On the 28th July 2014 the UK's Energy Minister, Matthew Hancock, invited applications for the award of new onshore petroleum exploration and development licences (PEDLs) in the 14th Landward Licensing Round. The round will close on the 28th October 2014. The new round is being welcomed after an extended hiatus since the last onshore licensing round six years ago, caused by a moratorium on fracking imposed between November 2011 and December 2012 following two seismic tremors near a frack site in Lancashire.
The UK operates a licence-based petroleum exploitation regime where the rights and obligations of the state and the licensee are defined by a legislative framework. UK petroleum licences and operations are administered and regulated by the Department of Energy and Climate Change (DECC). The UK Petroleum Act 1998 vests ownership of all petroleum in the Crown and sets out a fundamental right of the government to issue exclusive rights "to search and bore for and get petroleum." Further statutory instruments support the Petroleum Act and prescribe specific terms for the exploitation of PEDLs (onshore) and seaward petroleum licenses (offshore) by licensees.
Upon the award of a PEDL, the conditions attaching to its grant are published in statutory instruments and are known as "Model Clauses." The Model Clauses for the 14th Round are set out in the Petroleum Licensing (Exploration and Production)(Landward Areas) Regulations 2014, which were brought into effect on 17 July 2014. These new regulations are the first to prescribe Model Clauses addressing issues that are specific to development of shale gas and coal bed methane. The publication of the new regulations coincides with the conclusion of a strategic environmental assessment (SEA) on further onshore licensing, and follows the closure of a long public consultation on the environmental impact of unconventional oil and gas development onshore in the UK.
The 14th Round Model Clauses contain significant new provisions to promote shale exploration and development. DECC has also modified its application and marking scheme that compares competing applications to better assess PEDL applicants' fracking experience and capabilities, as well as introducing more detailed requirements for an environmental awareness statement that is submitted with applications, as is consistent with the environmental impact mitigation measures adopted in the SEA.
Significant new provisions of the 2014 Landward Model Clauses include:
Designation of "Retention Areas" and "Development Areas"
DECC may agree with a licensee the creation of so-called "Retention Areas" and "Development Areas" within the PEDL area. A licensee may retain the PEDL acreage covered by Retention Areas and the Development Areas into the second term of a licence at a reduced rental rate. Creation of these Retention and Development Areas modifies the traditional requirement that at least half of initial PEDL acreage must be relinquished upon expiry of an initial term.
Applications for a Retention Area must be accompanied by a Retention Area Plan setting out the licensee's proposed work programme to explore and appraise the area within a defined time frame. In a bid to promote exploration and appraisal activity, a Retention Area can be revoked by DECC if a licensee fails to properly implement its Retention Area Plan. Similarly, during the third term of a licence (the production phase), in order to protect any remaining PEDL acreage that is neither a Retention Area nor a Development Area from "land-banking," where licensees retain but take no steps to develop areas of the PEDL, DECC may revoke the acreage and offer it for re-licensing.
When submitting a development programme for a Development Area, a licensee must now state the latest date by which it will obtain petroleum from each defined Development Area. In addition, where a Development Area relates to production of shale or coal-seam gas, a Development Area Plan must be submitted setting out the proposed development activities with defined timescales for achieving them.
Designation of the new areas is intended by DECC to promote the economic success of shale development. The nature of shale plays is that they may be dispersed over a broad area meaning that the economic viability of a development plan may be extinguished if the usual 50% PEDL area had to be relinquished at the end of the initial term. Additionally, Retention Areas may be defined in three dimensions rather than two, in recognition of the way coal bed methane and shale gas may be dispersed at different depths, in contrast to conventional oil and gas reservoirs. DECC is clearly also exerting more pressure on licensees to work to, and keep to, a defined timescale for development of shale resources with a view to expediting the economic return.
Confidentiality and Reporting
A new exception to the confidentiality provision in the Model Clauses means that DECC will only be required to respect six months' confidentiality for reports from licensees that contain data relating to geology, operations or results associated with the fracking of shale. All other information supplied to DECC by a licensee will continue to be kept confidential for four years. The significantly reduced confidentiality period in relation to information on fracking operations reflects the tighter monitoring and controls DECC will be exerting over unconventional exploration and production activities.
In addition to changes designed to promote unconventional hydrocarbon development, the new Model Clauses have also introduced changes to align the terms of PEDLs with the current Model Clauses applicable to offshore seaward production licences.
Incorporating the "drill-or-drop" concept seen in seaward licences by providing for early termination of the PEDL at the end of a specified period if the drill-or-drop obligations in a work programme have not been complied with, or a licensee has not undertaken the remainder of a work programme at the end of the initial term.
Licence Term and Extension
Inserting the duration of the various terms of the licenses into a new Schedule attaching to the PEDL. Whilst not explicit in the Model Clauses, DECC has commented that the duration of the initial term of the PEDLs to be set out in this Schedule will be shortened in line with that of seaward licences, so that the usual 6+5+20 year structure will become 5+5+20 years. This means that minimum work obligations in an initial term need to be completed in a short timeframe, demonstrating once again DECC's interest in expediting shale exploitation.
In a simplification to the traditional process for extending the term of a PEDL, the new Model Clauses also now permit extensions to the initial or second term to be agreed by notice, rather than formalized in a deed of variation to the PEDL. This brings the extension procedure in line with that for seaward licences.
Non-Exclusive Exploration Licences
Introducing a new non-exclusive exploration license for the onshore area. Such non-exclusive licenses for data acquisition have already been available for some time offshore, and will permit seismic data to be gathered over open acreage, subject to usual planning and access consents being obtained.
The changes to the Landward Model Clauses make it clear that the government is taking a pro-active approach to promoting the development of UK shale gas and coal bed methane. This interest is driven by the significant benefits unconventional resource exploitation is perceived to bring to the UK, by boosting the economy and increasing energy security. The new licence terms are designed to create an attractive package for licensees whilst ensuring that the UK's shale potential is maximised.