The logic for restricting domestic gas production never made sense

12 Thoughts on Jackdaw’s approval

The Department for Energy Security and Net Zero have approved production on the Jackdaw gas field in the North Sea.

1. This is unlikely to make a large difference to wholesale gas prices in the UK. Gas prices are set on the global market and a single gas field, Jackdaw, will not produce enough to move the dial. In fact, Jackdaw at peak will increase total domestic gas production by just 6%.

2. Some of the pessimism on bill impacts is overblown. Gas isn’t oil. It is internationally tradable, but gas supplied via pipelines is typically far cheaper than gas supplied via LNG terminals. Gas prices are set at the margin and cheaper gas displaces the most expensive gas from the merit order.

3. There are resilience benefits too. Gas imports can be disrupted. Bad weather or military action could mean that tankers destined for Britain are diverted or delayed. On a cold winter’s day, people are unlikely to turn their boilers down or meaningfully cut their power use. In such a scenario, Britain will be forced to bid at far higher than normal prices to get enough LNG in. The more domestic gas production there is, the less fiercely we need to bid for LNG. This will also lower bills at the margin.

4. The Net Zero case for restricting domestic fossil fuel extraction never made much sense. The only way blocking domestic fossil fuel production is likely to reduce emissions is by raising wholesale prices, which in turn incentives households and businesses to cut back. To the extent that oil and gas prices are set on the global market, domestic restrictions will have a negligible effect. To the extent that domestic fossil fuel production restrictions increase prices, domestic restrictions reduce emissions at an extremely high cost relative to other approaches.

5. There are high costs to restricting domestic fossil fuel production. Taxes on North Sea Oil and Gas generate £4.4bn each year. And while the North Sea is a declining basin, it still employs over 100,000 people. Blocking projects like Jackdaw is likely to accelerate the loss of jobs in the North Sea. This isn’t just bad from a human point of view – there are unlikely to be similarly high-paying domestic jobs available for individuals affected – it also makes the Net Zero transition harder. Efforts are underway to make it easier for workers to switch to offshore renewable projects, however at the current pace of job loss many skills will be lost in the interim.

6. North Sea tax revenues are a source of energy security. They act as an automatic stabiliser. When energy prices spike, North Sea assets generate more revenue for the Exchequer which can then be spent on protecting the most vulnerable billpayers.

7. As are North Sea exports. When gas prices increase, Britain has to pay more to import the same amount of gas. All things equal, a rise in imports increases the supply of pounds internationally and therefore lowers the pound’s value. As a result, our remaining pounds buy less, contributing to wider inflationary pressures. The more gas and oil we export (or the more imports we displace) the more the pound in your pocket keeps its value.

8. There are negative geopolitical consequences to reduced British gas supply. At the margin, British gas displaces more expensive foreign gas. Regrettably, democracies like Norway and the US are not the only suppliers of gas. Higher gas prices create a windfall for belligerent dictators like Vladimir Putin. Likewise, the price impacts of high diesel prices has allowed Putin to persuade the US to lift some sanctions.

9. British gas extraction has relatively low emissions. Not all gas wells are equal, some meet far higher standards of emission control. Some wells flare or leak methane at far greater levels. Regulations in Britain are among the world’s toughest. Jackdaw will emit roughly a tenth of imported LNG. It is plausible that Jackdaw lowers overall emissions, even if gas prices fall to the extent that more gas overall is burnt.

10. If the aim is to discourage gas use, then carbon taxes are a better alternative. Unlike domestic restrictions, carbon taxes reduce the incentive to use oil and gas without generating large windfalls for fossil-fuel supplying dictatorships. They also generate revenues that can be used to shield poorer households from the cost of expensive energy. Some greens rule out carbon taxes on the grounds they’re politically toxic, yet what’s really politically toxic is high fossil-fuel costs which is the only way in which domestic fossil-fuel restrictions ‘work’.

11. If we are unwilling to make gas more expensive via taxes, then our best bet to cut emissions is making the alternatives cheaper. Green campaigners should focus less on blocking domestic fossil fuel extraction and more on removing the barriers to building new sources of clean power. I’d suggest JustStopOil rebrand to JustImplementFingleton, but I suspect they’d be a net-negative for the cause.

12. Almost all of these arguments apply to oil fields like Rosebank and future exploration. There is a strange ‘centrist’ position of pro-Jackdaw (gas) and anti-Rosebank (oil). It does not add up. While Rosebank is unlikely to generate direct savings for British consumers, it will generate jobs, tax revenue, and improve our balance of payments.