Oil giant BP has hammered home its belief in the potential value of the UK North Sea's reserves as concerns mount that the offshore wind revolution could be derailed by cost increases.

BP’s chief executive Bernard Looney highlighted the company's interest in North Sea oil and gas exploration and development opportunities in its second quarter results call earlier this month. 

The company posted a $2.6 billion profit shortly before research by experts in the public finances underlined the value of the industry to the economy of Northern Scotland.

Highlighting a marked deterioration in earnings and employment trends in the Highlands, Islands and north east Scotland, IFS said the fall probably reflected cuts in oil and gas industry activity in recent years. It noted these are areas which have historically had “relatively strong labour market outcomes”.

Following a boom in investment fuelled by globalisation in the early years of the last decade oil and gas firms retrenched during deep downturns, which culminated in the slump triggered by the pandemic.

The cuts were made during a period in which there was strong investment in renewables in Northern Scotland, including windfarm developments on land and offshore.

READ MORE: Scottish Government dithers as investors cash in on renewables boom

However, such investment in Scotland has failed to generate anything like the number of jobs expected.

The Scottish Government hopes the landmark ScotWind offshore licensing round completed in 2021 will provide a big boost to activity. Oil giants, including BP, bid successfully for licences.

But Swedish giant Vattenfall dampened hopes of a boom in the UK recently after it shelved activity on the Norfolk Boreas development citing the impact of cost increases.

Shell boss Wael Sawan indicated the company, which won a ScotWind licence, was struggling to make the economics of windfarms work.

In BP’s results call Mr Looney noted the company is working on plans for big windfarm developments in the East Irish Sea, which he said was looking good. He made a passing reference to ScotWind.

The Herald:

The update was awkward for the SNP Government. Former first minister Nicola Sturgeon appeared to turn against the industry, which the SNP had claimed could bankroll an independent Scotland, as she courted greens.

In the energy strategy released in January following long delays the Government said there should be a presumption against exploration for oil and gas to help speed the shift to a low carbon economy. It has been slated by environmentalists since then for not doing enough to promote the just transition needed to ensure oil and gas-dependent communities are not left high and dry.

READ MORE: 100 million barrel oil and gas find to stoke interest in North Sea

Mr Looney reckons oil and gas has an important role to play in the transition to net zero given the increasing importance of energy security considerations amid Russia’s war on Ukraine.

BP recently decided to slow the pace of the reduction in oil and gas production that he had promised in 2020.

In the Q2 results call, Mr Looney said we must invest in securing the oil and gas supplies the world will need while developing low carbon energy sources. It is a case of and, not or, he told analysts.

The risk of reliance on imports was underlined when gas prices surged around 40 per cent on Tuesday amid fears LNG supplies from Australia would be disrupted by strike action.

The IEA then said global demand for oil reached a record high this month as the global macroeconomic outlook improved. Rising Chinese petrochemicals production was a key factor.

READ MORE: Aberdeen oil services heavyweight wins boost from major North Sea player

Mr Looney made clear he thinks the North Sea has an important role to play in meeting demand for hydrocarbons. Some of the gas concerned could be used as feedstock in the production of low-carbon hydrogen fuel.

“For us that means investing in the North Sea and the transition and that’s what we’re doing,” said Mr Looney.

He highlighted the work BP is doing to make the most of the giant Schiehallion field off Shetland while looking for new resources in the area. It is preparing to bring the Seagull oil field onstream off Aberdeen.

Asked if the introduction of the windfall tax last year had put BP off the UK, Mr Looney said: “We’re on a five-well campaign West of Shetland, we’re bringing on Seagull later this year and will continue to look at licences and investment decisions there based on the information we have at the time.”

The comments indicate the windfall tax introduced last year will not be as much of an obstacle to investment as industry cheerleaders have claimed.

They could boost hopes that giants such as BP will support the UK Government’s intention to ‘max out’ the North Sea’s reserves. Rishi Sunak signalled this month that the Government would make hundreds of new licences available.

The licensing round launched last year appears to have won a strong response. The results will be released in coming months.

Sector watchers are eagerly waiting to hear if Equinor will proceed with plans for the massive Rosebank development off Shetland. Its partner in Rosebank, Ithaca Energy, recently enjoyed drilling success in the North Sea.

READ MORE: Rosebank oil field developer insists controversial project is on track

The case for investment in the area was reinforced last week by a company which was a big beneficiary of the rise in oil and gas prices fuelled by Russia’s war on Ukraine.

Neptune Energy posted $1.1bn underlying operating profit for the first half. The company is a significant North Sea player, and has operations in continental Europe, Asia and North Africa.

While oil and gas prices have fallen from the highs hit last year, Neptune has continued to generate huge amounts of cash even after allowing for the impact of windfall taxes. These have been imposed by other European countries as well as the UK.

Neptune’s owners last month agreed a $5bn deal to sell the bulk of the business to Italian giant Eni.

READ MORE: Blockbuster acquisition of North Sea firm set to underline appeal of area

Neptune became a big player with the backing of US private equity houses and the state-owned China Investment Corporation. The company bought significant North Sea assets at what directors decided were attractive valuations during industry downturns.

Neptune has a stake in Seagull.

In the results announcement, Neptune said it expects gas prices to remain strong by historic standard given demand trends.

The company reckons it can capitalise on demand for gas while supporting the net zero drive.

It has been working on projects to store carbon from North Sea production operations in depleted reservoirs in the area. These could be linked to hydrogen production operations.

Chief executive Pete Jones said: “We now have licensed storage capacity for the equivalent emissions from our reserves portfolio.”

Some may feel that prospect reinforces the case for the UK to go large on Carbon Capture Usage and Storage.

READ MORE: Investors eye big returns as carbon capture bandwagon gathers pace

The UK Government last month announced backing for plans to develop a huge carbon capture cluster in Scotland.

However, environmentalists say carbon capture could provide an excuse to continue using oil and gas and has not been proven to work at scale. Friends of the Earth Scotland last week noted research showed two carbon storage fields in Norway have experienced unpredictable carbon movement underground and reduced storage capacity.

It declared: “This research raises real red flags about a project that Scottish Ministers have hailed as a pioneer, and used to justify their over-reliance on the technology to meet climate goals.”