The UK oil and gas industry’s history of innovation will be ‘critical’ to efforts to build a low carbon economy, a report claims, but fossil fuels will only play a back-up role as a source of electricity as more wind and solar comes online.
The Energy Transition Outlook 2018 report, published by industry body Oil & Gas UK, considers the issues and opportunities for the offshore oil and gas sector in the changing energy landscape.
Drawing on existing research carried out by its member organisations and independent consultants and agencies, the 20-page report provides an overview of the key political, economic, technological and social drivers influencing the energy mix. It also highlights the importance of industry’s drive to maximise production from the UK Continental Shelf to provide security of supply while moving towards achieving climate change ambitions. It concluded by setting out a policy road map that utilises the UK’s world leading expertise in offshore technology to deliver the next phase of the energy transition.
“Renewable and storage technologies have fallen in cost significantly. These trends are likely to continue as a result of the advances being made in reducing the cost of generation from both solar and wind technologies,” the report said. “These cost reductions are, to some extent, driven by the increased scale of investment. The largest wind turbines being installed are now 8 MW compared to 2-3 MW a decade ago, with the prospect of a 12-MW turbine in the next few years. Likewise, the average size of a solar farm is now 120 MW.
“These technological developments raise the prospect of a largely renewable electricity system that only requires minimal back-up generation from fossil fuels,” the report said. “Further advances in smart metering, digital control and, to some extent the internet-based service economy could also give more scope for automated response for ensuring supply and demand are in balance.
“How quickly this transformation takes place is, as yet, unclear. However, at current levels of electricity demand, it is a reasonable scenario that gas will only play a residual role in electricity generation compared to its share of around 40% today. This could reduce gas demand by up to one-third.
“In terms of investment, in addition to the social attitudes described above, uncertainties around Energy Transition also affect access to finance. Although there is not a strong perception that investments in the oil and gas sector risk being stranded assets, the energy transition has contributed to a shortening of timeframes and more caution when sensitivity-testing potential investments.
Investment in renewable and alternative energies is also growing and provides a potentially attractive alternative to oil and gas. With increasing scale, such investments are, like oil and gas, highly capital-intensive. Although the quasi-regulated nature of projects may, at first glance, appear less attractive to some investors, this is not necessarily the case. Support mechanisms for low-carbon energy have tended to remove the market price risk for investors while leaving other risks associated with research and development, project management, capital structuring and marketing which are not far from the core competences of oil and gas companies and investors.
“In addition, it has been possible to structure finance for renewable projects so that different types of investors can each have the combination of risk and return that they are used to. A common pattern is for the initial developers to refinance assets once they reach the operational stage where the returns are then more suitable for other types of investor. As a consequence of these changing circumstances among consumers, potential employees and investors, many oil and gas companies have themselves begun diversification efforts. Some larger international companies are increasingly becoming end-to-end providers building on their powerful brands and direct relationships with customers. Many have strategic objectives to accord with the objectives of the Paris Agreement in response to the wishes of investors and consumers and are becoming an important source of finance for investment and R&D in alternative energy.
Contractor and infrastructure businesses in the oil and gas sector are already part of the current or potential supply chain for alternative energy providers. To varying degrees, this section of our membership is already part of the energy transition.”
Oil & Gas UK energy policy manager and author of the report said “This report demonstrates industry’s key role in the energy transition and reinforces that Vision 2035, industry’s ambition to add a generation of production to the UK North Sea and double the export opportunity for the supply chain, is critical in achieving the balance between delivering our climate change targets and ensuring security of energy supply.
“As the report shows, despite the rapid advances in lower carbon technologies there is ongoing demand for oil and gas in several key areas including transport and domestic heating. A total of 80% of the UK’s 27M homes are heated by gas, demonstrating the long-term importance of our industry in ensuring security of energy supply.
“A lower carbon future will still require large-scale energy distribution networks, undersea engineering and the mass movement and storage of gases and liquids. The role for carbon capture, use and storage (CCUS) and the development of hydrogen on an industrial scale will also feature in the future as these will be essential elements of any lower carbon environment.
“Clear evidence for this was in the action plan recently published by the government to deliver the UK’s first carbon capture usage and storage projects by the mid-2020s. The industry’s expertise and use of pioneering technology means we are ready to play a central role in delivering cost effective, competently engineered solutions for CCUS.”
Responding to the report, Committee on Climate Change chief executive Chris Stark said, “Investors are already demanding that the sector pivots – and quickly. For places like Aberdeen it is essential.”
The Energy Transition Outlook 2018 is available here.