The day after the UK officially emerged from the longest recession on record the Energy and Climate Change Minister, Lord Hunt, announced the opening of the 26th Offshore Licensing Round. This announcement comes as a welcome boost to the North Sea oil and gas industry as it seeks to rejuvenate interest and encourage activity in the UKCS.
As a further boost, Chancellor Alistair Darling announced plans to extend the field allowances tax regime in an attempt to boost field development economics. This move could potentially trigger £14 billion of investment over the next decade, deliver 600 new jobs and help secure the UK’s energy supplies. This article looks at both the 26th Licensing Round and the extension to field allowances and considers their impact on future activity in the UKCS.
26th UKCS Licensing Round
For the first time since 1998, the 26th Licensing Round offers blocks in all areas of the UKCS providing a wide range of new opportunities with a view to increasing activity within among others, the North Sea basin.
Among the blocks offered for licensing are a number relinquished under the "Fallow Initiative". (which requires that once the primary term of a licence has passed, companies must have drilled wells, shot new seismic activity or carried out other significant activity in order to retain the acreage). In addition, the majority of areas licensed in the 1st Round in 1964 that had not been granted extensions have been relinquished and are now being included in the 26th Licensing Round. There are four types of licence available under the 26th Licensing Round, namely:
- Traditional Licence;
- Frontier Licence;
- Promote Licence; and
- "West of Scotland" Frontier Licence.
The "West of Scotland" Frontier Licence differs from the Frontier licence in that the period allowed for exploration is nine years (three years longer than the six allowed for by the Frontier Licence). The extra three year term is in recognition of the potentially challenging nature of this area and seeks to encourage exploration where geological knowledge is as yet limited. As with the "normal" Frontier Licence the rental rates in the first three years are reduced to 90%.
Field Allowances Tax Regime
Under pressure from Oil and Gas UK, Alistair Darling has announced plans to amend the UK offshore tax regime by extending existing measures to cover the West of Shetland region. The new tax measures are an extension to the field allowance system introduced in the UK by the 2009 Budget. The new measures aim to provide better conditions for gas field developments in the region and encourage further exploration and production. By offering a more competitive tax regime the Chancellor hopes to support further investment in the North Sea and ensure that natural reserves are fully exploited.
Oil and Gas UK chief executive Malcolm Webb said the concession could result in early investment of more than £2 billion and another £12 billion over eight years and "enhance the viability of future discoveries in this frontier area". However, the maximum allowance available for a qualifying field will be limited to £800million (calculated on current tax rates this would reduce overall tax liability of the field owner by up to £160 million). Under the relief, companies will still have to pay corporation tax at 30% on the whole of their income from fields offshore. The £160 million will be set against a further 20% due as a surcharge on profits from each qualifying field.
These changes are also likely to be welcomed by supply chain companies which will benefit from the potential increase in activity in the UKCS. Drilling activity dropped 35% in 2009 compared with drilling figures for 2008 representing the worst year for the British offshore sector since 2004. Tougher operating conditions together with a low oil price meant that activity across the industry was restricted.
2009 was a tough year for the North Sea oil and gas industry with many companies being forced to make difficult strategic decisions. Drilling and exploration were down on previous years and a low oil price added to the difficulties faced across the industry. Increased costs in a mature basin put pressure on the government and industry regulators to improve the operating environment. Many companies eagerly awaited the announcement of the 26th Licensing Round and the UK government hopes that this will lead to an increase in exploration, drilling and eventually production in the UKCS.
DECC are already sitting on eight Environmental Impact Statements (EIS) in respect of North Sea developments that have been submitted since last August – only one less than submitted in the whole of 2009. The Chancellor's plans to extend the field allowances regime to the West of Shetland will also help by making this area a much more attractive prospect.