Energy security has dominated policy agenda of the North Sea producers in 2022, although it has not derailed the efforts to decarbonize the upstream industry. Although there have been some big government announcements, mostly coming from the United Kingdom, producers have focused on the implementation of previous commitments to bolster low-carbon investment and cut emissions. Still, there are several emerging obstacles that could slow progress in the coming year.
Denmark is going full steam ahead to build CCS industry
Among the North Sea producers, Denmark has been the last one to join the decarbonization club, but it is quickly moving to keep up with the regional peers. Several legislative initiatives and broad political agreements over the past three years have formed a framework for the development of the offshore carbon storage sector. In its first carbon storage tender, the Danish Energy Agency (DEA) received two applications from three companies — TotalEnergies and a consortium between INEOS and Wintershall Dea International. Awards are expected in early 2023, and Nordsøfonden, a state-owned company, will participate in future projects with a 20% stake, which is likely to reduce risks for the operators.
The Danish energy regulator has also demonstrated an ability to ensure efficient review and approval procedures, which could accelerate the start-up of new projects. In late August, INEOS E&P and Wintershall Dea applied for a permit to begin CO2 injection as part of the Greensand Project off the coast of Denmark. Following a relatively fast review, the DEA granted a permit in early December. Further stages of the project, which is expected to store up to 1.5 million tons of CO2 by 2025, will require additional approvals, but the latest permitting decision by the DEA indicates a potentially smooth regulatory road for the Greensand developers.
Overall, the Danish government and political parties are strongly committed to advancing carbon storage projects, which is a likely to ensure favorable above-ground environment for the CCS sector. There is some uncertainty associated with the formation of a new government after the latest general election on 1 November. However, the country’s political parties are expected to honor previous agreements on the carbon storage framework, ensuring policy continuity and stable terms and conditions.
In Norway, business as usual under a center-left coalition
The energy policy of the minority coalition between the Labour and Center Parties is impacted by the Socialist Left Party, a parliamentary partner, whose votes are critical to passing major legislation, such as annual budgets. Still, all three parties seem to be on the same page, when it comes to the energy transition on the Norwegian Continental Shelf (NCS). The government continued to promote offshore carbon storage acreage: in October, the Ministry of Petroleum and Energy awarded a CO2 exploration license to Wintershall Dea Norge AS and CapeOmega AS in the North Sea. Subsequently, yet another North Sea area was opened to CO2 storage licensing, with applications due on 3 January 2023.
Moreover, the Norwegian authorities have moved forward with the plans to promote offshore wind development, which could open opportunities for cutting emissions from oil and gas operations through platform electrification. In early December, the Ministry of Petroleum and Energy released plans to hold offshore wind tenders in the Southern North Sea II and Utsira North (here with the focus on floating offshore wind) areas in 2023. Still, it remains to be seen how much power (if any) will be available to decarbonize the petroleum industry, given the need to mitigate the risk of high electricity prices in the domestic market. Soaring power prices that rocked Norway in the second half of 2021 and compelled the government to allocate budget funds to support households, fueled political debates about the electrification of oil and gas facilities and its potential impact on mainland power supply and prices. If the center-left coalition prioritizes affordability of energy, the oil and gas industry may have to wait until the next round of acreage offerings to pursue platform electrification. However, over the longer term the focus on power affordability could benefit the upstream sector as lower electricity prices would bring down the cost of electrifying existing and new projects.
Court ruling could play havoc with decarbonization plans in the Netherlands
The Dutch government is determined to accelerate the development of low-carbon projects by removing any regulatory or funding obstacles. In early December, the government named five developments as projects of national interest, including offshore wind grid connections, hydrogen infrastructure, and Aramis, a CCS full-scale facility. The prioritization of the proposed projects is likely to facilitate construction and ensure their launch according to schedule.
However, the country’s CCS and blue hydrogen projects could face delays due to the latest ruling by the Council of State, the Dutch highest court. In early November, the Council upheld the lawsuit by the Mobilization for the Environment (MOB), an environmental group, which challenged the exemption of the Porthos CCS project from assessing and reporting nitrogen emissions during the construction stage. More broadly, the group targeted the allocation of over $2.5 billion to the project in 2021 as part of the state-funded SDE++ scheme as a subsidy to fossil fuel companies (the Porthos consortium includes Shell and ExxonMobil). Still, the parties to the case will have several more months to defend their positions before the Council delivers its final verdict. If the MOB wins, the project operators will likely have to seek additional regulatory approvals, which could delay the construction phase.
Mixed bag for energy transition in the United Kingdom
The UK has been an enfant terrible among the North Sea producers in 2022. On the one hand, the country announced a new Energy Security Strategy, held its first carbon storage licensing round, and Scotland conducted a targeted offshore wind tender for platform electrification. These developments indicate a potentially strong start for 2023 and a solid low-carbon project pipeline over the medium-term. However, the UK’s political turmoil — three prime ministers in less than six months — and fiscal policy swings raise doubts about the Conservative government’s ability to live up to expectations.
The Energy Profits Levy (EPL), a 35% windfall tax on oil and gas companies (a 10% increase compared to the initial rate), could become a major deterrent to investment over the medium-to-longer term. Following its introduction as part of the Autumn Statement in November, major players on the UK Continental Shelf (UKCS) started reviewing their investment plans, with TotalEnergies shortly announcing a 25% cut in planned 2023 capex. However, an accompanying 80% Investment Allowance for decarbonization projects could potentially encourage low-carbon developments. For example, in early December Equinor, BP, and Ithaca Energy signed a memorandum of understanding to explore electrification options for their fields — Rosebank, Clair, and Cambo, respectively — in the West of Shetland area. The announcement encourages optimism about decarbonization investment on the UKCS, but regulatory amendments could be required to facilitate such projects.
In the meantime, the reform to streamline blue hydrogen and CCUS regulations remains uncertain, increasing the risk of project delays. The Energy Bill, the centerpiece of the Conservative Party’s efforts to bolster decarbonization (and energy security), remains stuck at the committee stage in the House of Lords without any clear timeline for adoption. In addition, as the government is focused on supporting households amid skyrocketing energy costs, the allocation of funding to proposed CCUS projects from the CCS Infrastructure Fund could be in question. The proceeds from the hydrocarbon industry (including the EPL) are expected to bolster public finances: the Office of Budget Responsibility forecasts the oil and gas revenue over $18 billion in 2022–23 and over $25 billion in 2023–24. The government is likely to have enough money to finance the $1.2 billion CCS Fund, but policy swings and previous track record in backtracking on CCS funding will continue to generate uncertainty.
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