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    Editorial: Theory and practice [NGW Magazine]


Europe’s transition could be an expensive lesson. [NGW Magazine Volume 5, Issue 23]

by: NGW

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Natural Gas & LNG News, Top Stories, Insights, Premium, Editorial, NGW Magazine Articles, Volume 5, Issue 23

Editorial: Theory and practice [NGW Magazine]

This year has shown the chilling effect low prices have on upstream investment decisions; but above-ground risk can act as just as powerful a brake.

The UK government appeared to have caught the upstream industry on the hop with its latest, deeper revision of emissions reduction cuts. Just a few weeks after its ten-point plan for “green growth”, it now wants to have the highest targets in Europe. Unsurprisingly it has been accused of virtue-signalling. But regulatory uncertainty is the enemy of good business.

It is also surprising that there is any available ministerial bandwidth to give these matters due consideration, given the twin, pressing problems of Covid-19 and negotiating a UK-EU trade agreement in the closing weeks of 2020.

But while laudable in theory, there are risks. Industry group Oil & Gas UK said that higher targets made a sectoral deal all the more important. Such a deal has been promised for some time. It would presumably have to redraw the lines of engagement between the finance ministry and the upstream, as its statutory requirement to maximise the economic return from the North Sea and to reduce emissions to zero are not always a neat fit: decarbonising a field might make a project unprofitable.

The industry, though, should count itself lucky it is not in Denmark, whose parliament voted December 3 – albeit with a generous three-decade notice period – to halt all oil and gas production and scrap the current eighth licensing round.

This is what Greenpeace would like to see in the UK: it said the prime minister should cancel the next round of oil and gas licensing, end all future exploration and ditch the legal requirement to extract as much as possible from the North Sea. To recover from this pandemic and to future-proof the economy, the North Sea must become a renewables-only energy industry that creates jobs for workers and powers the UK with clean, affordable energy.

There is no comparison in scale between the UK and Danish production: the latter is foregoing an estimated revenue loss of a mere $13bn over the 30 years. But the decision prompted GlobalData to ponder whether the “decision will also have an impact on the neighbouring UK, which recently announced that it was planning to review its oil and gas licensing round process in the context of achieving net-zero emissions by 2050."

It would be good to see some numbers underpinning the Greenpeace vision of a renewables-only North Sea. Wind farms of course will be a big part of that; and not a cheap one either.

Costs are coming down but they do not reflect the whole picture as they exclude the priority grid access that wind power is given. They also exclude the costs borne by despatchable generation as it ramps up and down to match supply with demand in real time. It needs flexible gas supplies and presumably plant, always happier working in steady state, needs more frequent maintenance.

And according to a former major industrial gas buyer who now sits on various industry panels, it is not just the renewable industry that ignores these costs. “Even people in the gas industry talk about using free or cheap electricity from wind farms that have been ‘constrained off’ the grid in order to create hydrogen through electrolysis,” Eddie Proffitt told NGW in early December.

Another pressure group, whose views are diametrically opposed to Greenpeace, is the privately-funded Global Warming Policy Foundation. It has tried to evaluate Johnson’s vision, and says the current policies, such as wind power, work out at about £100-£150/metric ton CO2e, and, “in spite of industry propaganda, figures of more than £200/mt CO2e are plausible for the future. Hence, the new target translates to a cost of between £50bn and £100bn/yr.”

This in microcosm is the debate that will be played out across the European Union, and which perhaps was first prefigured in miniature in the gilets jaunes riots in France.

Throwing another spanner in the works is the poor relationship between the governments of Poland and Hungary on one hand and the European Commission on the other. They both have been challenged by the EU for undermining the independence of courts, the press and non-governmental organisations. They risk losing tens of billions, according to Bloomberg, but they have so far vetoed the budget, which will be key to financing the bloc’s green development plans.

The Gas Exporting Countries Forum, it will perhaps come as no surprise to learn, is unconvinced that the European Union’s Green Deal will materialise. All the bloc’s shrinking resources will be needed to bring the economy back on the road to recovery, it tells NGW. There will be nothing for subsidising green hydrogen, for example. Creating jobs in order to make and distribute energy that is more expensive than it was before, seems only to be a lose-lose option.

And its members – and other producers around the world too, let us not forget – are putting their money where their mouth is: booking capacity in LNG terminals, pipelines and storage facilities in Europe to underpin supply deals or support spot trade. Continuous optimisation of the hardware and taking the initiative with blue hydrogen will be good tactics too.


Subscriber note: This will be the last issue of NGW Magazine for 2020 and so we would like to wish our readers a very happy holiday. The next issue will be published January 4, 2021.