On 21 November 2016, the Oil and Gas Authority (the "OGA") published a consultation on proposed changes to the model clauses for Offshore Production Licences to apply to licences awarded in the 30th Seaward Licensing Round.
Policy Background
As part of the OGA's ongoing efforts to stimulate activity on the UKCS and its goal of maximising economic recovery of the UKCS's resources, the OGA has developed a flexible "innovate" licence to replace the previous traditional, promote and frontier licences.
The innovate licence has been designed to be applicable across all fields and to provide more flexibility for applicants to work with the OGA to design optimal work programmes and determine realistic project timelines. The concept was partially implemented for the 29th Licensing Round, which launched on 27 July 2016 and targeted under-explored "frontier" areas of the UKCS. It will be fully implemented as part of the 30th round, which will cover mature areas of the UKCS, following consultation and input from the industry on the proposed changes to the model clauses for that round.
Proposed changes to the model clauses
The current model clauses for offshore licences are set out in the Petroleum Licensing (Production) (Seaward Areas) Regulations 2008 and were introduced to ensure uniformity and equal treatment of competing applicants for such licences.
The main proposed change is to give licensing round applicants additional flexibility when structuring their bids. Applicants will be able to propose:
- the length of the initial term (which is currently fixed for each type of licence); and
- a work programme for the initial term which is divided into up to three separate phases:
- Phase A – for studies and reprocessing;
- Phase B – for shooting new seismic; and
- Phase C – for drilling wells
The other main changes to the model clauses are as follows:
(a) A licence will expire at the end of each phase of the initial term unless (a) the work programme for that phase has been completed; (b) the licensee has committed to undertake to the work programme for the subsequent phase and (c) the OGA is satisfied that the licensee has the financial and technical capacity to carry out that work programme.
As the innovate concept provides for flexibility in terms of time, it is important to ensure that valuable exclusive rights granted are not retained through a longer period unless the licensee carries out the agreed work programme on time. As this will apply over multiple prescribed phases it means licence blocks are less likely to sit dormant for long periods of time in the control of single licensees who are unable to carry out work on the block.
(b) Any individual element of a work programme may specify an associated deadline by which the work is to be done, and the licence shall expire if the work has not been completed by then.
The OGA will consider setting specific deadlines to particular work within a phase when assessing the application for a licence and is more likely to do so within a longer phase. For example where a Phase C allows four years to drill, the OGA may specify that a seabed survey is carried out within its first year. Failure to meet the requirement would result in the licence expiring unless the OGA decides otherwise.
(c) A mechanism by which a licensee may propose, and the OGA may agree, an amendment of the work programme.
Such amendments may be appropriate when, for example, improved knowledge and changed circumstances suggest the need for revision of the work programme. The OGA suggest a less burdensome process whereby a straightforward consent procedure is adopted rather than the need to formally amend the licence at each juncture.
(d) The Petroleum Licensing (Applications) Regulations 2015 to be amended so that all of the provisions that previously applied to applications for "Promote" Production Licences are applied to applications for Innovate Licences.
In these Regulations certain requirements to provide information about the company's ability to meet the costs of any damage caused by the release or escape of petroleum through drilling or production operations were dis-applied in the case of promote licences as they were inappropriate. It is proposed that the same exception should also apply to innovate licences unless the proposed work programme under that licence begins with a drilling phase.
There are other proposed changes suggested by the OGA which are not part of the innovate concept. These generally seek greater efficiency in respect of licence commencement dates and termination provisions.
The amendments to the commencement date of licences seek to address the precarious position that is sometimes faced by licensees under the current regime whereby delays in execution of the licence result in applicants having less time than expected to complete their work programme.
The amendments to termination provisions provide flexibility in termination dates for fields which are still producing. The proposal is for all licences to have termination provisions that allow a licence to last for as long as justified by the need to cover continuing production, without further amendment to the licence being needed. This would allow licences to continue where production is continuing and would allow rights to be terminated in areas where production has not begun or where it has permanently ceased.
There are also suggested operational amendments which are not being consulted on.
Next stage
The deadline for responses to the consultation is 17:00 on 6 January 2017.
The OGA will review the responses to the consultation and then make its recommendations to the Secretary of State for Business, Energy and Industrial Strategy. If accepted, regulations will need to be agreed by Parliament before being introduced.
Information and samples powers
The OGA's information and samples powers under the Energy Act were brought into force on 19 December 2016.
Those powers allow the OGA to require "relevant persons"2 to provide it with any petroleum related information or samples for the purpose of it carrying out any functions which are relevant to the fulfilment of the principal objective of maximising economic recovery of UKCS's resources.
For more information on the OGA’s powers under the Energy Act, please click here.
2 "Relevant persons" being: The OGA, offshore licensees, operators of offshore licenses, owners and operators of upstream petroleum infrastructure