The future of the oil and gas industry Contents

6Climate change challenge

89.As we have outlined in previous chapters, the adaption to a low carbon economy is one of the main challenges facing the oil and gas sector, as the sector, and its products, are a significant cause of greenhouse gases. According to Oil and Gas UK’s Environmental Report the upstream production of oil and gas produced 15.7 million tonnes of CO2 equivalents (MtCO2e) in 2017 which accounted for 3% of the UK’s total emissions.161 This figure does not include emissions from the use of oil and gas when they are burned for energy, only emissions from the extraction process. The Government’s figures for CO2 emissions by fuel type show total emissions from oil and gas in 2017 were 333.9 MtCO2e, accounting for more than 91% of the UK’s total emissions of 366.9 MtCO2e.162

90.Both the UK and Scottish Governments are committed to reducing greenhouse gas emissions. The UK’s Climate Change Act 2008 established a legal framework which set a target to reduce emissions by at least 80% of 1990 levels by 2050 and introduced five-yearly ‘carbon budgets’ which place limits on emissions over a set time periods which act as stepping stones towards the 2050 targets. The Scottish Government has introduced a Climate Change Bill in the Scottish Parliament which would set an emission reduction target of 90% by 2050, which would mean net-zero emissions of carbon dioxide.163

91.The UK is currently in its third carbon budget period (2018 to 2022), which limits emissions to 2,544 MtCO2e.164 The UK is currently on track to outperform this target, but it is not currently on track to meet the fourth carbon budget target (2023–2027). To help deliver its ambitions the Government launched its Clean Growth Strategy in 2017, which outlined their commitment to cutting carbon emissions to combat climate change whilst driving economic growth. In the Industrial Strategy 2017, the UK Government stated their commitment to “moving towards clean growth” in energy, while also acknowledging that “oil and gas remains one of the most productive sectors of the UK economy”.

Emissions from oil and gas production

92.Oil and gas production on the UKSC increased by almost 13% between 2014 - 17 with CO2 emissions rising by 12.5%, from 13.1 million tonnes to 14.2 tonnes, in the same period. The figure below shows the trend in emissions related to upstream production.165

The Oil and Gas Authority have argued that the MER strategy has led to the industry reducing the carbon footprint of oil and gas extraction by driving efficiency improvements.166

93.As offshore rigs are not connected to the national grid they have to produce their own power to run power compression equipment to transport oil and gas to shore and to provide electricity for those working on the rig. Of these sources, the compressors consume most energy, and are responsible for 72% of emissions from rigs. Colette Cohen, CEO, Oil and Gas Technology Centre told us that the industry has started trials for using tidal energy to provide some of this power as part of its efforts to reduce its carbon footprint.167

94.The sector deal is seeking to help the industry reduce its own carbon footprint through the centre of excellence on transformational technologies, one of the outcomes is to “deliver lower carbon operations”.168 In their evidence, the sector deal team said that the £50 million share investment from industry and Government would be “an additional part” of the OGTC and would seek to meet industry demand for low carbon technologies. They argued that the industries demand for low carbon technologies was “beyond the current remit of the OGTC” and additional investment is required to respond to this need.169 In her evidence Emily Bourne, Director for Energy Development and Resilience, BEIS said that the sector’s role in energy transition might be a part of the sector deal where there were “iterations to be discussed” suggesting that this might be an area where the Government would be seeking additional commitment from industry.170

95.Adaption to a low carbon economy is one of the main challenges facing the oil and gas sector. We welcome the efforts that the sector is making to reduce the carbon footprint of the extraction process and the intention of the centre on transformational technology to develop this area. We recommend that before the Government finalises the sector deal it should ensure that the sector brings forward a more detailed proposal on how this will be achieved and how the success of the centre on transformational technology in developing low carbon technologies will be measured.

Carbon Capture, Usage and Storage

96.Carbon capture, usage and storage technology (CCUS) can capture up to 90% of CO2 emissions produced from the use of fossil fuels in electricity generation and industrial processes, thereby preventing the carbon dioxide from entering the atmosphere.171 The Government’s Clean Growth Strategy says that there is a “broad international consensus”172 that CCUS has a vital role to play in reducing emissions by decarbonising industrial processes and energy sources. This was also reflected in evidence we heard in our inquiry, with Professor Corienne Le Quere, Member of the Committee on Climate Change, telling us that for “the cost-effective path” to meet emission targets “we need the technology of carbon capture and storage”:

This is the cost-effective path, and without the development of CCS, the pathway for oil and gas would need to decarbonise much faster and the cost would be a lot higher.173

This technology could be particularly useful to the oil and gas sector. In her forward to the Government’s CCUS action plan, the Minister said that:

We know that flexible gas generation still has a role to play in generation. As we transition to the inexpensive but intermittent world of renewables; CCUS technologies can help to take the carbon out of this valuable service.174

The UK Government is investing £45 million in CCUS innovation programmes between 2017 and 2021, with other funding from the Industrial Strategy also being potentially available to CCUS. In its supplementary evidence the Government said it was also at the “forefront of international collaboration on CCUS” citing its co-leadership of the “Mission Innovation Carbon Capture Challenge” to reduce the cost of innovative new carbon capture technologies.”175

97.CCUS is one of the five supporting focus areas of the sector deal. The deal proposal says that it aims to “provide input into the Government’s CCUS programme” and will provide “project management secondees to work with the Government and partners from other sectors to take forward the CCUS strategy.”176 Some experts in CCUS who gave evidence to this inquiry felt that the sector deal’s proposal in this area did not go far enough. Professor Haszeldine, Director of Scottish Carbon Capture and Storage and Professor of Carbon Capture and Storage at University of Edinburgh, described the proposals as “remarkably naive and unambitious”,177 and added that they amounted to “basically three lines of associating the oil industry with other developers that are going to take that [work] forward.”178

98.Carbon Capture Usage and Storage (CCUS) technology has an essential role to play in enabling continued use of gas as a power source in a way that is consistent with the UK’s climate change goals. We believe that the sector deal could be more ambitious in this area and recommend that before the sector deal is finalised the sector should bring forward a more detailed proposal on how the three centres of excellence could support the development of CCUS technology and how their success will be measured.

99.We were told by witnesses that the main barrier to the deployment of CCUS was commercial viability of developments, rather than challenges with the viability of the technology itself. Jenny Stanning, External Affairs Manager, Oil and Gas UK, told us:

We know that carbon capture, use and storage is technically viable. There are small-scale examples of that at the Acorn facility in the north-east of Scotland and around the UK. The challenge now is to make it commercially viable.179

100.Concerns about the cost effectiveness of investment in CCUS were cited as one reason why previous efforts by the Government to invest in the technology failed. In 2012, the Coalition Government launched a CCUS programme, supported by £1 billion of capital funding, with the aim of enabling developers to invest in CCUS in the early 2020s. However, in the 2015 Spending Review the Government announced that capital funding was no longer available, leading the main bidders to cancel their projects. The Government spent £100m on the cancelled competition.180 According to an NAO review the Treasury withdrew the funding because it considered that:

the costs to consumers through contracts for difference (the consumer-funded mechanism for supporting projects once up-and-running) would be high and regressive;
the competition was aiming to deliver CCS before it was cost-efficient to do so;
the competition would not guarantee the further investment required to expand CCS; and
there were better uses for the £1 billion.

More recently the issue of commercial viability was also raised in the Government’s Clean Growth Strategy, which “re-affirm[ed] [the Government’s] commitment to deploying CCUS in the UK subject to cost reduction.”181

101.To address this problem the Government established the CCUS Cost Challenge Taskforce in January 2018 to propose a strategic plan to Government for supporting the development of CCUS in the UK, to meet the Government’s stated ambition of “having the option to deploy CCUS at scale during the 2030s, subject to costs coming down sufficiently.” The Taskforce reported in July 2018 and recommended the following steps to deliver cost effective CCUS:

Unlock early investment: Industry and Government working together to create a stable, long term, supportive policy environment to unlock development of at least two CCUS clusters to be operational from the mid-2020s, anchored by “catalyst” projects to enable learning by doing, to pull through innovation and reduce the cost of capital, meaning future projects cost less.
Develop a new business model for CO2 transport and storage infrastructure: Separating the business model for CO2 transport and storage (“T&S”) infrastructure from the business models for CO2 capture projects can reduce overall commercial risks and costs, by reaching cost-effective public-private risk sharing arrangements. Developing viable business models, as well as sharing of T&S infrastructure, and the strategic re-use of existing oil and gas assets are considered important steps that can enable potential cost reduction in CCUS.
Create CCUS clusters: The development of clusters (i.e. regional groupings where several CCUS facilities share infrastructure and knowledge) and associated Clean Growth Regeneration (“CGR”) Zones can help drive lower cost CCUS, unlock value for local economies, and foster continuous technical innovation. It also recommends that development funding is made available to support these clusters, with two being operational by the mid-2020s.

102.The UK Government has set out its ambition to have a CCUS pilot facilities running by mid-2020s followed by full scale operations by the 2030s. The Government’s CCUS action plan stressed the importance of its current review of CCUS Delivery and Investment Frameworks in delivering this, which will seek to identify investable commercial models and establish market-based frameworks for bringing forward CCUS. The Government has also mentioned the potential for CCUS to receive support from the £315m Industrial Energy Transformation Fund and the £170m Industrial Strategy Challenge Fund for the Industrial Clusters mission.182 The Government has also committed £45 million into CCUS innovation programmes between 2017 and 2025, including:

£20 million Carbon Capture and Use (CCU) Demonstration Programme to fund design and construction of CCU demonstration plants in the UK;
£15 million CCUS Call for innovation to fund innovative projects that lead to cost reduction or accelerated deployment; and
£6.5 million of UK funding to the second international call of the ACT research programme.

103.In November 2018 the Government also announced an immediate investment of £175,000 in the Acorn Carbon Capture project at the St. Fergus gas terminal, to support feasibility work of its CCUS project. The plant also received funding from the Scottish Government and European Commission.183 This funding will support “detailed engineering feasibility, looking specifically at how to transport CO2 from where it is captured to where it will need to be used or stored.”184

104.The St Fergus and Grangemouth sites form one of the potential clusters of CCUS identified by the CCUS Cost Challenge Taskforce. The Report argues that as Grangemouth was natural candidate for carbon capture as it is the centre of the chemicals manufacturing and refinery industry and has the largest concentration of CO2 emissions in Scotland. It continued that St Fergus is a natural hub for CO2 transport to offshore storage, as there is potential to re-use existing offshore pipelines and suitable CO2 storage sites in the Central North Sea. St Fergus is the landing point for around 35% of all the natural gas used in the UK, making it a potential location for future hydrogen production with CCUS. St Fergus also provides the potential for ship import or export of CO2 from the UK or Europe, via Peterhead Port, and the re-use of the natural gas pipelines to bring CO2 up from Central Scotland.

105.We welcome the Government’s ambition to support the development of CCUS clusters, which should drive up value for local economies and encourage ongoing technological innovation. We ask the Government to set out in response to this Report; what support from the announced Industrial Strategy funds will be made available for the development of CCUS cluster, how the bid for this funding will be evaluated and how it has incorporated lessons from previous failed CCUS competitions into this process.

106.One of the main challenges to the commercial viability of carbon capture is its cost compared to both other forms of energy generation and the cost of emitting carbon, which is determined by the UK’s carbon floor price.185 According to the Carbon Capture and Storage Association, “recent studies conclude that the first CCS projects in the power sector are likely to cost between €60 – 90 per tonne of carbon dioxide abated although these costs are expected to decline significantly reaching €35 – 50 in the early 2020s primarily as a result of cost reductions for carbon dioxide capture.”186 One way to help reduce the cost associated with CCUS is by selling the carbon for re-use in other industrial processes.

107.One potential use of captured CO₂ within the sector itself is in Enhanced Oil Recovery (EOR), where CO₂, or another substance, is pumped into an oil reservoir to displace oil and increase the amount that can be extracted.187 The Carbon Capture Association argued that using captured CO2 for EOR could potentially boost the economic return for Scotland’s oil and gas reserves, but note that at present this form of offshore EOR is not seen as economically viable for the UK. The Scottish Carbon Capture and Storage (SCCS) argued that investment in EOR would both help to achieve the maximise economic recovery strategy and “kick-start the development of CO2 storage in the North Sea basin”. However, SCCS said that they were concerned that the OGA may be moving away from supporting EOR, saying that “email correspondence between SCCS staff and the OGA suggests that the OGA takes the opposite view, and may not now produce a CO₂ EOR strategy at all.”188

108.Hedvig Ljungerud, Director of Policy, OGA said that they saw EOR “as potentially playing quite a big role” and that the OGA had an informal target of using the method to sanction the production of 250 million barrel of oil equivalent,189 but that the OGA would not favour any particular methods of EOR noting that “if anything, polymer might be a front runner in a lot of projects rather than CO2” and that the drive had to come from investors.190 There is also debate about the environmental benefits of EOR, with some groups arguing that because the combustion of the additional oil extracted would itself release CO₂, this limits its effectiveness as a way of removing carbon from the atmosphere.191

109.There are other uses for captured carbon other than oil extraction. A study commissioned by BEIS identified the most promising UK applications as being: synthetic production of methanol and methane; production of polymers, such as polyurethane; production and curing of concrete; carbonation technologies, and in horticulture. However, this study estimated that by 2030 demand from these selected CCU (carbon capture and usage) technologies would be less than 1% of the UK’s carbon emissions. The Government noted that both this Report, and one by the Royal Society, highlight that it is hard to quantify the potential for CCU as most CCU technologies are at an early stage of R&D. However, the Government said that there were already some UK companies innovating in these areas, including one in Aberdeen and that its £20 million CCU Demonstration programme would supporting the construction of CCU technologies at industrial sites across the UK.192

110.Creating a market for using stored CO₂ can make a contribution to the commercial deployment of CCUS by creating an income stream from some of the captured gas and we welcome the support that the Government has announced for businesses innovating in this area. As there is likely to be limited demand to use captured CO₂ the Government must ensure that the lessons learned from projects supported by the CCU Demonstration Fund are shared with facilities focused on the long-term storage of captured CO₂.

Infrastructure re-use

111.One argument for the deployment of CCUS technology in Scotland is the potential to re-use oil and gas infrastructure for CCUS. This is particularly useful for geological storage where captured CO2 is pumped back into empty oil and gas wells. SCCS argue that the UK’s depleted oil and gas fields provide an ideal environment to store CO₂. According to the UK CCS Storage Appraisal the UK has offshore geological storage potential for over 78 gigatonnes of CO₂193 Professor Haszeldine, emphasised the potential cost saving from re-using oil and gas infrastructure for this purpose compared to building facilities:

As an example […] the Acorn project in north-east Scotland calculates that, by reusing the pipeline, we could develop transport offshore for about £30 million or £40 million, whereas if they have to build a new pipeline from scratch, it might cost £200 million.194

SCCS argue that oil and gas pipelines are strategic national assets; they should be retained and preserved as a low-cost route to storage. They argue that CO₂ storage in the Central North Sea is the best understood in Europe following decades of oil and gas activity as well as specific assessments of CO₂ storage requirements, and that existing pipelines can access these storage sites from the mainland.195

112.This potential has been acknowledged in the Maximising Economic Recovery Strategy, which states that:

before commencing the planning of decommissioning of any infrastructure in relevant UK waters, owners of such infrastructure must ensure that all viable options for their continued use have been suitably explored, including those which are not directly relevant to the recovery of petroleum such as the transport and storage of carbon dioxide.196

113.However, SCCS have raised concerns that this requirement is being interpreted in a way which allows the decommissioning of pipelines that have been identified as being suitable for CO₂ transport—by projects such as ACT Acorn and the Caledonia Clean Energy Project—but which do not have a firm project plan attached to them:

It is clear from informal discussions with OGA and BEIS that neither party feels they have responsibility for this aspect of decommissioning planning, so the UK Government needs to take urgent action to close this gap to ensure that infrastructure is retained and maintained, and CCS projects are not lost due to poor regulation.197

114.The UK Government has said that it is working with stakeholders to explore the potential for redundant oil and gas infrastructure to be re-used for Carbon Capture, Usage and Storage, where this was appropriate to reduce CCUS costs. The Minister said that they “are very aware now of this need to not decommission something that could potentially be useful.”198 One challenge that will have to be addressed is the liability of an asset that was not decommissioned to allow for the possibility of re-use. At the moment the operator has liability in perpetuity for its assets,199 which include a monitoring liability and liability for remedial action needed.200 The Government said that is was one of the questions it needed to look at.201

115.Oil and gas infrastructure has the potential to be re-used for CCUS and it would be regrettable if this potential was lost due to a relatively short gap between infrastructure being decommissioned and CCUS becoming commercially viable. We welcome the Minister’s openness to finding solutions to this problem and invite the Government to set out what options are being considered in its response to this report.

116.One solution that we recommend the Government considers is that it underwrites the liability for this infrastructure for a fixed time while options for re-use are explored. This would ensure that the original owners are not at risk from additional liability for keeping this infrastructure in place for an extended length of time. Ownership and liability could then be transferred to the new CCUS operator if re-use went ahead, or back to the original owner for decommissioning if the option of re-use does not materialise.

117.SCCS also raised concerns that “the OGA is not taking a proactive role in enabling the development of CCUS” arguing that “the division of responsibilities in relation to CCS between BEIS and the OGA is not clear, and that this is putting CCS cost reductions at risk by allowing premature decommissioning of pipelines that could be re-used.”202 When we raised this point with the OGA we were told that:

If we think there might be a potential [for infrastructure to be re-used for CCUS], we will ask the operator but we will not promote and push in the sense that, given the economics, there has to be some impetus from industry […] We do not see ourselves as having a massive promoting role, as we do in some where we are out there actively pushing it.

Hedvig Ljungerud, Director of the Strategy at the OGA, said that “When the Government’s report comes out on that, on which we will be very happy to work with them, but they very much own it, I think we will all have a much clearer sense of what the overall policy will be.”

118.We recommend that the Oil and Gas Authority take a more proactive approach to encouraging the industry to consider opportunities for infrastructure re-use and that it brings forward a strategy for how it will promote re-use of oil and gas infrastructure within the sector as soon as possible. We believe this would be a natural extension of its role to ensure the economic return from the UKCS is maximised.

161 Oil and Gas UK, Environment Report 2018

162 BEIS, 2017 UK Greenhouse gas emissions, provisional figures. This includes all oil and gas use to provide energy in the UK, not just that produced domestically.

163 Scottish Government, Climate Change Bill, accessed 15 Jan 2019

164 Committee on Climate Change, Carbon Budgets: how we measure emission targets, accessed 15 January 2019

165 Oil and Gas UK, Environment Report 2018

166 OGA, Environment Report 2017

167 Q112

168 Sector Deal team (OGI0030)

169 Sector Deal team (OGI0030)

170 Q364

171 Carbon Capture and Storage Association, What is CCS?, accessed 11 December 2019

172 Some witnesses/organisations used the acronym CCS instead,

173 Q163

174 UK Government, Clean Growth, The UK Carbon Capture Usage and Storage development pathway: An Action Plan