Scottish divestment: could, and should, Scotland pull out of oil?

Scotland has become something of an epicentre of climate change discourse in the UK in recent months. In November, Glasgow hosted the much-trumpeted COP26 climate summit, but even months before the conference, Scottish First Minister Nicola Sturgeon made headlines for calling for an end to new oil and gas permits in Scottish waters.

This call was as ambitious as it was controversial, with oil and gas production a cornerstone of both the Scottish and British energy mix for generations. In a world increasingly blighted by resource nationalism, the practice of tying energy supply to ideas of national interest and security, a resource like the UK Continental Shelf (UKCS) is not one to be dismissed out of hand, as countries around the world strive for greater energy independence.

The future of Scottish oil and gas, therefore, is as much about environmental ideals as political will. Much will rest on the willingness of actors within the sector to phase out reliance on oil and gas, and replace it with jobs and energy sources more suitable for a sustainable future. 

But with alarm bells raised by the COP26 summit, and a rapidly-closing window to avoid irreversible damage to the Earth’s climate, can the oil and gas sector balance its desire for slow reform with the need to clean up its activities?

“Currently, oil and gas provide 73% of the UK’s energy, and every future energy scenario shows oil and gas will still be needed for years yet to come,” explains Will Webster, energy policy manager at Oil and Gas UK, the trade industry representative body. 

It is certainly unsurprising to see a group that speaks on behalf of oil producers bullish about oil’s future, but this optimism is supported by the figures; Scottish Government data notes that total annual oil and gas production increased by 0.4% between 2018 and 2019, and accounted for 82% of total UK oil and gas production by the end of 2019.

“This not only supports UK jobs, but ensures our security of supply, manages our reliance on volatile global markets, and allows us to stay in control of emissions in a way that importing does not,” continues Webster, highlighting how a strong domestic oil and gas industry can provide a range of benefits, from energy independence to minimising environmental damage. 

“While new projects come online, many others are being decommissioned, so the sector must continue with exploration and production if we are to keep up.”

Yet the narrow nature of the Scottish oil industry has left it vulnerable to external pressures, such as the Covid-19 pandemic. 

A 2020 survey conducted by the Aberdeen and Grampian Chamber of Commerce found that just 13% of contractors were working at or above “optimum levels” in the UKCS, compared to 47% in 2019, with 82% expecting revenue to fall in 2020. Similarly, 34% of contractors put activities on hold during the pandemic, while 23% of those surveyed reported cancellations of projects altogether.

This is to say nothing of the challenges that arise within the oil and gas industry, which threaten any such producers but pose a particular risk to a country like the UK, where so much of its domestic production is tied up in a single region. 

Scottish Government figures placed the sales value of Scottish oil and gas at £22.5bn ($30.4bn) in 2019, down 11.5% on the previous year’s figure due to a fall in oil and gas prices. Similarly, both operating expenditure and capital expenditure increased year-on-year, as companies are required to continue investing in assets long after the first oil is produced.

The spiralling costs of Scottish operations are compounded by the fact that the UKCS, home to many of the country’s most productive reserves, is an asset that has seen better days; Webster refers to the area as “a declining basin”.

While the UK’s potential oil reserves remain at what the Oil and Gas Authority (OGA) call a “significant level”, with UKCS reserves estimated at around 4.4 billion barrels of oil equivalent, this security is not as long-term as was once thought. 

The OGA notes that the UKCS could sustain current levels of production until 2030, but increasingly, and especially in the wake of the COP26 summit, most actors are considering the consequences of their actions until 2050 at the earliest. This is the timeframe to which the world’s most polluting industries, such as the oil and gas sector, need to set their own plans.

This has led to a difficult situation for figures such as Sturgeon, who are trying to balance the long-term aims of environmental protection with the short-term need to provide affordable fuel for citizens. Webster points out that, even in the most ambitious climate-friendly projections, oil and gas is expected to meet one-quarter of the UK’s energy demand in 2050, so there is little sign of demand relenting in the near- or even long-term.

“It is important that we still have a domestic industry to help meet these needs continuing to provide roughly half of the amounts being used,” says Webster, who went on to say that, contrary to Sturgeon’s advice, new oil fields will be needed to meet this demand in the short term. “The changing oil and gas prices in autumn of this year have shown how crucial new fields are going to be to heat people’s homes and power workplaces.”

The solution, as is often the case with such matters, is a form of compromise. While pulling the plug on offshore operations overnight would be the best for the environment, such a move would leave a gaping hole in the UK’s energy mix, and the Scottish economy more broadly. There is a legitimate argument to be made that domestically-produced oil is far better for the environment than that which is imported from overseas.

With this in mind, Webster points out a number of incremental changes that the oil and gas industry has been making to improve its environmental performance, slowly but surely.

“Projects in the UKCS have been developed with the low-carbon future in mind and have passed rigorous environmental checkpoints put in place by our regulator,” Webster says. “We are working on further reducing methane and carbon emissions from production. We can expect oil and gas projects to become more sustainable. Our industry is also continuing to develop carbon capture, hydrogen, and renewable projects to decarbonise other areas of the economy.”

There is a similar story for another group whose lives are tied to the offshore industry: oil and gas workers. Simply ending oil and gas production would wipe away around 71,500 jobs across Scotland, and slash a £19.4bn ($26.2bn) hole in the gross value added to the Scottish economy, a total of 12% of the country’s GDP. 

A more sustainable way of changing the face of Scottish energy employment would be to retrain offshore workers, rather than simply leave them out to dry as facilities shut down, and Webster highlights a number of potential retraining opportunities in the Scottish oil and gas sector.

“Companies across our industry are diversifying into renewable technologies such as wind, solar, carbon capture and storage, and hydrogen,” he explains. “With this, we have the opportunity to make the northeast of Scotland a centre of excellence for low-carbon innovation. We must take our people and skills along with us on this journey.”

Of course, the challenge faced by the world’s energy industries, not just the Scottish oil sector, is the timeframe with which they must make these changes in order to avoid total environmental collapse. With the COP26 summit highlighting the need for dramatic change through its Glasgow Climate Pact, many of the programmes and initiatives supported by the oil and gas industry will need to be accelerated.

In both the near and long term, it is unlikely that Scotland will dramatically phase out domestic oil and gas production; but perhaps the sector can be urged to speed up the rate of its clean energy transition, before it truly becomes too late.