Uncertainties regarding eighth tender for oil and gas exploration in Danish North Sea

Background
Political pressure
Impact analysis
Global perspective


On 28 September 2018 the Ministry of Climate, Energy and Utilities invited companies to take part in the eighth Danish licensing round for oil and gas exploration and production in the Danish North Sea.

Licences were expected to be issued this summer, but political pressure on the government elected in June 2019 means that the eighth licensing round's future is uncertain.

Background

The eighth licensing round is part of a continuous project to secure efficient exploration in the Danish North Sea dating back to the first production of oil in the area in 1972. The Danish government signed the North Sea Agreement in 2017 and made a significant commitment to rebuild oil rigs and improve general conditions in the Danish North Sea.

The eighth licensing round concerns the unlicensed parts of an area in and around Central Graben in the North Sea. The current licences in the Danish North Sea expire in 2047.

Exploration licences are valid for six to 10 years. If a sufficient amount of oil or gas is found to start production, licences are given out for up to 30 years. This means that the eighth tender will license companies to extract oil in the area until 2055.

Four companies have applied for a licence in the eighth round: Ardent Oil, Lundin, MOL and Total.

Political pressure

The new government has promised to lead the way in the transition to renewable energy. In order to reach that goal, the left-wing parties supporting the minority government want to put a stop to the eighth licensing round.

The Social-Liberal Party and the Socialist People's Party want to cancel the tender so that Denmark can be an example to the world and lead the way in the transition to renewable energy.

At the same time, the parties argue that profit from oil production in the latest tender rounds has been minimal compared with earlier levels, dropping from over Dkr30 billion in 2010 to Dkr8 billion in 2018.

This critique concerns only further licensing, as both parties still support the North Sea Agreement.

Other political parties on the left want to go even further by revoking current licences and projects such as the North Sea Agreement, shutting down oil production in the area before 2047.

The government has yet to address this criticism. Prime Minister Mette Frederiksen has stated that the government is working to assess the situation and will reach a conclusion about the eighth licensing round. The future of oil production in the Danish North Sea therefore remains unknown.

Impact analysis

For now, the four applications are awaiting evaluation by the minister of climate, energy and utilities. Licences will be given out based on his evaluation and approval from the Energy Committee.

The government has initiated a thorough analysis of the eighth licensing round's effect on the climate, the economy and the security of supplies. Once this analysis has been completed, the minister will assess whether the tender should be cancelled.

The minister promises to deliver his conclusion as soon as possible, but is unable to give a deadline due to the complexity of the impact analysis.

Global perspective

The government has promised to reduce Denmark's carbon emissions by 70% by 2030 compared with 1990 levels. However, oil and gas from the Danish North Sea is not included in this figure. Only emissions from the extraction of oil and gas are attributed to the above figure. Emissions resulting from the use of oil and gas from the Danish North Sea are attributed to the country using it. Therefore, shutting down the Danish North Sea will not affect Denmark's emission levels considerably.

However, the Danish government should think globally when assessing the eighth licensing round's effects on the environment.

Although every effort should be made to transition successfully to renewable energy, Denmark will remain reliant on oil and gas for years to come according to Martin Næsby, the managing director of lobby group Oil Gas Denmark, who argues that the climate will not benefit from shutting down the tender.

According to a 2018 study by Stanford University, Denmark is the global leader in low emission oil and gas production. This will only improve in the future, as the North Sea Agreement allocates Dkr100 million for green initiatives in oil and gas extraction. If Danish oil and gas production is shut down before the country's energy demand can be supplied entirely by renewable sources, countries currently using oil and gas from the Danish North Sea will have to rely on oil and gas produced with higher emissions.

For further information on this topic please contact Nicolaj Kleist at Bruun & Hjejle by telephone (+45 33 34 50 00) or email (nkl@bruunhjejle.dk). The Bruun & Hjejle website can be accessed at www.bruunhjejle.com.