Supercharged oil and gas prices in 2022 have placed emphasis on the Crude Petroleum and Natural Gas Extraction industry, which is projected to generate revenue of £17.2 billion in 2022-23. The industry is important for UK energy because, according to Offshore Energies UK (OEUK), UK energy systems remain reliant on fossil fuels with oil and gas providing 75% of total energy. The sector is in current focus due to a sharp increase in commodity prices, which has contributed to inflationary pressure.
Russia vs Ukraine vs prices
The Russian invasion of Ukraine in February 2022 and sanctions that followed have wreaked havoc in global oil and gas markets, which affects the domestic exploration industry.
Russia is the third largest oil producer in the world and sanctions have resulted in an effective reduction in supply, which has driven up prices at a time when the global economy is reopening after the COVID-19 pandemic.
The US ban on Russian oil and gas imports led to crude oil prices skyrocketing, with WTI crude last reported at US$110.80 (£88) per barrel on 25 May 2022, up from US$92.12 (£73.17) per barrel on 24 February 2022, the day of the invasion.
The UK government followed suit, announcing the phasing out of Russian crude oil and refined crude products by the end of 2022. The European Union also announced plans to phase out Russian produced oil and gas by the end of 2027, which could lead to the use of coal – a more carbon-intensive option.
Exploring taxation
Exploration activity generally increases when global oil and gas prices surge and this year has been no different. Exploration firms have reported record profits, with BP’s profit more than doubling in the first three months of 2022 to £5 billion, while Total Energies reported approximately £2.2 billion in profit over the same period. The average profit margin in the Crude Petroleum & Natural Gas Extraction industry expected to rise to 9.4% in the current year, up from 6.3% in 2021-22. The higher-than-expected returns led to calls for a one-off windfall tax on excess profit, which could help ease pressure on households.
The UK government resisted these calls for months, until announcing a 25% windfall tax on oil and gas firms’ profits on 26 May 2022. The package announced also includes a £400 energy bill discount for the majority of UK households. This is crucial for UK consumers, with Ofgem stating that average energy bills are likely to increase by a further £800 a year in October.
Main points of the 26 May announcement by the Chancellor:
- All households to receive £400 discount of energy bills in form of direct payments.
- Eight million of the lowest income households will also get a £650 one off payment.
- A one-off disability payment of £150 and pensioners to get £300.
OEUK stated that oil and gas receipts from producers are projected to reach £7.8 billion in 2022, up £3.1 billion on the previous year and further taxes and an unpredictable tax regime is likely to weigh on investment. Despite 10 major oil and gas projects worth up to £3.5 billion close to starting production in 2022, OEUK has raised concerns that lack of government commitment to UK production will affect the industry.
In addition, more stringent environmental policies and increasing focus on renewable energy sources will affect the long-term viability of the industry. The body stated that without investment UK production will fall by 30% and largely wound down by 2037.
UK investment in the oil and gas sector is expected to decline from £16 billion in 2014, to £4 billion in 2022.
However, the Russian-Ukraine crisis is likely to accelerate investment in the UK oil and gas sector, with BP announcing a £18 billion investment in UK energy systems by 2030. In the North Sea, the company has committed to investment in the Murlach, Kate and Mungo fields in the short term. Shell UK also announced plans to invest up to £25 billion over the next decade, 75% of which are targeted for low-carbon renewable products. Other firms are expected to follow suit as the public and private sector drive towards the goal of energy security.
Pumped prices
Higher global oil and gas prices have filtered down to UK households, hit with a double whammy of high food and energy costs. Fuel prices at petrol station pumps were already trending upwards prior to the Russia-Ukraine crisis as the global economy reopened, but the decision to invade Ukraine led to sharp upshot in prices between February and March 2022.
According to the Office for National Statistics, pump prices per litre reached 165.09p in May 2022. The government’s 5p cut to fuel duty in March 2022 has had limited effects, with motorists using their vehicles less every week as part of measures to cut running costs.
The crisis has also contributed to higher gas prices after the increase in the energy price cap in April 2022.
Russian gas accounts for approximately 35% and 3% of natural gas used in Europe and the United Kingdom receptively, according to the International Energy Agency.
This indicates that Europe’s plans to reduce reliance on Russian gas will take years, and represents a long-term solution. For the United Kingdom, supplies from Norway remain secure. However, more investment in the North Sea is expected, aimed at bolstering supply and ease pressure on household budgets.
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