A majority in the Danish Parliament has on 4 December 2020 reached a political deal on the future of oil and gas extraction in the North Sea, leading to the cancellation of the ongoing 8th licensing round and future rounds to extract oil and gas.
The deal also establishes a final phase-out date of oil and gas extraction by 2050 and lays out plans for a transition of impacted workers. According to the government, the agreement sets the direction towards a climate neutral Denmark.
The agreement also locks down remaining rules.
Existing licences
It remains to be seen how the political agreement will be implemented by means of legislation, how ever from the agreement text it appears that activities under existing licences will continue in accord ance with the existing rules and regulations for those licences already awarded.
In the agreement, the parties to the agreement declare that stability and predictability in opportunities and conditions in the North Sea are a necessary precondition for maintaining the industry's activities and investments.
Oil and gas activities are conditioned by long investment horizons and a long return profile. Activities up to 2050 are promoted by and presuppose stable, reliable and predictable opportunities and con ditions.
Therefore, the parties to the agreement state that it is important to have stable, reliable and predict able options and conditions for the existing permits and remaining activities until the 2050 end date. The parties to the agreement also confirm that until 2050 it must continue to be possible to apply for new exploration and production permits according to mini-rounds and the neighbouring block proce dures in the same way as currently.
The parties to the agreement then go on to discuss if and how the responsible minister can award licences:
If the Minister intends to take a decision on award that does not follow the intention in the Danish Energy Agency's statement pursuant to section 6 of the Subsoil Act (which obliges the minister to consult with the Energy Committee of Parliament), it must first be discussed with the parties to the agreement. The intention in the statement is based on a professional assessment based on the requirements in the Subsoil Act and the tender conditions. If the criteria in the Subsoil Act regarding
permits for exploration and extraction of oil and gas must be changed, agreement is required among the political parties. Case processing time in the Ministry of Climate, Energy and Utilities, including the Danish Energy Agency, may not exceed a total of six months.
The parties agree that the 2050 end date for oil and gas extraction in the North Sea will not be brought forward further.
It is expected that there will be increased interest in mini-rounds and the neighbouring block proce dure in the situation where tender rounds are no longer initiated, which, however, will not be fore casted to offset the overall reduction in production as a result of the agreement (which is currently expected to be 9-15 per cent of the Danish Energy Agency's latest forecast).
It is noted that this section does not relate to other than the above areas, including not possible necessary implementation of EU legislation and other international obligations, e.g. in the field of the environment.
It is further noted that this section does not relate to tax matters relating to hydrocarbons where applicable settlement does not change, or prevents future changes in this regard.
Voluntary agreement with companies affected by the end date
Today, there is a permit in the North Sea, which was announced in the 7th tender round, and which has a justified expectation of extension until after 2050, if discoveries will be made in the future. This does not harmonize with a 2050 end date for all permits.
Therefore, the parties to the agreement agree that a legal basis must be created for the conclusion of a negotiated, voluntary agreement on changes to licenses for the companies that may be signifi cantly affected by an end date.
Main points of the new agreement
- A 2050 cut-off date for oil and gas extraction
- A cancellation of the 8th licensing round and future licensing rounds
- A commitment to lead a global campaign on the role of fossil fuel producing countries
- A transition initiative in the affected region to ensure development and employment
- Remaining rules nailed down to ensure stability, including access to two other licensing
- schemes with limited scope. However, any such permits would still have to adhere to 2050 date
- An analysis of the potential of electrification of current North Sea production
- An initiative to explore the potential of carbon capture and storage, using old oil and gas wells
Background
- Denmark started extracting oil and gas in the North Sea in 1972 and since then the tax revenue and the associated employment has been a cornerstone in building and maintaining the Danish welfare state.
- Since 1972, Denmark has made around 541 billion DKK in revenue from the North Sea. In 2019, the number was 5.9 billion DKK.
- In 2016, where the latest inventory was made, there was around 4.000 workers directly or indirectly employed in the extraction industry.
- Denmark is the largest oil producer in the EU. In global terms, Denmark was number 28 in per capita production in 2017 and number 39 in total production in 2019.
- In June 2020, the Danish Parliament passed a Climate Act. The Act, among other things, establishes a legally binding target of 70 pct. GHG reductions by 2030
WSCO law firm will continue to monitor and report on the development of offshore oil and gas projects in Denmark.
