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UK enterprise at a crossroads with North Sea oil and gas licences

Em Rose Profile picture for user Em Rose August 1, 2023
Summary:
The UK Government's commitment to hundreds of new licenses for North Sea oil and gas extraction could spell trouble for ESG ratings of UK-based companies.

An image of an oil and gas rig out at sea
(Image by C Morrison from Pixabay)

The UK Government has announced plans to grant hundreds of licenses for oil and gas extraction in the North Sea, as well as carbon capture and storage (CCS) technology in an effort to increase energy independence and security. The move has been described as “the wrong decision at precisely the wrong time” by fellow Conservative MP Chris Skidmore. Prime Minister Rishi Sunak has defended the decision, describing it as “entirely consistent” with UK plans for net zero

The UK government's decision to grant more licenses for North Sea oil and gas extraction stems from considerations of energy security, amidst geopolitical tensions and the Russia-Ukraine conflict. Many nations responded to the war in Ukraine by boycotting Russian natural oil and gas exports, with some governments responding to the disruption in fossil fuel supplies with further investment in renewables, such as in the US and EU. UK energy policy, however, is focused on directing investment towards exploiting domestic oil and gas reserves in order to achieve the transition to net zero, stating that this project will “unlock” new technologies for cleaner energy such as hydrogen and CCS. Relatively speaking, the UK is lagging, with investment in renewable energy falling year on year. 

The impact on ESG, finance and enterprise

An increase in North Sea oil and gas extraction combined with underinvestment in renewable energy will significantly impact the energy mix for UK-based enterprises in the long term. A domestic energy strategy that focuses on carbon-intensive and polluting fossil fuels, rather than prioritizing a transition to renewable sources of energy, may hinder the adoption of cleaner alternatives and slow down progress towards businesses achieving ESG goals. UK businesses are facing long term challenges in aligning their energy usage with sustainability targets, risking reputational damage and investor scrutiny.

Despite recent controversy, ESG ratings hold increasing significance from a financing and global market perspective. Investors are seeking sustainable investments, making high ratings crucial for attracting capital. While some prominent detractors are keen to burn ESG on the bonfire of the culture wars, others are quick to point out that ESG ratings are a metric designed by finance, for finance, offering little by way of genuine contributions to a sustainable future. However, it is generally accepted that strong performance signals effective risk management against environmental, social, and governance factors, leading to more stable financial outcomes, and in a recent report by Chaucer, “air pollution” and “management of emissions” were identified as the biggest risks to ESG ratings for large UK companies. 

In a competitive market, companies with positive ESG profiles gain a strategic advantage, and leveraging technology is instrumental in realising ESG objectives for businesses. Finance is already using AI-driven tools such as RepRisk to help make investment decisions. There are also a number of tools available to businesses to help communicate their ESG commitments, such as Sedex and Emitwise, as well as emerging AI-driven supply chain risk management solutions such as Kavida.ai, which can help give smaller enterprises the edge over competitors when it comes to organisational transparency. Exposure to increased emissions due to national energy policy threatens to undo the progress made towards achieving these goals, and combined with chronic under-investment, new North Sea oil and gas extraction threatens to undo more than it “unlocks” for UK businesses.

The wrong tech, at the wrong time

The UK has committed, alongside the other 197 nations of the UNFCCC, to the Paris Agreement of 2015, which aims to reduce carbon emissions to net zero by 2050. The UK Government’s “Build Back Greener” net zero strategy includes “full decarbonization” of our power supply by 2035 as a key policy. The new North Sea oil and gas fields will emit as much carbon as 14 million cars, which casts reasonable doubt over how the granting of these licences might help the UK Government achieve its environmental commitments, or net zero. 

As part of offsetting the emissions from oil and gas, the UK Government has invested £20 billion in carbon capture and storage technology, which it claims can help to reach its stated net zero commitments. However, CCS is a technology that is primarily used to enhance extraction of fossil fuels. Furthermore, offsetting can only contribute a fraction of the reductions in emissions necessary to meet net zero, with the general scientific consensus being that emissions from fossil fuel usage need to be drastically reduced as a primary method of mitigation.

Last year in the IPCC report, Antonio Guterres, Secretary-General of the UN, described the pursuance of new fossil fuel projects as “moral and economic madness” which is supported by a recent report that suggests new licenses may fail to attract investment. The average time for newly licensed North Sea oil and gas projects to begin production is 28 years, and there will likely be significant reduction in demand for oil and gas by 2050. It goes on to say that the UK Government is pursuing a policy that is “no longer economic for the Treasury, taxpayers, or consumers” with experts pointing out that the proposed new oil fields would provide just 3 weeks of energy per year.

The impact of this decision by the UK Government on enterprise is yet to be seen, but there is already evidence of the effects of this decision. As the UK’s share of the green tech market “slips away” Australian billionaire and philanthropist Andrew Forrest has threatened to pull out of any further investment in UK tech enterprise, telling Politico “I cannot invest in a country which is basically denying global warming and putting its faith in a failed ‘wait for the next idiot to come along’ solution called CCS.” 

My take

Set to a dismal backdrop of record-breaking heat waves, floods, crop failures and under-investment in green tech; the UK Government has unveiled an environmentally-destructive, carbon-intensive project to provide 3 weeks of energy a year, which appears to offer little by way of economic incentives for anyone at all. 

It is difficult to ascertain whether the change of pace on environmental issues is here to stay, or just a knee-jerk reaction to results of the recent Uxbridge by-election, where environmental policies were scapegoated as a reason for a narrow Labour loss. Either way, the UK Government is failing to read the room.

I’m far from an ESG evangelist, but it seems reasonable to conclude that the current UK Government’s contributions to all three pillars will be felt for generations to come.

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