Powering UK North Sea oil and gas platforms with renewable electricity from offshore wind turbines has long been an ambition of policymakers. Recently announced changes to the latest “windfall tax” on upstream operators could help to make this vision a reality.
Background
According to Offshore Energies UK, in 2018, the equivalent of 18.3 million tonnes of CO2 were emitted from upstream oil and gas operations, representing 4% of the UK’s total emissions. Of these, 70% of emissions from offshore assets were associated with power or heat generation from gas-fired turbines, engines and heaters, with the remaining emissions from flares and vents[1]. The North Sea Transition Deal of March 2021, an initiative between the UK Government and the UK’s oil and gas producers to help the industry reach net zero, set a target of reducing greenhouse gas emissions arising from upstream exploration and production activities on the UKCS and onshore processing, achieving 50% by 2030, against the 2018 baseline[2].
Platform electrification is seen by the North Sea Transition Authority (NSTA) as key to meeting the North Sea Transition Deal targets. The NSTA also views cutting greenhouse gas emissions from oil and gas production as “critical to preserving the industry’s social licence to operate” whilst potentially extending the operating life of existing assets and generating cost efficiencies when developing new hydrocarbon projects.
The electrification of platforms is also a commercial opportunity for the renewables sector and, in particular, for those seeking to develop floating offshore wind – since many oil and gas platforms are in deeper waters unsuitable for fixed-bottom wind turbines. Indeed, as stated by the NSTA, offshore platform electrification “may unlock the faster growth of renewables, expansion of offshore transmission infrastructure and establishment of floating wind power technologies in the UK”. As well as reducing emissions, with, according to Wood Mackenzie, around 5% of offshore wellhead production globally used as fuel to power platforms[3], platform electrification will allow gas usage to be optimised (key during an energy crisis) or, potentially, used elsewhere (for example, in the production of hydrogen).
The Scottish Government has specifically targeted the decarbonisation of offshore platforms through the Innovation & Targeted Oil & Gas leasing round (INTOG)[4]. The deadline for INTOG bids was 18 November 2022 and the results are expected in February 2023, with a number of developers having announced their intention to participate. INTOG will allow developers to apply for licences to build offshore windfarms dedicated to providing electricity to oil and gas platforms in order to decarbonise the sector. Some developers will also look to oversize these projects so that they can sell excess power onshore, but INTOG rules limit the overall size of the project to five times the aggregate platform demand to balance this.
However, the goal of platform electrification will require significant investment. Xodus (a consultancy firm owned by Subsea 7) has reportedly estimated that it will require £3.5-5 billion in capital expenditure, depending on the number of assets to be electrified. According to Upstream Online, the other issue the industry could face is “bottlenecks in obtaining grid connections (with regards to connections to onshore transmission systems) and windfarm access if many players want access at the same time”.
Energy Profits Levy
The Energy Profits Levy (the Levy), originally a 25% temporary levy on ring-fenced profits of oil and gas companies which included a new 80% investment allowance, was introduced by the Energy (Oil and Gas) Profits Levy Act 2022 and was due to expire on 31 December 2025.
In imposing the Levy, the UK Government had stated its intention was to make oil and gas companies “pay their fair share” whilst they benefit from extraordinary oil and gas prices, and “to see the oil and gas sector reinvest its profits to support the economy, jobs and the UK’s energy security”.
The Levy was increased in November 2022 to 35% and will now apply until 31 March 2028. The investment allowance was also reduced to 29%, except for investment relating to expenditure on upstream decarbonisation (e.g. modifying existing installations to use power from offshore windfarms, installing bespoke wind turbines to power the installation or running electricity cables to the installation from shore)[5]. At the same time, the Government announced an Electricity Generation Levy. This will be a new, temporary 45% levy on the extraordinary profits of electricity generators, being electricity sold above £75MWh[6], replacing the Cost Plus Revenue Limit announced in October.
This additional tax is in addition to the Ring Fence Corporation Tax (30%) and the Supplementary Charge (10%) currently payable by oil and gas companies, bringing the headline rate of tax in the UK to 75%. According to the UK Government, this rate of tax is comparable with other North Sea tax regimes, including Norway.
Now, whilst the UK Government appears to be taking away from oil and gas companies with the one hand, it appears to be trying to give (or at least encourage investment) with the other, by maintaining the 80% investment allowance on expenditure relating to upstream decarbonisation. This will mean that an oil and gas company spending £100 on upstream decarbonisation projects, such as platform electrification, will be able to deduct £109.25 when calculating its levy profits[7].
Summary
The UK Government states that the “changes to the Energy Profits Levy are not expected to have a significant macroeconomic impact on the level of business investment” as, while affected companies will pay more tax, they may also benefit from the investment allowance. However, there is a danger that the Levy will mean that oil and gas companies will have less capital to deploy in investing in new technologies, such as platform electrification, in the UK, making the UK less competitive.
[1] https://oeuk.org.uk/wp-content/uploads/2020/09/OGUK-Production-Emissions-Targets-Report-2020-1.pdf
[2] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/972520/north-sea-transition-deal_A_FINAL.pdf
[3] https://www.woodmac.com/news/feature/why-power-oil-and-gas-platforms-with-renewables/
[4] https://www.crownestatescotland.com/resources/documents/intog-public-summary
[5] The changes related to decarbonisation expenditure will be legislated for in the Spring Finance Bill 2023.
[6] The levy relating to electricity generators will apply from 1 January 2023 and will be legislated for in in the next Finance Bill and apply until 2028. See further https://www.gov.uk/government/publications/electricity-generator-levy-technical-note.
[7] https://www.gov.uk/government/publications/autumn-statement-2022-energy-taxes-factsheet/energy-taxes-factsheet
