North Sea oil and gas: tough trade-offs facing UK policymakers

One of the most hotly contested issues in the UK since the conflict involving Iran began in February is whether there should be more drilling in the North Sea.

The debate has elicited more heat than light.

Frontier Economics has produced two independent briefing notes. The first examined whether increasing North Sea oil and gas production would lower UK energy prices, or improve energy security. 

The latest — published today — sets out the potential impact of higher drilling in terms of growth, jobs, tax revenues and climate change.

This blog post provides an overview of the key judgements which really matter in this debate. 

How much North Sea oil and gas is left?

North Sea oil and gas hit its peak in 1999, but reserves are by no means exhausted. UK offshore oil and gas production peaked at around 4.5m barrels of oil equivalent (boe) a day in 1999, and was about 1.09m boe a day in 2024. The UK still produces significant volumes of oil and gas, although far less than at its peak. This is still enough to meet almost half of the UK’s oil and gas needs.

Figuring out the size of remaining reserves that are extractable is not an exact science. The latest estimates from the North Sea Transition Authority suggest proven and probable reserves of around 2.9bn barrels of oil equivalent at the end of 2024, with a further 6.2bn boe of contingent resources. Those contingent resources are less certain and depend on future investment and policy.

How much of it is realistically extractable?

For oil and gas companies, further extraction has to be a profitable enterprise.

The level of tax and oil and gas prices - as well as the cost of extraction - will all weigh on their calculus.

There is also the thorny issue of whether new drilling licences would be required and, if so, whether they would be compatible with the UK’s Net Zero legislation (enacted by the previous Government). 

Would higher production boost jobs and lower prices?

Increasing North Sea production and reducing imports would bring in more tax revenue. 

It would not necessarily support more jobs overall, as some of the workers involved might otherwise move into the growing renewables and low-carbon industries, particularly in Scotland. On the other hand, a slower decline could ease the transition for affected workers and regions.

More domestic production won’t reduce the price people in the UK pay for oil, because oil prices are set globally and the UK is what is termed ‘a price taker’. 

More drilling is also likely to have little effect on UK gas prices. Prices are set in a wider European market, and the UK is too small a player even at higher volumes to affect them materially.

What about the impact on carbon emissions?

Whether lowering imports reduces emissions linked to UK energy supply depends mainly on what higher domestic production replaces.

If higher UK gas production displaced imported liquefied natural gas, emissions linked to UK gas supply could fall, because liquid natural gas is three times more emissions-intensive than UK gas. But if it displaced pipeline imports, such as gas from Norway, the emissions case would be much weaker and could even go the other way.

For oil, the argument is more complicated. Crude is globally traded, and much UK crude output is exported, so the link between domestic oil production and the emissions associated with UK consumption is less direct.

And on the UK’s resilience?

Reducing imports could make the UK somewhat less exposed to international supply shocks, particularly in gas, but the effect should not be overstated. Higher production would take time to come on stream, so it would not shield the UK from near-term shocks.

A shift in Government policy in favour of oil and gas could be seen as a pragmatic response to a more uncertain geopolitical environment. On the other hand, it could raise questions about the Government’s commitment to boosting renewables making that goal harder to achieve.

But if that is right, the debate needs to move on. If more production will not materially cut prices, then the serious questions are the ones about growth, jobs, fiscal revenues, emissions and the pace of transition.