This is a quick note, because a report I was keeping an eye out for is now in the public domain. As I understand it, it was commissioned by Dale Vince of Ecotricity, and presented at the UK Labour party in September, and lays out a ‘mid-transition’ argument for effectively bailing out oil and gas firms with a fixed price for gas for the next 10-15 years.
Why am I asking this?
I work at the Green Web Foundation, a non-profit focussed on a fossil free internet by 2030. One of the key things we talk about is getting the internet off fossil fuels, fast, fairly and forever. The UK is decarbonising relatively quickly compared to other Western European nations, and has a “clean power by 2030” plan, so it’s one place we might actually see this happen first.
Well, that was the story before – with a new mania around AI datacentres, you’re now seeing a renewed interest in the North Sea for gas, which has been considered to be in decline for years, and depending on how quickly it’s used, is thought to have between 5-10 years of supply that is economically viable to get out the ground.
What is this bailout you’re referring to?
In the report, PUTTING AN ARM AROUND THE NORTH SEA OIL AND GAS INDUSTRY, the authors propose setting up a Contract for Difference (a CfD) for all gas produced from the North Sea, and pay a set price that works out to be about 40p / therm, or 13.64 GBP per MWh.
What does this mean?
If the cost of power on the wholesale electricity market in the UK is higher than 13.64 GBP, then the difference is paid to the generators is distributed back to consumers in lower energy bills. I don’t quite understand this mechanism in more detail – the report is only 8 pages long so I can’t say more.
If the cost is lower than 13.64 GBP, then the cost of production is subsidised, and the government essentially pays the producers of the North sea gas, via the state-owned Low Carbon Contract Company. This would be enough to make sure that producers get a guaranteed 10% margin on the gas they produce.
Is this a good deal for producers?
I don’t know.
We know that supplies in the North Sea are dwindling, and over time the cost of producing oil and gas will likely climb, as people have to work harder to get as out the fields. this is not just a North Sea thing, although it’s more acute there.
Oil and gas production both suffer from decline rates, meaning that to maintain the same amount of production, you need to constantly make investments just to stay till.
The IEA’s recent report on Decline Rates in the Oil and Gas industry makes this really really clear – around 90% of the 500 billion US dollars invested in oil and gas production last year was to maintain existing production, not find new fields, so without it, we see a natural drop off.
The IEA normally makes it easy to link to their charts, but for some reason, this report has no easy to reuse images, so I have to use screenshots from the PDF report. Here’s a good one from page 50, showing how quickly it drops off, when investment stops. s
Gas typically sets the price of electricity in the UK most of the time, suggesting you’d get more than 13.64 GBP per MWh, but prices are also volatile, and there is a predicted glut of LNG coming onto the market in the coming years, as the US tries to ramp up production, Qatar’s terminals come online, and so on, which is expected to push the price right down.
Is this a good deal for everyone else?
In other parts of the world, I’ve see two main ways of getting fossil fuels off the system. They either get pushed off the grid by cleaner energy, or the owners of fossil plants get bought out. Coal got pushed off the grid in the UK with the first mechanism (broadly, although a floor on a carbon price was needed), and in Germany, a series of reverse auctions have been used to buy out coal fired power plants, so they can be shut down early. There have been some examples in the US and Indonesia of this public buy-out too.
This seems to be trying to find a third way, of some form of managed decline, but it seems different to the approach proposed by Stonehaven, which seems to be using a more similar approach to the one used to fund nuclear power in the UKK, in their report literally called Managing Decline – A regulated asset base for legacy gas in the age of clean power.
The question I have (aside from the moral and legal implications of supporting oil and gas production) is whether oil and gas producers will accept the low price in the long term to keep workers employed, or whether they’d prefer just try to cash out in the short term selling oil and gas at a higher price, returning money to shareholders, and then just fire everyone anyway as soon as the easy to get oil and gas runs out.
Is this really about getting rid of the windfall tax?
It’s hard to ignore that this is coming from a billionaire who owns an energy retail company, Ecotricity. My current understanding is that even if a company has 100% of their power coming from clean generation, as their published fuel mix suggests, there are still times where a energy retailer has to buy power on the wholesale market to be able to supply it to customers.
I can see how a scheme like this would bring down the cost of buying on the wholesale market, if the gas burned to generate from electricity is bought at this lower price than the price you’d have to pay on the international market, which is usually much higher:
Moving North Sea suppliers to a CfD would provide the following benefits: Lower bills – by fixing the price generators receive to something closer to the true cost of producing this energy and a fair profit margin, it would remove the excess international market prices that drive up bills.
They’re also explicit about it removing the need for a windfall tax on energy profits:
Windfall tax – there would no longer be a need for the Energy Profits Levy, which is politically toxic, complex and much harder for businesses to plan for
Right now, as I mentioned before, in the UK, gas usually sets the price of electricity, not clean generation like wind or solar, which tends to be cheaper. So, if you’re generating clean energy at 10 GBP per MWh, when the wholesale cost is 80 GBP, it’s a nice margin you’re making. Thing is, these profits currently get clawed back with a windfall tax – from the POV of an energy company, having no windfall tax would be great.
I don’t know enough about how UK energy profits are taxed to know if this makes much sense.
Is this really about keeping jobs?
This is another argument made for using CfD to keep oil and gas production going – you need the CfDs, otherwise oil and gas companies will fire everyone, and it’ll be your fault when they vote for the fash instead of your party.
This is new territory for me, and I might as well share my priors – oil and gas companies seem very happy to shed workers when it suits them, and having a CfD like this doesn’t seem like any real guarantee of employment, in the face of pressure from investors.
I find Uplift’s UK’s recent post about the North Sea oil and gas situation miuch more convincing to be honest so far, and they at least link to an actual platform from offshore workers in their post.
Who is writing good analysis about this right now?
I’d welcome pointers here.