No country for oil men (and women)

Among countries signed up to the Paris Agreement, the EU27 and UK are among the most committed. Tackling climate change is at the heart of policy on future energy supply and demand, with the express intention to push to a low-carbon energy system and deliver net zero by 2050.

The energy transition, though, is proceeding well behind the Paris Agreement’s goal to limit the rise in temperature to 2 °C or lower. Wood Mackenzie’s base case projects a 2.5 °C pathway. But the 3 °C pathway of our Delayed Energy Transition Scenario (DETS) is increasingly plausible, particularly in light of the Trump administration’s early pronouncements.

Today, with energy security and affordability at the top of all governments’ agendas, politicians the world over are being forced into pragmatism. There’s a creeping acceptance that fossil fuels will be around for a long while yet.

Malcolm Forbes Cable, VP Consulting, and I considered some of the implications of Europe’s push to low carbon and the risks posed to energy security. We argue that the UK’s energy policy not only wastes the remaining growth potential in the UK North Sea that the domestic economy so desperately needs but that the policy is moving in a direction other mature oil- and gas-producing nations should be wary of following.

First, Europe is making great progress decarbonising the power sector

Renewables’ share of electricity supply has risen from 20% in 2010 to 52% in 2025 and will reach 67% by 2030 in our forecasts. Success, though, comes at a cost. With coal and nuclear plant closures, the subsequent loss of fuel diversity (and base load power) and an insufficient strengthening of interconnection leave markets vulnerable at times of low renewables output.

Power markets depend heavily on gas-fired plants for flexibility and to balance variable renewables. At times of low renewable availability, power prices will be tied to highly volatile gas prices until alternative sources of flexibility, including long-duration energy storage, emerge at scale in the coming decade and beyond.

Second, oil and gas demand are not falling at the pace European policymakers might have envisaged

Cost is one of multiple reasons. Higher electric vehicle take-up is critical to disrupting light transport and reducing oil consumption. Although sales of new ICE vehicles are banned from around 2035 in the EU and UK, EVs are still more expensive in most markets, with sales slowing in the wake of the cost-of-living crisis. Automakers have eased back on investment in electric powertrains.

Europe currently imports two-thirds of the 14 million b/d of oil it consumes. While we forecast demand falls to around 10 million b/d by 2040 in our base case, the share of oil imports will actually increase as domestic production declines. It is higher still in our DETS.

Outside the power sector, gas demand looks set to be sticky in the residential, commercial and industrial sectors. Demand fell by 20% on soaring prices when Russian pipeline imports were stopped in 2022. But, as with oil, the anticipated disruption from low-carbon technologies is slower than hoped. Heat pump sales, for example, have lost momentum while, similarly, the ramp-up of low-carbon hydrogen will fall short of near-term targets.

Our base case view is that European gas demand declines at a modest 1.5% a year from 460 bcm today to 370 bcm in 2040. Declining domestic gas production means that imports will have to meet an average 60% of demand through the period.

Third, European policymakers are beginning to recognise that oil and gas may not be wanted, but they are needed

The UK, however, has a harder line. Its government’s energy policy, guided by net zero targets, is effectively throttling investment in upstream. This has important implications for both the UK and Europe, reducing regional energy security by increasing their reliance on imports.

The UK North Sea is an ultra-mature province that requires continuous investment to eke out its remaining molecules and maximise the life of existing infrastructure. However, on the current trajectory, billions of barrels that could play an important role in the European energy supply will be left in the ground.

The UK upstream investment environment has never been so uncertain. Several factors – the introduction of the Energy Profits Levy, the judgement this week on scope 3 emissions for new projects, constraints on new exploration and the consultation underway on future exploration licensing – have together led companies to rein in spend and, in several cases, exit. Exploration drilling has sunk to its lowest level since 1964. Upstream environmental statements, an indicator of coming project FIDs, have dwindled despite a pipeline of projects and relatively high oil and gas prices.  

The UK is a net importer of oil and gas and will remain so even under a net zero scenario. Ignoring this and sacrificing the domestic industry only to replace it with higher carbon imports is not economically or environmentally rational.

De-investment in the North Sea may be well-intentioned as part of the net zero strategy but it comes with consequences, some unintended. Less domestic production will reduce territorial emissions. Yet, with demand resilient, the UK will see higher overall emissions from oil and gas imports, given their higher carbon intensity compared with domestically produced barrels.

Further, reduced spend in the North Sea will expedite the decline in production. This will lead to the earlier abandonment of producing assets and infrastructure, closing off forever the opportunity to tie in future fields. In turn, the loss of the upstream supply chain could delay and significantly add to the cost of developing low-carbon technologies offshore, notably carbon capture and storage.

This represents a significant risk to an upstream service sector that employs up to 200,000 people. Jobs and skills could vanish before alternatives appear in the developing low-carbon ecosystem. A reduction in upstream investment could put US$18.5 billion of tax receipts at risk between 2030 and 2045. Moreover, the government will have to pay its substantial share of decommissioning costs.

The UK government has said its number one priority is growth and the prime minister has told his cabinet to “hard-wire growth into all their decisions”. To date, the government has done the antithesis of this for the UK’s oil and gas sector, by imposing hefty tax burdens and jeopardising development projects through regulatory paralysis on the back of the scope 3 judicial review.

A true growth mindset would seize the economic opportunity presented by the upstream sector and unlock billions of pounds of investments, thousands of jobs, billions of tax receipts, reduce net energy imports and emissions, and nourish the UK’s world-class supply chain that is integral to delivering the energy transition the country is so determined to deliver. Can the UK really afford not to seize it?

Thanks to: Graham Kellas and James Reid (Upstream Fiscal), Peter Osbaldstone (P&R), Stephen O’Rourke (Global Gas) and Prakash Sharma (Energy Transition)

Make sure you get The Edge

Every week in The Edge, Simon Flowers curates unique insight into the hottest topics in the energy and natural resources world.

Sign up today using the form at the top of the page to get The Edge delivered to your inbox.