Promote and Frontier Licences Differ

“Describe How Promote And Frontier Licences Differ From Standard Offshore Licences On The UKCS And Explain The Rationale For Their Introduction. Complete Your Answer With An Assessment Of Their Success Or Failure”.

Introduction

The United Kingdom Continental Shelf (“UKCS”): A Mature Petroleum Province

By the year of 2004, with more than 20,000 workers offshore, supported over 260,000 jobs and generated £190.000 Billion revenue for the Treasury, the United Kingdom oil and gas industry has proved to be the fourth largest gas producer and the tenth largest oil producer in the world. At the same time, following the discovery of the Foinaven and Schiehallion Fields in the early 1990s, the industry’s exploration activities have been rather limited. Given the fact that the maturity of the UKCS has brought the industry to a situation where finds are getting smaller while cost of operation and development are rising, there is a need to make best use of the limited reserves. This situation has encouraged the Department of Energy and Climate Change (“DECC”) – formerly the Department for Business Enterprise and Regulatory Reform (“DBERR”) – to establish series of initiatives in order to ensure maximum exploitation of the UKCS reserves whilst encourage the development of new technical ideas and new entities to explore as well as enable a low cost and low commitment exploration.

The main current licensing regime within the United Kingdom distinguishes two different licences: seaward and landward licences; also known as offshore and onshore licences. For the purpose of this paper, the present writer will only cover the three types of Production Licences for Seaward areas: Standard Offshore Licences, the Frontier Licences and the Promote Licences. This paper will focus as well on the legal nature for the prologue of Promote and Frontier licences and whether these initiatives have been successful to maximising economic recovery of oil and gas from a mature province like the UKCS.

UKCS Offshore Licensing

Generally, a state will claim the rights to the oil and gas deposits situated within its border or located beneath the Continental Shelf and interfere in regulating the way in which these natural resources are exploited. The DECC, on behalf of Her Majesty will get involved in the task of exploiting these resources in two different ways: (1) actively involved throughout a national oil company or (2) delegates its authority to the private sector oil and gas industry by granting licences or concessions or entering into contractual agreements such as: production sharing agreements or service contracts.

Briefly, the term licensing refers to a permission authorizing an activity, the conduct of which would otherwise be unlawful. In compliance with the UK licensing regime, the two main legislations which govern the licensing policy for those who wishes to conduct any activities aim to explore for and exploit the oil and gas resources within the UKCS are the Continental Shelf Act 1964 and the Petroleum Licensing (Production) (Seaward Areas) Regulations 1998 (the “Petroleum Act 1998”). While the Continental Shelf Act 1964 regulates that any rights exercisable by the United Kingdom outside territorial waters with respect to the sea bed and their natural resources, except coal, are hereby vested in the Crown; the Petroleum Act 1998 – as the former legal basis – regulates that an exclusive Production Licences over a limited area and for a limited period issued under the Petroleum Act 1998 is required by anyone who wishes to conduct any activities aim to search and bore for, and get Petroleum in the sea bed and subsoil under the seaward area within the UKCS.

Petroleum production licences are generally issued within licensing rounds in which each round is presaged by publication which stated that particular areas are to be made available and inviting bids from interested parties. As the original type of Seaward Licences, the Standard Licences are divided into three phases: a four-year of Initial Term in which time an Agreed Work Programme for exploration must be completed; another four-year Second Term of appraisal and preparation phase in which time at least one Filed Development Plan must be approved by DECC; and an 18-year of production period in which time a development will take place.

Promote And Frontier Licences: Initiatives To Encourage Exploration

The United Kingdom Continental Shelf (“UKCS”) is known as a mature oil and gas province. As the total UKCS Offshore crude oil production falls from 86.785.928 million tonnes in 2004 to 64.053.656 million tonnes in 2008 and the total gross of offshore gas production fall from 101.286 million cubic metres in 2004 to 75.285 million cubic metres in 2008, the industry is now experiencing a striking decline in oil and gas production. With the major hydrocarbons area has been extensively explored, the following characteristics are commonly used when describing its maturity: declining production, declining average new field size and prospectivity and the rising unit of operation and development costs. Nevertheless, there are still many unexplored and unexploited oil and gas within the area. To ensure that these natural resources are explored efficiently, the Government, working side-to-side with the industry, has introduced a partnership initiatives schemes to the industry: “Promote Licences” and “Frontier Licences”.

Designed to encourage smaller players with specific geosciences experiences and knowledge, the DTI introduced the concept of Promote Licence to the industry on the 21st Offshore Licensing Round on 5th February 2003. The licensees to whom these licences are granted are generally those who have detailed knowledge on specific hydrocarbon prospects, except that they are lacks in financial and managerial prospects. Thus, unlike the Standard Licences applications, companies applying for this type of licences do not have to demonstrate a minimum level of technical, environmental or financial capacity. However, they are liable to demonstrate financial viability until which they will not be allowed to conduct any drilling activities. Similar with the Standard Licences, the initial second and third terms of the Promote Licences are of the same length with a 90% reduced fee for the first two years.

Moreover, in the 22nd Round (2004), the DBERR introduced what the oil and gas industry known as the Frontier Licence. Frontier Licences are divided into three phases: a 6-year Initial Term followed by another six-year Second Term and an 18-year Third Term. With a longer Initial Term, this licence acknowledges greater technical difficulties, costs, and inherently longer timescales to explore and develop that part of the UKCS which lies to the West of the Shetland Islands.

By large, the distinction between the Standard Licences and the initiatives licences (Promote Licence and Frontier Licence) can be put as follows:

1. 1. Respective Initial Terms

While the initial licence period for initiatives licences lasts for two years, the Standard Licences are given a four-year of initial licence period.

2. 2. Annual Area Rental Payments

Unlike the Standard Licence, where the annual area rental payment is £150/square kilometre during the first four years, as part of the initiatives, the licensees granted initiatives licences merely entitled to compensate the rental payments at £15/square kilometre.

3. 3. Relinquishment

In a Standard Licence, 50% of the acreage awarded is relinquished after the four-year initial term. This differs from a Frontier Licence which has a longer six-year initial term divided into a two-year first phase where 75% of the acreage awarded needs to be relinquished at the end of the period, followed by a four-year second phase where another 50% needs to be relinquished.

4. 4. Work Programme

The work programme proposed for the Standard Licences applications are proposed for the licence’s four-year Initial Terms. This differs from the one proposed for the Frontier Licences application where the work programme proposed for both the licence’s six-year Initial Term, including the evaluation that will enable the Licensee to make a 75% relinquishment after three years. Furthermore, in favour of the Promote Licences, the Work Programme proposed (including timings) together with a description of plans and approach to secure the necessary resources to complete the Initial Terms.

5. 5. Operator Competence

DECC will not issue any offshore licensing other than to a competent operator who is able to demonstrate a satisfying capacity to manage and supervise drilling operations. These operatorship competence criteria will not be applied to the initiatives schemes applicants during the Licensing Round and the applications do not need to address this section.

With all the above mentioned facilities given by the DECC, both the Frontier and Promote Licences are expected to generate a positive approach to a better licensing regime within the United Kingdom oil and gas industry.

The table above shows that the Frontier Licences are first introduced in the 22nd Offshore Licensing Round held in 2004. Within the round, there were seven Frontier Licences, forty-two Promote Licences and thirty Standard Licences applications. Before the Frontier Licences were introduced to the industry, there were forty Promote and thirty Standard Licences applications within the 21st Offshore Licensing Round held in 2003. There was obviously an increase of over 100 from the previous round held in 2002, where there were only twenty-nine Standard Licence applications at that time. According to the DTI 13 May press release, it was the biggest number of blocks applied for since the early 1970s. This figure continues to rise with seven Frontier, sixty Promote and sixty-seven Standard Licences applications applied in the next licensing round held in 2005. Along with the increased number of licences applications, the number of licences awarded between 2003 and 2005 has also increased significantly from the total of ninety-seven licences awarded in 2004 to one hundred-fifty licences in 2006/7.

Furthermore, the initiatives schemes have successfully produced new players in the industry. This can be seen by looking at the number of new entrants within each licensing round. In 2002, where there were only one type of licences – the Standard Licences – there were only six new entrants. This number doubled almost five times to twenty-seven new entrants in 2003 when the industry introduced the Promote Licences scheme. In 2005, a year after the DBERR introduced the Frontier Licences; there were twenty-four new entrants in the industry. In addition to that, twenty-three out of fifty-eight promote licences offered in 2004 will continue, including commitments to drill twelve firm wells and undertake further seismic work (with a DTI decision whether to drill or not) on ten others.

Conclusion

Aiming to reduce cost and increasing size of acreage, both the Promote Licence and the Frontier Licences have clearly drawn the attention of players within the UK oil and gas industry. As most of the new entrants within the previous licensing round were small and unproven companies and the number of wells committed to drill was below the numbers of explorations awards given, it is explicable when some parties within the industry have a notion that it is too early to claim the successful of the initiatives schemes.

Nonetheless, the present writer believe that considering the aim and objectivities of the initiatives schemes and by looking at the increasing number of licences applied for and awarded as well as the number of new entrants within each licensing round, it should be sufficient to make the Promote and Frontier licences a permanent offering in subsequent rounds, particularly as the UKCS becomes an increasingly mature region with declining likelihood of major finds and more smaller-scale opportunities.