On 1 February 2007, the DTI announced the latest 24th Licensing Round awards with offers of 150 oil and gas exploration and production licences to 104 companies covering 246 blocks. What can these companies, including the new entrants, expect in participating in the United Kingdom Continental Shelf (UKCS).
The UK's onshore petroleum licensing system was set up after the First World War and offshore licensing started on the UK Continental Shelf (UKCS) with the oil discoveries in the 1960s. The designated area of the UKCS has been refined over the years by a series of designations under the Continental Shelf Act 1964 following the conclusion of boundary agreements with neighbouring states.
The UKCS is a mature oil province and has been in operation since the first offshore licence was granted in 1964, the discovery of the first offshore gas field (BP's West Sole) in 1965 and its production in 1967, the first offshore oil field (Arbroath) discovery by Amoco in 1969, and the first offshore oil field (Argyll) production by Hamilton Bros in 1975.
According to the DTI's Energy Statistics, in 2006, the UK production of crude oil and natural gas decreased by 10.2 per cent compared with 2005 to 17.3 million tonnes. The only two new fields that started production in the year ending September 2006 were insufficient to make up for the general decline in production from older established fields. However, the new discoveries during 2006 were the highest since 2001 with at least half a billion barrels of new discoveries with 40% of exploration wells with potentially commercial oil and gas accumulations.
The statistics for oil and gas in the UK are the following:
- The UK was a net importer of oil and oil products in the third quarter of 2006 by 2.5 million tonnes. In the same period of 2005 the UK was a net importer by 2.3 million tonnes.
- Total indigenous UK production of natural gas in the third quarter of 2006 was 2.4 per cent lower than in the corresponding quarter a year earlier.
- Compared with the third quarter of 2005, exports and imports of natural gas in the third quarter of 2006 increased by 62.8 and 14.2 per cent respectively. The UK was a net exporter of gas in the third quarter of 2006 (1.9 TWh), whereas the UK was a net importer (9.3 TWh) in the third quarter of 2005.
- Demand for gas in the third quarter of 2006 was 10.3 per cent lower than the level in the third quarter of 2005.
Worldwide figures for 2005 are as follow:
- The UK was the world’s 5th largest producer of gas (after Russia, the USA, Canada and Algeria) and the world’s 3rd largest consumer (behind the USA and Russia).
- Russia, Canada, and Norway were the largest exporters of gas and USA, Germany and Japan the largest importers (Indonesia, Malaysia, Qatar and Algeria were the largest LNG exporters).
- World gas reserves are estimated to be about 180 trillion cubic metres or 62 years of production at 2005 rates. Russia has 27 per cent of these reserves, Iran 15 per cent, and Qatar 14 per cent.
- Over the last 20 years, rates of gas production have grown fastest in Iran and Malaysia and rates of gas consumption have grown fastest in Iran and China.
Challenges for new entrants to UKCS
On the UKCS a large number of companies already operate under Traditional and Frontier Seaward Licences and Promote Licences. The latest 24th Licensing round awards to 104 companies include a number of new entrants that will participate in offshore licences for the first time.
The question that now begs is what challenges can these companies (in particular the new entrants) expect during their operations in the mature UKCS?
The entrants will fit comfortably in the UKCS petroleum sector, with the support of government and industry bodies such as UKOOA, with their best operating standards, and the PILOT joint working group. They could also take advantage of the UKCS offshore infrastructure already in place and the expertise of the companies that have so far contributed to the success of the North Sea industry.
With their new role as active participants come added responsibilities within a well-developed regulatory framework, with various government and industry deadlines, contractual obligations and a complex taxation regime. The licensing criteria expect them to have the necessary financial and technical capacity and the environmental capability to exploit the licensed area fully and responsibly.
Furthermore, the new entrants will be exposed to a raft of challenges of operating in the North Sea including:
- The financing of their petroleum exploration (and, if successful, production) activities, which are generally regarded by banks as too risky;
- The adherence to the licence controls, work programmes and DTI approvals, which were put in place to ensure completion in a timely fashion;
- The negotiation of effective contractual arrangements with joint licensees framed under joint operating agreements that will govern the relationship between them in the conduct of their operations;
- The challenging operating and geological conditions of the UKCS;
- Compliance with statutory controls regulating offshore employment, work practices, health and safety and the environment (including planning requirements and decommissioning of offshore installations);
- Environmental challenges (including planning requirements and the decommissioning of offshore installations).
Oil and gas industry activities are associated with a range of environmental impacts and marine pollution thereby creating some important challenges for the new entrants on the UKCS. During the preparation for the 24th Licensing Round, the offshore blocks in the Strategic Environment Assessment areas (SEA) were subjected to public consultation.
According to the DTI:
"The oil and gas sector is one of the UK's most important industries and our role in awarding these licences is to balance the continued development of the North Sea whilst respecting and minimising the impact on our environment. In making the decision to separate four of the blocks from this round for further assessment, we can continue to capitalise on this record investment in the North Sea whilst allowing us to properly consider the important issues surrounding these blocks."
Thus compliance by the new companies with the environmental requirements during all phases of the petroleum operations in these blocks is mandatory.
In addition to these challenges, there is increasing competition among new-start companies. It is now widely recognised that industry is in a declining phase, with increasing reliance on gas imports, new fields are smaller and more costly to develop, there is a scarcity of rigs, seismic vessels and budget funds and the existing infrastructure is facing unavoidable decommissioning obligations.
To carry out their licensing obligations effectively, companies will have to develop open and transparent relationships with their partners and also with the relevant government and industry bodies. Various government bodies and statutory agencies have their own administrative requirements including regulatory controls. It is therefore the responsibility of the new entrants to familiarise themselves with and comply with all the relevant regulatory requirements through early consultation with all interested organisations. Failure to do so may result in unnecessary delays for their activities.
This intricate relationship encompasses many different aspects of the day to day running of the company. Thus, the necessary advice is pivotal to the company's well being..
The North Sea still offers vast opportunities for new entrants. With up to 15-20 billion barrels still remaining in the UKCS, and further positive predictions of very high levels of well activity over the next three years that will add about 500 million barrels of oil equivalent per year to UK reserves, there is plenty of scope for investment - especially for those companies which have a sound understanding of the challenges presented by North Sea operations and a strategy to tackle those head on.