More North Sea production: weighing up the real trade-offs

Britain’s energy system remains exposed to global fossil fuel markets, with oil and gas still accounting for around three-quarters of primary energy consumption.

Recent geopolitical shocks have intensified concerns over prices and security of supply, prompting renewed calls to increase North Sea production.

If current policies were changed to support higher production, through licensing, regulation or taxation, there is a broad set of impacts to consider.

Today, we publish the second of our two-part report series, What are the broader impacts of a more supportive North Sea oil and gas environment?, focussing on the implications for growth, tax revenues and emissions from new North Sea production.

This follows from our first report, which examines the impact on price and resilience.

Together, they form our independent analysis of this complex issue, at a time when world events highlight Britain’s fragile exposure to global energy markets.

A delicate balance of trade-offs

Across these two briefings, we assess both the direct energy sector impacts and the wider economic, fiscal and climate implications.

On prices, the answer remains that increasing oil and gas production in the UK would have limited impact. Oil and gas prices are set in international markets, so even a relatively optimistic increase in UK production would do little to reduce costs for consumers. Any material increase would also take time to come through, limiting its relevance for near-term shocks.

On resilience, increased domestic production could reduce import dependence to some extent, particularly for gas. But the UK would continue to rely on imports and interconnected European markets. For oil, the case is weaker: consumers depend on refined products, and most UK crude is exported, so higher production does not directly translate into greater resilience.

That is not the end of the story. A more supportive regime could still have wider impacts:

• On growth and jobs, it would not automatically increase economic growth, but it could help if it supports activity in upstream sectors and supply chains, and that helps to smooth the transition of skills to low-carbon industries.
• On tax revenues, higher production could increase receipts, depending on the design of the fiscal regime and its impact on investment.
• On emissions, domestic gas production has lower embedded emissions than LNG, so the impact depends on what imports are displaced; globally, there may be some emissions benefits if UK production replaces higher-emissions sources.
• On climate leadership, there is a clear trade-off between the economic and energy system benefits of additional production and the UK’s position as an international climate leader.

These findings suggest that the case for more North Sea production does not rest on lower prices or a step change in energy security. Instead, it hinges on a broader and more complex set of trade-offs, between maintaining relevant skills for clean energy sectors and making the transition less disruptive, fiscal returns, emissions and the role the UK chooses to play in global climate leadership.

Click here to read the second part of our series, What are the broader impacts of a more supportive North Sea oil and gas environment?

Part one is available here.

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