On the same day that Harbour Energy (HBR) revealed plans to scale back its Aberdeen workforce due to the government's windfall tax on profits, Sir Keir Starmer announced that an incoming Labour government would stop investing in new UK oil and gas fields altogether.
The news would have been welcomed by activists at the Just Stop Oil coalition and, perhaps by extension, the board of trustees of The National Gallery. However, the policy position is unlikely to meet with the approval of investors, or at least those who remain sceptical about the practical steps needed to achieve a meaningful energy transition.
Harbour Energy is the largest independent operator in the North Sea with an output of around 210,000 barrels of oil equivalent per day, 93 per cent of which is extracted from offshore UK assets. The company’s liquid hydrocarbon production is equivalent to 8 per cent of daily liquid fuel demand in the UK, to say nothing of its natural gas output. On that scale, it could realistically be described as a strategic energy asset. So, the company’s parallel decision not to submit bids as part of the latest North Sea licensing round will also force investors to reconsider their long-term exposure to the region.
A clean power alliance?
Starmer's pledge was delivered to business leaders at the World Economic Forum in Davos, hardly a locale that will play well with denizens of the 'red wall'. He also encouraged like-minded nations to form a “clean power alliance” as a counterpoint to the Organization of the Petroleum Exporting Countries (Opec). It’s doubtful whether Saudi Crown Prince Mohammed bin Salman will be having sleepless nights at the prospect. The pledge may have been designed to put some distance between Labour’s energy policies and those of the Sunak administration, yet both major parties remain in lockstep on the yellow brick road towards net zero.
Labour's energy plan does not involve fossil fuels, which is peculiar given that the use of hydrocarbons within the global energy mix has fallen by just two percentage points over the past two decades despite at least $5tn (£4.0tn) in subsidies for solar, wind and battery technologies. That figure, amongst others, was revealed in a paper published last year by Mark Mills, a senior fellow at the Manhattan Institute for Policy Research, who concluded that “despite ever-escalating rhetoric” an “energy transition away from society’s dependence on hydrocarbons is not feasible in any meaningful timeframe”.
Some would dismiss that conclusion, including the shadow front bench, and investors would be well advised to take account of Labour policy proposals given the party’s lead in the polls. Labour is placing great store in a revitalised industrial strategy, and has set out its stall – albeit in broad brushstrokes – within its Prosperity through Partnership manifesto. With specifics in short supply, it often reads more like a wish list, although that's usually par for the course this far out from an election.
Yet the party has promised to decarbonise electricity generation by 2030 – five years ahead of the current government’s timetable. That’s one of the more explicit pledges, certainly by comparison with “caring for the future, harnessing data for the public good and building a resilient economy”. All very laudable, but investors would be rightfully wary over whether the energy commitment is realistic, along with the potential implications for stock market valuations.
Nuclear opportunity
Sir Kier does want to accelerate the roll-out of small modular nuclear reactors, a move that would be welcomed by shareholders in Rolls-Royce (RR.), even though it doesn't represent a departure from existing government policy – presumably both parties are rather keen on fusion research as well.
Perhaps the mining sector will be the big winner from the transition, botched or otherwise. According to the International Energy Agency, a shift to a material-intensive energy system would necessitate an increase in the supply of lithium by 4,200 per cent by 2040, while reserve shortfalls for minerals such as graphite, nickel and rare earths are comparable in scale. Needless to say, sourcing and extraction would be energy-intensive affairs.
The Labour Party's pivot away from UK hydrocarbon production, along with the government's arbitrary tax raids, will reduce the number of replacement barrels produced in UK waters and will contribute to long-term tightening in the supply of crude oil and natural gas. As Mills rightfully points out: “advocates of a carbon-free world underestimate not only how much energy the world already uses, but how much more energy the world will yet demand.” Lest we forget, it's a global market. Short of any further demand-side shocks, oil companies and investors can expect long-term, policy-driven support for prices despite the reproach of Starmer and his clean power alliance.
