Is Net Zero the Right Choice for the UK? Part 1: A Tale of Two Basins
- Callum Wheeler
- Apr 29
- 8 min read
Net Zero, which is fundamentally an accounting system where emitted carbon equals that captured, is a hotly debated topic in the UK and currently finds itself at the centre of a culture war.
The UK has the highest electricity prices in the G7 and 2nd highest globally for domestic electricity. Now, in the midst of yet another energy supply shock, which at the time of writing is the 9th week of the Iran war and disruption of the Strait of Hormuz, the UK is compelled to address both energy cost and security.
However, long before gas supplies and the cost of energy were topics of concern in the UK, and a now accelerated push for renewable energy, the UK and Norway underwent a very different energy transition, leaving two dramatically different systems in its wake.
A Brief History of the North Sea
The Era of Coal
In the 1950s and 60s, coal dominated the UKs political and energy landscape, generating over 90% of the Country’s electricity and employing over a million people.
And it wasn’t just electricity, coal had an absolute monopoly over the market for gas. About 13 million UK consumers connected to the gas network would receive ‘town gas’ into their homes, used predominantly for cooking and in gas-fires.
Town gas was produced via the pyrolysis of coal ‘baking’ in gigantic gasworks, which could be found at almost every major town and city in the country, and stored in towering ‘gas holders’. Baking coal was an inefficient process, forming a noxious and low-energy mixture of methane, hydrogen and up to 20% carbon monoxide - explosions weren’t the only concern with leaking town gas and the phrase ‘putting your head in the oven’ originates entirely from this era and risk of CO poisoning…
The Great Conversion
This all changed in 1965 when BP discovered a massive pocket of gas off the coast of Yorkshire. In the early years of extraction, vast volumes of North Sea gas was found in shallower waters near the coastline, and so was initially extracted very easily.
As ‘town gas’ at the time was manufactured, this new resource was dubbed ‘natural gas’ - it had twice the thermal energy, wasn't toxic to breathe and was significantly cheaper.There was just one problem - the infrastructure wasn’t suitable to distribute or utilise this energy dense fuel.
So began the great conversion, a 10-year process to convert or replace over 13 million burners and construct the 3000-mile National Transmission System - a feat of engineering described at the time as “the greatest peacetime operation in the nation’s history”. It brought into motion the UK’s first major energy transition since coal kicked off the industrial revolution, and I think, has parallels that are resonating today.
Black Gold and the Dash for Gas
The UK and Norway first struck crude oil in 1969/70 with the discovery of the Norwegian Ekofisk field and the infamous British Brent field, but extraction was a daunting engineering challenge and not initially economically viable.
This all changed during the 1973 oil embargo as global energy prices quadrupled, virtually overnight. This had a profound and lasting impact on Western energy policy, and in the UK, sparked urgent action in the North Sea. The British National Oil Corporation (BNOC) was formed, and just two years later, the first North Sea oil came ashore in Scotland.
The Thatcher Government of the 80s and 90s took the decision to aggressively scale up extraction - they believed it was the private sector that should be responsible for maximising the opportunity, and so like much of the public infrastructure of that era, the industry was privatised and BNOC was eventually absorbed by BP.
The UK Oil and Gas industry expanded rapidly and by 2000, gas production peaked at 115 Billion cubic metres, on par with today's production in Saudi Arabia.
Electricity generation was also privatised, triggering the infamous ‘dash for gas’ period of the 1990s. In a span of 10 years, over 35 massive combined cycle gas turbines (CCGT) were built, displacing multiple-GWs of coal generation that was reaching end-of-life.
The decline of coal continued until the final power station was closed in 2024 at Ratcliffe-on-Soar, ending 142 years of coal-fired power generation in the UK.
The Business Model
Extraction Strategy
At the time, the UK was going through a painful deindustrialisation, primarily with the closing of coal mines and steel works. The colossal tax revenues generated from the North Sea O&G, which at its peak was 10% of all Government tax revenue, was used to fund the enormous associated welfare spend, tax cuts and general spend. The total value spent today amounts to ~£350B in real terms
This is where UK policy diverged significantly from Norway; the Norwegian Government decided to maintain State ownership and employ a more gradual and sustained extraction.
In 1990, the Government Pension Fund Global (GPFG), otherwise known as the Norwegian Sovereign Wealth fund, was established and North Sea O&G tax revenues were invested instead of spent. The GPFG portfolio is the single largest sovereign wealth fund globally, comprising ~70% equities and ~30% Corporate and Government bonds, and today, is worth over £1.7 Trillion.The equities holdings represent a staggering average ownership of 1.5% of every publicly listed company on earth, with the majority holdings concentrated in US tech giants.
How much gas is left remaining?
The contrast in strategies could not be more stark, and to put this into clear context, the Norwegian basin was roughly equivalent to the UKs at the time of discovery.
The UK’s ‘Energy Sprint’ strategy has today extracted 90 to 94% of commercially-viable reserves, meanwhile, Norway’s ‘Energy Marathon’ has left 43% of reserves intact.
The reality that the UK must face is that today, North Sea O&G is all but depleted with the low-hanging fruit long since been taken.
The decline will inevitably continue, and by 2030, the North Sea Transition Authority (NSTA) and Offshore Energies UK (OEUK) anticipate gas production to fall from meeting 43% of domestic demand, to just 20%, even amidst a falling demand forecast.
Granting new gas licenses today would not yield fresh supply for at least another 10 years, but despite this, the logical argument is we will still need gas in 10 years, so why not green light licences today?Unfortunately, it’s not the no-brainer you might think it is.
The Economy of Extraction
The first and most critical point to make, and if you’re familiar you might be tired of hearing it, Oil and gas prices are set on the global market.
The O&G in the North Sea is not fundamentally owned by the British public, it becomes property of the private entity that extracts it, who then sells that commodity at the benchmark price.
Taxes are the tool for capturing value for the Treasury, which could in turn be used to subsidise fuel and energy costs.
But, in an ultra-mature basin, it isn’t always that simple…
There are two primary mechanisms that O&G firms are using to not only reduce their tax burden, but claw back tax paid.
When the Energy Profits Levy (EPL) or ‘Windfall tax’ was introduced, there was also a generous investment incentive for developing new sites, creating an effective 91.4% tax relief.If Rosebank and Jackdaw are approved, this would amount to an immediate tax relief of £3.25B on existing profits, not to be recouped until those sites are operational years down the line.
In addition, as a result of ring fenced Corporation tax, the tax payer will be on the hook for £10.8B in decommissioning costs as North Sea rigs reach end of life.
That eye-wartering sum gives pause for thought over whether new, marginally economic sites should be developed at all, given what can only be interpreted as a disproportionate risk:reward ratio for tax payers.
Energy Security
Fracking
Hydraulic fracturing or ‘fracking’ is a process where horizontal drilling is used to open up wells in shale rock formations. Water and sand are injected into the rock at high pressure to form cracks called fissures, enabling the trapped O&G to flow up the well.
Consequently, this process causes seismic activity, and when conducted near populated areas, can lead to noticeable earthquakes.
Fracking remains a highly contentious topic in the UK - doubts remain over whether sufficient support can ever be established to overturn the moratorium, green light drilling, and of course, overcome the inevitable legal and environmental challenges.
Even if all of this is achieved, as experts and political commentators have noted, such as Kwasi Kwarteng in 2022, green lighting projects today would likely not yield gas flows for another 10 years.So even if the UK can embrace fracking, which is a big ask, it is unlikely to ever produce results in time.
Low pressure or ‘gentle’ fracking sits outside of the wider moratorium, but remaining regulatory hurdles at sites such as the West Newton gas field, the one of the largest onshore fields ever discovered in the UK, have driven the developer to a familiar interim solution.
Security at the Pump
An mportant myth to dispel here is that North Sea crude oil meaningfully contributes to our energy security of products such as petrol and diesel.Unfortunately, over 80% of this crude is not suitable for the specific hardware of UK refineries, which were built before the North Sea boom. The North Sea oil from current production that does enter UK refineries contributes to ~10% of our domestic consumption, and so any additional fields, such as Rosebank, are marginal at best.
As it happens, North Sea crude is ‘light sweet’ making it a premium product and can be sold very lucratively on the global market. Conversely, the ‘heavy sour’ crude that our refineries are built for is a much cheaper commodity, and so generally, the UK does very well out of this import and export dynamic.
Gas production and consumption is far more pertinent in the energy security and macroeconomic argument. It is conclusive at this point that we can no longer meaningfully pull supply-levers, leaving demand-side action to take centre stage.
Gas Imports
The UK is now reliant on imports for ~50% of our domestic needs however, from an energy security perspective, supply is relatively secure.
The UK is heavily reliant on imports from Norway, who supply 78% of our shortfall.
Meanwhile, Norway’s export channels are at near-capacity and, as a hydroelectric powerhouse, only use 2% of their gas domestically.Ultimately, Norway is equally as reliant on the UK as an importer of their resource and as Bryony Worthington wonderfully sums up here, and in multiple podcast episodes, the UK should urgently seek to secure Norwegian gas under fixed long-term contracts
The remaining is supplied via liquified natural gas (LNG).
The majority of our LNG is supplied by the US, leaving just 3% of our supply coming from a diversified range of sources across Latin America and Qatar.
Whilst supply is relatively secure today, as our basin continues to deplete, our dependence on imports will continue to grow.What’s more, all of our imported gas is subject to global prices such as the Dutch TTF, and as we have seen again over the past 2 months, these markets are fragile and sensitive to geopolitical disruption.
The current conflict is history repeating itself - in the same way that the 1973 oil embargo reverberated across Western energy policy, completely restructuring the global supply, this time it is the demand-side which will undergo significant transformation.
In Part 2, First Principles Thinking, we will explore how the UK must seize on this opportunity, and the potential it has to overhaul our economy and liberate us from supply shocks forever.
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