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Future of North Sea oil in doubt as Shell pulls the plug on Cambo

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Shell oil - Toby Dexter for The Telegraph
Shell oil - Toby Dexter for The Telegraph

It was less than a month ago that Kwasi Kwarteng was celebrating Shell’s plans to move its group headquarters out of Holland and to the UK.

The business secretary heralded the decision as “a clear vote of confidence in the British economy as we work to strengthen competitiveness, attract investment and create jobs”.

Today he may have more complex feelings towards the FTSE 100 oil giant - and greater uncertainty about the challenges ahead for the economy.

On Thursday evening, Shell announced its decision to pull out of the controversial major Cambo North Sea oil and gas field which has come under sustained attack from fossil fuel critics - including Nicola Sturgeon, the First Minister of Scotland. It had planned to be a 30pc licence holder for the project.

The project 75 miles west of Shetland was set to create 1,000 jobs and pump 178m barrels of oil, but had become a flashpoint in the increasingly bitter debate over fossil fuels.

Although Cambo is a relatively small project for the supermajor, it has potentially large consequences for Britain as it tries to chart its path towards a greener economy.

Critics insist that new projects will only add to emissions and prolong the life of oil and gas amid a climate emergency; supporters argue that without it we will be in growing hock to the likes of Russia and the Gulf for energy at a time of soaring gas bills.

Shell’s choice to wave goodbye hands a victory to the former but does little to silence the overall debate, and raises further doubts over the future of an industry that employs more than 100,000 and whose skills will also be essential in helping the country move towards greener energy.

“I urge politicians to reflect carefully on their public statements on oil and gas and the impact they have on investment in the industry,” oil industry veteran Sir Ian Wood said last night.

“We must not create an adverse investment environment at this crucial moment in our energy transition journey. The future prosperity of our region and the country’s ability to meet net zero, depends on it.”

Shell blamed a weak economic case for its decision not to invest in the Cambo project but added that it also had “the potential for delays” - widely interpreted as a nod to potential legal and regulatory entanglements.

It is believed to have told Siccar Point Energy - the private equity backed firm that majority owns the project - on Thursday morning that it planned to pull out, blindsiding its 70pc partner and the rest of the industry after several publicly supportive statements.

Attention is turning to what might happen next, both for Cambo and the wider industry. Jonathan Roger, chief executive of Siccar Point, said on Thursday that it was talking with the regulator and others about taking the project forward.

Industry sources are split on the likelihood of that happening. What’s clear is that any new partner is unlikely to be among majors such as Exxon and BP, all of whom face the same reputational struggles over climate change as Shell. “Cambo risks being seen as poisoned chalice,” says one industry source.

The North Sea has, however, in recent years attracted growing interest from private or state backed players who may well find the funding and the appetite to take it on, such as China’s CNOOC or Sir Jim Ratcliffe’s Ineos, which has been snapping up new fields.

In reality, roads have led in the direction of Shell’s departure from Cambo for a long time. The company, which accounts for about 10pc of UK oil and gas production, has been under growing pressure over its own emissions - 63m tonnes last year - and to do more to invest in green energy products.

A Dutch court has ordered it to go faster to cut its emissions following a case brought by climate activists, and it is also under attack from activist investor Dan Loeb.

But the picture is also not straightforward. The UK Government has refused to set an end date for oil and gas exploration and supports the industry - recognising that oil and gas still supplies more than 75pc of UK energy - while plans to electric cars and electric heat pumps are some years off.

And the Government has pledged to continue to support the oil and gas industry, as long as it also slashes emissions from production and invests in green energy such as hydrogen and carbon capture.

Yet as the tensions over Cambo rose in the run-up to the UK hosting the international climate change conference Cop26 in November, ministers stopped short of a full-throttled defence. Boris Johnson told Cop26 that we want to “move beyond hydrocarbons completely in the UK, and do it as fast as possible”.

Senior figures at Shell are understood to have become frustrated by the UK Government’s unwillingness to give Cambo public support. A Whitehall source, however, accused Shell of bowing to a “vocal minority” of activists who have blocked the projects.

In Scotland, meanwhile, first minister, Nicola Sturgeon, has taken an increasingly strident stance against fossil fuels amid her power-sharing deal with the pro-independence Green Party.

Over the summer she demanded the UK Government review approved oil and gas licences while last month she said Cambo should “not get the green light”. Political signals from Scotland are also thought to have been important in Shell's decision.

In October, Shell was further disappointed when UK regulators declined to approve its major Jackdaw development in the North Sea. “They can do these projects anywhere in the world - why would they do it somewhere where they are going to spend all of their time fighting?,” said an industry source. Shell is revising plans to get approval.

Whether the giant’s recent move signals a wider caution towards the North Sea is harder to predict. One industry executive said it was “absolutely” still a great place to invest. Other sources echoed Sir Ian Wood’s warning about creating a hostile environment, stressing this placed investment in cleaner energy at risk, too.

“It’s either an investable destination or not and you make that decision based on stability of fiscal and regulatory policy,” said one industry source.

As it all unfolds, Kwarteng has a lot to think about.