As we approach COP 26, there is extensive discussion of the shift to net zero and how it will be achieved; a large part of this will be the transition from reliance on fossil fuels to a more environmentally sustainable energy portfolio. It is broadly understood that this transition should take place in a way which is fair to everyone – including those working in carbon intensive industries. “Climate action, fairness and opportunity must go together.” These are the opening words of the Just Transition Commission’s report published on 23 March 2021 and neatly capture the spirit of what is required for “just transition”.
At an international level, a key aim of the Paris Agreement (a legally binding international treaty on climate change which binds almost all countries in the world to limit global warming to well below 2 degrees celsius) is to take into account the imperatives of a just transition of the workforce and the creation of decent work and quality jobs in accordance with climate change priorities. Looking forward to COP26, the COP26 Energy Transition Council has recognised that a rapid and just transition to clean power is vital to meet the goals of the Paris Agreement, as well as offering huge opportunities for jobs and growth, cleaner air and improved public health and boosting access to energy, energy efficiency and energy security.
The Covid-19 pandemic has dominated daily life for over a year with many people living with some form of “lockdown” for large periods of this time. Whilst the social and economic impacts of this remain to be fully understood, it is clear that both the UK and Scottish Governments are keen to embrace the opportunity to set the UK on a cleaner path going forward – this can be demonstrated by the volume of activity in the energy transition space over the last six months and this is surely set to continue in the lead up to COP 26 and beyond. A timeline of some of the most significant developments from an UK energy and climate change sector perspective are set out below.
Elsewhere, on 21 April 2021, the European Parliament and Council of the EU reached agreement on the European Climate Law including a commitment to reduce net greenhouse gas emissions by 55% by 2030 (compared to 1990 levels), and to become the first climate neutral continent by 2050. Later this year the EU Commission is expected to publish its “Fit for 55” energy and climate package which will set out a suite of EU legislative changes in support of the climate change commitments. At this stage the commitments are high level and the detail of how this is expected to be achieved remains to be developed.
North Sea Transition Deal
The oil and gas industry increasingly recognises that, in order to survive long term, it must reimagine how it will fit into the energy mix going forward. In the UK, a framework for this transformation has been set out in the North Sea Transition Deal.
The North Sea Transition Deal (“NSTD”), published on 24th March 2021, proposes actions to be taken by the oil and gas industry and the UK government to reduce carbon emissions. There is also a joint commitment to invest up to £14-16 billion by 2030. The UK is the first G7 country to agree to form a unique partnership of this kind, offering an opportunity for the UK to lead the way in the energy transition from oil and gas activities in particular. The NSTD will support acceleration of energy transition in the UK but aims to do so whilst protecting jobs and the economy.
The key actions and outcomes of the NSTD relate to five areas of development:
Supply decarbonisation: the NSTD focuses on cutting industry emissions with an ambitious sector target to reduce emissions 10% by 2025, 25% by 2027, and 50% by 2030 all from 2018 levels;
Carbon Capture Utilisation and Storage (“CCUS”): in order to develop CCUS technology, industry has committed to leveraging existing infrastructure to provide transport and storage facilities;
Hydrogen: the government will create a Net Zero Hydrogen Fund to boost production capacity and encourage private investment;
Supply Chain transformation: to support the diversification of the UK supply chain, industry has committed to ensure that, by 2030, 50% of decommissioning and new energy technologies projects being developed are provided by local companies. Underpinning this is the appointment of an Industry Supply Chain Champion to coordinate growth and job opportunities with other sectors; and
People and Skills: a key aim of the NSTD is to decarbonise the economy whilst utilising existing skills to protect jobs and offer opportunities for job creation. This includes a commitment to support up to 40,000 new jobs and retaining the transferable skills of industry workers allowing them to work across the energy sector.
These five pillars of the NSTD set out what is to be achieved by industry and Government and, in some cases, by when. We will now consider some key aspects of how this might be achieved going forward.
Collaboration between Industry and Government
The quid pro quo basis on which the NSTD is set out will be a key feature of its success going forward. Government requires security of energy supply and also recognises that industry is important in providing the vital skills required to help it achieve its international climate change commitments. To effectively provide these things, industry requires certainty from Government as well as financial support to ensure emerging sectors such as CCUS are commercially viable. How well this can be achieved in the UK and the delicate balance of that relationship will be keenly observed by other global economies with active oil and gas industries and other carbon intensive industries such as coal.
The joint funding commitments set out in the NSTD also presume continued collaboration between industry and Government. This will also ensure that the oil and gas industry significantly contributes to the transition and will be a major factor in ensuring transition happens as efficiently and economically as possible.
Exploration and development
Although published only two months ago, the NSTD is already facing pressures and challenges:
An application for a judicial review of the OGA’s strategy has been made on the basis that (a) it is unlawful because it seeks to redefine the meaning of maximising economic recovery to exclude consideration of the tax breaks given to the industry and (b) it is “irrational” as it requires producers to cut carbon emissions – but allows production to increase and could lead to increased levels of fossil fuel extraction that are “in conflict with the UK’s legal duty to achieve net-zero emissions by 2050”.
On 26 May, a landmark decision in the Dutch courts ruled that Shell must cuts its emissions by 45% by 2030 compared to 2019 levels. Although the decision is only binding in the Netherlands (and remains subject to appeal), the effects will extend further afield given Shell’s international operations.
The International Energy Agency (IEA) has recommended that, in order to reach net zero emissions by 2050, no further oil and gas projects should be funded. On 1 June, more than 50 campaign groups and NGOs sent an open letter to Prime Minister Boris Johnson demanding an immediate moratorium on new UKCS oil and gas licences, based on the IEA recommendation.
Although a potentially alarming recommendation for those engaged in fossil fuel activities, the likelihood of it being implemented must be considered in context. Cutting off funding and arbitrarily halting licensing activity will only help to achieve net zero if a less carbon intensive alternative is available. From a UK perspective, it is largely recognised that oil and gas will form part of the energy mix going forward. To the extent there is remaining demand in the UK, it will almost certainly be the case that it will generate less carbon to utilise domestic production than to import from overseas. In addition, the NSTD framework in the UK will provide stakeholders with greater certainty that the oil and gas being used has been produced with due consideration to any environmental impact associated there with.
To benefit and be part of a just transition, oil and gas companies are expected to be part of the change. It may seem a somewhat self-serving argument, but without a concerted effort from oil and gas companies to decarbonise fossil fuel production there will be a significant conflict between energy demand in the UK and the UK’s net zero ambitions. Andy Samuel, Chief Executive of the OGA has indicated that the UKCS, combining continued fossil fuel production with CCS, offshore renewables and hydrogen production, can provide 60% of UK’s contribution to decarbonisation. A balanced discussion and analysis of the issues will be required to ensure the industry feels empowered to make change in a way that is meaningful for all stakeholders.
As the pace of transition increases, it can also be expected that the pace of decommissioning will increase. This will lead to competing demands for personnel and other resources which will therefore need to be factored into project planning and re-emphasises the need for all relevant industries to remain joined up along with their respective regulators - discussed further below.
Those carrying out decommissioning activities will also need to consider how they themselves can support the path to net zero. Many of the considerations currently factored into decommissioning already have a potential net zero impact – for example campaign or cluster decommissioning may not only achieve a cost saving from a financial perspective but may also be less carbon intensive. Although this illustrates some ways in which cost savings and net zero aims may be aligned, there will be other aspects where these considerations diverge – for example, to leave certain pipelines and associated facilities available for future use for CCUS may increase the overall cost of the project. It will be a careful balancing act on a case by case basis to ensure that decommissioning is carried out in both an economically efficient and low carbon manner. The supply chain’s ability to demonstrate low carbon decommissioning solutions will place it in a favourable position in the UK and internationally; this is just one example of how the energy transition framework in the UK can help to create a ripple effect outside its own borders.
The increased activity in accelerating the oil and gas industry’s move to net zero in the UK is also about accountability to a large number of stakeholders – to the regulator, to other oil and gas companies, to shareholders/investors, to the workforce and to the general population. Generally in the UK, consumers are now increasingly interested in the environmental impact of the energy they consume - it is no longer solely about reliability or cost of the energy source, for example with retail energy suppliers offering (sometimes at a premium) guaranteed ‘green’ energy supply. The workforce is also interested in the environmental impact of the industry they work within and will be integral in holding businesses to account. Recruitment will also increasingly require employers to demonstrate they are taking these responsibilities seriously.
Investors and shareholders are equally concerned about the environmental impact of their own investments. On 26 May 2021, both Chevron and ExxonMobil were subject to shareholder moves seeking to take greater action to reduce emissions and implement more effective transition plans. Investor and shareholder accountability can therefore be expected to shape day to day operations in addition to acquisition and divestment processes in order to avoid disgruntled shareholder action.
Another way in which this accountability can be demonstrated will be through the asset stewardship regime of the OGA - performance will be demonstrated via various benchmarking reports, particularly in relation to greenhouse gas emissions. The milestones in the NSTD also ensure that there are measurable targets against which oil and gas industry’s performance is being measured.
Collaboration amongst industries
It is widely recognised that the shift to net zero presents a significant opportunity for a number of businesses. To achieve net zero as efficiently as possible, this will involve bringing together historically disparate industries to work together to meet the targets set out in the NSTD. Existing energy transition projects are already adopting this practice.
The revised OGA strategy published in February 2021, already provides that relevant persons within the oil and gas industry (i.e. licensees, owners/operators of offshore infrastructure, and those planning and undertaking commissioning of such infrastructure) undertaking relevant activities (i.e. development, construction, use and decommissioning of offshore infrastructure) must collaborate and co-operate with (1) other relevant persons, (2) persons seeking to acquire an interest or invest in offshore licences or infrastructure in a region and (3) persons providing goods or services relating to relevant activities in order to support the delivery of such activities on time and on budget. There is also an obligation on relevant persons to co-operate with the OGA. Notwithstanding that these obligations are not binding on all those potentially interested, given the opportunities involved it may be expected that practice to be adopted voluntarily in support of the move to net zero.
Electrification offshore is a useful illustration of where the collaboration of industries is needed – this is a key feature of the NSTD from a UK perspective and is also expected to heavily feature in the EU Commission’s “Fit for 55” package. Electrification will require electricity to be provided offshore via cables from land or from offshore wind sources, bringing the existing oil and gas, power and renewables industries together. All have their own regulators to satisfy, and all may be accustomed to particular contracting structures or norms. There may also be new opportunities here, for example in relation to new licensing rounds for offshore wind. Collaboration will therefore be required on a number of levels to ensure alignment between the relevant industries in achieving the NSTD goals, particularly in the crowded environment of the UKCS where there may be competing demands for the same areas of seabed.
Similarly, the new and emerging CCUS and hydrogen industries will be working alongside oil and gas companies. Here there is no enshrined practice and there will be an opportunity for projects to ensure they are adopting the most efficient models. This will also require significant interaction with Government where perhaps new legislation will be required – for example in relation to the re-use of oil and gas infrastructure.
On 1 June it was announced that plans for a hydrogen exchange trading platform in the Netherlands (“HyXchange”) are progressing with plans to organise a pilot scheme and spot market simulation. HyXchange intends to replicate the structure of existing natural gas hubs such as the UK’s NBP and the TTF in the Netherlands with the use of a physical storage facility and trade in grid balancing and storage contracts. These developments will be observed keenly and will provide opportunities for further collaboration between innovative developments, existing industries and regulators.
The NSTD also focuses on supply chain transformation, “with the aim of establishing supply chain consortia which can lead the development of competitive low carbon solutions and deploy them at scale in the UK and internationally, making the most of the technology, innovation and expertise that has built the UK supply chain’s international reputation within the oil and gas sector”. Government grants will be available for consortia to bid to grow the sector, including via the £1billion Net Zero Innovation Portfolio, which aims to accelerate commercialisation of innovative low carbon technologies, systems and processes. Priority areas for the Net Zero Innovation Portfolio include floating offshore wind, hydrogen and advanced CCUS. Collaboration between oil and gas companies and the “new” supply chain will therefore be required to ensure opportunities are maximised on both sides and a willing market exists for the solutions which are developed.
Of equal importance to the net zero targets set out in the NSTD is its aim that energy transition in the UK should be carried out in a way which is fair and just to those currently working in and supporting the oil and gas industry. There is a recognition that the harsh consequences suffered historically by those working in the shipbuilding, steel and coal industries in the UK should be avoided in relation to the current energy transition path.
This aspect of the NSTD will be crucial from a global perspective and will provide an example for other jurisdictions and other carbon intensive communities to observe. As part of the European Green Deal, Poland is set to become the biggest recipient of the Just Transition Fund (proposed to be in the region of EUR 3.5billion) to support the shift away from coal. Similarly across Latin America, the APAC and the Middle East, support will be required if energy transition is to be achieved in a way which does not devastate local communities who rely on fossil fuel production either for work or in order to satisfy energy demand. Whilst the particular social and economic situation in the relevant territory will form a significant part of any energy transition policy, if the UK achieves energy transition in a way that is just, hopefully the experience of UK industry and its workforce may help to inform policy elsewhere.
In the UK itself, OGUK estimates that the number of people in direct and indirect employment within the oil and gas industry will decline by approximately 40,000 by 2030, with the most significant exposure geographically relating to particular regions in the UK – such as communities in Aberdeen, Shetland, Teesside and East Anglia. However, the NSTD notes that at least 68% of the UK’s oil and gas workers have skills that could transition to the low carbon sector. The Ten Point Plan introduced the Green Jobs Taskforce which is intended to support “building back better” from the covid-19 pandemic (see our previous Law-Now on this here). The Taskforce focuses on four main areas (1) supporting green recovery and ensuring the UK has the immediate skills needed; (2) developing a long term plan charting the skills needed to help deliver net zero by 2030; (3) ensuring green jobs are good jobs and open to all; and (4) supporting workers in high carbon sectors to transition and retrain. The most efficient way to ensure the “new industries” are reliable and well equipped will be to facilitate the transition of workers with the requisite skills and experience to support the low carbon sectors. This is being facilitated by the Energy Skills Alliance via the Future Energy Skills Demand workstream (due to be completed in 2021) which will map the energy sector’s current capabilities and future requirements.
Our Road to COP26 Reimagined series looks ahead and anticipates the issues and opportunities that climate change presents across a number of sectors and areas that impact our clients.
At CMS, we put our clients’ world at the heart of what we do. For this reason, we have a team of lawyers from across the firm from a range of different expertise areas who are actively engaging with the issues and opportunities that climate change presents. Our aim is to help our clients to navigate this rapidly evolving legal and commercial landscape whilst also providing the interested with more information about this growing area via this Insight section.
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This Law-Now is part of our Road to COP26 series. We will be analysing and reporting on the implications of these events for the agenda at COP – look out for further updates on our legal insight on our climate change and sustainability pages.