The United Kingdom's Conservative government is building policy and regulatory frameworks to facilitate decarbonization and reach emission-reduction targets on the UK Continental Shelf (UKCS).

Despite recent upstream policy volatility and uncertainty - reflected by the recently proposed 25% Energy Profits Levy (EPL) for oil and gas companies ¬- the government has avoided major shifts in its low-carbon policies so far, demonstrating a strong commitment to advancing the energy transition in the hydrocarbon sector.

Policy framework is evolving

Over the past two years, the UK government has outlined its oil and gas decarbonization policy in a series of strategic documents, which establish capacity targets and funding mechanisms for low-carbon projects. The latest British Energy Security Strategy, announced in April, set a new target for floating offshore wind capacity - 5 GW by 2030 compared to 1 GW previously, and supported by GBP160 million (USD190 million) in government funds for ports and supply chains. Separately, the government increased the UK's offshore carbon storage target from 10 million metric tons (MMt) of carbon dioxide (CO2) per year by 2030 to 20-30 MMt. The first carbon storage licensing round, launched in mid-June and featuring 13 areas, is expected to facilitate the buildout of offshore storage capacity. While increasingly ambitious low-carbon targets are likely to expand the opportunity set for investors, they could also drive uncertainty around the government's ability to implement regulatory changes and provide funding to realize longer-term goals.

Regulators will play a key role

Close collaboration between regulatory bodies in the energy sector and their engagement with industry are likely to become important factors in removing legal obstacles and developing clear regulatory frameworks in the low-carbon sector. The North Sea Transition Authority (NSTA) recently entered into cooperation agreements with other regulatory bodies, which could accelerate planning for and ensure transparent oversight of the emerging offshore carbon storage sector. The UK's upstream regulator will coordinate management of the seabed with the Crown Estate and the Crown Estate Scotland, which are responsible for granting seabed lease agreements for carbon storage depending on the location, potentially reducing the timelines for processing storage applications.

In addition, the NSTA signed a memorandum of understanding (MoU) with the Office of Gas and Electricity Markets (Ofgem), which is tasked with consumer protection and the promotion of effective competition in electricity and gas markets. Ofgem will assume the role of economic regulator for the carbon transportation and storage sector later this year. The latest MoU is a non-binding document and establishes a framework for the NSTA and Ofgem to streamline interactions on issues where there are joint, sequential, or overlapping regulatory activities.

Separately, the Crown Estate Scotland is seeking to launch a new leasing mechanism for offshore wind projects, the Innovation and Targeted Oil and Gas (INTOG) process, intended to encourage the electrification of upstream facilities. The first round is expected in August and will be open to potential operators of small-scale innovative offshore wind projects of less than 100MW capacity and for projects connected to oil and gas platforms. The leases will be offered outside of the existing offshore wind leasing arrangements, which is likely to accelerate project reviews and approvals.

Upcoming legislation will clarify regulatory approach

Before the end of 2022, the UK parliament is expected to adopt the recently announced Energy Security Bill, which will include major changes to the low-carbon regulatory frameworks. The bill is set to codify business models for carbon capture, utilization, and storage (CCUS) and low-carbon hydrogen, potentially ensuring longer-term stability and certainty in new sectors. In addition, the government is expected to outline the functions of Ofgem as the economic regulator of the carbon transportation and storage sector, which will be crucial to delineating the powers of Ofgem and NSTA with regard to CCUS oversight.

Consistent policies and timely adoption of previously announced regulations will bolster the UK's relative international competitiveness in the low-carbon space. Stable regulatory frameworks, clearly delineated roles for regulators, and continued budget support are expected to be critical to boosting investment in oil and gas decarbonization projects on the UKCS over the medium-to-longer term.

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Posted 07 July 2022 by Aliaksandr Chyzh, Senior Research Analyst, Upstream Solutions, S&P Global Commodity Insights

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.