The Oil and Gas Authority, nascent regulator of the offshore oil and gas industry in the United Kingdom (the “OGA”), has recently demonstrated how the use of the Government’s statutory discretionary powers (in this case to extend the initial or second term of seaward production licences) may help companies operating on the United Kingdom Continental Shelf to weather current adverse market conditions.
In the case of IOG North Sea Limited (“IOG” - part of the Independent Oil and Gas group), the OGA, acting on behalf of the Secretary of State for the Department of Energy and Climate Change (the “Minister”), recently permitted an extension to the “Initial Term” of IOG’s petroleum licence P.1609, such that the Initial Term will run in total for a period of almost eight years.
The extension until the end of 2016 will allow IOG extra time to drill a well to appraise its “Skipper” oil discovery, which will help determine an optimum field development plan for the Skipper field and is also hoped to target two potentially significant further prospects underlying the Skipper field. The extension will give IOG more time to negotiate with its lenders and contractors. Delay in spudding the well may also enable IOG to benefit from an improvement both in environmental conditions (the end of the North Sea winter storm season) and economic conditions including low oil prices.
The discretionary powers of the Minister to vary the term of IOG’s petroleum licence are incorporated within the conditions of the licence itself. UK petroleum licence conditions (known as model clauses) are published within statutory instruments that are issued from time to time pursuant to the Petroleum Act 1998. Each licence incorporates the most recent model clauses and licences are not generally affected by the subsequent issue of further model clauses (except where provisions are specifically stated to be retroactive).
In the case of IOG’s P.1609 licence, which was granted in February 2009, the relevant model clauses are those contained in the Petroleum Licensing (Production) (Seaward Areas) Regulations 2008 (S.I. 2008/225). These latest model clauses differ from previous versions through the express inclusion of provisions allowing the Minister to extend the “Initial or Second Term”. UK seaward petroleum licences are usually split into a series of three terms:
- the “Initial Term” of four years for exploration and containing a specified work commitment, after which the licensee is usually required to relinquish half of the licence area;
- the “Second Term” of four years for appraisal and development, after which the licensee is usually required to relinquish any parts of the licence area that are not related to its development; and
- the “Third Term” of eighteen years for the production of hydrocarbons from the development.
New model clause 7 allows the Minister discretion, if so requested, to make an extension to either the Initial or the Second Term, for such period and subject to such conditions as the Minister may determine. In the case of an extension to the Initial Term, the Second Term is reduced by the same amount, and in the case of an extension to the Second Term, the Third Term is reduced correspondingly: thus the provision adds flexibility without extending the full term of the licence.
For IOG, less than two months of the Second Term will be remaining upon the termination of the Initial Term. It is therefore highly likely that IOG will subsequently need to request an extension to the Second Term if and when it has drilled its appraisal well. However, without the current extension to the Initial Term, it would be facing certain determination of its licence with no further opportunity to appraise the Skipper oil discovery. This use of the relatively new discretionary power of the Minister to extend the Initial Term demonstrates a welcome flexibility on the part of a reasonable and prudent industry regulator to respond to market conditions. Indeed Mark Routh, Chief Executive Officer of IOG commented:
“In the context of this very severe oil price downturn, we are grateful for the OGA’s pragmatic and supportive stance in extending the Skipper licence which we anticipate will enable us to drill the appraisal well later in 2016.”