August 3, 2022

Explained: How does oil and gas licensing work?

Written by Jessica Kleczka

There is now a strong scientific consensus that, in order to keep global heating below 1.5°C, there can be no new oil and gas developments anywhere in the world. But, acting in spite of repeated warnings from climate experts, the UK is still planning a licensing round later this year, which would shoot us past the critical temperature threshold. 

Last year at COP26, thanks to the hard work of grassroots campaigners, we saw the oil and gas industry’s social licence to operate take a huge hit - a hit which arguably culminated in Shell’s withdrawal from the Cambo oil field. This year, however, Russia’s invasion of Ukraine and the subsequent energy price spike has once again set the stage for the UK government to cosy up with big polluters under the guise of providing Britain with “energy security” and independence from Russian gas imports. 

But pushing for more domestic production is not the solution to this global energy crisis. Just because oil is produced in UK waters does not make it ours and approximately 80% of it is exported. Nevertheless, a number of new oil and gas fields are now on the table, most notably the paused Cambo oil field, recently approved Jackdaw oil and gas field, and Rosebank, which is about twice the size of Cambo. Cambo would meet global demand for less than two days, whilst Jackdaw would meet our domestic demand for less than a week.

Conservative MPs branded onshore wind an “eyesore” - but polling shows that the majority of the public want to shift towards renewable energy.

Oil and Gas in the North Sea: An escalating mess

In the UK, the oil and gas industry operates on the UK Continental Shelf - the body of water extending around the coast of the British isles, with most activity happening in the North Sea. There are currently around 280 producing fields in total. The seabed is divided up into so-called “blocks”, which companies can “license”, or lease, to explore for and potentially produce oil and gas.. In terms of discovered resources, the NSTA estimates that 1.2 billion barrels of oil equivalent are currently unlicensed which, if burned, would cause a climate-wrecking quantity of emissions.

The benefits of licensing new fields simply do not justify either the economic or ecological costs and many experts are now arguing that more oil and gas extraction is not economic. Fossil fuel companies know this, and the “economic case for investment” not being strong enough was one of the reasons Shell cited for pulling out of the controversial Cambo oil field. 

However, while Shell might not be keen on the project, its current owner Ithaca Energy (which recently bought Siccar Point Energy) has expressed hopes that the project may be going ahead after all, despite sustained public pressure against it.

As part of its Energy Security Strategy, which Green Party MP Caroline Lucas has called “economically and environmentally illiterate”, the UK government announced a new oil and gas licensing round this autumn. Kwasi Kwarteng, the former Business Secretary, had voiced his support for the industry whilst blocking climate activists on Twitter and calling them “naive” for demanding a liveable planet. Although in light of recent mass resignations and a conservative party leadership race, it is unclear what exactly the government’s stance on fossil fuels will be. One thing is clear: neither of the two remaining candidates seem to have a solid policy on net zero.

Our government wants to expand oil and gas production to stimulate the economy - but experts think that new North Sea fields are uneconomic.

How does oil and gas licensing work?

The North Sea Transition Authority (NSTA, previously known as the Oil and Gas Authority), is the body which gives out licenses to oil and gas companies. Oil and gas fields go through many stages, meaning that campaigning is important at every point in the timeline of a project. For example, although the Jackdaw gas field has been given formal approval by the government, this does not mean that Shell can start drilling tomorrow. If there is one good thing about the way oil and gas works in the UK, it’s that there are so many ways to intervene and potentially stop a project from going ahead. Licenses run for three terms, the first one being exploration, the second project development, then production. 

The Licensing Round: Bidding for climate breakdown

Licensing rounds are a process run by the regulator (North Sea Transition Authority) to hand out defined areas of the UK Continental Shelf (referred to as “blocks”). They can be thought of as auctions - they give oil and gas companies rights to operate in certain areas on the continental shelf. Some blocks may contain known fields of oil and gas, others may not. When a licensing round is opened, the NSTA invites companies to apply for licences for certain blocks. The NSTA then reviews those applications and awards licences to successful companies - namely, those who “promise to ensure economic recovery of the UK’s oil and gas resources, whilst supporting the drive to net zero carbon by 2050”. If you think that sounds contradictory, you’re correct.

Once a licence is granted, it gives companies the opportunity to explore for and eventually produce oil and gas - but only if they pass a series of steps on the way. Here, it is important to note that a licensing round does not involve approving any new oil and gas projects - that happens at a later stage. There is also a difference between licensing rounds and production licences: A licence alone is not the same as approval to start drilling. For example, if Shell buys a licence block containing an oil field, Shell can explore how economically viable the field would be for oil production - but it does not give the company the right to actually start operating a new oil field just yet.

In the UK, there have been 32 licensing rounds in the history of the industry. The last licensing round offered 768 blocks (chunks of North Sea), out of which 113 production licences were issued. In September 2020, licensing rounds were paused so that the Government could review licensing for North Sea oil and gas to ensure it was compatible with climate change goals. This led to the announcement of a “Climate Compatibility Checkpoint” on future oil and gas licensing, which has been heavily criticised by campaigners - with Uplift founder Tessa Khan stressing that “there is no such thing as a climate compatible oil and gas licence anymore”. The next licensing round in the UK is currently expected this autumn.

Project proposal: Who cares about climate anyway?

Before a project can go ahead producing oil and gas, it needs its project plan approved by the North Sea Transition Authority. This is the stage the Jackdaw gas field has just gone through. But before the NSTA can give consent for a project, a company needs to provide the Business Secretary (currently that’s gas-loving Kwasi Kwarteng) with an environment statement. Although climate impacts must be considered in this statement, companies applying for NSTA approval only have to assess the environmental impact of the emissions produced by constructing the field - these are often referred to as "Scope 1" emissions.

The companies are under no obligation, however, to assess the impact of the emissions that will be released from burning the oil and gas. The emissions caused by the burning of fossil fuels produced by an oil field are called "Scope 3" emissions, and can make up over 90% of an oil and gas company's carbon footprint. BEIS (the responsible government department) has a lot of leeway in whether or not a statement is deemed satisfactory. In theory, the Business Secretary can revoke a licence if conditions are breached.

Because the NSTA’s strategy does not include Scope 3 emissions, or the actual impact of the burning of fossil fuels, Shell and Co. can get away with fields like Jackdaw under Net Zero - for example, by sticking a wind turbine on their oil rig (a popular practice in the fossil fuel industry which allows them to call their operations “carbon neutral”).

Production licences: Drill, baby, drill

The production term of a licence usually happen later down the line, once the company has assessed or found the oil and gas in its licence area. Production licences are contracts for an area of sea, where certain activities are allowed for certain periods of time. For example, the Cambo oil field’s licence was recently extended to buy Ithaca energy more time to get a plan together to have the field approved - but the company was not allowed to drill yet. However, drilling for exploration can happen before that, even if there is no production licence. 

Bottom line: Campaigning is important at every stage of the process.

The oil and gas licensing process goes through several stages of regulation, which, on paper, sounds like a good thing. The downside is that regulators are far too lenient to oil and gas interests and fail to consider the full impact of new oil and gas projects on net zero, 1.5 and other climate goals. Not to mention the sheer amount of billionaire interests and industry lobbying that permeates the regulatory system makes it highly dysfunctional. 

On the upside, every project has a public consultation, where experts and the public can give evidence to the government directly and advocate against approving new fields. Again, great on paper. Not so great when our government doesn’t actually listen to scientific advice.

Another thing to bear in mind is that licensing rounds do not necessarily lead to increased production - in the last ten years, no commercial discoveries have been made in newly licensed areas. Fields like Jackdaw and Cambo were discovered decades back, as it can take a long time from discovery to approval and production - 27 years on average - but there’s a lot of variation.

Despite there being many challenges for campaigners and activists there is also hope, with the high court recently ruling that the government's half-hearted Net Zero strategy is unlawful under the Climate Change Act and needs to be improved, and Greenpeace taking the Government to court over the Jackdaw gas field. There is every chance that the UK’s generous treatment of the fossil fuel industry will be subject to severe scrutiny in the near future.. In the meantime, it’s crucial that we keep the pressure up: grassroots action can dismantle both commercial viability and companies’ social licence to operate, through legal action, protest and advocacy. In a climate emergency, new oil and gas is and will always be completely unacceptable.

Take action…