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UK North Sea’s oil and gas future darkens after Shell’s Cambo exit -Breaking

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© Reuters. FILE PHOTO – The Royal Dutch Shell logo can be seen in a Shell station in London on January 31, 2008. REUTERS/Toby Melville

Shadia Naralla, Ron Bousso

LONDON, (Reuters) – The British North Sea producer Siccar Point had been negotiating the sale to another private equity-backed firm, NEO sources said.

Royal Dutch Shell, Siccar Point’s partnership in the project (LON), pulled its support of Cambo during a larger public debate over the future development of fossil fuels in the North Sea. According to industry sources, the NEO deal and future plans for the project worth 1.9 billion pounds ($2.51 billion), were in turmoil.

The decision by Shell sends a bad signal to all other investors, banks and companies who might consider investing in the ageing basin. This includes buying assets from majors. Industry sources said this to Reuters.

Cambo was withdrawn several weeks ago after Shell rejected plans to build Jackdaw in the North Sea. Jackdaw’s future is also uncertain unless Shell develops a new plan.

Shell announced Thursday that Cambo is not financially viable in its announcement. According to company sources, the decision was also influenced partly by climate protests in North Sea against the extraction of oil and gas. It is also believed that Cambo’s opposition by Nicola Sturgeon, the First Minister of Scotland, was part of the reason for the change.

Although it is an economic decision, the outside environment can have an effect on that decision. One Shell source stated that it’s all about business risk.

Shell and Siccar Point have repeatedly delayed decisions on Cambo’s development, including the most recent due to the pandemic coronavirus. Sources close to the matter say that Siccar Point was close to reaching a deal for NEO. However, it is not clear what stake or the price of such a deal.

NEO declined comment. Siccar Point refused to respond when Siccar Point was asked about NEO talks.

CLIMATE – ‘TOXIC’

Over the past decades, oil companies such as Shell and BP have invested heavily in North Sea. They still view the region as an important part of their future, despite having reduced their footprint in the area in recent decades.

The UK was hosting the COP26 summit on climate change last month. It decided not to sign an alliance with countries promising to end new oil- and gas projects in their territories.

However, investors, governments, and activists are putting pressure on the oil industry to reduce spending on oil and gas and invest more in renewable energy to cut greenhouse gas emissions.

According to industry sources, if Shell doesn’t make the UK clear their support of investment in the sector, the UK could see a drop in production from the North Sea mature oil-and gas basin.

Shell’s move has had a significant impact on investment in British North Sea. One North Sea oil-and-gas source said, “At this moment it’s toxic.”

Regular investment is required in oil and gas fields to drill new wells, and expand existing fields. This helps offset natural depletion. More investment is necessary for mature fields.

British oil production is now at 1.5 million barrels oil equivalent per hour (boepd), about 1% less than the peak of 4.4 million boe/d reached in 1999.

Although investments in existing wells will continue, many companies are now hesitant about making major capital investment decisions.

One source said that “for the UK North Sea, it’s a little depressing.”

SHELL’S EXIT WELCOME

Shell’s withdrawal from Cambo is welcomed by investors and climate activists. Shell was referring to a report issued by the International Energy Agency, (IEA), that said no new oil and/or gas projects were needed to reduce global warming to 1.5 degrees Celsius.

Siccar Point has stated, as have some politicians that stopping oil and gas exploration in the North Sea would make Britain more dependent upon higher-emissions import fuels.

A spokesperson for the government said 75% of the UK’s primary energy demand comes from oil and gas at present and the decision on Cambo “is a commercial decision that has been taken independently by Shell.”

British courts are increasingly being used by climate activists to stop oil and gas production in Britain.

In October, a Scottish court ruled in favor of BP in relation to a North Sea offshore oilfield. However, a second case is being brought against the government and the Oil and Gas Authority. The hearing will begin Dec. 8, and it will determine whether or not tax incentives for producers and oil and gas companies are legal.

According to data from official sources, the tax year 2020/21 saw the UK’s oil and gas production drop by 71%. The decline was due to an increase in oil prices and the subsequent pandemic.

This figure is comparable to the 400 million pounds the government paid gas and oil producers in 2016/17, due to tax arrangements made when oil was low.

Graphic: Britain depends on energy imports https://fingfx.thomsonreuters.com/gfx/ce/movanjldmpa/Britain%20depends%20on%20energy%20imports.png

Graphic: From where do Britain’s LNG imports originate? https://fingfx.thomsonreuters.com/gfx/ce/zgpomrnaqpd/Where%20does%20Britain’s%20LNG%20come%20from.png

Graphic: UK tax revenues from oil and gas sector https://fingfx.thomsonreuters.com/gfx/ce/xmpjonkadvr/UK%20tax%20revenues%20from%20oil%20and%20gas.png

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