Energy transition in the UKCS – Modelling the effects of carbon emission charges on upstream petroleum operations

Abstract

The UK has ambitious decarbonisation, climate change mitigation and energy transition goals. The upstream petroleum sector in the UK shares in these goals, as evidenced by its North Sea Transition Deal and as set out in its sector ‘Roadmap 2035’ for emissions reduction. Participation in an emissions trading scheme as a mechanism for achieving these goals is a key strategy identified in the sector roadmap. Currently, only qualifying installations in the UK Continental Shelf (UKCS) are charged for their emissions. Notwithstanding, prudent non-qualifying operators are also now incorporating these charges in their financial models for asset valuation purposes. This paper uses a recently updated database of 21 new UKCS fields to examine the effects of carbon emission charges on upstream petroleum operations in the province. We find that emission charges increase operating expenditures, which results (1) an acceleration of the timing of the economic limit of fields, leading to significantly lower petroleum production and carbon emissions; and (2) a reduction in the economic value of petroleum fields hence diminishing the competitiveness of the UKCS. These outcomes advance the energy transition cause of the UK. However, they give rise to major implications for the UK, including energy security, jobs, risk of exposure to a carbon leakage situation, and so on. We advocate a ‘just transition’ approach to energy transition, where petroleum production in the UKCS progresses but with a carbon footprint that is reduced and consistent with an economic optimum.