Industry and politicians talk at cross purposes on future of energy

The energy sector has become one of the key battlegrounds of the general election campaign, with all the main parties seeking to show themselves capable of both protecting the industry and securing the just transition.

Much of the focus has fallen on the North Sea and the role oil and gas will continue to play.

The Conservatives, as with all UK parties, signed up to that commitment when it was enshrined in Labour’s 2008 Climate Change Act. Tory leader Theresa May extended this again in 2019. However, the party is hoping to win the sector over with its permissive stance on oil and gas.

Difference of opinion

It has said it will legislate to mandate annual North Sea licensing rounds. This is despite launching the windfall tax in 2022. Prime Minister Rishi Sunak has highlighted the value of energy security over climate concerns.

Indeed, when he called the general election, Sunak talked up his achievements. He boasted his government had “prioritised energy security and your family finances over environmental dogma and our approach to net zero”.

Labour, on the other hand, has made it clear that it opposes all new exploration. It also wants to increase the windfall tax levied on producer profits, from the current level of 75% to 78%. It will also push the expiry of these taxes to the end of the next parliament.

Party leader Keir Starmer has said Labour’s move would create a “proper windfall tax”. As part of this, the party would also scrap existing investment incentives. These give producers tax relief of 91p in the £1 when they invest in their UK operations.

A Labour government would use money from the tax for state-owned energy company GB Energy. The full details of which are yet to be revealed.

Scotland’s take

In Scotland, the governing Scottish National Party (SNP) has previously tried to outdo Westminster. It set a more ambitious target of net zero by 2045 – a goal it admitted earlier this year it may not achieve. North of the border, the picture is less clear cut.

Former first minister Nicola Sturgeon declared that her government was opposed to further exploration in Scottish waters. She spoke out against the development of fields including Cambo and Rosebank.

Her successor Humza Yousaf took a similar stance.

Yet the most recent administration, led by First Minister John Swinney, seems altogether more confused. Both Swinney and his deputy, Kate Forbes, have said they do not oppose new licences, in of themselves. However, in a Panorama interview that aired this week Swinney branded Sunak “utterly irresponsible” and a “climate denier” for supporting further exploration.

“The prime minister has basically said he will license 100 new projects. I think that is utterly irresponsible. That is climate denier status of the first order,” Swinney said. “We’ve got to have a rational, considered process to look at every application to determine whether it can be sustained and compatible with our climate objectives.”

Human condition

Political parties trying to score points against each other is a predictable, if unedifying, prospect. Bob Ruddiman, head of the energy team at law firm Burness Paull, said the situation facing both the sector and the planet are so serious that consensus must be found.

“The human condition is to be addicted to energy and we need to be honest about the consequences of that,” he said.

“The discussion needs to be about generating secure, affordable energy in a way that in the medium- to long-term has least impact on our planet. If we focus on that it will have some potentially positive consequences. Unfortunately, what we’re seeing at the moment is a failure of all political parties to recognise that the plan to achieve that requires them to transcend party politics and to have a consensus.”

Spending plans

Labour looks almost certain to win the general election and, as prime minister, Starmer will follow through on his promise to further crack down on the windfall tax.

Labour has said it will use the money for GB Energy, which will focus on driving the energy transition.

Melfort Campbell, chairman of engineering firm Imes Group and a member of the Royal Society of Edinburgh’s economy and enterprise committee, said that would be a mistake.

Starmer has said GB Energy will be “an investment vehicle, not an energy company”.

For Campbell, taxing the sector and using the proceeds to invest in clean energy projects rather than simply enabling companies to invest in those projects via incentives, adds an unnecessary layer of bureaucracy. Ultimately, he said, this will delay the energy transition.

“Politicians are constantly talking about tax but if they made the case for the value-add in the economy we’d have a much better conversation,” he said.

“They don’t say ‘tell us what you can do on the value-add and the opportunity to create jobs and grow the economy’ – they are missing the point talking about tax … People don’t understand enterprise or the enterprise economy but oil and gas development is my opportunity to invest in a business, grow it, employ more people and make more money. Once I’ve done that what will I do? I’ll invest it in other opportunities. And where are the opportunities today? Renewables, but I see the opportunity in renewables in Africa, not in the UK.”

Competitive advantage

Campbell said he recently invested in the second-largest windfarm in Africa. He is not alone in diverting investments away from the UK energy sector as a result of uncertainty.

This week exploration company Deltic Energy announced it was surrendering its stake in Pensacola. It made this North Sea discovery with Shell.

The company said it had been unable to secure the funds needed for its share of work. It pointed the finger of blame at “deteriorating sentiment towards the oil and gas industry”. It clearly linked this to the “ongoing fiscal volatility and negative political rhetoric in the run-up to the July election”.

Similarly, Jersey Oil and Gas is a partner in the Buchan field northeast of Aberdeen. The company said it would only go ahead with the project, if it saw “fiscal clarity from the next government”. The £900 million project would create an expected 1,000 jobs, it said.

It is this fiscal clarity rather than soundbite politics that will be key to the energy sector’s development, said Ruddiman.

“The windfall tax was brought in to address a perceived windfall,” he says. “That perceived windfall has been and gone and the attempt to levy a tax on highly profitable companies has impacted on investment across offshore energy. It needs to be revisited with an honest, objective eye.”

Public confusion

Against this backdrop, the public that the political parties are attempting to win over appears confused. People are unclear about what the energy sector could and should be doing as part of the transition.

Diffley Partnership, on behalf of Uplift, a lobbying group that advocates for a rapid transition away from oil and gas, carried out a poll recently. It found that 67% of people living in Scotland believe increased investment in renewables and energy efficiency measures will deliver energy security. However, just 23% think further investment in the North Sea has a role to play.

Yet a poll carried out by Survation, on behalf of True North, an Aberdeen-based advisory business, found it differently. This reported three quarters of Scots calling for the UK to meet its energy demands from domestic sources.

The poll found that, by a factor of four to one, people see energy companies operating in the North Sea as an economic force for good. True North senior energy adviser Allister Thomas said the findings were “a clear signal to politicians to get the sector back on track”.

Moving forward

Regardless of the disparity in the findings, Tessa Khan, executive director at Uplift, has said that if politicians are serious about getting the sector back on track they need to shift the conversation away from trying to score points on oil and gas. Instead, they need to look at what tangible action they will take to drive renewables.

“When the conversation is about oil and gas production, it’s a distraction,” she said. “The North Sea basin is in decline and thousands of jobs have been lost in the last decade – 250,000 jobs have been lost despite 400 licences being issued and the standard of living is declining.”

She called for an “urgent plan” to support communities. “There are still 30,000 people directly employed in the oil and gas industry and around 80,000 in the supply chain. There are lots of skills here and we’re just at the cusp of an explosion in clean-energy technology … It’s a real shame that this election campaign hasn’t brought out the best in our political parties – I haven’t seen the seriousness an issue like this requires.”

For Ruddiman, seriousness means politicians being willing to work together. They also need to be honest about the role taxes and investment incentives have to play in achieving goals. These plans will outlive the current political cycle.

“You can’t have major capital projects with a political-term horizon,” he said. “The message to politicians needs to be around recognising the reality of the situation we’re in. We need to look honestly at the sources of our energy and what’s required … The significant and eye-watering capital investment required to decarbonise our energy system while maintaining energy security requires a stable fiscal and regulatory environment.”