The UK North Sea could be hit hard if proposals currently tabled for Phase III of the EU’s Emissions Trading Scheme are implemented, according to an Aberdeen University report.
Worst case, implementation could result in billions of pounds of lost investment, coupled with the loss of hundreds of millions of barrels equivalent of oil&gas production.
Such proposals would result in accelerated cessation of production from older fields; non-development of fields which would otherwise have gone ahead, and an overall reduction in field investment. To the partners in producing oil&gas fields, the costs associated with their having to buy an increasing proportion of their CO allowances are “akin to an extra tax on production activities and an increase in operating costs”, according to the latest analysis by renowned petroleum economist Professor Alex Kemp and colleague Linda Stephen, of Aberdeen University.
Their Phase III ETS study conclusions boil down to a “significant loss of production” being in prospect, so confirming worries already voiced by Oil & Gas UK to the UK Government and the European Commission.
OGUK tabled its concerns in a report lodged with the now former Brown administration well over a year ago.
How much investment is stymied and how much oil&gas are left in the ground depends on a number of factors. Key direct uncertainties include:
The size of total emissions.
The proportion of these emanating from electricity generation.
The extent of sharing the costs (directly or indirectly) between interconnected parties.
The price of CO allowances.
Additionally, the effects on activity in the UK Continental Shelf also depend on several factors relating to the underlying economics of oil&gas exploitation, including:
Investment-hurdle criteria employed by licensees in making investment decisions.
The behaviour of investment and operating costs.
Kemp and Stephen point out that any loss of production would have to be countered by an increase of imports, and this would introduce a “carbon leakage” problem.
“It is to be expected that the loss of production from the UKCS will result in a corresponding replacement in production from countries where the EU ETS is not imposed,” they say in their report.
“The evidence produced in this study supports the claim that the carbon leakage problem in the UKCS will be significant under the present proposals.”
What the Kemp/Stephen report does not address is impacts associated with future oil&gas finds in UK waters.
As usual with such reports, they tested the Phase III proposals against three oil&gas price scenarios – $45 and 30p; $60 and 50p, and $80 and 70p.
Further, they selected three prices for CO allowances – 20 euros, 40 euros and 60 euros per tonne – and three cases of availability of free CO allowances, namely 80% of total requirements in 2013 falling linearly to 0% in 2027; 80% of 50% of total requirements in 2013 falling to 0% in 2027 (50% of emissions from electricity generation), and zero free allowances from 2013 onwards.
Selecting several scenario permutations and with respect to the total loss of production from existing discoveries in the period to 2040, it was found that, in the case with maximum free CO allowances, under the $60, 50p case, there was a cumulative loss of 177 mmboe under the 20-euro CO price, 244 mmboe under the 40-euro CO price and 392 mmboe under the 60-euro CO price.
Under the $45, 30p case, the cumulative loss of production is 213 mmboe under the 20-euro CO price, 290 mmboe at the 40-euro CO price, and 407 mmboe at the 60-euro CO price.
Under the $80, 70p price case, the cumulative loss of production is 47 mmboe under the 20-euro CO price, 151 mmboe under the 40-euro CO price, and 206 mmboe under the 60-euro CO price.
Kemp and Stephen say: “The loss of production is greatest under the $45, 30p price case because there are more marginal fields under this price scenario than with the others. In this scenario, many fields and projects are also sub-marginal even without the obligation to purchase CO allowances. Under the high-price case, more fields/projects can withstand the cost of purchasing allowances and still remain viable.”
With respect to the loss of new field investment, it was found that, under the $60, 50p case, cumulative investment to 2040 would be reduced by £2.5billion under the 20-euro CO price, by £2.7billion under the 40-euro CO price and by £4.1billion under the 60-euro CO price.
Under the $45, 30p price scenario, cumulative field investment is reduced by £1.3billion under the 20-euro CO price, by £1.4billion under the 40-euro CO price and by £2.2billion under the 60-euro CO price.
Under the $80, 70p price case, cumulative investment falls by £160million under the 20-euro CO price, £1billion under the 40-euro CO price and £1.1billion under the 60-euro price.
Kemp and Stephen warn that the total cumulative cost of purchasing CO allowances under the $60, 50p case was found to be £5.6billion with the 20-euro CO price, £10.7billion with the 40-euro CO price and £15.5billion with the 60-euro CO price.
Under the $45, 30p price case, the cumulative costs of purchasing CO allowances are £3.4billion with the 20-euro CO price, £6.5billion with the 40-euro CO price and £9.5billion with the 60-euro CO price. And under the $80, 70p price scenario, the costs of purchasing the allowances are £7.6billion under the 20-euro CO price, £14.7billion with the 40-euro CO price and £21.1billion with the 60-euro CO price.
As for the potential impact on new field investment, the message is just as stark.
Kemp and Stephen found that, under the $60, 50p case, there would be a cumulative reduction of £2.5billion under the 20-euro CO price, £3.6billion under the 40-euro CO price and £4.1billion under the 60-euro CO price.
Under the $45, 30p scenario, the reduction in investment amounts to £1.4billion at the 20-euro CO price, £1.7billion at 40-euro CO price and £2billion at the 60-euro CO price. Under the $80, 70p price case, the investment reduction is £160million with the 20-euro CO price, £1billion at the 40-euro CO price and £1.3billion at the 60-euro CO price.
This is a complex piece of work but, in Energy’s view, warrants a close read.