Oil and gas industry: outside interests

Eren Waitzman

On 20 January 2022, the House of Lords is due to consider the following question for short debate:

Baroness Jones of Moulsecoomb (Green Party) to ask Her Majesty’s Government what steps they have taken to ensure that (1) subsidies, and (2) licensing decisions, related to the oil and gas industry are not subject to undue influence from outside interests.

Background

What are fossil fuel subsidies?

Fossil fuel subsidies are measures taken by governments to artificially lower the price of coal, oil or natural gas. Generally, there are two types of fossil fuel subsidies:

production subsidies: these are tax breaks or direct payments that reduce the cost of producing fossil fuels; and
consumption subsidies: these are energy price cuts for consumers, such as by fixing prices at petrol stations so that fuel is less than the market rate.

Analysis published by the International Monetary Fund in October 2021 had estimated that the global production and burning of coal, oil and gas was subsidised by US$5.9 trillion in 2020.

In December 2021, the UK Government stated that the country did not give any subsidies to fossil fuels:

The UK does not give any subsidies to fossil fuels, and follows the approach of the International Energy Agency, which defines fossil fuel subsidies as measures that reduce the effective price of fossil fuels below world market prices.

However, some have argued that the UK does support the industry in other related ways. For example, analysing Organisation for Economic Cooperation and Development (OECD) figures, Politico has claimed that “Britain currently supports the fossil fuel industry through tax breaks and subsidies for exploration and research and development”. It estimated this at around £10 billion a year.

How is oil and gas regulated in the UK?

The licensing system for the oil and gas industry covers Great Britain, its territorial sea and the UK Continental Shelf, which is the region of waters surrounding the United Kingdom, in which the country claims mineral rights. This principally refers to the North Sea, where there are large resources of oil and gas.

Established in 2015, the Oil and Gas Authority (OGA) regulates and licenses petroleum exploration and production in an onshore and offshore capacity in the UK. It does this by:

issuing exploration and production licenses conferring exclusive rights to search for and/or bore for and get petroleum (in accordance with secondary legislation made under the Petroleum Act 1998);
inviting applications ahead of competitive licensing rounds;
authorising out of round petroleum licence applications;
assessing the financial and technical capability of applicants (amongst other licensing criteria);
overseeing and enforcing licence terms, including in relation to the drilling, completion, suspension or abandonment of wells, the approval of work programmes and the revocation, determination, or extension of a licence; and
complying with licensing requirements (as provided for in secondary legislation, such as the Offshore Petroleum Activities (Conservation of Habitats) Regulations 2001).

Licences fall into several categories, with the principal distinctions being between onshore and offshore licences, exploration licences (which cover exploration alone) and production licences (which cover both exploration and production). They can be held by a single company or by several companies working together, but legally, there is only ever a single licensee named on a licence. Despite this, all companies on a licence share joint liability for obligations that arise under it. Each licence takes the form of a deed, which binds the licensee to obey the licence conditions regardless of whether it is in use.

The OGA states that it has discretion in the granting of licences to “help ensure the economic recovery of the UK’s oil and gas resources, while supporting the drive to net zero carbon by 2050”.

What action has the Government recently taken?

The Government has outlined its intention to change the way oil and gas is licensed in the UK and to work towards phasing out global fossil fuel subsidies.

Review into the licensing of oil and gas

In September 2020, the Department for Business, Energy and Industrial Strategy (BEIS) announced that it would be launching a review into the licensing of oil and gas in the UK. It stated that the review would form part of its aim to tackle climate change and achieve net zero emissions by 2050.

BEIS considered a wide range of factors in the review that would influence the UK’s policy on future oil and gas licensing. This included the:

production of oil and gas;
economy (including jobs, tax revenues and economic contribution);
greenhouse gas emissions from oil and gas production activity (both domestic and international); and
the UK’s ability to achieve net zero in the UK.

The review concluded in March 2021. It found that continued licensing for oil and gas was “not inherently incompatible with the UK’s climate objectives”. However, the review acknowledged that this “may not always be the case in future”.

To resolve this, the review recommended the introduction of a formal climate compatibility checkpoint. This would ensure that the compatibility of future licensing with the UK’s climate objectives “is always evaluated before a licensing round is offered”.

Responding to the review, the Government said that it was “vital” that future licenses were granted to industry on the basis that they were “compatible with the UK’s climate change objectives”. Therefore, the Government stated that if evidence suggested that a future licensing round would “undermine” the UK’s climate goals or delivery of net zero, it would not go ahead.

In December 2021, the Government launched a consultation into the design of the climate compatibility checkpoint. This included proposed tests that must be passed for the checkpoint outcome to be positive. For example, examining reductions in operational greenhouse gas emissions from the oil and gas sector. The consultation is set to close on 28 February 2022.

Revised Oil and Gas Authority strategy

In December 2020, a revised strategy for the OGA was laid before Parliament. It came into force in February 2021.

The revised strategy included several obligations for the oil and gas industry in the UK. This included that the industry must:

take necessary steps to secure that the maximum value of economically recoverable petroleum is recovered from the strata beneath relevant UK waters; and, in doing so,
take appropriate steps to assist the secretary of state in meeting the net zero target, including by reducing as far as reasonable in the circumstances greenhouse gas emissions from sources such as flaring and venting and power generation, and supporting carbon capture and storage projects.

In December 2021, the High Court heard a judicial review regarding the revised strategy. The challenge was brought to the court by three environmental campaigners who argued that the OGA’s interpretation of its legal duty to “maximise economic recovery” of oil and gas had failed to consider public money supporting the oil and gas industry. Ahead of the judicial review, Rowan Smith, a solicitor at Leigh Day, which is representing the campaigners, stated that:

The simple point is that the OGA says it can by law ignore the tax breaks received by oil and gas companies when deciding on whether a project will benefit UK taxpayers. Our clients are going to court to establish the opposite.

In response, a spokesperson for the OGA stated that it was “disappointed” by the claim and that the strategy was the “primary tool that the OGA has to hold industry to account”.

A judgment has yet to be made.

Commitment to reduce unabated coal usage and phase out fuel subsidies globally

The 26th United Nations Climate Change conference (known as COP26) was held in Glasgow, Scotland, from 31 October to 12 November 2021.

At the conference, 196 countries (including the UK) adopted the Glasgow Climate Pact, which was the first climate agreement to detail plans to reduce unabated coal usage. In addition to committing to reducing coal usage, countries pledged to phase out “inefficient fossil fuel subsidies”.

Following COP26, the Prime Minister, Boris Johnson, stated that the agreement was a “big step forward” and that the world would “look back on COP26 in Glasgow as the beginning of the end of climate change”. Additionally, Greenpeace UK’s international executive director, Jennifer Morgan, praised the agreement, declaring that the “era of coal is ending”.

However, some environmental groups criticised the final agreement for not going further. Lars Koch, the policy director for the charity ActionAid, argued that the focus on only reducing coal usage gave a “free pass to the rich countries” that had been “extracting and polluting for over a century to continue producing oil and gas”.

Do outside interests have too much influence on the oil and gas industry?

Some environmental organisations have argued that outside interests have too much influence on the oil and gas industry in the UK.

In September 2021, several environmental organisations, including Greenpeace UK, warned that close links between the OGA and the oil and gas industry risked affecting the regulator’s decision-making process. This view was based on an investigation funded by the Uplift campaign against fossil fuels, which found that three of the OGA’s 13 board members held shareholdings in oil companies amounting to approximately £225,000. In addition, the investigation revealed that eight members of the board had previously worked within the industry. In an article in the Guardian, the head of oil and gas transition at Greenpeace UK, Mel Evans, stated:

How can a supposedly unbiased regulator deliver its role, taking climate science into account, with such a huge ex-oil industry presence and ongoing vested interests in maintaining the status quo on oil and gas extraction?

In response to the investigation, a spokesperson for the OGA said that several members of its board had “direct experience” of working in the oil and gas industry and that their knowledge and experience were “vital in enabling the OGA to regulate what is a highly specialised sector”.

In November 2021, an investigation by the Guardian into the Electoral Commission’s records on political donations revealed that political parties and MPs had registered gifts and donations from “climate sceptics and fossil fuel interests” since the 2019 general election. According to the investigation, these donations totalled approximately £812,000 for the Conservative Party from 2019 to 2021. Over the same period, the Labour Party had registered £18,400 from such donations.

On 8 December 2021, environmental campaigners brought a High Court legal challenge against the Government claiming that oil and gas companies had benefitted from £13.6 billion in subsidies since the 2015 Paris Agreement. The claim, based on data from the OECD, suggested that companies had received £9.9 billion in tax reliefs towards the exploration and production of oil and gas and £3.7 billion in payments towards decommissioning costs between 2016 and 2020. The campaigners suggested that these reliefs and payments amounted to subsidising the production of fossil fuels.

Responding to the legal challenge, a spokesperson for BEIS stated that the department “could not comment” on ongoing legal proceedings, but that “the UK does not give any subsidies to fossil fuels”. To date, a judgment on the case has not been made.