Directions regarding exploration are the first of the substantive Supporting Obligations, covered in Paragraphs 10 to 12 of the MER Strategy. Limited by the Safeguards[1], the intention and effect of the Supporting Obligations is to expand on the Central Obligation[2].

Paragraph 10

"The licensee of an offshore licence must plan, fund, and undertake exploration activities, including seismic and drilling activity, of a type and in a manner which is:

"(a) in relation to matters within their licence area, optimal for maximising the value of economically recoverable petroleum that can be recovered under the licence; and

"(b) in relation to matters outside their licence area, set out in a plan produced under paragraph 23."

Put simply, an offshore licensee is required to plan, fund and undertake exploration activities to maximise the value of economically recoverable petroleum (ERP) within its own licence area. It is not clear how ERP fits into standard petroleum categorisation. For example, is ERP limited to proven reserves or can its meaning be much wider, including say contingent resources or even prospective resources? For ERP to be meaningful in the exploration context, clearly it must have a wide meaning, perhaps extending to prospective resources. It is certain that during the exploration phase, there could be doubt about the extent of the petroleum recoverable from a licence area.

The licensee is also obligated to follow an OGA-produced plan in relation to matters both inside and outside of its own licence area. These OGA plans could apply generally to a certain region or to an individual company or corporate group. If the licensee does not intend to carry out the OGA plan, they are obliged to consult with OGA.[3]

Paragraph 11

"The licensee of an offshore licence who has made a firm commitment to carrying out a work programme in respect of that licence must not relinquish the licence without first having completed the work programme as set out in the licence."

This Paragraph is a departure from the status quo, reflected by the Petroleum Licensing (Production) (Seaward Areas) Regulations 2008 (the Model Clauses). The Model Clauses state that the licensee is obligated to carry out a work programme in a timely fashion[4] and allow a licensee to "determine"/relinquish its licence at any time by giving one month's notice[5].

Under the new regime, the licensee must not relinquish their licence unless the firm work programme is complete[6]. If in breach, the licensee is exposed to the specific sanctions listed in the Energy Bill[7]. While it is important to note that there is nothing in the Model Clauses to limit DECC's right to sue for damages or seek injunctive relief if the agreed work programme is not performed, to our knowledge DECC has never utilized these powers.

Paragraph 12

"Where the obligation in Paragraph 11 does not apply because Paragraph 3 applies, the licensee must carry out a work programme of the same or similar nature to the one set out in the licence or such other work programme as the licensee may agree with the OGA enables the Central Obligation to be met."

This governs a scenario whereby a licensee does not wish to complete an agreed work programme due to a lack of satisfactory commercial return (SECR)[8]. Logically, the kind of "replacement" work envisaged by Paragraph 12 would have to be carried out on another licence. What happens if the relinquishing licensee does not have another licence? What happens if it does hold another licence but with different partners: are these obligated to participate in the "replacement" work commitment?

Conclusion

The changes in exploration rules implemented by the MER Strategy are radical, altering petroleum realities on the UKCS, without ever formally amending a UKCS licence.  It will be interesting to observe whether there is any impact on the rate of licensing on the UKCS as a result.

The MER Strategy, combined with Energy Bill sanctions, gives the OGA wide powers which, if exercised, could be onerous for an offshore licensee. In the future, the extent to which OGA exercises these powers will be important.