The Big Picture: Carrots vs. Sticks in Europe, US Transition

Copyright © 2021 Energy Intelligence Group

• The oil industry has always depended on implicit and explicit state support. But government-industry efforts to turn low-carbon economy goals into a technical reality are taking different paths in the UK, Norway and the US. • Ostensibly, the governments share the same transition goals -- to create jobs and slash greenhouse gas emissions. But the varying collaborative approaches with industry, and mixes of carrots and sticks, reflect the different political dynamics playing out on both sides of the pond. Government and industry recognize that state backing will be crucial to scale up low-carbon technologies in order to expand new markets, boost growth and redefine investor perceptions. Indeed the recent multibillion-dollar deal struck by the UK and North Sea oil industry marked an important step in turning net-zero ambitions into concrete action. Norway, too, has taken progressive steps in climate terms to build new industries while protecting the commercial future of its hydrocarbons sector. But in the US, the Joe Biden administration and the oil companies, and lobbies that back them, have not yet managed to find common ground. UK Quid Pro Quo The North Sea transition deal was designed as a quid pro quo targeting up to £16 billion ($22 billion) in joint government-private investment for key low-carbon initiatives by 2030 (IOD Mar.24'21). State funding and regulatory support for new technologies sit alongside an industry pledge to cut emissions and invest in carbon capture, utilization and storage (CCUS) and the nascent hydrogen sector. Proposals for a sector deal were submitted by industry lobby group Oil & Gas UK in 2018. The aim: to reposition the sector’s capabilities, preserve jobs and reduce exposure to ever-more onerous conditions in the declining offshore province. The UK government also stopped short of banning or restricting activity, in contrast to the US’ restrictions on federal lease sales, although new licenses will have to pass a "climate compatibility checkpoint" to ensure they align with net-zero 2050 objectives. The prospect of a looming second Scottish referendum on independence may have compelled the government to take a more constructive approach. Last month’s deal announcement couldn’t have been better timed ahead of local elections in May in Scotland, which employs around 40% of the industry’s 260,000 workers and stands to benefit the most from the deal. That the North Sea is a mature play, in decline for decades, also means lobby group Oil & Gas UK and industry trade unions have long had the notion of a jobs transition for the sector in their sight lines. Exploration drilling fell sharply to a record low last year. In this context, the emergence of a green transition pathway is seen more as an opportunity than a headwind. US' Great Divide In the US, political and cultural divisions are more likely to shape the road to a lower-carbon economy. Republicans and Democrats are at the opposite end of the spectrum when it comes to an energy policy pathway, and in particular over oil and gas' future as transitional fuels. Renewables' role in the US energy landscape is intensely politicized, as seen in reactions to the Texas blackout in February (EC Feb.26'21). Key, too, is that the US oil sector, pre-pandemic, was still riding out its shale boom phase -- meaning restrictions carry greater impact relative to those undertaken in a declining UK oil sector. US oil companies have been slower to reorient to renewables than their European counterparts, choosing to focus more on carbon reduction strategies that allow production. This gives them less incentive to take advantage of government tax incentives for clean energy (related). Industry lobby groups also lag behind US Big Oil on some transition issues. There is also no unionized labor in the field, meaning workers don’t really have a seat at the table. All combine to make the US oil industry less inclined to seize the initiative to approach the administration with constructive proposals, unlike their European counterparts. One question is how big a strategic mistake passing up the chance to steer solutions to their advantage could prove to be for the US majors. The Biden administration's green agenda looks set to put that choice to the test (EC Jan.29'21). In the highest profile overture the Biden White House has made to the oil and gas industry, White House climate czar Gina McCarthy last week called executives of major oil companies to the table to explore avenues of common ground. Carbon capture and methane abatement strategies emerged as possibilities. This marked a shift from the former Barack Obama administration, when US producers fought against methane standards -- although that may have been driven primarily by the evolution of financial and investor pressures. But the Biden administration does seem to be taking a softer approach where it can. For instance, Transportation Secretary Pete Buttigieg has said the administration favors incentives for electric vehicle infrastructure over a hard mandate like California’s phaseout of internal combustion engines. The new administration also sees carbon capture as a critical part of its climate strategy, and backs extending landmark tax credits for CO2 capture, which the industry supports. At the same time, Biden has threatened to kill long-standing tax breaks prized by producers, especially smaller to midsize independents. And the administration walks a political tightrope when it comes to support for technologies like carbon capture viewed by some progressives and green groups as offering a lifeline to fossil fuels. Norway's Measured Steps As Western Europe's biggest hydrocarbons producer but also home to one of the highest shares of renewable energy in Europe (primarily hydropower), Norway and its carrot-and-stick approach to the hydrocarbons industry could offer guidance (NE Mar.21'19). Last year’s improved temporary tax terms to spur investment were followed by Oslo proposing this year to almost triple its carbon tax rate on upstream activity by 2030. Prime Minister Erna Solberg said it was an important way to cut upstream emissions and she hoped it would incentivize development of low-carbon technologies for oil and gas production. The state has so far pledged almost $2 billion of funding and support for a trio of carbon capture and storage schemes, dubbed Longship, to be built over a 10-year period. But reflecting the tricky balancing act, even Norway faces some difficult patches ahead. Opposition to platform electrification in the Arctic Barents Sea is growing due to the projected high costs. Potentially higher electricity demand would also require the development of onshore wind projects, and locals don't want new wind farms spoiling the region’s pristine ecosystem. Deb Kelly, London, and Bridget DiCosmo, Washington

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