Offshore Petroleum Licensing Bill

Summary

• The Offshore Petroleum Licensing Bill (OPL Bill) effectively requires annual licensing rounds for offshore oil and gas extraction in the UK.¹ The stated aim of the Bill is to ‘boost the UK economy, energy security and transition to net zero’.²

• New oil and gas licensing will also have minimal impact on UK supplies of oil and gas: between now and 2050, new licences are expected to provide just four days worth of gas a year on average.³ Consequently, new licensing won’t significantly boost tax revenues, secure energy supplies, or prevent the decline of jobs in the oil and gas sector. As the Secretary of State for DESNZ confirmed, the OPL Bill is not about lowering bills. 

• The OPL Bill erodes the already weak measures that are in place to align the UK oil and gas industry with the UK’s climate targets. The new ‘tests’ in the OPL Bill, which licensing rounds will be subject to, override the already weak climate checkpoint that came into force just last year, make no reference to the industry’s emissions reduction targets, and are designed to be impossible to fail.

• The OPL Bill offers support for oil and gas at a time when the renewable energy sector should be the priority, and households are still dealing with sky high energy bills without plans being put in place to scale up energy efficiency and renewables to prevent the cycle continuing.

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What does the Offshore Petroleum Licensing Bill do?

The OPL Bill was introduced to Parliament in November 2023. It requires the oil and gas regulator, the North Sea Transition Authority (NSTA), to invite oil and gas companies to apply for at least one licensing block each year. In practice, this means running an oil and gas licensing round at least annually. However, the NSTA already has the power to issue licences when it sees fit and there have been annual licensing rounds for most of the past decade.⁴ The NSTA Board unanimously agreed that legislation requiring annual licensing rounds was unnecessary.⁵

The Bill includes two ‘tests’, which must be passed before licences are offered. Without amendments, these tests will be impossible to fail. A range of amendments, including proposals for strengthening the tests, were put forward in the House of Commons but none were adopted before it was passed to the House of Lords on 20 February 2024.⁶ The existing tests include:

• Carbon intensity test: this would be met if the carbon intensity (i.e. production emissions) of UK gas is lower than that of LNG imported into the UK. This is a disingenuous test which compares UK gas to the most polluting of imports, despite the fact that LNG imports are not the main source of gas imports.⁷ Around half of our gas imports come from Norway, which is half as polluting as UK gas. It also compares carbon intensity at the point of production rather than combustion which exaggerates the difference,^8,9 and doesn’t consider the carbon intensity of oil, which makes up the majority (70%) of remaining North Sea reserves.¹⁰ The carbon intensity of UK-produced oil is higher than the global average. The Government’s line on imported gas emissions has been widely shown to be misleading.¹¹ 
• Net importer test: this would be met if the amount of oil and gas produced in the UK is less than the UK’s demand for oil and gas. Yet the UK will remain a net importer until decarbonisation policies are introduced to significantly cut demand for fossil fuels.

Given the government does not currently produce all of the data required to carry out the tests, it is also unclear how they will be applied in practice.¹² 

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What does the Offshore Petroleum Licensing Bill not do?

The Secretary of State for DESNZ, Claire Coutinho has been clear that this Bill is not concerned with lowering energy bills. “That’s not what we’re saying,” she said. “This is much more about security of supply.”¹³ The stated purpose of the OPL Bill is to safeguard homegrown energy supply and to provide certainty and investor confidence for the oil and gas industry.²

But new licensing rounds will have minimal impact on UK supplies of oil and gas. After 50 years of drilling, the UK has burned most of its gas. The North Sea’s dwindling reserves, which are predominantly oil not gas, mean that significant new discoveries are unlikely.¹⁰ For example, new North Sea licences issued since 2010 have only led to nine weeks worth of gas being discovered and only 16 days worth of gas actually being produced.¹⁴ 

Between now and 2050, new licences are expected to provide just 103 days of gas at today’s demand - that's four days worth of gas a year on average.³ Wood Mackenzie similarly finds that licensing rounds under the Conservatives have added just 4% to the UK’s oil and gas reserves.¹⁵ In 2022, the former head of the NSTA said that new licences would only make a difference to gas production ‘around the edges’.¹⁶ Even the former Executive Director of BP has said that the government's decision to expand North Sea drilling is “not going to make any difference” to Britain’s energy security.¹⁷

The UK also exports the majority of its reserves. According to official figures, around 80% of UK oil reserves are put in tankers and shipped overseas.¹⁸ The UK also exports a significant proportion of its gas, but the picture is more complex: official gas export figures include imports that are then re-exported and the government does not publish UK-production-only export figures.  In 2022, during the energy crisis, the UK exported the equivalent of 61% of its gross gas production.¹⁹

The only way to reduce gas imports is to cut domestic consumption by scaling up renewable energy and increasing energy efficiency. These measures would also lower bills. In 2023, British renewables displaced the equivalent of 126 LNG tankers.²⁰ Similarly, ensuring homes have basic insulation cuts household gas demand by up to a fifth.²¹ Given the impact on households of volatile gas prices –  with the average energy bill still double what it was two years ago and an estimated six million households now living in fuel poverty²² – recent polling shows strong public support for renewables, as well as measures to improve energy efficiency in homes, over new oil and gas drilling.²³

The UK has become a less attractive place to invest in renewables, according to analysis by EY, in part due to recent “diminishing of green policies” undermining investor confidence.²⁴ Encouraging oil and gas investment takes the UK in the wrong direction. The oil and gas industry is not investing in the UK’s transition to renewable energy, with the majority of North Sea oil and gas operators investing nothing in UK renewables.²⁵ Analysis by IEEFA found that “stimulating increased offshore oil and gas activity in the UK threatens its renewable power ambitions”.²⁶ The offshore wind and offshore oil and gas sectors share critical supply chains, which means that the more the workforce, vessels, limited port space and raw materials are taken up by new oil and gas development, the less capacity there is for scaling up renewables.

New licensing will not stem the decline in oil and gas sector jobs. Over 200,000 jobs supported by the UK’s oil and gas industry have been lost in the past decade, despite hundreds of drilling licences being issued by the government.²⁷ According to industry data, some 441,000 jobs were supported by the oil and gas sector in 2013,²⁸ falling to just 213,000 jobs in 2023,²⁹ during which time the government has issued roughly 400 new drilling licences in five separate licensing rounds. Today, 30,000 people are directly employed in the industry, with the rest either supported through the supply chain or in jobs that are supported by oil and gas workers’ spending.²⁹ Around Aberdeen, this decline in jobs has not been effectively offset by increased jobs in other parts of the energy sector, revealing a failure to invest in transitioning the workforce.³⁰

Tax revenue from new licensing would be negligible. While the Office for Budget Responsibility expects around £16 billion from oil and gas revenues in the next five years, half of this is due to the temporary windfall tax that will expire towards the end of the decade, after which the UK tax rate will revert to being one of the lowest in the world.³¹ Given the marginal impact of new licensing on production, further licensing rounds will provide little for UK taxpayers.

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Is the Offshore Petroleum Licensing Bill moving the goalposts on cutting oil and gas industry emissions?

The OPL Bill seems to override the already weak, non-binding ‘climate compatibility checkpoint’.³² Since 2022, new licensing rounds have been subject to a ‘climate compatibility checkpoint’, which includes three tests: performance of the sector against emissions reduction targets; oil and gas production emissions benchmarked internationally; and the status of the UK as a net importer of oil and gas. The checkpoint does not consider the far greater emissions produced when oil and gas is combusted, and its result is not binding. The OPL seeks to lower the bar even further by permitting new licensing so long as the UK remains highly dependent on oil and gas, and by comparing UK gas (and gas alone) to only the most polluting imports.

The OPL Bill does not help the UK oil and gas sector to meet its voluntary emissions reduction targets of cutting production emissions by 50% by 2030, as set out in the North Sea Transition Deal (NSTD). The Climate Change Committee (CCC) has described these targets as “weak” and recommended they be increased to 68%,³³ but even so the industry is currently not on track to meet them.³⁴ There is no reference in the OPL Bill to how annual licensing will be judged against the NSTD emissions reductions targets, let alone emissions from combustion.

New oil and gas developments put the goal of the Paris Agreement to limit the global average temperature increase to 1.5^oC at serious risk, according to the International Energy Agency,³⁵ UN Secretary-General,³⁶ Intergovernmental Panel on Climate Change³⁷ and numerous climate scientists.³⁸ The Production Gap 2023 found that governments plan to produce 110% more fossil fuels in 2030 than is consistent with limiting warming to 1.5^oC.³⁹ The CCC has confirmed that the expansion of fossil fuel production is not in line with net zero.⁴⁰ While it acknowledged that the UK will continue to need some oil and gas until it reaches net zero, the CCC was clear that: “this does not in itself justify the development of new North Sea fields”. Questions have been raised by the UK’s COP26 president about contradictions between the OPL Bill and the outcome of COP28.⁴¹