David Telfer, 11th May 2010
Proposals for the latest phase of the European emissions trading scheme (ETS) would mean costs similar to an extra tax on UK oil and gas production.
This emerged in a new study by Professor Alex Kemp and Linda Stephen of Aberdeen University, published today.
The report said there would also be an increase in operating costs, and the net increase in costs overall would be very substantial.
The Phase 3 costs would also result in loss of production from a combination of the acceleration of end of field lives and non-development of marginal fields made uneconomic by the scheme.
The study added that UK output would be replaced by production from other countries.
The key proposals were that, from 2013, all CO allowances for electricity generation had to be bought at auction, and for other CO emissions, such as those relating to mechanical power and gas flaring, 20% of the allowances had to be bought in 2013, increasing to 100% in 2027.
Prof Kemp and Ms Stephen say the oil market was global and so increasingly was the gas market.
They added that when North Sea oil and gas producers were faced with increased costs because of having to buy CO allowances they would be unable to pass them on in higher prices because there were plenty of producers outside the EU which did not have such increased costs.
David Odling, industry body Oil and Gas UK’s energy policy manager, said: “Oil and Gas UK has for some time been very concerned about the effect of Phase 3 rules on the competitiveness of UK oil and gas projects.
“We welcome Prof Kemp’s research, which estimates that the consequence of Phase 3 will be 260-420million barrels of lost production, never to be recovered.
“Even on achievement of the main political parties’ target to source 15% of our energy from renewables in 2020, we will still rely on oil and gas for 70% of our energy needs at that time.
“If the industry is to maximise production of indigenous oil and gas reserves and help secure energy supplies, the UK Government should recognise the risks posed by Phase 3 and work to restore the competitiveness of UK oil and gas projects with all the tools at its disposal.”
OGUK believes that the government could aid the oil industry by making changes to the fiscal regime to help offset the higher costs incurred through Phase 3.