Energy security meltdown dominates UK leadership contest

Energy policy is front and center in the race to succeed Boris Johnson as UK prime minister and head of the ruling Conservative Party, with North Sea oil and gas producers fearing renewed fiscal instability and critics urging reform to fix deep-seated energy problems.

As European energy prices skyrocket the UK is torn between those in industry and government calling for greater development of domestic energy, including oil and gas, and those demanding more punitive taxation of supposedly unfair energy sector profits and a quicker transition to renewables.

The UK is better off than some in Europe thanks to its North Sea production, which still meets around half its gas needs and the equivalent of 80% of oil demand.

But output has declined sharply in recent years, particularly during the pandemic, and the country has minimal gas storage capacity. An emphasis on wind generation, in combination with reduced coal and nuclear capacity, has made for an uncomfortably tight power supply situation, critics warn.

Close ties with Norway provide reassurance; the northern neighbor has gone from meeting 27% of UK gas demand to 41% in the last decade, partly due to declining supply from the Netherlands. But Norway is looking to send some of its supply through a new pipeline to Central Europe, underlining the worries some have about the UK's energy underpinnings.

Criticism has mounted of both past and present policy, while Scotland's devolved government has joined with opposition parties in London in growing skepticism toward the sector.

Low-tax candidate

On the face of it those arguing for oil and gas investment have little to fear from Liz Truss, the front-runner in the Conservative leadership contest. The poll of Conservative Party members is due to be completed by Sept. 5, with the winner expected to lead the country into the next election, due by early-2025.

Truss is an avowedly low-tax politician and the same is true of Kwasi Kwarteng, current business secretary and her expected pick for chancellor of the exchequer.

He has stressed the need to maximize North Sea production and now looks favorably on shale drilling, having resisted calls for a windfall tax on the sector earlier in the year.

Kwarteng eventually had to give way when an "energy profits levy" was imposed by then-chancellor Rishi Sunak, now Truss' leadership rival, in May.

The measure raised the headline tax rate for North Sea producers from 40% to 65%, and in fairness the industry response has been mixed.

Industry group Offshore Energies UK was sharply critical and has warned of "untold damage" in the event of further windfall taxes, urged by the opposition Labour Party.

Shell has also warned that an unstable tax regime jeopardizes both oil and gas investments and nascent transition projects such as carbon capture and storage that could take years to turn a profit.

Others have been more accepting: TotalEnergies CEO Patrick Pouyanne has said the company can live with what he calls the UK's "active" tax rates, noting upstream taxes have historically been lowered as well as raised, dependent on oil prices; the French major is one of the largest North Sea gas producers.

BP has also said it will continue to work on making the UK an energy transition showcase, anticipating it will invest GBP18 billion ($21 billion) in the country between now and 2030.

Policy ambiguity

Privately, however, critics in the industry argue the government has failed to provide either the fiscal or symbolic support needed to ensure continued investment.

Johnson's wavering over the need for oil and gas during COP26 climate talks in Glasgow in 2021 is seen as emblematic, contributing to an atmosphere in which some of the biggest energy companies on the London Stock Exchange could end up relocating elsewhere, critics say.

Uppermost among the concerns is a failure to ensure gas storage since the closure of the Rough storage site beneath the North Sea in 2017. The site is due to be reopened by utility Centrica as soon as this winter, but its capacity will be ramped up only gradually.

Another concern is the failure to relaunch regular offshore licensing rounds after the process was put on hold in 2020 ahead of the COP26 climate talks. A revamped system is promised, but it is now over three years since the last round was launched.

The picture is not clear-cut. UK oil and gas production has shown some signs of stabilizing after oil output plunged 17% in 2021. And Norway's Equinor has published plans for the 350 million barrel Rosebank oil project in the UK West of Shetland area, with a number of other projects moving toward approval.

On the demand side, there are some signs the pain for consumers could start to ease in the next couple of years, although this will be cold comfort in the meantime.

Analysts at S&P Global Commodity Insights argued recently that extreme European gas prices are "increasingly unsustainable" and wholesale prices should start to ease due to faster-than-expected demand destruction in both Europe and Asia — a rival for LNG deliveries — and increases in stored gas.

The UK situation should also be eased by new gas projects recently or soon-to-be started up, notably Tolmount and Seagull, as well as increases in wind capacity and greater coal consumption, they argued.

None of which assuages the concern of critics in the industry, increasingly anxious about a potential change of government at the next election.

"The government has put us in this peril by not supporting the North Sea properly in terms of gas," one energy industry banker told S&P Global Commodity Insights, arguing Brexit had "completely distracted" the "political class."

"Anyone making a long-term investment decision doesn't like instability," he underlined.