The UK’s social, political and economic terrain is fractured by seemingly competing crises. The climate crisis, the cost of living crisis, the energy crisis driven by the war in Ukraine – all are causing acute social harm and vying for press coverage and policy action.
At the same time, fossil fuel companies find themselves in a moment of celebration, reporting record-breaking profits. Shell reported first-quarter profits of an eye-watering £7.3bn in the first three months of this year – the highest ever for a single quarter. Other majors and smaller companies are sucking up unprecedented amounts of cash from the globally high price of fossil fuels.
Although these crises have distinct impacts, there is profound overlap in form and causation. And at the centre of this Venn diagram sits the oil and gas industry.
The UK has been hit by the highest inflation in 40 years with the poorest bearing the brunt, energy bills have shot up and now cost £1,971 on average a year, and police have been advised to “use discretion” if people are stealing food to eat. And in Ukraine, the Russian state, fuelled by oil and gas exports, continues its atrocious and unlawful war. Under such devastating circumstances, it seems common sense to look to those exploiting these intersecting crises for profit.
However, on May 17, not a single Conservative MP voted in favour of a windfall tax on oil and gas, defeating the motion 310 votes to 248. Campaigners have been calling for the tax, which would distribute profits to those struggling with extortionate energy bills. But the UK government is pursuing quite the opposite – instead cheering on North Sea fossil fuel companies. Just six months after the UK hosted Cop26, business secretary Kwasi Kwarteng is insisting companies plough more investment in the North Sea in the name of domestic energy security.
It’s not the UK’s energy security needs, however, that steer the investment decisions of North Sea oil and gas operators. It is the profits that they can make from these investments. This is the bottom line that determines what fossil fuel infrastructure gets developed. This much is obvious from the projects that are in the pipeline. Across the whole basin, 72% of the planned investment between now and 2026 is in oil. But it’s not all the type of oil that we use in UK refineries, which means that we export 80% of it. Shell is forecast to spend more money on developing new fields and exploring for more oil and gas than any other North Sea operator, but nearly three-quarters of its investment is in oil. The government is therefore cheering investment for investment’s sake, which will have little impact on the UK’s “energy independence”.
Besides this, the intractable problem of geology pulls apart the false conflation of North Sea fossil fuels and energy security. After nearly 50 years of production, only 30% of what’s left in the basin is gas, the rest being oil. To put North Sea gas reserves in context – as Europe seeks to slash its dependence on Russian gas – even extracting all proven UK reserves and resources from new fields would meet just 1% of European gas demand each year to 2050, according to the Climate Change Committee.
Ministers can use the threat of a windfall tax to try to leverage more investment in the North Sea, but it’s not going to alter the geology of the UK’s ageing basin.
Then there is the nature of the companies currently operating in the North Sea. Private equity-backed operators are now responsible for nearly a third of oil and gas production in the UK continental shelf, a figure that’s likely to increase as the oil majors gradually divest. Private equity firms tend to make short-term investments, where money can be made by cutting costs, before selling the asset on for a profit. The UK public’s need for a supply of affordable energy is not paramount in their minds when deciding on future investment.
Another factor that diminishes the public benefits from oil and gas is the tax system. The UK offers oil and gas operators the best profit conditions in the world to develop big offshore fields, incentivising companies to drill for more. We provide hundreds of millions of pounds of public funding to oil and gas companies each year, yet receive far less in taxes than our neighbours. In Norway, the government receives about $21 (£17) in tax per barrel of oil. In the UK, we receive less than $2 (£1.60).
It means that, for example, the UK was the only country where Shell operated that it didn’t pay any tax in 2020. In fact, it collected almost £100m from the UK government. Even last year, with soaring gas prices, Shell collected more than $120m (£95m) from the UK. Shell has received £400m from the UK Exchequer in net tax repayments on its North Sea operations since 2016. The public return from North Sea investment is not what it was.
This is compounded by the flow of money to shareholders compared to investments. A spokesperson for the prime minister restated opposition to the windfall tax last week, saying: “we want to see significant investment by these sorts of companies into British jobs to grow the economy, to secure our energy supply for the long term”. But while oil and gas companies are seeing enormous growth in cash flow, UK investments are not expected to grow significantly this year. Companies are instead prioritising shareholder returns and debt-reduction.
But while the UK government continues to license new fields – a new licensing round is due this autumn – these companies will carry on drilling, rather than transitioning their investment to renewables. Despite extensive greenwash campaigns, most North Sea operators are making meagre investments in renewables: just 11 of the 49 operators currently active in the North Sea are investing in any renewable energy in the UK. Not all of this is for the national grid and the benefit of UK citizens: some of it is to decarbonise their own oil and gas production.
Even the oil and gas majors are dragging their feet when it comes to transitioning to renewables, despite their involvement in the UK government’s net zero strategy. BP spent 12 times as much developing oil and gas projects in 2021 as it did on renewable energy. BP’s global spending on renewables as a share of its total spend has increased less than four percentage points since the Paris Agreement was signed in 2016, to just over 7% last year. The notion that these companies are powering the green transition is a myth.
An acceleration of renewable energy offshore and onshore – alongside a massive increase in measures to make homes and building more energy-efficient – is how we can bring down energy bills in this country. In the short term, this means using a windfall tax on oil majors to help those struggling the most. Doubling down on new oil and gas drilling is a false solution, but one that featured in the government’s recent Energy Security Strategy. Focusing on the North Sea’s remaining reserves distracts from the urgent task of reducing energy demand and transitioning the UK to a cleaner energy system. It doesn’t solve the real crisis facing the UK, which is one of affordability.
This is before we even breach the climate component of our interlocking crises. The International Energy Agency has warned that in a scenario where we limit global heating to 1.5C, there is no room for new oil and gas projects. New research this week goes even further, suggesting 40% of existing oil and gas infrastructure must be retired early to keep within safe climate limits.
With all this at stake, the government is looking the other way, using the opportunity to push the myth that energy security means more North Sea oil and gas. The result is spiralling costs of living, escalating temperatures and a pipeline of public subsidies to fossil fuel shareholders via the most polluting industry on earth. Robust intervention is needed which strikes at the heart of these crises – taking on the fossil fuel industry.
Tessa Khan is a climate lawyer and a director of climate crisis campaign group Uplift.