As the Oil and Gas Authority continues to work with industry to develop a single, compelling vision for the UK oil and gas industry, it is important to ensure that the Vision adequately addresses the threats and opportunities created by the transition to a low carbon future.
UK oil and gas production is in decline. The draft Vision 2035 highlights potential increased gross revenues from Maximising Economic Recovery (MER) of £140bn or increasing the expected gross revenues of £280bn by half again over the next 20 years, to £420bn. This will undoubtedly take a massive effort and involve new initiatives in areas such as collaboration, digitisation, innovation and consolidation. Challenging though they will be, these initiatives are entirely within the control of the sector and its workforce. What the Vision currently fails to reflect is the very different place the world will be by 2035 and the impact of external factors, over which the sector has little or no control. Of these, possibly of greatest significance for the O&G sector is the impact of climate change and the resulting low carbon transition.
Today’s low oil price is the result of the supply and demand balance. There is no shortage of supply and that oversupply is likely to continue. Climate change has created business opportunities and coupled with current/future carbon pricing and emissions regulations, there is a significant move to reduce the carbon intensity of our energy system. For oil that is largely seen in the transport sector with the significant increase in battery electric vehicles and the emergence of hydrogen vehicles. For gas, which is a cleaner alternative to coal for thermal power generation and the source of most of the UKs energy for heat, the near-term future may appear less at risk. But if we are to meet our Paris Agreement obligations, the UK and other countries will need to stop using or decarbonise all fossil fuel power and heat by 2050, including gas.
So, what does this mean for the oil and gas supply chain? Vision 2035 is targeting an incremental supply chain turnover of £150bn over the baseline of £350bn to achieve £500bn turnover by 2035. This is premised upon capturing a larger share of oil and gas export markets.
There is a considerable difference of opinion on the impact of the low carbon transition on the oil and gas market. However, it is clear there will be change and that the transition to a low-carbon future presents a considerable risk (and opportunity) to the oil and gas sector.
Vision 2035 should seek out opportunities created by the low carbon transition, to look Beyond Petroleum. Two linked emerging sectors of huge significance to the oil and gas sector are Hydrogen and Carbon Capture and Storage (CCS).
Hydrogen and CCS both require oil and gas supply chain capabilities, are high growth, have clear links to hydrocarbons and should form part of the transition (or risk mitigation) strategy of oil majors. Bulk hydrogen can be made from natural gas and with CCS can be carbon free. Given a likely future need to sequester carbon as part of any consent to produce it, CCS is likely to become a part of any ‘licence to operate’. Supporting UK Energy Security and delivering the MER targets set out in Vision 2035 will require a massive CCS effort to offset much the carbon being produced. For the supply chain, diversification into CCS and Hydrogen can help provide new growth opportunities both in the UK and abroad to support the ambitious targets set out in Vision 2035. Hydrogen and CCS are vital to support the engagement of a talented workforce in what risks being seen otherwise as a sunset industry.
Elsewhere in Europe, Norway intends to move to electric only vehicles by 2025 as does the Netherlands, Germany has proposed similar measures by 2030. France has declared it will ban the sale of petrol and diesel cars by 2040 and is expected to halt the issuance of new oil and gas exploration licenses through legislation later this year. These international developments place the draft UK Oil and Gas Industry Vision 2035 in a strange and eerie light!
Vision 2035 should address the threats and opportunities created by the low carbon transition and include a clear reference to the need and potential for Hydrogen and CCS as the oil and gas sector looks Beyond Petroleum.
If you’d like to learn more about the Hydrogen and CCS opportunities or how your business can position itself to benefit from these emerging markets, get in touch.