An extract from The Oil and Gas Law Review, 8th Edition

Licensing

The Petroleum Act vests all rights to petroleum in the Crown but permits the OGA to grant licences to 'search and bore for and get' petroleum to persons deemed fit. Under the Petroleum Act, exploration for and production of petroleum in the UK and on the UKCS can only be undertaken under the terms of these licences. A company wishing to participate in the UK upstream oil and gas sector must bid for a licence or acquire an interest in existing assets, with any acquisition being subject to regulatory consents.

The OGA is now responsible for issuing licences through competitive licensing rounds that generally take place every year, and the MER UK strategy is applied by the OGA in each licensing round. Separate rounds are held for seaward (offshore) licences and landward (onshore) licences. In exceptional circumstances, where there are compelling reasons provided by a company, the OGA may issue a licence outside of a licensing round.

Licences take the form of a deed, pursuant to which the licensee is bound to observe the conditions of the licence. These detailed terms and conditions are prescribed in a series of 'Model Clauses', which are set out in secondary legislation under the Petroleum Act. The model clauses applicable to a particular licence are those that are in force at the time the licence was granted and are not affected by subsequent sets of model clauses, except through specifically retrospective measures.

UK licences are both contractual and regulatory in nature – contractually, being executed as a deed and providing for the contractual transfer of rights from the Crown to the licensee, and regulatory, because the model clauses are encompassed in statutory regulations, and Parliament may unilaterally amend the terms upon which a licence is granted. Legally, only one licence exists, although a licence may be granted to one or more licensees, who will be held jointly and severally liable in respect of obligations arising under the licence.

The Petroleum Licensing (Applications) Regulations 2015 contain the application process for licences. All applications must be made in the prescribed form and for a specific area. The OGA will only grant a licence to an entity that has the appropriate technical and financial capacity to contribute to the MER UK strategy. The OGA considers all applications on an individual basis, and companies must meet certain criteria, including technical competence, financial capacity and tax considerations (the OGA routinely corresponds with HMRC for information on any tax issues).

The different types of licences currently being issued are:

  1. seaward production licences: these are the main offshore production licence, which run for three successive periods or terms. The initial term is associated with exploration, the second with development and the third with production. However, the licence requires fulfilment of the relevant work programme, agreed with the OGA, before it can proceed from one term to the next – but a licensee who fulfils the required obligations and obtains the relevant consents quickly during the initial terms, will not be prevented from commencing production under the licence prior to the third term. Production licences expire automatically at the end of the term unless the licensee has advanced the work programme sufficiently to commence the next term. The licence will expire at the end of its initial term unless varied by agreement, or the licensee has completed the work programme, all sums have been paid, and the licensee has relinquished 50 per cent of the initial licence area. Each production licence also requires payment of an annual fee (known as rental), charged on an escalating basis for each square kilometre covered by the licence at that date and for licensees to relinquish areas that are not being exploited;
  2. landward production licences: the onshore equivalent of seaward production licences as described above (formerly referred to as petroleum exploration and development licences);
  3. offshore innovate licences: the innovate licence offers greater flexibility during the initial and second term as the applicant can propose the durations of the initial and second terms. The 'offshore innovate licence' replaced the traditional, promote and frontier versions of the seaward production licence, described below (which still remain relevant for many existing offshore production licences); and
  4. exploration licences: an exploration licence is non-exclusive and covers the UK's entire offshore area apart from those areas covered by any production licences that are in force at the time. These are commonly used by seismic contractors who gather data to sell rather than exploiting the resources themselves, or by holders of a production licence who wish to explore outside the areas where they hold or require exclusive rights. The OGA grants both seaward and landward exploration licences. The annual payment is significantly lower than that of production licences and covers exploration relating to hydrocarbon production, gas storage, carbon capture and sequestration or any combination. An exploration licence grants rights to explore for petroleum, but not to extract it and enables licence holders to carry out seismic surveys and to drill wells for core-sampling to a maximum depth of 350 metres below the seabed.

The 'traditional, promote and frontier licences' are no longer issued, but many remain in existence:

  1. traditional licence: this was the most common type of offshore production licence. They were granted with licence term lengths of four years for the initial term to complete the initial work programme, following which the licensee was required to relinquish 50 per cent of its acreage to move to the next phase. The second term was for another four years, and finally reaching a production phase for an 18-year third term (other than in relation to the 27th and 28th licensing rounds where greater flexibility was introduced for certain licences);
  2. promote licence: aimed at small and start-up companies, applicants did not need to prove technical or environmental competence or financial capability before the award of the licence, but they were required to do so within two years of the start date of the licence. Otherwise, the terms of the various phases and relinquishment obligations were the same as a traditional licence; and
  3. frontier licence: this licence had an exploration phase of six years to allow companies to evaluate larger areas and look for a wider range of prospects, but the terms varied based on the terrain (two more years for standard frontier licences and five additional years for the more challenging West of Shetland frontier licences). Licensees were required to relinquish 75 per cent of the acreage at the end of the third year of the initial exploration phase, and a further 50 per cent at the end of the initial exploration phase.

The 32nd UK Offshore Licensing Round opened in July 2019, offering a total of 796 blocks or part-blocks across the main producing areas of the UKCS. In September 2020, the OGA offered 113 licence areas over 260 blocks or part-blocks to 65 companies. There will be no licensing round in the 2020–2021 period in order to allow relinquishment of current areas. The OGA is expected to engage with the industry on the timing and nature of the next licensing round.

Production restrictions

There is no national oil company in the UK that is directly involved in oil and gas exploration and production activities in the UKCS. Oil and gas exploration and production are regulated by restrictions on the award and transfer of licences, and requirements relating to approval of work programmes and how that work is performed. There are no special regulatory requirements that apply to the exports of oil or oil products, other than the payment of applicable duties or taxes, and compliance with EU oil stocking obligations. In the event of an actual or threatened emergency in the UK that will affect fuel supplies, the Secretary of State may use emergency powers under the Energy Act 2016 to regulate or prohibit the production, supply, acquisition or use of substances used as fuel.