Energy Transition Report 2018

ENERGY TRANSITION OUTLOOK 2018

TR & NSITION ENERGY

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

TR & NSITION ENERGY

ENERGY TRANSITION OUTLOOK 2018

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TR & NSITION ENERGY

Foreword This document is Oil & Gas UK’s 2018 Energy Transition Outlook . This is our first document on the subject of energy transition and it is focused on the implications and opportunities for our members, both operators and contractors. The Energy Transition has been gathering pace and is sometimes described as the approach of a new 'third age of energy'. Such transitions have occurred before. For example, in the period from World War II to the 1960s oil and gas supplanted coal as the largest primary energy source and, by 2017, provided 54% of global energy needs. Energy systems do not change overnight, but as we move into the next decade, the need for sustainable, reliable and affordable energy sources are ever more apparent. Increasingly businesses need to demonstrate they are contributing to all these goals. In our recent Economic Report 2018, we highlighted some the key drivers for the Energy Transition to which our members are responding. At a political level, the Paris agreement made the imperative of moving to a low-carbon economy more pressing. Likewise, rapid technological and economic changes are taking place both in the way energy is used in society and how we buy goods and services. Finally, societal demands on the energy sector are evolving rapidly as new cohorts of consumers, investors and employees bring additional expectations. This outlook draws on research and projections carried out by our members and many other organisations. It shows that the Energy Transition is already having an impact, particularly in the UK which has been at the forefront of emissions reduction. Most of the 40% reduction since 1990 has been in the electricity sector from renewables growth and the switch from coal to gas. But it is not yet clear how the next phase of the transition will play out in terms of either the mix of technologies being adopted or the rate of change, particularly in the case of transport and heat where oil and gas continue to be central to the needs of consumers. Although the global context is important, this document focuses particularly on the features of the UK energy sector, including how the transition process relates to Vision 2035. Our conclusion is that the shared concept of Vision 2035, namely to extend the life of the North Sea for an additional generation and to double the share of UK supply chain goods and services worldwide, is wholly consistent with Energy Transition pathways. The report also examines the response of oil and gas companies to this fast-changing environment. Many are already taking steps to diversify into alternative energy, reducing their carbon footprint or investing in research and development. For these reasons, as well as the ongoing need for oil and gas production in the medium-term, sustained investment in our sector is crucial, both for the wellbeing of the UK economy and a successful transition to a lower carbon future. We conclude by putting forward a wider energy policy roadmap aimed at further intensifying the UK's comparative advantage inoffshore technology todeliver thenext phaseof theEnergy Transition, focusingon theheat and transport sectors. In particular, we recommend a more strategic focus highlighting the development of Carbon Capture Usage and Storage (CCUS) and the hydrogen economy as essential elements of any long-term energy strategy.

Deirdre Michie Chief Executive, Oil & Gas UK

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Report at a glance

456mt compared to the current 2050 target of

160mt

Current UK carbon emissions are

150 mtoe

Oil and gas demand in the UK is around

is for power generation and 55 mtoe for transport

of which around 30 mtoe

27 million households are heated by natural gas

80% of the UK's

300 miles

200 and

A typical range for electric cars on a single charge is now between

$600bn investment in fossil fuels is still required globally in the IEA Sustainable Development scenario

Between 2018-2040 around

Equinor is developing Hywind, the world’s first

off the east coast of Scotland

floating wind project

Natural gas can be converted to hydrogen at around 70% efficiency through methane reformation

with a capture capacity of 21 large-scale CCS facilities

Globally there are

37 million tonnes

The UK Oil and Gas Industry Association Limited (trading as Oil & Gas UK) 2018 Oil & Gas UK uses reasonable efforts to ensure that the materials and information contained in the report are current and accurate. Oil & Gas UK 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 Oil & Gas UK nor any of its members assume liability for any use made thereof.

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Energy Transition – the story so far Climate Change targets have led to significant changes in the energy mix, particularly in the UK. Meanwhile, energy efficiency improvements and the spread of renewables have reduced UK oil and gas demand. However, UK oil and gas production levels are now well below what the UK consumes, underlining the importance of Maximising Economic Recovery (MER UK) and Vision 2035. Background to the Energy Transition The roots of the Energy Transition can be traced back to the 1997 Kyoto Protocol which was the first international treaty relating to the need to address climate change. The treaty built on the 1992 UN Framework Convention on Climate Change (UNFCCC), and entered into force in 2005. These agreements formed the basis for the first set of commitments made by signatory countries and associated climate policy initiatives. These included the 2020 targets agreed at the 2007 European Council which led to the EU Emission Trading Scheme (EU ETS) and Renewables Directives as well as the 2008 UK Climate Change Act. These policies have affected both the way the UK economy uses energy and the energy sources used.

Hywind Hywind Scotland is the world’s first floating offshore wind farm, and has been developed by Norwegian energy company Equinor. The30-MWwindprojectrepresentsa £152 million investment that will see over 20,000 homes in Scotland powered with renewable energy. By 2030, Equinor intends to reach a levelised cost of energy of 40 to 60 euros per MWh for future floating wind projects. By 2023, the company also intends to achieve a 50% reduction in capital expenditure for such developments worldwide.

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Changes in how the UK economy uses energy UK primary energy consumption has fallen by around 18% since 2008. 1 There have been significant advances in some industrial processes, heating and lighting. But these efficiencies have been partially offset in the UK by continued economic and population growth mirroring wider global trends. The chart below shows the main elements of energy demand in 2017. Overall, demand for oil and gas in the UK was around 140–150 million tonnes of oil equivalent (mtoe) per year – a 15% reduction since 2008 – compared with total UK production of 90 mtoe.

UK Domestic Energy Flow, 2017

Hydro, Wind & Solar Bioenergy †

Coal ‡

Crude Oil & Petroleum Products

Nuclear

Natural Gas

Domestic Imports

40

15.1

50.9

5.8

12.9

1.9

95.2

45.1

0

1.6

3.5

6.5

Energy industry use and losses

PRIMARY SUPPLY 278.6

15

Exports Marine bunkering Stock change

Transformation and conversion losses

78.5

35.8

TRANSPORT DOMESTIC INDUSTRY SERVICES MISCELLANEOUS

Petroleum 8.8

Petroleum 55.1

Petroleum 2.5

Petroleum 4.3

Petroleum 0.7

Gas

4.4

Gas

0

Gas

25.5

Gas

8.7

Gas

4

Coal

0.05

Coal

0

Coal

0.6

Coal

1.3

Coal

0.02

Bioenergy 1.7

Bioenergy

1

Bioenergy 2.2

Bioenergy 1.2

Bioenergy 0.07

Electricity 6.7

Electricity 0.4

Electricity 9.1

Electricity

8

Electricity 1.7

Other

0.2

Other

0

Other

0.3

Other

0.7

Other

0.1

FINAL CONSUMPTION 149.1 ∆

*all values in million tonnes of oil equivalent (mtoe) † Includes geothermal and solar heat ‡ Includes manufactured fuels, benzole, tars, coke oven gas and blast furnace gas ∆ Total does not equal sum of the sources due to statistical difference, stock changes, marine bunkering and rounding

Source: BEIS

1 BEIS – Digest of UK Energy Statistics

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Changes in sources of energy Growth in renewable energy has been particularly significant and by 2017 renewables accounted for 17% of total electricity consumption, or 11% of total primary energy. When combined with increased use of gas-fired generation, the main effect of this has been to displace coal in the electricity generation mix. The impact of renewables or other low carbon sources in the heat and transport sectors has, so far, been minimal.

UK Greenhouse Gas Emissions by Sector

300

Transport

Other

Agriculture

Business

Industrial processes

Energy supply

Residential

250

200

150

100

50

Greenhouse Gas Emission Projections (MtCo2e)

0

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

Source: UK Climate Change Committee

The combination of reduced energy demand and the changing energy mix has meant that the UK has already met its 2020 objectives with respect to reduction of carbon emissions. This has largely been achieved without a major economic impact and indeed the delinking of GDP growth from energy and carbon intensity has been a key feature of the last twenty years in many developed countries. The chart above, reproduced from the UK Climate Change Committee, showed the electricity sector as the main source of the reduction in carbon emissions. 2

2 BEIS – Energy and Emissions Projections 2017

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Energy Transition – the future to 2035 and beyond Vision 2035 is consistent with potential pathways for the transition to a low-carbon economy, including those projections with the most rapid change. By 2035, the maximum forecast impact of alternative technologies will only reduce UK oil and gas demand to around 100 mtoe per annum from the current level of 140–150 mtoe. This is significantly above the Vision 2035 target production level of around 60 mtoe (or 1.1 million boepd). In the longer term, the UK cannot decarbonise to the extent required without large scale development of CCUS and increased use of hydrogen. New objectives for emissions reduction For the UK, the Climate Change Act established legally binding longer term 2050 targets for emission reduction of 80% below 1990 baseline levels. Other countries have gone further. For example, Sweden has committed itself to being carbon neutral by 2045. 3 New intermediate objectives have also been set at European level following the 2016 Paris agreement. The EU has now adopted a 40% reduction target for GHG emissions for 2030 as well as a 27% target for renewable penetration and a 32% energy efficiency improvement. 4 Success in delivering these objectives and the impact on the oil and gas sector depends on current and medium-term technological development. Renewable energy and storage Renewable and storage technologies have fallen in cost significantly. These trends are likely to continue as a result of the advances being made in reducing the cost of generation from both solar and wind technologies. These cost reductions are, to some extent, driven by the increased scale of investment. The largest wind turbines being installed are now 8 megawatts (MW) compared to 2-3MW ten years ago, with the prospect of a 12-MW turbine in the next few years. Likewise, the average size of a solar farm is now 120MW. 5 These technological developments raise the prospect of a largely renewable electricity system that only requires minimal back-up generation from fossil fuels. Further advances in smart metering, digital control and, to some extent the internet-based service economy could also give more scope for automated response for ensuring supply and demand are in balance. How quickly this transformation takes place is, as yet, unclear. However, at current levels of electricity demand, it is a reasonable scenario that gas will only play a residual role in electricity generation compared to its share of around 40% today. This could reduce gas demand by up to one-third and remove roughly 25 mtoe from the total level of oil and gas consumption in the UK. 6 Technological drivers

3 https://unfccc.int/news/sweden-plans-to-be-carbon-neutral-by-2045 4 https://ec.europa.eu/clima/policies/strategies/2030_en 5 IEA — World Energy Outlook 2017 6 BEIS — Updated energy and emissions projections: 2017 – Annex J: Total electricity generation by source

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Electric vehicles Meanwhile, in the last ten years electric-powered vehicles have moved from a marginal component of the automobile market into the mainstream. There are many types of transport vehicles where this technology is already a reality, whether in hybrid form or purely electrical propulsion, ranging frommotorcycles to cars and light delivery vehicles. The main constraints to the adoption of electric technology for vehicles come from their limited range and the availability of charging infrastructure. But both these aspects of the technology are improving quickly and are likely to mean that the use of electric vehicles will extend beyond users who have enough space in the home for charging equipment. The general move towards short-term hiring and leasing of vehicles may also facilitate the uptake of this technology. Furthermore, the government has already set an objective that by 2040 there will no longer be any vehicles sold with solely petrol or diesel engines. One possible outcome is that electric vehicles largely replace internal combustion engines for all personal and light commercial transport and that the electricity used to power them is derived from renewable sources. This would correspond to a further reduction in UK oil and gas demand of up to 30 mtoe (assuming full electrification). Other energy uses There are a number of sources of demand where the Energy Transition is unlikely to have a significant impact in the short to medium term. These difficult-to-decarbonise sectors include heavy freight transport by road, maritime transport, aviation and most domestic and industrial heat applications. For many industrial processes, high energy density is required to serve particular needs where acceleration of a heavy load or achieving high temperatures rapidly is required. Electricity-based technologies are currently not available to serve requirements of this nature and at present there is little evidence of these emerging in the short to medium term at the required scale. For domestic heating, particularly for the UKwhere 80%of households are heated by gas, the cost and infrastructure implications of a wide-scale transformation to electricity-based technologies may be difficult to overcome in the short to medium term. Estimates suggest that transferring domestic properties to electric heating would require 20,000 properties to be changed over per week between 2025 to 2050. It is unclear how such a transition would be organised or whether such a change would be acceptable to consumers. 7 A full-scale transfer to electrical heating would require a more significant upgrade to distribution and transmission networks in addition to any requirements for electric vehicles. In addition, the nature of heat demand also includes a much higher degree of daily and seasonal variation compared to current electricity use and demand from vehicles that would further stretch investment and storage requirements if electricity generation is expected to transfer almost entirely away from fossil fuels.

7 National Grid – Future of Gas 2017

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Feedstock Finally, another common use of both oil and gas is to provide feedstock, or raw materials for industrial processes to create end-use products. Industrial processes using oil and gas create a host of fuels, lubricants, fertilisers, plastics, paint, clothing, electrical boards and goods from fossil fuel feedstock. Many of these will be challenging to replace due to the physical properties of oil and gas. For example, even in the most conservative outlook for fossil fuel use, the IEA’s sustainable development scenario predicts increased use of oil and liquids in industry and for petrochemicals from 2016 to 2040 worldwide (17.4 to 21.6 million boe per day). 8 For the UK, non-energy uses of oil and gas constitute 7 mtoe, around 5% of total current UK energy demand. Overall, current technological development, although rapid, is very unlikely to reduce UK demand for oil and gas more than around 50–60 mtoe. This would leave demand at between 90–100 mtoe and well above projected production levels expected under Vision 2035. Longer-term technology drivers It is difficult to second-guess longer termtechnological developments before they have been tested in a commercial environment. In the energy sector in particular, it is unlikely that one particular technology will be totally superior and eclipse all others. In addition, there is likely to be an important value in maintaining market resilience and the option of switching between sources. Finally, the best perceived solution is not always the one which gains popular approval among consumers. Carbon Capture and Storage It is widely recognised that carbon capture, usage and storage (CCUS) is an essential element for meeting long-term climate change policy objectives. Globally, it is expected that CCUS projects will need to deliver 14% of the total cumulative emission reductions required if the Paris agreement is to be achieved. CCUS is an existing and proven technology. There are currently 21 active, large-scale CCS facilities with a capacity to capture 37 million tonnes of CO 2 per year. 9 The Carbon Capture, Usage and Storage Cost Reduction Task Force Report highlighted the clear potential for using this technology in the UK to enable further decarbonisation. This includes the potential use of decommissioned oil and gas assets in the North Sea. Potential development of up to five strategic clusters would provide the UK the opportunity to become a global technology leader in this area, leveraging existing expertise from the oil and gas sector.

8 IEA — World Energy Outlook 2017 9 Global CCS Institute — The Global Status of CCS 2017

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Hydrogen There are also strong reasons to believe that hydrogen could provide a solution to meet the needs of sectors where renewable and electricity-based technologies are unable to effectively meet UK energy needs such as heavy goods transport, aviation and domestic and industrial heat. One advantage of hydrogen, in common with natural gas, is likely to be in terms of energy density and flexibility. The recently published H21 feasibility study has shown the wide-reaching decarbonisation potential for using hydrogen for heat and industrial processes. 10 In many ways development of the Hydrogen sector would build on the skills and expertise of the UK oil and gas industry. A further policy advantage to this argument will be the synergies with the development of CCUS, eventually to achieve negative emissions if atmospheric capture of carbon dioxide can be achieved either through artificial methods or through reforestation and the use of sustainable biomass. Wider energy systems In relation to energy systems, there was until recently a strong expectation that renewable technology would drive a more decentralised energy system. This was created by rapid uptake of small-scale wind and solar installations. Localised investment led on to the possibility of individual consumers being active participants on both sides of the energy market, so called 'prosumers', whereby technology integrates small and individual users into the management of a network. This is still reflected in a number of forecasts and scenarios. However, some of these expectations are now being superseded as a result of economies of scale in the renewable sector and the limited appetite for individual consumers to become active energy market participants. Subsidy levels for smaller installations have been reduced as it has become apparent that larger scale wind and solar facilities are more likely to operate effectively at close to commercial conditions.

10 https://northerngasnetworks.co.uk/h21-noe/H21-NoE-23Nov18-v1.0.pdf

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Global demand forecasts to 2050 In the global context, trends such as population and development growth are likely to mean oil and gas demand continuing at similar levels to today, at least until 2030. Extending the availability of reliable and affordable energy and improving air quality are part of the UN Sustainable Development Goals alongside its Climate Change objectives. There is still much to be achieved in this area particularly for regions where the use of unsustainable biomass remains widespread. Likewise, there are significant advances in both carbon emissions and air quality when replacing older coal-fired generation with that of natural gas.

These projections mean that in most forecasts, oil demand continues to increase until the 2030s at global level. Meanwhile gas demand is expected to show modest growth for the forseeable future.

Global oil demand forecasts 11

Actual

IEA (New policy)

120

OPEC (Reference Case)

EIA (Reference Case)

110

IEA (Current Policy)

IEA (Sustainable Policy)

BP (Evolving Transition)

BP (Faster Transition Scenario)

100

90

80

70

60 Demand (mbd)

50

40

30

1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040

The above forecasts for oil demand give a wide range of outcomes for the year 2040 with OPEC, at the higher end, envisaging continued demand growth, approaching 120mbd by 2040.Meanwhile theDNVGL forecast (not graphed) and the IEA SD scenario both have oil demand peaking in the 2020s and a steady fall thereafter reaching 65–80mbd by 2040.

11 BP Energy Outlook 2017 IEA World Energy Outlook 2017 OPEC Long-Term Oil Forecast 2017 EIA International Energy Outlook 2017

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Global gas demand forecast Most projections confirm the status of natural gas as an important transition fuel during the period 2017–50. As well as its importance for particular heat and industrial processes which cannot decarbonise quickly. It is expected that the supply of gas needed for electricity generation globally will grow initially before falling back as renewable generation increases. 12 The move to electric vehicles may contribute to this increased demand for gas, particularly as coal generation is phased out and priced out of themarket by the increased price of carbon emission certificates.

Global Gas Demand by Sector, IEA Sustainable Development Scenario (bcm)

47

4,184

277

349

9

3,752

-250

2016

2040

Power Industry Building Transport Other Total Demand

Indeed, as well as the IEA, the majority of forecasts expect ongoing expansion in demand for natural gas. The higher projections include some scope for increased use of natural gas in the transport arena as a stepping stone to the hydrogen economy. Liquified natural gas (LNG) and compressed natural gas (CNG) already have potential to reduce emissions and improve air quality in maritime transport, urban public transport and for heavy freight.

12 IEA World Energy Outlook 2017

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The changing business environment for energy companies Oil and gas business are already responding to the changing requirements of consumers, investors and current and potential employees. Retaining investor confidence and recruitment are a key challenge to the delivery of Vision 2035 and the long-term future of the sector in the UK. Changing attitudes in society Although demand for oil and gas has been maintained, the attractiveness of the oil and gas sector among potential employees and investors has declined. At best, it is clear that the sector is now competing for interest with a wider range of innovative technologies, as shown below. Although investment in fossil fuels continues to be needed, renewable investment is catching up quickly. Whereas among some groups there exists an unreceptive attitude, several active campaigns, both globally and in the UK, to persuade public bodies, universities and churches to divest from fossil fuel activities. This has, to some extent crossed over into the criteria of some institutional investors such as pension funds and insurance providers.

This change in attitudes is not all-pervading but the erosion of the pool of possible investors and employees will certainly have some impact. This needs to be continually addressed especially in the industry’s core constituencies.

Investment in Fuel Sources Required to Meet IEA Sustainable Development Scenario 13

2010-2016

2017-2040

Other low-Carbon

Transmission and Distribution

Renewables

Fossil Fuels

Global Energy Investment by type to reach the sustainable development scenario ($2016bn pa)

0

200

400

600

800

1000

1200

13 IEA — World Energy Outlook 2017

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Changing attitudes of investors In terms of investment, in addition to the social attitudes described above, uncertainties around Energy Transition also affect access to finance. Although there is not a strong perception that investments in the oil and gas sector risk being stranded assets, the energy transition has contributed to a shortening of timeframes and more caution when sensitivity-testing potential investments. Investment in renewable and alternative energies is also growing and provides a potentially attractive alternative to oil and gas. With increasing scale, such investments are, like oil and gas, highly capital-intensive. Although the quasi-regulated nature of projects may, at first glance, appear less attractive to some investors, this is not necessarily the case. Support mechanisms for low-carbon energy have tended to remove the market price risk for investors while leaving other risks associated with research and development, project management, capital structuring and marketing which are not far from the core competences of oil and gas companies and investors. In addition, it has been possible to structure finance for renewable projects so that different types of investors can each have the combination of risk and return that they are used to. A common pattern is for the initial developers to refinance assets once they reach the operational stage where the returns are then more suitable for other types of investor. Impact on oil and gas company strategies As a consequence of these changing circumstances among consumers, potential employees and investors, many oil and gas companies have themselves begun diversification efforts. Some larger international companies are increasingly becoming end-to-end providers building on their powerful brands and direct relationships with customers. Many have strategic objectives to accord with the objectives of the Paris agreement in response to the wishes of investors and consumers and are becoming an important source of finance for investment and R&D in alternative energy. Many are also participating in the Oil and Gas Climate Initiative (OGCI). OGCI A voluntary, CEO-led group of 13 energy companies covering 30% of global oil and gas production across 130 countries. The group is focused on: • Reducing methane intensity of production to below 0.25% by 2025 and supporting the aim of zero routine flaring • Developing a portfolio of investments focused on carbon dioxide reduction and reuse • Consistent structure and guidance for members in reporting against common objectives Contractor and infrastructure businesses in the oil and gas sector are already part of the current or potential supply chain for alternative energy providers. To varying degrees, this section of our membership is already part of the Energy Transition. This process has been accelerated during the recent downturn in the oil and gas sector, where contractor companies have had to diversify out of necessity. Other oil and gas producers will continue to operate successfully with the confines of oil and gas for decades to come. Continued investment in oil and gas is still of significant importance to meet the needs of improving economic conditions and living standards across the world and to increase access to energy sources and air quality. Source: Oil and Gas Climate Initiative

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The Energy Transition Policy Roadmap To further promote investment, energy policy needs to be refocused on a smaller number of strategic government objectives including the development of CCUS at scale and the hydrogen economy. Energy strategy should also explicitly recognise the importance of the oil and gas sector Vision 2035 to the UK economy. Ideally, energy strategy should aim for cross-party support as is the case in, for example, Denmark. 14 The need for a clear government energy strategy Government policy has a key role in providing an efficient pathway to the low-emission future and its role in the energy sector has become much more prominent since the 2008 Climate Change Act. However, policy has reached something of a crossroads in recent years. The 2017 Clean Growth Strategy sought to set out a long-term vision for government energy policy. 15 But although some aspects of this provided a clear long-term picture, policy arguably remains overly focused on small marginal improvements rather than addressing the key strategic choices. General dissatisfaction with outcomes for some groups of consumers has led the government to introduce a regulated price cap for electricity and gas bills for those on standard variable tariffs. Under the EU Energy Union Governance Regulation, agreed in principle in June 2018, each EU Member State is required to prepare a national energy and climate plan for the period 2021 to 2030 aligned with the overarching EU targets. This Regulation will likely be in force during the Brexit transition period. However, in any case, the time is right for a restatement of energy policy goals in the UK, including government expectations related to the oil and gas sector. Strategy and policy should focus on key high-level objectives The 2017 Helm Review 16 of energy prices identified the extensive, overlapping and complex interventions in energy markets as a key driver of higher prices for consumers. Although the review was focused strongly on electricity markets, this assessment is also relevant to energy policy more widely. Meanwhile some individual policies have been assessed by the National Audit Office (NAO) as poor value for money. 17 18 One lesson from these assessments could be that government should focus more closely on large-scale and innovative technologies where the UK has an advantage or interest from a competitive and industrial policy perspective, and where potential market failures are more apparent. This would include the oil and gas sector, offshore wind and the development of CCUS and the hydrogen economy.

14 https://oim.dk/media/19094/energiudspil2604.pdf 15 https://www.gov.uk/government/publications/clean-growth-strategy 16 http://www.dieterhelm.co.uk/energy/energy/cost-of-energy-review-independent-report/ 17 https://www.nao.org.uk/wp-content/uploads/2018/02/ Low-carbon-heating-of-homes-and-businesses-and-the-Renewable-Heat-Incentive.pdf 18 https://www.nao.org.uk/report/green-deal-and-energy-company-obligation/

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CCUS will be key in delivering a low carbon future

CCUS is a key technology for the next phase of the energy transition. Successful implementation will provide the following benefits:

Allow decarbonisation across the whole UK economy which will be essential if the Government is to achieve its ambition of net zero emissions by 2050.

Boost regional growth in industrial heartlands and align with the Government’s Industrial Strategy, boosting investment in skills, industries and infrastructure across the UK.

Create a world-leading industry , maximising existing UK assets and skills, building on the offshore wind success story and aligning with the Government’s Global Britain agenda.

Following the release of the Carbon Capture, Usage and Storage Cost Reduction Task Force Report in July 2018, it is critical the government acts on the proposals and publishes a clear, ambitious and deliverable deployment pathway by the end of 2018, in order to achieve CCUS at scale by the 2030s.

A broad-based hydrogen economy is essential Natural gas has already provided significant emissions reductions to the UK and worldwide, having replaced coal as the most competitive, large scale method of power generation in many OECD countries. This is as, when combusted, natural gas produces half as much carbon emissions and provides other benefits such as improved air quality around major power generation hubs. Given the reliance of the UK domestic and industrial heating requirements on natural gas, the pre-existence of some of the required infrastructure and the lack of viable alternatives which can command public support, the development of decarbonised gas in the form of hydrogen is central to the next phase of the energy transition. It is recomended the government facilitate a hydrogen roadmap, building on and reciprocating the success of the CCUS TF reduction report and the H21 feasibilty studies. The roadmap should look to incentivise investors through a policy framework that is broad and scalable. Such measures are likely to require primary legislation. It is recommended that government should already begin to work towards a Hydrogen Bill to establish the regulatory and commercial framework for the production, transportation and supply of hydrogen at scale. The role of carbon pricing should be revived The establishment of a price for carbon has been a key element of government policy in both the EU and UK, but its effectiveness has been undermined by conflicting policies in other areas and led to low prevailing certificate prices during Phase III. This, in turn, caused governments to bring forward additional bespoke policies which further undermined EU ETS, creating a vicious circle. The reforms of EU ETS contained in Phase IV provide an opportunity to break this cycle. Carbon prices have already increased such that these provide a better incentive for consumers and businesses to respond. This should mean that overlapping and competing policies can be re-evaluated.

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The carbon intensity (the ratio of emissions released to unit production) of offshore UKCS oil and gas production has been trending downwards since 2006. This is due to improved operational management, tighter regulations, increased production efficiency, innovative design ideas for new platforms and the decommissioning of older more carbon intensive installations offshore installations. Offshore oil and gas facilities which will face much stronger incentives to reduce carbon costs during Phase IV if the UK remains in the scheme after Brexit or a similar UK-based scheme, aligned to the EU ETS, is introduced. Government strategy must underpin the Vision 2035 objectives As discussed above, UK oil and gas demand will not fall below the level of UK production in the 2035-40 timeframe, even if alternative technologies are exploited to the maximum extent. Continuing MER UK is consistent with the UK’s climate change legislation and targets, in accord with fulfilling the energy needed for economic growth for the UK. Likewise, the potential for developing CCUS and the hydrogen economy based on oil and gas industry expertise has the potential to make the UK a global leader.

Vision 2035 and Improved Indigenous Oil and Gas Production is Consistent with the Paris Agreement

300

250

200

150

Mtoe per year

100

50

0

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

UK Oil & Gas Demand

Foreacst UKCS Production

Vision 2035 Production

Government policy should continue to explicitly support a positive environment for oil and gas investment in order for the UK to achieve MER UK, reduce imports and continue to benefit from the many advantages an indigenous industry brings. The fiscal regime must continue to incentivise investors to produce, to the benefit of industry, government, and taxpayers.

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ISBN 978-1-9164677-6-7 © 2018 The UK Oil and Gas Industry Association Limited, trading as Oil & Gas UK

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