Finding a balance between the energy transition and energy security through targets, tax, and technology.
Why electrify offshore oil and gas production?
As a renewable energy engineer, I often need to remind myself that oil and gas in the UK is here to stay for the foreseeable future. DNV’s UK Energy Transition Outlook predicts that the share of oil and gas in the UK’s primary energy supply will decrease from 76% in 2021 to 31% in 2050. However, it will still provide more than half of the country’s energy supply needs over the next three decades.
The UK currently produces around two thirds of its oil and gas requirements and imports the remainder, with most of this production taking place offshore in the North Sea.With rising energy security concerns following widespread sanctions on Russian imported fuels, domestic oil and gas production has been prioritized by the UK government as evidenced by the 33rd oil and gas exploration licensing round being launched in October 2022. The round attracted a total of 115 bids, with licences expected to be issued by the North Sea Transition Authority (NSTA) in quarter two of 2023 according to the UK governments latest energy security plan . Operators plan to progress 22 projects in the coming years which would target 1.5 billion barrels of production, boosting UK domestic oil and gas production (for context the UK consumes around 1.2 million barrels a day).To get a sense of the scale of operations in the UK North Sea, figure 2 maps out the operational infrastructure and the hydrocarbon fields in production today.
Offshore oil and gas production facilities are not connected to the UK’s onshore electrical grid. Instead, they rely on local power generation, generally using onboard gas turbines or diesel generators to supply power for the production activities. With over 280 oil and gas fields in production in the UK North Sea today, the assets operating in this region collectively demand an average of 2.4GW of power. Greenhouse gas emissions from assets operating in this region accounted for a significant 4% of the net UK territorial greenhouse gas emissions from 2018 to 2020.The bulk of these emissions, 70%, come from the fossil fuelled power generation onboard the production assets. Powering these production facilities fully from renewable sources would have the same greenhouse gas emission reduction impact for the UK as removing a fifth of all combustion engine passenger cars on the roads today.
That would be a significant greenhouse gas saving. The 2019 amendment to the UK’s Climate Change Act 2008commits the UK government by law to reaching net zero greenhouse gas emissions by 2050. Targeting the decarbonization of power production for offshore oil and gas asset scan have a material impact on reaching this obligation.
How is it going to work?
There are two main technical challenges with oil and gas production electrification. The first is ensuring an uninterrupted supply of power to the assets when using variable renewable generation technology. The second is retrofitting brownfield installations to receive power from subsea cables which would need to be transformed to the appropriate levels used onboard. These challenges have recently been overcome in the Norwegian North Sea through the Equinor developed and operated 88 MW Hywind Tampen floating offshore wind farm. It has been delivering power to the Snorre and Gullfaks oil and gas field assets since November 2022 at water depths in excess of 260m. The key to the technical feasibility of this project is the relatively low share of power that will be delivered from the wind farm at around 35% of the annual energy requirements of the platforms. For higher renewables penetration in this offshore microgrid, storage solutions need to be implemented to supply power during periods of low wind energy. Alternatively, production could be curtailed during these periods to minimize power generation emissions, but this has obvious financial impacts which would need to be considered.
To investigate and propose technical solutions for UK North Sea applications, the UK government has funded three independent research projects at a total cost of £1m. The publicly available reports published in June 2022, all conclude that feasible solutions exist for overcoming the barriers in offshore platform electrification in the UK North Sea. Each report details various concept level system designs applied to specific areas in the UK North Sea, with estimated emissions reductions between 75-80%.
In parallel to these investigations, Crown Estate Scotland has been running its INTOG Innovation and targeted oil and gas (INTOG) seabed leasing process, with seabed lease exclusivity agreements awarded in March 2023 to 13 projects, eight of which fall into the targeted oil and gas category. The basis under which these leases are awarded is for developed projects to be connected directly to oil and gas infrastructure, to provide electricity and reduce the carbon emissions associated with production.The biggest winner of exclusivity rights is a company called Cerulean Winds which secured 3GW of the 5GW awarded. Off the back of this, Cerulean Winds has publicised its intention to develop the North Sea Renewables Grid which will be powered by floating wind farms built on their INTOG seabed areas. This development is anticipated to draw in £20b of investment to the UK and would be a substantial step forward for the sector in reaching its decarbonization targets. From a technical point of view, it seems that the pieces of the puzzle are starting to fit together.
Incentive – the carrot or the stick?
In 2021, the North Sea Transition Deal was agreed between the UK government and industry representatives from the UK offshore oil and gas sector. The Deal targets 50% emissions reductions by 2030 and zero emissions by 2050, leveraging supply decarbonization, CCUS and hydrogen technologies. Off the back of this deal, effective from start of 2023, the government has introduced tax relief in the form of a decarbonization allowance. Capital invested in the decarbonization of upstream oil and gas production qualifies for an 80% tax relief rate legislated in the Spring Finance Bill 2023. Assuming a Cerulean Winds type grid is developed in the North Sea, the main barrier to overcome for oil and gas producers in plugging into this low carbon electricity source is envisaged to be the commercial feasibility of retrofitting brownfield assets for alternative sources of power. The introduced decarbonization allowance should support in improving the financial feasibility of these retrofits. These capital investments are independent of the Annual Investment Allowance which is capped at £1m, meaning there is no threshold to the amount of tax relief that can be obtained through the scheme. Passed in the same Bill, the Energy Profits Levy was increased to 35%, meaning that the headline tax rate on oil and gas producers in the UK will be at 75% (normally 40%) through to March 2028. This increased tax rate, initially at 25% in 2022, has been cited by OEUK in its annual business outlook as the driver for 90% of O&G producers operating on the UKCS to reduce their investments in the region. OEUK has found that projects equivalent to a year’s supply from the North Sea, about 500 million barrels of oil, had been stalled or shelved during 2022. In the face of increased tax bills, to reinvigorate investment in UK North Sea oil and gas, producers are being steered towards investment in platform electrification and other decarbonization methods through the introduced investment allowance.
For now, it seems the carrot approach is being used by the government to incentivize oil and gas producers, but perhaps the stick will need to be employed in the form of fines and production licence removal if decarbonization targets are not met. Towards the end of 2022 the NSTA imposed fines on three operators in the North Sea for unconsented flaring, and in April this year issued a letter to all licensees reminding them of their expectations to have a greenhouse gas emissions reduction action plan in place under the NSTA’s Stewardship Expectation 11. However, in a time of prioritized energy security, it’s difficult to see any government intentionally constraining its domestic oil and gas production. We will have to wait and see just how serious the NSTA’s decarbonization priorities are.
Nick currently oversees all of DNV’s business development activities across the renewables market for the UK & Ireland region. He is also the regional segment lead for offshore wind, managing internal upskilling programs and overseeing external engagement with the industry. He has 7 years of engineering experience in power and renewables, starting first in generator design and then moving into the wind industry where he specialised in control algorithm design for both fixed and floating wind turbines. He holds a BSc in Mechatronics Engineering from the University of Cape Town and an MSc in Renewable Energy Engineering from the University of Exeter.