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Investment will be key to success of North Sea energy transition deal

Posted: 7th April 2021

Rachel Warner, Legal Director and oil and gas specialist at Pinsent Masons

The North Sea Transition Deal details how the government will support the UK oil and gas industry in transitioning to green energy while preserving jobs.

Existing skills, infrastructure and private investment potential will be channelled into new and emerging technologies, including hydrogen production, offshore wind and Carbon Capture Usage and Storage (CCUS), and incorporates new emissions reduction targets and commitments to support the supply chain, backed by up to £16 billion in government and industry investment.

The government is not proposing to end oil and gas exploration and production at this stage. Instead, it intends to introduce a “climate compatibility checkpoint” before each future oil and gas licensing round which will award licences based on domestic demand, availability of clean energy supply and progress by the industry and the UK as a whole, towards their wider climate objectives.

The checkpoint will be designed in such a way that if the evidence suggests that a future licensing round would undermine the UK’s climate goals or 2050 net zero target, it will not go ahead.

Successful applicants in any licensing round are very likely to have to demonstrate a commitment to developing any discoveries in a way that works towards meeting the new production emissions targets. This, together with the industry regulator OGA’s Asset Stewardship Net Zero Expectation – will actively encourage companies to reduce emissions for both new developments and existing ones.

The £16bn investment includes previous commitments to invest in CCUS and low carbon hydrogen production, first contained in last year’s Energy White Paper. The government intends to deliver a business model that will enable CCUS and hydrogen production at scale. The government also set aside up to £27m to develop a green energy hub in Aberdeen and up to £5m additional funding for underwater engineering opportunities in the city as part of its recent Budget announcement.

It’s not surprising that CCUS and low-carbon hydrogen are key aspects of the deal, as the government is betting heavily on those technologies in terms of its net zero commitments. The oil and gas sector is already developing significant projects based on such technologies, and the deal recognises that the sector has the skillset to benefit from the substantial growth of CCUS and hydrogen that the government is expecting.

However, the key barrier to such projects is likely to be financial, rather than technical. Deploying CCUS and low-carbon hydrogen at scale will require a huge amount of investment from both the government and private sector investors. As a result, much will depend on the detail of the CCUS and hydrogen business support models that are to be developed and finalised this year and into the next. The hope is that these models will be sufficient to give investors the confidence to invest in the necessary development of these relatively new markets.

In the last 12 months, the sector has lost a significant number of quality personnel, so the commitment to support 40,000 jobs signals a real effort in attracting recent leavers back into the industry and encouraging new graduates.

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Business Comment is the Edinburgh Chamber of Commerce’s bi-monthly magazine. It provides insight on Edinburgh’s vibrant business community, with features on the city’s key sectors, interviews with leading figures and news on new business developments in the capital.
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