Hill+Knowlton Strategies

In the last week of August, the biannual Offshore Northern Seas conference took place in Stavanger, Norway. This year’s record attendance is testament to the boom in the North Sea market and the optimism of recent years’ major discoveries, but the boom also brings about challenges.

By Ola Bosterud and Henrik Arnestad Salthe

This year, almost 60,000 guests visited the trade show and conference at ONS – almost 10,000 more than in 2010. The visitors came from 109 different nations, and a total of 1,264 companies participated in the exhibition.

The atmosphere at this year’s ONS was extremely different compared with two years ago: gone are the somberness and talks about the oil and gas industry as a sunset industry. The recession depression has been replaced with eager chitchat about new discoveries and new business opportunities. The good mood is also penetrating the rest of Norwegian society, making Norway the odd one out in a world where recession and fossil fuel skepticism reigns. Even though a very large part of the Norwegian public is positive about the industry, there is still a strong anti-petroleum sentiment in parts of the public, especially on the far left of the political spectrum.

"Ocean Vanguard" - one of the drilling rigs that have been working on the Johan Sverdrup discovery. (Photo: HARALD PETTERSEN / STATOIL)

Massive discoveries
The reason for the change in mood is obviously the new discoveries made on the Norwegian Continental Shelf over the last couple of years. This includes the amazing Johan Sverdrup field, which was found in the most mature parts of the North Sea through applying new exploration models in pre-drilled areas. The field is expected to hold between 1,700 and 3,300 million barrels of oil, but the discovery is still being delineated and appraised to find out more about the total resources in place. Statistics Norway now predict record high investment levels in the Norwegian oil and gas industry over the next year, and their predictions for 2013, NOK 204 billion, are now the highest predictions ever, since Statistics Norway started predicting investment levels in 1985.

Even though everything is looking bright, history has taught us that the oil industry is a volatile industry. The slogan for this year’s ONS conference was Energy Paradoxes, and there are several paradoxes on the Norwegian Continental Shelf that the Norwegian industry needs to handle and that the international energy industry often finds puzzling:

• The public is very much pro-environment, and Norway has several strong E-NGO’s. At the same time, society is totally dependent of income from the oil sector
• Major discoveries have been made, but the industry still wants to open controversial areas to gain new acreage, to prevent the expected production drop after 2020
• The tax level for the oil industry is massive, but special tax breaks have fuelled a massive growth in the industry, resulting in tripling the number of E&P companies since 2000, from around 15 companies to close to 50 companies now prequalified for holding licenses.
• The Norwegian Continental Shelf is seen as mature, but major discoveries are still being made, and there are still large frontier areas that have not been thoroughly explored.
• Norway has steered clear of most of the Curse of Hydrocarbons, even though the population is small and hydrocarbons is a major driver in the economy.
• Norway has one of the world’s largest sovereign wealth funds, financed by income from the oil and gas industry. At the same time, the sovereign wealth fund’s investments in industrial players and oil companies have been controversial.

Trust is key
The industry is full of paradoxes, and the list could go on and on. What is true about all these paradoxes is that they need to be handled in the right way to win out both in the local and global competition for resources. In our view, the right way to do that is to be transparent about these paradoxes: about the challenges they present, as well as their opportunities. The oil and gas industry is dependent on the trust of their stakeholders. The only way to attain this is to earn that trust through being transparent and open, and communicating based on the facts.

About the authors:

Ola Bøsterud heads the energy and industrials practice in Gambit H+K in Norway. He has a long track record as Head of communications in various oil and gas related companies like  Petroleum Geo-Services, oil service company Aibel,  and Total Norge .

Henrik Arnestad Salthe is part of the energy practice group in Gambit H+K Norway, and works at the comapny’s Stavanger office. Before joining Gambit Hill+Knowlton Strategies, Henrik worked for several years as an oil and gas editor for various trade magazines and websites in Norway.

Following the Queen’s Speech, today the Government publishes its landmark piece of legislation to reform the electricity generation market in the UK. The draft Energy Bill contains the long-awaited Electricity Market Reforms, which are intended to provide the support necessary to balance future electricity generation over a mix of energy sources in order to reduce dependence on any one source and to meet carbon reduction targets. Against a challenging economic backdrop and with a fifth of existing generating capacity due to be retired from the grid in the next decade, these reforms are critical to ensuring the lights stay on while meeting our commitments to cut carbon emissions.

Overview

The key part of the Electricity Market Reform (EMR) are ‘market mechanisms’ designed to transform our generating capacity. The first of these is the introduction of Feed-in-Tariffs with Contracts for Difference (CfDs), long-term instruments designed to provide stable and predictable incentives for companies to invest in low-carbon generation. This will replace the system of Renewables Obligations (RO), which is due to end in 2017.  DECC has also committed to working with industry on Final Investment Decisions (FID) Enabling to enable some investment to begin in advance of the CfD regime coming into force. The second is an Emissions Performance Standard (EPS) that will limit carbon dioxide emissions from fossil fuel power stations by setting emissions standards for all new fossil fuel powered generation. This will prevent the construction of new coal plants which emit more than 450g/kWh.

Further support for the market mechanisms is the introduction of a Carbon Price Floor. This was announced by the Chancellor in the 2011 Budget and was introduced in the Finance Bill. This provides a clear economic signal to move away from high carbon technologies by increasing the price paid for emitting carbon dioxide. It places an initial value on the price of carbon of around £16/tCO2 (2009 prices) in 2013, which will rise to £30/tCO2 (2009 prices) by 2020. This will be complemented by a Capacity Market that will, if required, provide security of electricity supply by ensuring sufficient reliable capacity is available.

The measures are set to increase consumer bills, although the Government argues the rises will be less than if the UK carries on without reforms. The Department of Energy and Climate Change estimates the average bill will increase by GBP160 by 2030 instead of the GBP200 rise predicted if the market is left as it is. The costs of this investment will preoccupy media interest today and in the coming weeks, especially as consumer bills continue to rise and incomes tend to fall. One aspect of energy policy that will be critical to ensure that the cost increases stay within Government targets is the drive to improve the energy efficiency of the UK’s housing stock, and therefore reduce energy usage. The Green Deal is not part of the Energy Bill, but will be very important to achieving the Government’s affordability ambitions.

In addition to EMR, the Energy Bill also aims to ensure that Government and regulator Ofgem are aligned at a strategic level through a Strategy and Policy Statement (SPS). The Bill also establishes a new nuclear regulator, the Office for Nuclear Regulation, to regulate the building of new nuclear power stations. Finally, the Bill contains provisions that will enable the sale of the Government Pipeline and Storage System (GPSS). The Parliamentary Under Secretary of State for Defence Equipment, Support and Technology, at the Ministry of Defence provided a separate Written Ministerial Statement about this.

Gas

The Government have said that gas will continue to play an important role in the transition to a low-carbon economy, to provide flexibility and help maintain security of supply. A separate strategy on the role of gas will be published in autumn 2012. This is the subject of a public consultation and the deadline for submissions is 28^th June 2012. Also the Government announced earlier this year that the Emission Performance Standard for gas fired power stations in the UK that will allow them to continue to operate until 2045. Gas may well play a critical role in filling any gaps in supply created by a delayed roll out of the EMR.

Nuclear

The introduction of CfD for nuclear, together with other forms of low-carbon generation, is an important part of the Government’s plans to support the construction of new nuclear capacity. Some commentators have suggested that the EMR has been designed firstly to accommodate the nuclear consortia that are bidding to build new nuclear reactors, to the detriment of other energy sources. This is primarily because the Government have stuck to their no subsidy line for nuclear. This appears to provide very positive reading for nuclear and DECC appear very ready to engage with project developers in the short term before CfD comes into force. This will be welcomed by EDF Energy, who today suggested that they may apply to extend the life of their existing nuclear power stations.

Renewables

The CfD is seen by many commentators as favouring developers of larger renewables projects, but as an industry the EMR will be welcomed as a first step to providing the investment certainty required to build new capacity, especially the third round of offshore wind. For developers though the devil will be in the details and there remain some questions about issues like the tenure of CfDs, the details about contracting parties on CfDs, but perhaps most importantly around the proposed timeline for implementing EMR. The industry suggests these timelines look ambitious. The CfD must be in place to support investment decisions before the end of the RO, which currently expires in 2017.

While the Chancellor’s freeze on fuel duty is likely to grab the headlines, on deeper reflection this afternoon’s Budget announcement is indicative of the Coalition Government’s struggle to fulfil its goal of reducing emissions at the same time as it looks to squeeze spending.

With DECC and the Treasury having fought a running battle over the Green Investment Bank’s ability to raise funds, it looks – as had been anticipated – as though the Treasury has got its way. This will undoubtedly be viewed as a setback for Secretary of State for Energy and Climate Change Chris Huhne, and his Liberal Democrat colleagues.

So much for ducks quacking and banks borrowing eh?

Worries about rising energy prices are also behind the decision to slash the CCS Levy, while the Government has clearly taken note of the need to incentivise the Green Deal at a time when most consumers are more concerned with making ends meet than lowering their carbon footprint (a subject that Huhne spoke about at the launch of the CBI report ‘Making the Consumer Case for Low Carbon’ which was held at H&K 2 weeks ago)

In this context, green campaigners and investors in green technology look set to be disappointed. Many have already begun to argue that the carbon floor price will not drive investment into the more conceptual forms of clean energy or improved efficiency at the proposed level. Nuclear looks like the winner in this regard at the moment, but events in Japan may well put the brakes on the new build programme in the UK as they have elsewhere.

Ultimately for all those involved in the energy sector, whatever their sentiment towards today’s announcements, the 2011 Budget serves as a stark reminder of the difficulties that lie ahead for the Coalition in its quest to become ‘the greenest government ever’ in an age of austerity.