The Petroleum Licensing (Exploration and Production) (Landward Areas) Regulations 2014 (the “Regulations”) have taken effect from 17 July 2014.

The Regulations set out the model clauses applicable to exploration and development licences issued as part of the 14th onshore licensing round (the “Model Clauses”) which The Department of Energy & Climate Change ("DECC)" is expected to announce following consideration of the responses to its Consultation on Environmental Report for further Onshore Oil and Gas Licensing and following its issue of a Post-Adoption Statement outlining how it intends to proceed in relation to future onshore licensing.

The Model Clauses largely reflect the form of previous onshore petroleum licences but with several notable exceptions. The terms of existing petroleum licences will not be affected. 

Exploitation of Acreage

In the 14th onshore licensing round, companies will be expected to commit to single work programmes spanning larger areas than under previous licences.

As expected, the requirement remains for a work programme to be completed during the initial term if the licence is to continue into a second term and a development programme must be approved if the licence is to continue into a production phase.

Although not expressly set out in the Model Clauses, recent DECC comments suggest that the initial term in the new licences will be shortened from 6 years to 5 years and that the second term and production period will remain at 5 years and 20 years respectively. Minimum work obligations will therefore need to be completed in a shorter period than was previously the case.

Borrowing a concept from recent seaward licences, the increased use of “drill-or-drop” obligations also appears to be likely. These obligations provide for early termination of the licence if the licensee at the end of the “drill-or-drop” period has not completed the “drill-or-drop” element of the work programme and has not undertaken to complete the remainder of the work programme within the initial term.

During the production phase, DECC will have a new power to revoke the licence in respect of any acreage which has not been previously designated as a Retention Area or Development Area (see below).

To keep further pressure on licence holders, DECC has a new express additional right to reject a development programme if the programme does not ensure the “maximum economic recovery” of petroleum. The use of this right in practice may prove controversial as what is likely to be deemed the maximum economic recovery of shale reserves is far from certain.

Development Areas

When a development programme is submitted, the licensee must now state the latest date by which the licensee will obtain petroleum from each defined Development Area; and, where a Development Area relates to well-based production from shale or other strata encased in shale or from coal seams, submit a Development Area Plan outlining the proposed development activities and timescales. Whilst there is an acceptance that a new type of programme is required to accommodate shale activities, there is also greater explicit pressure being exerted to ensure the licensee is being held to a timescale. 

Increased Flexibility

The previous requirement to surrender 50% of the licensed area at the end of the initial term does not apply to areas previously designated as Retention Areas or Development Areas. These areas may be retained into the second term of the licence even where together they constitute more than 50% of the initial licensed area.

An application to have an area designated as a Retention Area must be accompanied by a Retention Area Plan outlining the licensee’s proposed exploration and appraisal activities within such area and the relevant timescales for performance, again putting the pressure on a licensee to operate to a clear time scale. Retention Areas may be “three-dimensional” areas at depths. Designation of an area as a Retention Area can be revoked by DECC if the licensee fails to comply with an approved Retention Area Plan. 

Extensions to the initial term and second term may now be agreed by notice rather than deed of variation. Any extension to the initial term will result in an equal reduction to the second term and any extension to the second term will result in an equal reduction to the Production Period.

Confidentiality and Reporting

The confidentiality period for all information supplied pursuant to the licence was previously 4 years. However, when requested licensees will now be required to submit reports to DECC in respect of geology, operations and results associated with hydraulic fracturing in shale or other strata encased in shale and in such circumstances, the confidentiality period will be reduced to 6 months. Licensees should be aware of this drastically reduced period.

Conclusion

DECC has recognised the different attributes of shale gas exploration and production programmes and the fact that shale gas is typically spread across wider areas compared to conventional oil and gas resources. Whilst it is showing flexibility in relation to retention, it is clear that licensees are also being put under tighter controls in terms of proposed activities, timescales and reporting with a clear directive to accelerate the activities of licensees in both the exploration and production phase.