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Oil & Gas News05th Apr 2022

Offshore Energies UK (OEUK): Why is the UK exporting gas when we are in short supply?

7 key questions about UK oil and gas – answered by an expert

four key new technologies to help the UK with carbon neurtrality

1. Do oil and gas companies get subsidies from taxpayers?

Oil and gas production in the UK is sometimes described as being subsidised by taxpayers. This is wrong – there are no subsidies for the UK oil and gas industry.

There are instances when spending on decommissioning can lead to a tax refund. This is because all companies, not just those involved in exploration and production of oil and gas in UK waters, can offset the expenses of running their business against their profits. These costs are known as Allowable Expenses. If expenses increase profits, and the tax due on them, will decrease.

Decommissioning is one such allowable expense, but these expenses are often incurred after an oil or gas project ceases production – sometimes years after. HMRC rules allow decommissioning costs to be offset against profits reported in previous years. This reduces those profits – and the taxes due on them. This generates a tax repayment.

2. Is it true that UK oil is mainly exported?

Many countries import and export oil. This is mainly because there are different types or grades of oil, and not all countries have the ability to produce and then process those different types into its different uses.

Overall, however, the UK imports more oil than it exports. In 2019 the UK consumed 59 million tonnes of oil and oil products such as petrol, diesel and aviation fuel. This amounts to just under a tonne of oil per UK citizen. Transport is the primary use, and some 32 million cars, vans and lorries rely on petrol or diesel.

In the same year we produced 53 million tonnes of oil in our waters. About 45 million tonnes of UK-produced oil were exported for refining. The Netherlands and China were the biggest purchasers of UK crude oil.

The UK imported 51 million tonnes of oil and oil products from countries including Norway, the US, Algeria and Canada.

In line with the North Sea Transition Deal, new reserves will be produced at a lower rate of emissions than those which have come before. So while we continue to import and export oil, we can play a part in reducing emissions from oil and gas production both in the UK but also globally.

3. Why is so much UK oil sent for export?

Oil is an international market, with trade flows between countries on a daily basis to balance demand requirements – this includes flows both to and from the UK. The nature of oil producing infrastructure on the UKCS also means that some production is piped or shipped directly to other countries, even though it is produced in UK waters. Some of this oil would then be processed and shipped back to the UK directly, some will be re-imported as refined products, and some will be used elsewhere around the world.

Oil must be processed into products like petrol, diesel, and aviation fuel before it can be used. The UK doesn’t have the capacity to refine and manufacture the amount of oil-based products that it uses. Overall refinery capacity in the UK has fallen by around 30% since 2010. This means that we are reliant on other countries to produce the products that we need.

Oil from the UKCS is mainly ‘premium crudes’, meaning they are relatively simple to refine and so in high demand. Much of it is transported to refineries in hubs around Europe. Some are in the UK and others in nearby countries such as the Netherlands.

Each refinery tends to specialise in different grades of crude oil and in producing particular fuels and chemicals. The UK then imports the fuels and other refined products that it needs to balance customer demand with domestic refinery production.

Essentially the UK is part of a network of refineries with countries exporting and importing according to which specialised products they produce and what they need.

4. Why is the UK exporting gas just when it’s in short supply?

The UK’s own gas supply is mainly from the UK Continental Shelf (our waters) and from Norway, augmented by LNG shipments which come in at the UK’s three main import terminals: Isle of Grain, Dragon, and South Hook. The South Hook and Dragon LNG terminals are both located in the port of Milford Haven, in Southwest Wales, and both were launched in 2009.

The UK lacks gas storage capacity relative to overall demand. Europe as a whole (EU plus UK) has roughly 105 bcm of gas storage capacity, which equates to 22 per cent of annual consumption. By contrast, the UK has just 0.9 bcm of gas storage relative to around 80 bcm of annual demand. Instead of importing substantial amounts of LNG in the summer and placing it into storage for the winter, the UK relies on UK production and Norwegian pipeline supplies, ‘topped up’ with LNG imports. The UK often has surplus capacity to import LNG. Europe, by contrast has comparatively less LNG import capacity.

The solution for all is that the UK takes in extra shipments of LNG and then transports it to Europe via undersea pipelines. This means that European gas users can use the UK’s infrastructure to access supplies from the global market.

The UK is physically connected to the continental European market by two interconnector pipelines under the English Channel: the interconnector from Bacton (UK) to Zeebrugge (Belgium), and the Bacton-Balgzand Link (BBL) from Bacton (UK) to Balgzand (Netherlands). The interconnector between the UK and Belgium has 25.5 bcm of bi-directional technical capacity.

Over the past several years the interconnections between the UK and Belgium/Netherlands have usually shipped gas from the UK to Belgium/Netherlands in the summer and to the UK in the winter. By doing so, they take advantage of the UK having additional supply in the summer (when gas use is lower) due to its own production and pipeline imports from Norway, and the UK effectively making use of continental gas storage stocks in the winter, in the absence of such seasonal gas storage in the UK.

So these pipelines balance supply and demand between the UK and EU.

5. Are UK offshore oil and gas companies creating barriers for their employees to move into working in greener energies?

No. Oil and gas companies are actually the same companies innovating and producing renewable energies. It’s in their interest that any barriers are scrapped.

OEUK are also pushing for that to happen and have just signed the North Sea Transition Deal with government – one of its five goals is around skills and improving workers’ ability to work between different energies.

The UK won’t hit net zero by 2050 without our workforce’s skills and experience. The Transition Deal is a roadmap to get us there and could create 40,000 new jobs. We need talents of the workforce to deliver the innovation, skills and infrastructure needed to make the Deal happen.

6. The International Energy Agency has said there should be no investment in new fossil fuel supply projects. Are they wrong?

The International Energy Agency has proposed a ‘no new investment’ scenario, suggesting a global halt to opening new oil and gas resources.

Our Business Outlook report warns that such a policy will make the UK and other countries increasingly reliant on Russia and OPEC member states. It would push their share of the global oil supply market from 37% now to 52% by 2050. This has obvious implications for UK energy security.

7. The Committee for Climate Change claims it takes 28 years from discovering to developing a new oil or gas field. Is that true?

This is correct when looking at the history of the UK industry, but doesn’t tell the true story of where the industry is now.

Many fields which have been developed in more recent years were discovered more than 20 years ago. However, they are being developed now rather than at the time of discovery due to advances in technology, which means they are viable now whereas they weren’t in the past. When they were discovered there were also many investment opportunities than there are now – meaning that other fields were more attractive for development. These are the reasons why it has sometimes taken so long, it is not because this is the amount of time that it takes to develop a new project. The UKCS’ expanse of infrastructure also means that new fields now can be moved forward quicker than they could have been in the past.

Fields which have been discovered more recently have been developed in a much shorter time scale. For example, Apache moved from discovery of the Garten field in 2018 through to first production in 2019. Harbour Energy are currently aiming for a similar turnaround with the Jade South project which was only first drilled last year.

Generally, the time depends on the economics and geology of a field and the corporate strategy. But a few years can be long enough from final investment decision to first gas. Economics can be improved by having other developments nearby that the new production can piggy-back on.

The North Sea Transition Authority, which regulates upstream oil and gas, has powers to sanction obstructive behaviour (e.g. prohibitively high transportation tariffs for third parties).

The Elgin and Franklin fields took 16 years to start up and that was then the largest high pressure high temperature development in the world. But subsequent fields came on stream much faster.

The West Franklin reservoir was discovered in 2003 and developed by a deviated well from the Franklin platform. First production was achieved in March 2007 with the second well coming on stream in September 2008 (4 years).

The IOG Saturn Banks project took 30 months and was in time to capture massive prices in February 2022.

Want to find out more about the offshore energy industry? Read our Business Outlook Report.