As we reported last week on this blog, the UK Government published its landmark North Sea Transition Deal with the UK oil and gas sector. We look at these developments in more detail in this post.

Introduction                                                                                                  

In the Energy White Paper (published last year) the Government made clear it views that the UK domestic oil and gas sector (the Sector) is essential to the UK’s medium-term energy security and economic growth and made a commitment to integrate the Sector into its decarbonisation strategy. The Government recognised that the Sector has played a critical role in maintaining the country’s energy security for over five decades, and remains a major contributor to the economy. The Government believes that excluding oil and gas from the UK’s ‘green’ future would therefore risk economic de-stabilisation, significant job loss, reduced investment in the UK energy sector as a whole, carbon leakage (as oil and gas companies remove operations to other jurisdictions) and demand further outstripping supply (thereby forcing greater reliance on oil and gas imports).

In a significant step forward in delivering on its Energy White Paper commitment, last week the Government announced its commitment to the North Sea Transition Deal (the Deal) with the Sector. By integrating the Sector into its decarbonisation programme, the Government aims to reposition the UKCS as an asset to maintain energy security and drive investment in the technology required for decarbonisation. The Government has been engaging with Sector participants (through the Sector body OGUK) over the past year, and the deal represents a blueprint for Government and Sector cooperation to achieve net-zero by 2050. The Deal is the first announced by a G7 country and demonstrates the Government’s commitment to work in partnership with the Sector.

The Deal is built around five outcomes:

  1. Decarbonisation of supply (electrification of platforms through offshore renewables, methane capture technology and an end to flaring);
  2. Developing carbon capture usage and storage (CCUS) infrastructure;
  3. Developing and scaling-up hydrogen production technology;
  4. Transforming the oil and gas supply chain to 1) support the above-mentioned decarbonisation initiatives; and 2) develop technology and expertise which can be exported internationally; and
  5. Supporting up-to 40,000 direct and indirect supply chain jobs.

Headline commitments

The Government and Sector have each agreed to deliver on key commitments in respect to each outcome. Broadly speaking, the Government is agreeing to provide funding, develop business models for new technologies and adapt the current regulatory framework, in exchange for hard commitments from the Sector to cut emissions, invest in CCUS and hydrogen and deploy Government proposals. The headline commitments are as follows:

  • Sector emissions reduction targets of 10% by 2025, 25% by 2027 and 50% by 2030;
  • Joint Government and Sector investment of up to £16 billion by 2030 to reduce carbon emissions. This includes up to £3 billion to replace fossil fuel-based power supplies on oil and gas platforms with renewable energy, up to £3 billion on carbon capture usage and storage, and up to £10 billion for hydrogen production;
  • Joint Government and Sector commitment to achieve a 60Mt reduction in greenhouse gas emissions, including 45Mt through CCUS and hydrogen technology and 15Mt through the progressive decarbonisation of UKCS production over the period to 2030;
  • By 2030, the Sector will voluntarily commit to ensuring that 50% of its offshore decommissioning and new energy technology projects will be provided by local businesses, helping to anchor jobs to the UK;
  • Joint Government and Sector commitment to support up to 40,000 direct and indirect supply chain jobs in decarbonising UKCS production and the CCUS and hydrogen sectors;
  • Government investment of £6.3 million in the Global Underwater Hub, and a further £2 million to develop the Deal, helping to support the Sector to play a leading role in meeting the UK’s net zero ambitions;
  • Sector support for the Government’s prompt payment initiative by championing the Prompt Payment Code (ie the Government-mandated code (which can be accessed here) which sets out good practice for the payment of and communication with suppliers; and
  • The Sector’s appointment of a supply chain champion who will support the coordination of local growth and job opportunities with other sectors, such as CCUS and offshore wind.

The commitments in detail 

The table below sets out in detail the commitments that have been made by Government and the Sector in respect of each of the outcomes.

Government Commitments Sector Commitments
Decarbonisation of Supply
  • Provide continued regulatory cooperation with respect to the monitoring, reporting and management of emissions
  • Identify potential funding opportunities for early-stage offshore electrification studies that businesses could bid into, on a match-funded basis by the end of 2021
  • Work with the Sector to develop potential decarbonisation funding solutions for offshore electrification by late 2022
  • Commit to working with the Sector to further explore the economics of electrification and work to identify the most cost effective options to unlock investment for the electrification of its assets. The OGA will promote the adoption of cost-effective electrification opportunities via the provisions in its new strategy
  • Create and lead a senior Offshore Implementation Group addressing the regulatory and legislative barriers to electrification and other offshore energy integration matters
  • Emissions reduction targets of 10% by 2025, 25% by 2027 and 50% by 2030
  • Support the development of and implement the OGA’s Net-Zero Asset Stewardship Expectation
  • Work with Government, OPRED and the OGA to develop consistent emissions reporting structures and frameworks
  • Implement the Methane Action Plan to 1) seek to accelerate compliance with the World Bank’s ‘Zero Routine Flaring’ initiative ahead of 2030; and 2) commit to OGCI 2025’s methane intensity commitment – currently 0.25% (ambition 0.20%)
  • Invest £2-3 billion in the electrification of oil and gas production
CCUS
  • Deliver on the business model for the transport and storage (T&S) network in 2021
  • Develop initial T&S infrastructure in support of CCUS through the deployment of industrial clusters and creation of the £1 billion CCUS Infrastructure Fund
  • Establish an independent economic regulator to regulate the T&S sector
  • Deliver policy and regulation to optimise the reuse of oil and gas assets and to support the deployment of CCUS T&S infrastructure
  • Coordinate strategic T&S deployment issues (including leasing and licencing considerations) and liaise with relevant offshore regulatory bodies such as the Crown Estate and the OGA
  • Invest £2-3 billion in the T&S network infrastructure by 2030
  • Develop robust industry standards for CCUS
  • Transfer learnings from international CCUS projects and previous basin cost reduction initiatives such as decommissioning practice into CCUS deployment in the UK
Hydrogen
  • Invest £1 billion in hydrogen technology research and development
  • Deliver detail on preferred hydrogen business models in 2021, to be finalised in 2022
  • Review the gas market framework as set out in the Gas Act with a view to incorporating hydrogen and other decarbonised gases
  • Accelerate and simplify the planning process for hydrogen production plants
  • Continue to monitor the delivery of the iron mains replacement programme and support investment in net-zero technology through price controls
  • Work with Government to deliver 5GW of low carbon hydrogen production capacity by 2030
  • Invest in hydrogen technology research and development
  • Support the development and deployment of offshore green hydrogen production
  • Continue to support measures related to the hydrogen safety programme
  • Measure and track public opinion on the use of hydrogen across a variety of applications, focusing on heating, to better understand the public’s appetite for hydrogen
Supply Chain Transformation
  • Work with the Sector to identify potential funding opportunities for the low-carbon supply chain by the end of 2021
  • Support the Sector’s supply chain review to identify the UK’s capability to deliver technology and services across both the energy transition and decommissioning projects
  • Collaborate with the supply chain champion
  • Promote the capabilities of the UK’s energy supply chain in international markets
  • Develop policies to enable supply-chain investment in CCUS and hydrogen industrial hubs
  • Simplify the channels to access research and development and innovation funding
  • Support the development of the Global Underwater Hub with £5 million, subject to business case, on top of the £1.3 million committed last year
  • Develop a UK low carbon supply chain to provide innovative solutions in support of the net-zero agenda and secure supply chain diversification and export opportunities
  • Target 50% UK content for the lifecycle of new energy projects, as well as oil and gas decommissioning, and 30% for locally provided technology
  • Develop industrial scale capability for low-carbon industry by appointing a supply chain champion to co-ordinate business opportunities with other energy sectors
  • Promote supply chain capabilities abroad
  • Attract and secure further investment for net-zero
  • Leverage incubator funding to secure the development of new technologies
  • Develop the Global Underwater Hub (the Hub will develop and promote opportunities for the UK’s subsea engineering sector)
  • Champion the Government’s prompt payment code
People and Skills
  • Support the work of the Energy Skills Alliance and work programme to ensure the Sector is prepared to meet the future demand for skills in oil and gas, and other related energy industries
  • Support the Centre for Doctoral Training (CDT) in geoscience and its role in the low carbon energy transition and challenge to meet net-zero emissions targets
  • Continue to champion the role of the Sector and its workforce in the energy transition, supporting work on its People and Skills Plan and continue to prioritise support for people in high carbon sectors of the economy, which need to transition, via the Green Jobs Taskforce
  • Support the work of the Energy Skills Alliance and work programme
  • Develop an integrated people and skills plan, with measurable objectives, to support its transition and diversification
  • Work to ensure that the workforce’s skills and competencies are mutually recognised across energy sectors enabling easier job transferability and promote the uptake of relevant existing initiatives and expand these as appropriate
  • Support the CDT and match Government funding
  • Promote high employment standards and equality of opportunity

The Sector has broadly welcomed the Deal and OGUK’s statement on the announcement can be accessed here.

Next steps 

As part of the Deal implementation plan, the Government has announced proposals to establish a Deal Delivery Group, which will be chaired by BEIS and a Sector representative (which is likely to be the OGUK). The Deal Delivery Group will meet on a quarterly basis and oversee the implementation of the Deal, which will include reviewing progress of the commitments against the stated objectives.

The Government will also establish (by April 2021) a senior offshore implementation group to co-ordinate strategic development of integrated energy projects, such has CCUS, hydrogen, wind and electrification of oil and gas hubs. We understand that this implementation group will be led by BEIS and include senior representation from Ofgem, the Crown Estate, OGA, OPRED, HSE, Marine Scotland and the Crown Estate Scotland.

The supply chain champion will then be appointed in summer 2021, with the integrated people and skills plan delivered in March 2022.

The Government has also promised to deliver a progress report on implementation of the Deal in March 2022.

We will be following these developments closely, and will continue to engage with OGUK to bring you further detail on the meaning of the commitments for the Sector. You can also follow the HSF Energy Notes blog for further articles on the Government’s decarbonisation strategy.

 

Laura Hulett
Laura Hulett
Partner, London
+44 20 7466 2937
Steven Dalton
Steven Dalton
Partner, London
+44 20 7466 2537
Amrit Gill
Amrit Gill
Associate, London
+44 20 7466 3060
Beatrice McGuire
Beatrice McGuire
Associate, London
+44 20 7466 2900