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Upstream Oil Horizons Begin to Narrow

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Future upstream access is at risk in some large Western producing nations as governments get more serious about tackling climate change. In Norway and the UK, there is a recognition across political parties that their domestic oil and gas industries must be downsized to reduce greenhouse gas emissions, even as Europe faces an energy crisis with the recent spike in electric power and natural gas prices. In the US, climate change remains a divisive issue but the Biden administration is trying to impose a freeze on oil and gas leasing on federal lands and waters. While there are few signs of these kind of climate driven restrictions in other major producing countries yet, they could come in the future. Even without them, reduced exploration and development budgets among oil companies are already driving a significant pullback in global upstream activity. 

The rise of extreme weather events and the upcoming Glasgow summit on climate change are prompting some Western governments to address decarbonization more aggressively and rethink the future roles of their oil industries. The recent “code red” UN climate science report and the International Energy Agency’s net-zero road map have also factored. The latter suggests that no new oil and gas fields — beyond those already sanctioned — would need to be developed for the world to reach net-zero emissions by 2050. Exploration bans have popped up around the world in recent years, but they have been imposed in marginal upstream areas so far. Any restrictions in Norway, the UK and the US — countries that have been large producers for decades — would up the ante significantly.

In Norway, the future of the oil industry was at the center of the climate debate in this month’s parliamentary elections. The center-left opposition, led by the pro-oil Labour Party, regained power from the Conservative-led government that ruled for eight years. Talks have started with potential coalition partners to try to form a majority government. But Labour’s reliance on the smaller, green-leaning Socialist Left could force some compromises on oil exploration. 

Earlier this month, Norway’s incumbent center-right coalition sprang a surprise plan for a tax overhaul on the industry. One element of the plan involves stopping tax relief for exploration — an incentive that was introduced by Oslo in 2005 to spur declining activity. Labour has signaled they will push ahead with that proposal in one form or another. Restrictions on new exploration licenses offshore Norway — particularly in the Arctic Barents Sea — could also be on the table in post-election negotiations to form a coalition. All parties were forced to sharpen their climate policies in the election campaign. Yet the Green party was vocal in demanding an end to fossil fuel production in Norway by 2035 but did not go over the electoral threshold with around 3.8% of the vote. Labour Party leader Jonas Gahr Store supports a faster green transition than the Conservatives but, like them, is keen to preserve the more than 200,000 jobs supported by the oil sector.

The UK’s Conservative government is also under intense pressure from climate campaigners and other stakeholders to halt all new oil and gas development in UK waters. That includes the greenfield Cambo oil project in the West of Shetland area, which is currently awaiting regulatory approval and has become a political football. The government pledged earlier this year to conduct "climate compatibility checks" for future upstream licenses to ensure they are aligned with the country's target of achieving net-zero emissions by 2050.

The UK’s compatibility checkpoints are under development and will go out for consultation in the fourth quarter. Industry lobby group Oil & Gas UK (OGUK) has warned that the “symbolic … cliff-edge transition” proposed by those seeking to block new North Sea oil developments could lead to supply shortages and painful economic damage, since the UK still relies on oil and gas to satisfy 70% of its primary energy demand.

A US federal court halted President Joe Biden’s leasing freeze in June, siding with the oil industry. But the administration could still take backdoor measures to effectively bog down new lease sales. Democrats in Congress are also eyeing tax and royalty overhauls for fossil fuel production that could make the US upstream less competitive. Politically, Biden is more concerned about rising energy prices than his European counterparts. Industry sources expect Gulf Lease Sale 287, which will offer 80 million offshore acres, to take place later this year. The administration is challenging the court ruling. Even if it fails, ClearView Energy analysts say it “could draw out environmental reviews, cancel sales via other statutory authorities, or impose terms that might make the sales less attractive to potential bidders.”

Paul Merolli is editor of Petroleum Intelligence Weekly. Deb Kelly is Energy Intelligence’s corporate correspondent based in London.

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