Why the death in North Sea oil will be a disaster for Britain

The UK is now dangerously exposed after squandering its most valuable asset.

A massive, deserted oil platform lies abandoned in the North Sea. Brent Charlie is the final remnant of the Brent Field – once a huge resource that supplied a third the UK’s oil daily needs.

The Brent field was discovered in the 1970s and at one time produced 184,000,000 barrels of crude oil per year. This earned Shell, its owner billions in profits, as well as £20bn tax revenue for the Exchequer. Brent Charlie, Alpha Bravo Delta and Delta were four huge platforms needed to extract the oil.

Alpha, Bravo, and Delta are now gone. They have been cut off their supports and sent to the scrapyards.

Brent Charlie’s legs will be cut off later this year and it will then be lifted onto Pioneering Spirit, a ship designed specifically to tear apart decaying oil-and-gas installations.

Pioneering Spirit, along with the growing fleet similar to oil rig-slaughtering vessel, is set for a busy few years. In the UK’s waters, hundreds of oil and gas installations have been silenced. The final decline of the North Sea boom, which began 50 years ago, is now upon us.

In addition to bringing the rigs back on shore, the nearly 8,000 deep-sea wells must be plugged.

The decline of North Sea oil and gas has implications for public finances in general, not only energy policy.

The North Sea cleanup could cost up to £60bn.

Decommissioning is the responsibility of energy companies, but with tax breaks much of this money can be recovered from the Exchequer and ultimately by taxpayers.

In the last year, more than 200 oil-and-gas wells have been plugged. Eight platforms and 8,000 tons of subsea structure were removed from the ocean. Another 250km of seabed pipes were decommissioned. By the end of this decade, another 180 of UK’s 284 gas and oil fields will be closed.

The closure of large numbers of schools is not the result either of eco-protests or a lack in demand.

The supply isn’t diminishing either. In the past five decades, oil and gas equivalents to 47 billion barrels have been extracted. But seismic surveys indicate that another 25 billion barrels are still available.

Instead, operators blame punitive taxes for the rapid pullback, with Some face levies exceeding 100pc of their profits.

Production has now declined rapidly.

The North Sea Transition Authority, the government regulator, has revealed that UK oil production peaked in 2000 at 150 million tons of oil per year – about twice the country’s consumption. About 108 billion cubic meters of gas were also produced – roughly 20 billion more than was consumed.

All three were booming: exports, taxes and jobs. Oil and gas employed 500,000 people either directly or through its supply chain. Its products are the fuels that power not only our homes and cars but also the entire UK economy.

In the five decades leading up to 2020, the offshore industry has paid in around £400bn as taxes.

The contrast between then and now is unimaginable. The UK produced only 38 million tons of oil last year, down 74pc since its peak. This is about 20 million tonnes below what we require. Gas production was only 30 billion cubic meters, less than half of our needs.

The number of people employed has dropped to 130,000. Tax revenue has also fallen to approximately £3bn.

The UK’s dependence on oil and natural gas has not changed. Oil and gas still provide 75pc of the UK’s total energy, just as they did 20 years ago.

The fossil fuels are not only responsible for warming the planet, but also heating 27 million homes that rely on oil or gas boilers. Around 30 million cars still run on petrol or diesel, and gas-fired stations produce over a third our electricity.

Despite this, we still consume 77 billion cubic meters of gas per year. This is equivalent to 1,100 cubic metres for each person. That’s the same as 14 double-decker busses. About 60 million tonnes of crude oil are consumed annually – almost a tonne for each person. Imagine having several wheelie-bins full of oil per citizen, even children.

What the green lobby may claim and what the politicians may promise, it is a fact that the UK continues to be a fossil fuel nation.

Will this change? The use of fossil fuels has decreased a bit. It should continue to fall if we can convince the government to install Heat Pumps and buy electric cars, and make other changes that are required for net zero.

It is becoming increasingly clear that fossil fuel consumption will never decline as quickly as our North Sea supply.

This means that the UK is likely to be more dependent on imports for the next several decades, with all of the vulnerabilities that come along with it. These include price fluctuations and the whims or dictators like Putin.

In the past two decades, we produced enough oil and natural gas to meet our needs and exported some. We are now in energy poverty, and we rely on other countries to keep our homes and vehicles warm and running.

What happened?

“Dear God give us another oil rush. Next time, we won’t throw it against the wall.

The words scrawled by an anonymous graffiti artist on a wall in Aberdeen some years ago still ring true today.

The roots of the city as the UK’s oil and natural gas capital can been traced to the mid-1960s, when BP found the West Sole field. This was the first sign that there were more fossil fuels waiting to be discovered in the North Sea.

Philips Petroleum discovered Norway’s Ekofisk oil field in 1969. The UK’s Brent field was discovered in 1971, and then the Piper field, in 1973.

The UK’s economy could be transformed by these giant oilfields, and others similar to them.

Tony Benn received the first delivery of oil from the Argyll Field. The famous photo shows Tony Benn, the former Labour energy secretary, opening a valve in order to release the first shipment of oil at the BP refinery located on the Isle of Grain.

Tax revenues also began to flow in. They reached a high of £12bn by the mid-1980s.

At its height, the industry accounted for approximately one-third of the tax revenue that the UK government received.

Heute, this figure is less that 1  in 100.

As the value of the pound rose, it caused a huge shift in Britain’s economic landscape. This rendered large swathes British industry uncompetitive. It also destroyed thousands of jobs.

It also helped finance Thatcher’s campaign to cut taxes in the late 80s, cementing that legacy of a great reformer.

Politicians milked this cash cow ever since.

The petroleum revenue tax was introduced along with the discovery of gas and oil. In 1981, Geoffrey Howe, Tory chancellor of the UK introduced a new 20pc oil tax in the North Sea.

Gordon Brown, Labour’s Gordon Brown, introduced a “supplementary charge” of 10pc on North Sea profit in 2002. This effectively raised tax on region’s production from 30pc to 40%. In 2005, he launched a second attack on profits by doubling the additional charge. The SNP called it a “smash-and-grab” of PS2bn.

George Osborne further tinkered around with North Sea taxes, launching in 2011 a £2bn raid to pay for an ounce of fuel duty cut as oil prices rose above $100 per barrel.

Jeremy Hunt’s windfall levy, imposed in response to Russia’s invasion in Ukraine, helped plug a gap in the public finances.

Norway, for example, has taken a different approach in managing its oil and gas wealth.

Norway created a huge savings account in 1990 when the UK used its North Sea earnings to finance battles against unions and support day-to-day financial needs. This is now called a sovereign wealth funds.

This fund controls assets valued at £1.5 trillion today, including a stake of 113 buildings in London’s Regent Street from Apple’s flagship to Hamleys Toy Shop.

Norway’s sovereign fund holds today the equivalent of around £250,000 per citizen. This is enough to keep the country comfortable for decades, even after oil and gas run out.

At the beginning of the oil industry, there were those who argued for a similar fund in the UK North Sea. Tony Benn, Labour’s former Scottish Secretary of State, and Bruce Millan were among them. They were overruled, however, by the rest the cabinet who became wary of growing calls for Scottish Independence.

Denis Healey admitted, in his last interview, that the government “underplayed the value of oil for the country due to the threat of nationalism”.

Sukhdev Johal is an accountancy professor from Queen Mary University in London. He estimates that the UK would have made £850bn if it had created a fund similar to the Norwegian one. This would amount to about £13,000 for each person in the UK, despite its much larger population.

In the end, North Sea income was used to support tax reductions for the wealthy when the Tories defeated Labour. Nigel Lawson was the chancellor of Margaret Thatcher and had reduced the top tax rate from 60p per pound to 40p in 1988.

Healey said to Holyrood Magazine: “Thatcher would not have been able implement any of her policies if she didn’t get that extra 5pc from oil. She had incredible good fortune from that.”

The North Sea has become less profitable and money is quickly running out.

The Office for Budget Responsibility estimates that operator revenues will be £10bn (ten billion pounds) in 2022-23. However, this figure is expected to drop to £4bn (four billion pounds) this year, and to just £2bn (two billion pounds) by 2028-19.

The cost of production is also increasing. After decades of drilling, all easily accessible oil is already gone.

Oil extraction in mature UK fields is now among the most expensive in the world. Rystad Energy reports that it costs $26.20 per barrel to produce oil today. This compares to $5.50 for Saudi Arabia and $7.30 for Norway.

Today, the biggest challenge is decommissioning.

The NSTA estimated six years ago that it would cost PS60bn to deal with the rusting remains from the UK’s North Sea projects. The scrapheap challenges include 320 fixed installations and 250 “subsea system” – wellheads and equipment on the seafloor. There are also 20,000 miles worth of pipelines that connect wells, platforms, and shore.

The 7,800 wells that often extend over a mile deep into bedrock are the most expensive. The casings of each well must be stripped and then plugged with concrete. This process is likely to take up half of the decommissioning budget.

One of the most experienced engineers in the industry says that each unplugged well poses a serious threat to future generations. It could leak polluting oils or methane – a powerful greenhouse gas – into the ocean for decades or even centuries.

The Treasury’s problem, however, is not pollution in the future, but costs.

Decommissioning is treated as a business cost in the UK, which can be deducted from profits earned previously to reduce tax bills. Shell’s Brent cleanup alone has cost Treasury £600m since 2018.

The question of how much the North Sea’s end will cost the taxpayers in the long run is one of many.

In a report for 2019, the National Audit Office (NAO), estimated that Treasury would be facing a bill of £24bn.

The NAO stated that “taxpayers will ultimately be liable for decommissioning assets which operators are unable to decommission.”

The Treasury put pressure on NSTA in order to reduce the decommissioning costs. The Treasury’s latest estimates show a dramatic drop in total costs from £60bn down to £40bn. This, combined with the increase in oil prices and profits, has reduced its predicted liability by £4.5bn.

The NSTA insists that the savings were genuine. Some critics believe the savings to be a political accounting exercise. The NSTA insists on the importance of knowledge sharing and “more sophisticated forecasting”. It adds: “Setting targets for cost reduction has sharpened industry focus.”

Insiders in the industry disagree, claiming that it is impossible for any sector to reduce costs by a quarter during a time of high inflation.

Gilad Myerson said that the NSTA estimates did not take into account the UK windfall taxes, which have restricted investment. This will “bring forward the timing of existing UK field decommissioning programs while reducing production”.

Myerson: “These fiscal policy changes were intended to increase taxes. In reality, they will cost the economy even more, as fields close early, reducing tax payment and driving up decommissioning expenses.”

So far, more than 250 decommissioning planning documents have been submitted. The plans detail not only what will be removed, but also what will remain, such as pipelines, concrete mattress (used to protect pipes) and other metalwork or concrete.

The Ospar Convention, a treaty between the UK, 14 other European countries, and the EU to protect the north-east Atlantic, prohibits all of this dumping.

Environmentalists are furious that the UK regulator has taken a more relaxed approach to the seabeds.

Derogations may allow companies to save more money by allowing them to abandon massive installations forever in the ocean despite rules.

Ospar warns that many more derogations are likely. “There are currently 59 installations of steel weighing over 10,000 tonnes, and 22 installations of gravity-based concrete for which more derogations may be considered.”

Shell, in particular, wants to derogate the 165-metre legs that supported three of its Brent platform. Shell claims leaving them in place would be the safest and cleanest option.

The “gravity-based structure” was built with concrete and steel bars in an era when the main concern was to survive the 200mph wind speeds and 80-foot-high waves that were found on the Atlantic Seas north-east of Shetland.

Nobody thought about the eventual removal of these structures. Each of the resulting structures weighs 300,000 tons, which is equivalent to New York’s Empire State Building.

These tanks also contained thousands of tons of toxic oily sludge.

Shell says that leaving them in place is the best choice: “Our recommendations were the result of a decade of research involving over 300 scientific and technological studies.”

Some disagree. Tessa Khan is the executive director of Uplift an NGO which campaigns to stop UK fossil fuel production. She said: “Oil companies who have profited for decades from this basin and are sitting on windfall profits now should be forced to clean up their mess, just like any other company.”

It’s scandalous that the government has given in to the lobbying of industry, causing the taxpayers to pay a portion of the cleanup bill.

What is the future? Offshore contractors are finding that tearing apart oil and gas facilities is the best way to earn money.

The amount spent on decommissioning has risen, from £1.39bn to £2bn, this year. This will continue in the future, especially if the NSTA’s £40bn total is not as optimistic as predicted.

Decommissioning spending is increasing as exploration expenditure for new oil fields plummets from £800m to £330m.

In the past five years, only a few new wells were put into production compared to the hundreds of others that have been shut down.

Some people believe that there is still money in the North Sea. The NSTA approved 51 new exploration licenses last year, with 60 more pending. Claire Coutinho, the UK energy secretary, has called for more domestic oil and natural gas exploration.

But energy companies aren’t impressed. Few invest and others walk away for reasons that are nothing to do about geology, but everything to do politics.

Windfall tax imposed by the current government has increased the levy of oil and gas production profit from 40pc up to 75pc. Some operators have faced tax rates of over 100pc due to the vagaries of taxation.

Harbour Energy, UK’s biggest oil and gas producer blamed tax burdens for its decision to stop investing in the UK.

The next likely government has added to the uncertainty. Labour has promised to stop all new licensing and add an additional 3pc of windfall tax.

Chris Wheaton, Stifel analyst who specializes in the offshore sector, says that the impact of these policy swings by the UK’s main political parties is disastrous for the industry as well as the country.

He estimated in a recent report that the UK Government could lose £20bn in tax revenue if investments are “effectively shut down” by higher taxes, or stopping future developments.

He argues that energy security would be affected as well. The UK gas production would be accelerated, forcing the importation of more gas… with implications on energy prices for consumers. “We estimate that the UK will import 80pc or its gas needs as early as 2030.”

Mike Tholen, Offshore Energies UK’s policy director, said that if the UK shut down its oil and gas production without building low-carbon alternatives, it would be exposed to price spikes around the world and to the whims dictators.

He says that gas boilers are used in over 23 million homes for heating and hot water. Gas also provides between 40 and 60 percent of our electricity, depending on the wind speed.

We can choose a transition to energy where the [oil-and-gas] infrastructure offers opportunities for UK workers and companies. We can either choose to rely more on energy imported from other countries or we can increase our reliance.

Westminster seems to have no interest in these arguments, and there are no proposals that would reduce the tax burden. Decommissioning has become the new buzzword.

Brent Charlie will be melted down and cut up for scrap in the same year as this year’s general elections.