David Cameron’s newly-elected Conservative Government’s policies are seeking to secure a period of stability and growth for the UK oil & gas sector, as part of the overall drive to diversify UK energy supply. As the dust begins to settle following the Conservative’s unexpected majority win at the general election in May, the energy policy of the UK is beginning to take shape.
The Government has made a selection of pledges to ensure the continued support of the UK North Sea oil & gas industry. The Infrastructure Act 2015 requires the Government to draw up a strategy to maximize the economic recovery of UK oil. Historically the UK Government has tried to maintain investment in the aging UK North Sea via tax incentives. Recently, largely due to the fall in the price of oil, investment in new projects has fallen and billions of dollars of UK North Sea assets are up for sale. It is widely believed that the Government will have to introduce further bold oil tax changes to inject new life into the battered North Sea. Indeed, in his pre-election budget from March 2015, Chancellor George Osborne revealed a selection of policies to bolster the UK’s North Sea oil industry, including reducing the supplementary tax on oil-related revenues from 30 per cent to 20 per cent. That cut alone was set to benefit oil producers to the tune of £1.3 billion.
UK shale gas continues to receive support from the Government too, despite public opposition to fracking remaining high and relatively little shale gas exploration in the UK to date. The Infrastructure Act 2015 requires the Government to assess how the development of shale gas could fit with UK carbon targets. In its election manifesto the Conservatives said they ‘will continue to support the safe development of shale gas’. On the eve of the general election, David Cameron remarked there would be ‘no dash into [shale gas] technology without the safeguards in place’.
The exact nature of the Government’ energy policy may become clearer when Osborne unveils his post-election budget later in the year. Indications are, however, that support for traditional oil & gas will only be part of a wider energy remit as the Government looks to reduce carbon emissions, which will require investments in alternative energy. Indeed, the Conservatives pledged to continue to support the UK Climate Change Act 2008, which established a framework to develop an economically credible emissions reduction path, and to fight for a global deal on climate change.
Unlike many Conservative Members of Parliament who are sceptical of measures to address climate change and anti-renewable energy, Amber Rudd, the new Secretary of State for Energy and Climate Change, has been described as ‘really green and no nonsense’. Even so, carbon neutral power does not have to be from renewable sources and, interestingly, the Conservatives’ manifesto backed a significant expansion in new nuclear.
The Government has indicated it may implement measures to reduce regulatory and planning risks for investors in new nuclear. However, the Government faces a number of challenges in the nuclear sector. The first is the further postponement of the plans for nuclear development starting at Hinkley Point in Somerset, a project that is backed by Amber Rudd. Two new reactors capable of supplying seven per cent of total UK electricity demand are planned.
However, despite £10 billion of financial guarantees, funding is not in place, and there is an apparent reluctance of investors to commit such funding, which has widespread implications for the companies involved (Areva and EDF) and the future of nuclear energy in the UK.
Onshore wind is set to have its hefty backing removed by the new Government. Controversially, the Conservatives’ election manifesto pledged to end support for onshore wind power, which provides the cheapest source of renewable energy and had previously received significant Government subsidy. It said: ‘We will end any new public subsidy for [onshore] wind and change the law so that local people have the final say on windfarm portfolios.’ The manifesto further noted that onshore windfarms ‘are unable by themselves to provide the firm capacity that a stable energy system requires’. The wind industry has issued pleas for the Conservatives to reconsider their opposition to onshore windfarms.
It is unlikely that renewable energy investors will accept any such changes to tariffs without a fight. Senior officials from trade organisation RenewableUK have already threatened legal action should subsidies be cut. This could mean the Government facing expensive arbitration claims as has happened in markets in Spain, where government cuts to subsidies have allegedly left developers millions of pounds out of pocket.
Even so, the Government has suggested that UK oil & gas will remain one of many viable solutions to the UK’s energy needs. This is encouraging for a sector that is currently going through a difficult time.
By Nina Howell