Innovative partnering between oil and gas, renewables, hydrogen and carbon capture can accelerate energy transition, says the UK’s Oil and Gas Authority (OGA).
The North Sea industry’s regulator has been seeking to promote an integrated approach, not least because of the collateral benefits it could deliver to hydrocarbon exploitation, in line with maximising economic recovery under the MER UK doctrine.
However, the imperative for which the OGA was established has not prevented its enlightened chief executive, Andy Samuel, from pursuing the offshore energy integration dream that he believes will play an important role in reducing UK carbon emissions.
Evidence of this lies in extensive study work conducted by the OGA in association with BEIS, the Crown Estate, Crown Estate Scotland and Ofgem. The UKCS Energy Integration Project has so far delivered preliminary findings and a final report.
Though well publicised, it is perhaps useful to remind that the project pivots around five topics:
• Platform electrification could significantly reduce emissions on oil and gas
• Gas-to-wire (GtW)
• Offshore energy hubs
“We started this work over a year ago,” Samuel said. “However, we’ve been on this energy transition journey for well over two years and see it as being vital that the North Sea oil and gas industry becomes a part of it, not least as a means of protecting its future licence to operate.
“We saw that there was a huge amount that we needed to study and begin to understand, which is why we commissioned two phases of this work, which we’re preparing to take to a third stage.
“Meanwhile, with everything that we’ve seen this year — the latest oil price downturn and the effects of the Covid-19 pandemic especially — we at the OGA are doing everything we can from the smallest well workover to the most exciting hydrogen project, trying to stimulate activity and get things moving wherever it can be done safely. Big stuff and small stuff.
“The energy integration project deals with some of the bigger stuff and, if you like, the future. But we’ve got to have the skills, diversity of investors and the tripartite framework to allow the big stuff to happen.”
Samuel sees a more dynamic and complex UK energy-scape than there has ever been. It is changing rapidly, partly driven by an investor community that at last realises Big Oil can no longer rule the energy roost.
A hot example is BP, whose CEO, Bernard Looney, said on August 4 that oil would be the “engine of value creation” in the company’s net-zero drive.
“I would suggest that is well aligned with what we’ve been talking about. I’ve been in contact with BP on a number of specifics from a UK North Sea point of view and what I’m hearing comes through as good,” Samuel said.
But BP doesn’t have any choice and nor do any of the majors that have had the riot act read to them by investors becoming worried by their inaction over global warming. They are having to become integrated energy companies, albeit reluctantly.
In BP’s case the story is even more curious when one considers that former group CEO John Brown tried to recast BP as “Beyond Petroleum” and greenwash the corporation more than 20 years ago.
That putative attempt at BP’s intended transformation was signalled by his speech at Stanford University in May 1997, but killed off in 2008 with his departure from the group.
This time it’s different, isn’t it?
In Samuel’s view, the answer is “yes”, that BP and other European super-majors have woken up and that the OGA can be a catalyst to their change while not compromising its own position.
Fortunately, the OGA has convening powers and can pull in the UKCS leaders for discussions, or “deep dives”, as Samuel calls them. Even carbon capture has entered such conversations.
“My deep dives with the operators — and there have been 16 so far this year — have been on the net-zero ambition,” he said.
“Each of the MDs was provided with a standard agenda that goes through everything from flaring and granular emissions (basically methane) right through to hydrogen and nature-based solutions.
“It’s up to them whether they bombard me with slides, or simply talk or whatever. We listen and we challenge. If I had done this two years ago it would have been a very different conversation.
“I’m pleased that things are moving rapidly in a good direction. Most companies are now underway on a raft of different initiatives designed to at least reduce their emissions and to better understand measurements of methane.
“Taking the other extreme, we’re tracking more than 30 projects and strongly supporting and working on 10 of them with operators and other co-venturers. I think we’re getting closer to some meaningful project sanctions.
“We’re also working with other parts of government and, clearly, CCS still requires some good commercial frameworks that only government can put in place , plus there are question-marks about long-term liabilities. I would argue that there’s now really good momentum building.”
However, one potential major barrier to meaningful progress is the state of the oil price.
The North Sea industry has been absolutely hammered with companies driven to extreme cost-cutting in order to survive. The current recovery with oil around $40 is tentative.
With that in mind, is the OGA having to drag oil and gas companies kicking and screaming into the energy transition?
Samuel said: “This latest downturn came so quickly after the last one that people in the industry are beginning to figure that the new normal is in fact abnormal. No one can take anything for granted and certainly no one can rely upon past ‘normal’ cycles for cues.
“People in the industry are now realising that the great companies are those that are agile, forward looking and which understand that now really is the time to embrace a more sustainable future.”
But is there a sense of fear out there?
Samuel said: “Yes. There is. It’s why the OGA’s head of supply chain, Bill Cattanach, recently contacted the top 20 operators and went through the list of all the small oil and gas projects that are still considered investable in an attempt to understand what can be done just to keep activity going, from well workovers to small well tie-ins to existing fields.
“A big issue we’ve got now is what constitutes safe working. Different operators have differing views on that.
“But no one is taking it for granted. This pandemic is all around us and working offshore is not at all straightforward.”
Is there also a sense of envy or regret among North Sea companies who wish they had followed the likes of Equinor and Dong Energy (now Orsted), with their low-carbon pioneering?
After all, the UK now has significant offshore power generation capacity in its own right and there’s a clear future developments roadmap.
Unlike Big Oil, Big Wind forward investment is relatively predictable and its supply chain can genuinely plan ahead, both because of its well-defined projects pipeline and regular inspection repair and maintenance work.
Oil and gas prices are highly volatile, electricity prices are relatively stable.
Samuel seems to agree: “We’re seeing a range of responses to our revised strategy. Some companies have said they absolutely will up their game, reduce their emissions, go about their business as cleanly as possible, but wouldn’t get involved in CCS, hydrogen or offshore wind.
“Some see their business as being about optimising late-life production of oil and gas. That’s good for MER UK and so gets our support.
“Equally, other companies are saying now is the time for them to diversify into offshore low carbon. BP, for example, now sees itself becoming an integrated energy company.
“So, different companies are taking different approaches and the North Sea continues to benefit from the diversity of players because there really is such a breadth of opportunity.
“The thing we try to highlight in the report, however, is that some of the new opportunities actually require a more integrated approach if we’re actually going to maximise value from the UKCS.
“This really does cut through to some strategic stuff. In reality, to truly maximise value for the UK we need to get grassroots manufacturing going. The change required is truly massive.”
Samuel is clearly concerned about the role of regulators and other relevant bodies in driving for change. But he is encouraged too.
“This transition study has been invaluable in terms of getting us much closer to Ofgem, BEIS, Crown Estates, Crown Estates Scotland and others,” he said.
“And we recognise that there’s work we at the OGA can do to make things easier for investors and potential investors, like making it easier for companies to cross different regulatory regimes, because that’s how the value is going to be generated.
“It’s also good that the Oil and Gas Technology Centre has linked with the Offshore Renewable Energy Catapult, to help join up the thinking on technology because there’s a huge opportunity in that alone.
“Our work shows there’s a lot to be done but the economics are still quite difficult. Naturally, new technologies can lead to some future opportunities becoming more economic than now, perhaps dramatically so.
“There’s also a lot of strategic work to be done on offshore electricity pricing, for example.
“While our study highlights the opportunities that are out there, it also sets out the current barriers. There are now plans afoot to address those barrier in a very similar way to what we did on MER UK over the last five or six years.”
If an operator is looking to electrify an existing offshore production operation or bring in a new development using floating offshore wind to generate the power required, the process is not as straightforward under the current regulatory regime is it ought to be.
But the OGA is on the case and working with other regulators to simplify the bureaucracy.
Samuel insists it’s not about trying to shortcut good practices. It’s about making sure that the processes are joined-up and investor-friendly. Because there is competition from outer countries, the UK must be seen to be open for business.
But how open is the UK? Let’s take hydrogen for example.
There are several very large hydrogen projects in-hand in the EU, but it’s hard to spot anything of meaningful scale here.
Regardless of which low carbon energy opportunity one might care to select, the UK is perceived as dragging its heels and too often changing its mind.
CCS is a classic example or dithering.
Even with burgeoning wind, virtually all high-value components are imported or made by UK offshoots of foreign brands.
Surely that hampers North Sea Big Oil’s thinking on the energy transition.
Samuel appears optimistic, at least on the CCS front: “What I can tell you is that I’ve been very pleased over the last few months to have had serious conversations with a European supermajor and a private-equity-backed company around specific blue hydrogen projects, both linked with CCS.
“Both are already in deep dialogue with the onshore industries that want to join forces, utilise the CCS opportunity, use hydrogen. Both are commercially-led. Neither would need government investment but both will require a government framework. It think both are really exciting.
“What we’re trying to do above all else is highlight the scale of such opportunities and broadly encourage the process of energy integration.
“It really is genuinely heartening to see new groupings that never existed before now working together, because I think that’s what’s going to unlock the future.”
Samuel sees simple changes to working practices of the oil and gas industry itself also having a key role to unlocking the future of the North Sea, at least in the MER context.
It boils down to simple, good husbandry.
“What we have found is that just good environmental management — emissions management — is adding value,” says Samuel.
“I have documented numerous cases where operators have said, ‘the more we’ve looked at this we’ve realised, for example, that not using all of our wells for water injection makes sense because there’s an energy cost and actually the extra recovery we’re getting is not value-adding’.
“They’re actually adding value simply by looking at their operations through this lens called emissions management. That’s really good.
“Some companies at their daily operations meetings include on their dashboards, all of the emissions metrics.
“That’s fantastic. It says that the culture is changing and the workforce likes this. The average person in the oil and gas industry cares about the environment.
“Companies are also finding that in terms of attracting and retaining talent, having this extra dimension is bringing nothing but good.
“I then say to them, ‘that’s brilliant, but it would be really good if you could now prove that your company is future-looking by investing in CCS and hydrogen projects, for example’.”
Boosting production usefully through simple environmental husbandly is good, but what about new developments, ideally projects with a low carbon dimension to them?
With two crashes in quick succession and an awful lot of assets up for sale on the UKCS, that is surely going to slow progress.
“Deals are happening,” Samuel said. “We’ve been surprised at the level of activity since March. The regulatory team has been dealing with changes to assets control.
“It’s always been quite a vibrant landscape in the North Sea. People still talk about a pioneering spirit.
“When I was an MD managing assets in the North Sea, you had to be resilient. That’s still the case. I don’t think anyone comes here expecting it to be easy. It is possible to make good money.
“We now have a stable and competitive fiscal regime and I know from the deep dives that a number of operators are planning to get rigs back to work and so-forth.
“From the OGA’s perspective, the top priority is to support new projects. I’d really like to see a couple of these achieve sanction before long.”
And there’s more. It turns out that private equity is still interested in the North Sea, even after two back-to-back downturns. But it’s with a twist.
“A new type of private equity is taking an interest,” Samuel said. “For example, I know one North Sea operator that is deep in discussions with a big New York PE player that is involved in offshore wind and green hydrogen. This is serious money looking for opportunities.”
And having interested investors is really the linchpin to progress, is it not?
“I think so, I really do,” agreed Samuel. “I also think there’s a long way to go with all of this and the more we work it the better.”