990

1995

2000

2005

2010

2015

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Energy Transition Outlook 2019

Impact of the energy transition on consumers

Higher levels of investment in the energy sector will require significant funds to be raised from the private sector, including capital markets. Regulatory regimes will need to be established so that investors have appropriate revenue streams to cover costs and to provide suitable returns. The need to finance additional investment may also have some impact on consumer bills, particularly in terms of unit costs, while energy efficiency measures can help manage the overall impact. Current overall investment in the UK economy is around £350bn per annum, with around £200bn being business investment. As shown above, energy sector investment has typically been £20– 25bn of this amount in recent years, between 10–12% of the total.

Increasing this to a figure of £40bn per year, as indicated by the CCC, would correspond to around 20% of total business investment or, as shown in the pie chart below, roughly half the amount currently invested in housing and close to the total amount of investment by government. It is hard to assess the impact of the energy transition on households at this stage, and more work is required to do so. Typically, on average, UK household expenditure on energy products, including gas, electricity and fuels, has varied between 5–7% of disposable income. However, around 1 in 10 households are in fuel poverty, which is defined as a situation where more than 10% of disposable income is devoted to energy bills. This is relevant to the question of how rapidly the UK could decarbonise.

Summary of UK investment 2018 (total capital formation £bn)

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83

205

58

Source: ONS

Business Investment

General Govt

Dwellings

Other

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Re-allocation of resources

In addition, more rapid action may also create issues around capacity of the sector to deliver new technologies since the amounts required already go well beyond the amounts delivered to date. The required expertise, skills and supply chain for such a programme will only emerge over time. In addition, although some new technologies are emerging rapidly, others will take time to reach their full potential in terms of performance or cost reduction. Developing legal and regulatory structures also takes time. Governments will need to learn from experience in how the net-zero economy is delivered; for example, to avoid consumers being harmed by unfair practices or to develop new health and safety or planning requirements. Finally, although the desire from society for the energy transition is clear, it may take considerable time for consumers to understand and accept the behavioural changes required to achieve net-zero set out in the CCC report. Government also needs to consider that UK industry could be significantly disadvantaged if other nations don’t adopt the same level of ambition to decarbonise.

The Paris Agreement requires countries to set emissions reduction goals that are consistent with their “highest possible ambition”, and that are “fair and ambitious in light of their national circumstances”. In its recommendations for the UK government, the CCC assessed a 2050 target to be a “necessary, feasible and cost-effective target” to meet the UK’s commitments as a signatory of the 2015 Paris Agreement, noting the Committee “did not currently consider it credible to aim to reach net-zero emissions earlier than 2050”. There are a number of reasons why a more rapid target may be difficult to achieve at this stage, given the need to sustain massive amounts of investment whilst driving radical change to societal behaviour. A faster transition would require a larger and more rapid reallocation of resources into energy sector investment. An even more rapid increase could begin to compete more obviously with other priorities. The increased cost of this could negatively impact household and business customers. As noted by the CCC, “the design of the policy framework to reduce UK industry emissions must ensure it does not drive industry overseas, which would not help to reduce global emissions, nor the UK economy.”

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Energy Transition Outlook 2019

The UK oil and gas industry has an important role as part of the solution to a net-zero economy, helping to reduce the carbon emissions from oil and gas production and providing some of the technologies to reduce the carbon footprint from the use of oil and gas. There are several pathways for current oil and gas companies to follow in contributing towards a net-zero outcome for the UK. They range from maintaining indigenous oil and gas production at a lower emissions intensity (thereby helping to displace international imports), through to investments into alternative energy sources which are already happening. The UK Oil and Gas Industry’s Strategy for Net-Zero

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OGUK's pathways to a low-carbon industry

UK Oil and Gas Production on the Path to Net-Zero Emissions PROGRESSING

a World-Leading Offshore Low-Carbon Industry DEVELOPING

and Deploying Emissions Mitigation Technologies SUPPORTING

Other Low-Carbon Business Opportunities EXPANDING

Expand and support low-carbon business

Support the development of a CCUS industry

Aim to be producing 1.1 million bpd in 2035 Reduce reliance on international imports, maintaining energy security Maintain international competitiveness in alignment with Roadmap 2035

0.5 MTCO 2 e GHGs from production and operations by 2050 Significantly reduce emissions intensity from operations Understand and reduce wider upstream emissions (logistics, supply chain)

Advocate for hydrogen fuels

Enable the transfer of skills across the offshore energy sector

development around the UK

Explore other mitigation technologies

TR & NSITION ENERGY

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Energy Transition Outlook 2019

Pathway 1: Progressing UK Oil and Gas Production on a Path to Net-Zero

Our first pathway recognises the need for oil and gas within our energy mix during the coming decades. The UK oil and gas industry has an important role as part of the solution to a net-zero economy, helping to reduce the carbon emissions from oil and gas production and providing some of the technologies to reduce the carbon footprint from the use of oil and gas. But as the economy transforms, there will remain continued domestic demand for hydrocarbons.

The rate at which fuel switching and energy efficiency measures reduce UK oil and gas demand will be parallel to the rate at which UKCS production will decline due to the maturity of the basin and taking into account additional developments of remaining reserves. As set out in Roadmap 2035, part of the vision for the sector is for indigenous oil and gas production to fulfil as much domestic demand as possible, reducing the need for international

imports, maintaining energy sovereignty, and helping keep affordable energy prices. Therefore, strategies looking to maximise economic recovery from the UKCS remain part of the solution to transitioning to a net-zero economy. The failure to fully develop the UKCS means the UK will risk emissions from oil and gas consumption simply being offshored to achieve UK targets.

UK Oil and Gas Demand versus UKCS Production to 2050

300

UK Oil and Gas Demand

Forecast UKCS Produc�on

250

)eotM(dnameDdnanoitcudorPsaGdnaliO Roadmap 2035 Produc�on (Interpolated to 2050)

200

150

100

CCC Net Zero UK oil and gas demand

50

CCC Net Zero UK oil and gas produc�on

0

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Source: BEIS, CCC, OGUK

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Even though output from the UKCS will decline, investment in exploration and production of oil and gas will still be needed during the transition period. This is expected to be at the lower end of historical ranges. Similarly, as identified by the IEA and other global organisations, significant ongoing global investment in oil and gas involving hundreds of billions of dollars will be required to meet projections consistent with the Paris goals. The International Renewable Energy Agency (IRENA) estimates global investment in oil and gas production to be a total of $18 trillion out of a total global energy investment of $120 trillion between now and 2050. It is therefore important for the UK to continue to attract global investment through a competitive cost structure, stable regulatory framework and strong environmental oversight. Likewise, a healthy indigenous UK sector aligned to the net-zero commitment made by UK industry and government will help drive the investment and technological change that is required. Finally, a coordinated transition of energy production and other industrial sectors of the economy will help maintain employment opportunities in important regional locations. The Industrial Clusters programme envisaged in, for example, the government’s CCUS Roadmap6 provides the opportunities to maintain thousands of high-quality jobs in these areas and to become a global leader in low-carbon industrial technologies.

6 The UK carbon capture, usage and storage (CCUS) deployment pathway: an action plan (BEIS, 2018)

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Energy Transition Outlook 2019

Pathway 2: Developing a World-leading, Low-carbon Offshore Oil and Gas Industry

The second pathway focuses on the reduction of the sector's own emissions. UKCS environmental performance has improved significantly in the last 20 years in terms of CO2 and other emissions. But a step-change in technology deployment is required to work towards the 2050 goal which implies significantly lower levels of emissions per barrel of oil and gas equivalent produced.

Oil and gas will continue to be part of the energy mix up to and after 2050. However, it is expected that most gas will be consumed in decarbonised form, while oil will be used more sparingly for feedstock and for some energy uses, and being offset by other economic changes such as land use. To be compatible with a net-zero UK and meet the targets framed in the CCC recommendation, the emission intensity of oil and gas production will fall significantly to 2050. In 2018, UK offshore oil and gas production resulted in 14.6 million tonnes of CO2 equivalent in 2018, around 3.5% of the UK’s total emissions. Industrial businesses, including oil and gas producers, already have strong incentives to reduce their emissions due to increased EU ETS compliance costs. During 2019, operators paid up to €28/tonne of CO2 released. Higher CO2 prices in future are likely, which will further incentivise the decarbonisation of operations.

A collective approach is needed to meet the expectations of society and achieve emissions reduction on a large scale, industry needs to be able to focus on action which will result in the greatest benefit to environment whilst maintaining environmental performance and compliance efficiently. Institutional investors are increasingly looking to see all types of businesses align with the Paris agreement and this includes reporting on their emissions profile. For any business, GHG emission can be characterised into three groups (“scopes”) as defined in the Greenhouse Gas Protocol.7 The GHG Protocol methodology was endorsed by the Task Force on Climate Related Financial Disclosures (TCFD).

7 The Protocol was established by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD).

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UKCS installation greenhouse gas emissions

25

N₂O CH₄

CO₂

20

15

10

5

GHG Emissions (CO₂ Equivalent Million Tonnes)

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: EEMS May 2019

Decarbonising offshore oil and gas operations

CO2 accounts for the vast majority of gaseous emissions from offshore installations. Furthermore, around three quarters of these emissions are the result of power generation, as installations rely on their own produced gas for fuel in open cycle turbines. The method of power generation is now significantly more carbon intensive than electricity supplied from the onshore transmission network. The other main source of the sector’s CO2 emissions is the flaring of gas at installations. This is largely for safety reasons or on facilities there is no available route for exporting that gas into the pipeline system. Methane, amongst other gases is also emitted, particularly where gas has to be vented to avoid pressure build up. With support from OGUK, companies have initiated industry collaboration to develop and achieve stretching targets for emission reduction. This strategy will focus on a range of technologies and areas for collaboration, sharing lessons learnt including the following areas: • Benchmarking of installations and subsequent sharing of best practice. • Exploring connection to onshore electricity generation. This would allow access to lower CO2 intensity and potentially more reliable power generation. • CCUS for the sector’s own emissions that can also be made available to other sectors. Although the UKCS’ emissions performance has been improving over the last few years, in terms of emissions per barrel produced, a step change in emissions management is needed. Succeeding in progressing a world-leading, low-carbon offshore oil and gas industry will become a competitive advantage for the UK, as investors further prioritise ‘advantaged’ (i.e. low emissions intensity) barrels, and as an exportable opportunity to international basins looking to achieve similar goals.

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BP – Mastering methane

Methane is the main component of natural gas, and a potent greenhouse gas when released into the atmosphere. Offshore methane releases can result from equipment and non-combusted flare or vent gas and is very challenging to accurately monitor and therefore reduce. Earlier this year, BP set a UK record for the longest commercial drone flight from the Shetland Isles to Clair Phase 1 platform whilst testing methane-detecting technology. By live-streaming data collected from the sensor onshore, the technique can build 2D maps of methane emissions for review.

Premier Oil – Trialling wave power generation

Since August of this year, Premier Oil has been trialling OPT’s PB3 PowerBuoy at the Huntington field. Whilst moored to the seabed, the Buoy uses wave power and an energy storage system to power sensors and instruments and is emissions-free. The device constantly charges itself, and streams data back onshore for review. In future, the system could be used to monitor live subsea information.

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Aker Solutions – Providing emissions solutions

Aker Solutions has been developing and supplying low carbon alternatives and solutions to the oil and gas industry and beyond for multiple years which has contributed to the reduction of power and energy requirements of offshore installations, as well as the carbon emissions of onshore installations. In alignment with this, Aker Solutions recently announced an updated strategy, targeting a 20% revenue from renewables and 25% revenue from low carbon technology by 2030. ‘20/25/30’ is a goal that aims to realise activity across several areas of focus: Renewable power solutions – Aker holds a 23% stake in Principle Power Incorporated, a supplier of floating wind semi-submersible technology and is involved in multiple major wind farm developments in the UK, US and South Korea. With gas turbine power generation, a critical influencer on offshore GHG emissions, the floating wind market provides a solution to GHG emissions in offshore energy applications. Carbon capture, utilisation and storage – Aker Solutions has a proven environmentally friendly, solvent capture technology as seen in its modular onshore capture technology JustCatch™ and the industrial scale Big Catch, expertise now being extended offshore. Aker has performed studies that allow for the capture and disposal of CO2 at the source on FPSOs. The company is also investigating advancements in gas membrane technology that filters out CO2 subsea and reinjects this back into the well. Decarbonisation of oil and gas – Furthermore, Aker Solutions has now entered a new phase of development to decarbonise the oil and gas industry, investigating and understanding where the main losses are in respect to GHG emissions and developing new technologies and solutions to save clients’ money and reduce CO2 emissions of offshore facilities. Examples of these include remote sensing capabilities, low-emission power from shore, energy efficiency, flare gas recovery, platforms of the future and material and process optimisation.

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Pathway 3: Supporting and Deploying Emissions Mitigation Technologies

The third pathway looks to reduce the impact of the uses of oil and gas products in the wider economy. While emissions resulting from the production of oil and gas offshore are 3.5% of the UK’s total GHG emissions, refining, transport, and above all, combustion of these fuels are a much larger proportion.

The use of natural gas in power generation, homes and businesses now produces 50% of the UK’s GHG emissions. Meanwhile, consumption of oil in the form of petrol, diesel and other fuels, including for aviation, comprises 40% of the total. Significant investment across the whole economy will be required to mitigate these emissions.

Many of these applications cannot be provided by renewable or electricity-based solutions rapidly enough to meet the UK’s climate obligations, if at all. Therefore, policies supporting carbon mitigation in these ‘difficult to decarbonise sectors’ must be supported by the government through solutions like CCUS and hydrogen.

Total UK economy emissions by fuel type and sector

Agriculture 5.6 1%

Waste Management 0.3…

LULUCF -11.3 -3%

Public 8.1 2%

Oil & Gas Production 14.63 4%

Non-fuel 1%

Other fuels 3%

Industrial process 10.0 3%

Coal 6%

Energy supply (rest of)

Business 65.9 17%

83.7 22%

Gas 50%

Residential 65.9 17%

Oil 40%

Transport 121.4 31%

Source: BEIS

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Hydrogen and CCUS: safe, reliable and affordable solutions

Gaseous or liquid fuels have important advantages in terms of energy density, and the cost of transport and storage. The ongoing need for such fuels underlines the importance of carbon capture technologies and hydrogen (and derivatives thereof) as a key element of the zero-emissions economy. This was underlined by the conclusions of the CCC report summarised below.

The foundations are in place. Policy development has begun for many of the components needed to reach net-zero GHG emissions: low-carbon electricity (which must quadruple its supply by 2050), efficient buildings and low-carbon heating (needed throughout the building stock), electric vehicles, carbon capture and storage (CCS), diversion of biodegradable waste from landfill, phase-out of fluorinated gases, increased afforestation and measures to reduce emissions on farms.

Hydrogen and CCUS industries will be required ‘at scale’ by 2050 in order to achieve a net-zero emissions economy

300

100 120 140 160 180 200

Direct air capture with CCS

Power Generation

Fossil CCS (hydrogen production) Fossil CCS (industry)

Transport Heat in homes

250

Electrolysis

200

MTCO 2 e

Shipping

150

BECCS (all sectors)

0 20 40 60 80

Gas reforming

TWH/yr

100

Industry

Fossil CCS (power generation)

50

0

Hydrogen Demand in 2050

Hydrogen Production in 2050

CO₂ captured and stored in 2050

Source: CCC

These show the recognised potential of CCUS and hydrogen technologies across a range of applications including flexible power generation, domestic and industrial heating and transport, and energy intensive industries.

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