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Dear <Name>,
First-Round licences: next steps
This letter seeks to clarify and reply to all the points raised by industry in response to my letter of 15 May,as well as to summarise the discussion held at PILOT’s Exploration Forum on Wednesday 18 June 2008. My thanks to Paul Dymond for supplying his note of that meeting.
I’ve set all those points out as a series of Questions and Answers at an Appendix.
I don’t wish to block any further discussion of policy, but I feel it will be difficult to take this consultation any further on the present hypothetical basis, and that we have therefore reached the point at which BERR needs to start considering individual cases. Of course, those individual cases may themselves suggest further policy refinements. In my letter of 15 May I set out what those applications should contain (repeated in the appendix) and I asked for applications by 8 October, and I hereby reiterate that invitation.
Yours sincerely,
Mike Hawkins
Head of Oil & Gas Licence Administration
Appendix: Topics raised by industry
Q1)Will BERR adopt a case-by-case approach?
We have repeatedly stressed that we will do so.
I am seeking to offer a high level of transparency and clarity of our policy, but I have also stressed at all times that we intend to take a common-sense and reasonable approach, and that we are fully aware that each case will be determined by its own characteristics.
For example, I previously offered three years as the duration of a typical Short-Term Extension, but we accept that an HPHT project is likely to take longer than a simple shallow-water tieback. Reasonable timetables would be an important part of a licensee’s case to BERR for a Short-Term Extension.
Q2)Why use first production as a criterion for extension(instead of FDP approval)?
Production is the sole justification for any licence extension. It is therefore both the simplest and most appropriate criterion to apply (although it needs to be production under an approved Field Development Plan, so as to exclude production under, say, an extended well test).
Q3)What happens if First Production doesn’t happen before the end of a Short-Term Extension?
Each licence will have been amended to ensure that acreage is taken back in those circumstances. We will, of course, always seek to be reasonable in any given situation, but licensees should not assume that BERR will offer further extensions. Short-Term Extensions are themselves concessions by BERR, and it would be wrong of BERR to make exception upon exception to its stated policy.
Q4)How long a Short-Term Extension should I ask for?
Our consideration will start with the licensee’s own estimate. We strongly recommend that licensees should be realistic and open about it.
It is not in a licensee’s interest to claim an unrealistically-short timescale, because as just pointed out if it proves inadequate they cannot assume that further extensions will be forthcoming. At the same time it is not in the licensee’s interest to claim an unnecessarily-long timescale, because to do so would weaken the case for a Short-Term Extension to be offered at all.
Q5)How will BERR define the Producing Areasgeographically?
We expect to base the Producing Areas initially on the existing Field Determinations; though we may ‘round them off’ where those areas are very irregular. The best geological understanding of a field may have improved since it was first determined so we reserve the right to reconsider any particular determination, but we don’t expect to do so routinely.
If asked, we will consider alternatives to the Field Determination on a case-by-case basis. For a particular field, for example, it might be that using the Field Development Area instead of the Field Determination would simplify contractual matters for the companies involved and would have no drawbacks from BERR’s point of view; in which case we may well accept the suggestion. However, we would be much less enthusiastic about the same suggestion if the Field Development Area contained separate discoveries.
All the geographical definitions will be a matter for my colleague Jen Brzozowska, supported by the field teams, to deal with (indeed she was working on them until the 25th Licensing Round descended on her).
Q6)How will BERR define the Potentially Producing Areasgeographically?
These are the areas that will be subject to Short-Term Extensions so that the licensee can have a set period in which to bring them to production.
Again, we will look at the definitions on a case-by-case basis. To the extent possible, we propose to apply the same principles as for Producing Areas, noting that of course there will be no formal Field Determinations (nor Field Development Areas) to work from.
There is a balance to be drawn between defining an area so large that it sterilises valuable exploration acreage, and defining an area so small that it may need to be revisited later in the light of further information. In each case, we will seek a reasonable definition that avoids either of these extremes.
Again, Jen Brzozowska will be dealing with these definitions.
Q7)Will BERR consider Short-Term Extensions to allow explorationand/or appraisal?
I refer you to my letter of 15 May. As I have stressed, we wish to take a common sense and case-by-case approach that leads us to reasonable decisions. Therefore we do not want to bind ourselves to a policy set out in narrow definitional terms before we have even had a chance to consider any particular cases.
Q8)What about the effect on health & safety of the reuse of infrastructure?
Some have said the reuse (or relicensing?) of infrastructure could prejudice safety. If true, that would be a very serious issue, but we have not yet heard an explanation of the issue. We urgently request a thorough explanation so that, if appropriate, we can raise the issue with the Health and Safety Executive.
Q9)What about gas supply contracts?
Some have raised the possibility of a conflict between our approach to the extension of 1st-Round licences and their Gas Supply Contracts; but nobody has explained what BERR is being asked to do differently as a result. Whatever the answer to that question, though, we believe that,in principle, contracts should be adapted to fit the licences, not the other way round.
Q10)When does the extension begin?
It will take effect in September 2010 (though it needs to be implemented by licence amendment before then).
Q11)When will the licences be amended?
This is going to be a big task both for BERR and for industry, and it would be irresponsible to leave it all till the last minute. We need a timetable that ensures that all 1st-Round licences get amended by September 2010, but which does not envisage them all being amended at once.
Doubtless some licensees will want their licences to be dealt with urgently; others may not be ready yet.
Our preferred approach is for industry to agree collectively on the prioritisation of the casework, perhaps via PILOT. If such agreement is not reached, we will prioritise using our own best judgement.
Q12)When will surrendered acreage be offered for relicensing?
We expect a great deal of acreage to be made available for relicensing during this process, either by early surrender by the licensee or by deemed surrender in 2010. We propose to offer it all at the earliest opportunity, as part of the normal licensing process. Most of the acreage will therefore become available in 2011, though licensees may choose to surrender some of it before then.
We have heard concerns that non-licensees need much more warning than the usual 90 days if they are to compete with the previous licensees for new licences. If the previous licensees choose to apply for their old acreage it is doubtless true that they will have a natural advantage over newcomers, having had many years to compile information and make plans. But we believe this is simply a fact of life, and we do not intend to treat this acreage as a special case.
Q13)Approach to be taken on later licences
I said in my letter of 27 November 2007 that we are formulating a general policy for all licence expiries, so in principle it applies to 2nd, 3rd and 4thRound licences (or for that matter to 25th Round licences).
That said, BERR will of course keep this and all other policies under review, and we reserve the right to modify it as the need arises.
Q14)Why a freeze on transactions during a Short-Term Extension?
The transactions freeze is justified by three reasons:
- We agree with OGIA’s view that extensions should not be given to allow licences to continue to be used as tradeable assets.
- We believe that normal trading would prejudice the prompt completion of the work for which the Short-Term Extension was granted, because that work will not proceed as long as deals are being negotiated and executed.
- We believe that Short-Term Extensions are only justified where a licensee can demonstrate a whole-hearted commitment to carry out a Work Programme. We do not accept that he is demonstrating the necessary commitment if he envisages that somebody else will have to enter the licence to do the work; and where we have granted a Short-Term Extension on the basis of statements that the companies are committed to carry out a certain programme of work, we will expect those companies to stay onboard to see the work through.
It should be noted, though, that there is no suggestion of any freeze before a Short-Term Extension begins in 2010; and that the freeze will only affect that acreage for which the Short-Term Extension was granted, so producing fields will be unaffected, and discoveries will be released from the freeze as soon as they start production.
Q15)Will BERR refuse to extend a licence because of stewardship concerns or broken work commitments?
Licence compliance, operator competence, field stewardship and work commitments are all important aspects of our regulation of the UKCS. As always, we will take a sensible and reasonable approach in each case; but in any case where BERR has serious concerns about such matters, we will expect to see our concerns remedied before we extend a licence further.
Q16)Will extensions be granted for fields that have suspended production?
In 2010 we will apply the same policy for suspended fields as for fields that suspend production after a licence has been extended. That is, BERR will consider them on a case-by-case basis, and will grant extensions where there is a reasonable expectation that production will recommence after a reasonable period. For example, if we agree that production has reasonably been suspended for infrastructure work or for conversion to gas storage, with the intention to recommence on a clearly-defined timetable, we will consider granting an extension. But we will not agree to extensions where the suspension is for an unreasonably long period or is intended to defer decommissioning, etc.
Q17)Will extensions be granted to cover decommissioning or reuse of infrastructure?
Q18)How can infrastructure use for transportation be “assured” after licence expiry?
Transportation and decommissioning are not licensable activities. BERR cannot extend a licence to cover them, and by the same token the companies involved do not require a licence to do them.
Nor, as a matter of policy, does BERR want acreage to be held under licence for long periods for purposes other than the production of hydrocarbons. That is why the trigger for acreage to be given up is based on a period without hydrocarbon production, rather than being linked to such things as decommissioning or transportation.
I have already pointed out the possibility of this situation to my colleagues at Her Majesty’s Revenue and Customs and at the Health & Safety Executive.
Note: I am assuming here that where apparently non-licensable activities like transportation and CCS continue after commercial production has ceased, they do not entail the incidental production of any native hydrocarbons at the site. If there are any exceptions, I’d be grateful for details.
Q19)How will companies exit from licences at deemed relinquishment of ‘their’ acreage?
In the usual way, by assignment. Where a company is left with no equity interest in any part of the Licensed Area and so wishes to withdraw from the licence, it will need to assign its licence interest to its remaining partners. It’s the same situation as when a company wishes to leave a licence because of the voluntary surrender of all the acreage that it has an equity interest in.
Q20)How can a field be converted to gas storage if the conversion takes more than two years?
Our proposal explicitly includes discretion for the Secretary of State to allow continuation during a period of suspended production. That applies equally well where the suspension is made to allow conversion to a different function, such as gas storage.
Q21)What is the definition of a ‘legitimate suspension’ of production?
When a field’s production is interrupted, the reason is usually that the licensee is in the process of putting an end to the field’s productive life altogether. When this happens on an extended licence, BERR requires that the acreage should be freed up for others who may wish to redevelop the same field or exploit other targets in the same area.
Not being able to use a definition that relies on decommissioning, we proposed a period without commercial production as the trigger for deemed surrender of the acreage; and we chose two years because that seemed to be a reasonable balance between allowing routine suspensions on the one hand, and getting acreage back in good time on the other.
However, BERR accepts that there may occasionally be cases where a field’s production has to be suspended for longer periods. Such circumstances might in principle include such tasks as damage repair, infrastructure upgrades and conversion to gas storage. On the other hand, the need to accommodate such possibilities does not mean that we can accept a formulation in which the licensee is free to decide for himself how long he can keep a field without producing any hydrocarbons from it. Therefore BERR will accommodate these cases by reserving the discretion to allow the field to remain under licence without production for more than two years.
Q22)How should a licensee apply for an extension?
I expect applications for Long-Term Extensions(covering producing fields) to be simple: a written request should suffice. If you want us to use a geographical definition other than the current Field Determination the request should include a description of the area to be retained and a case to explain why your definition is preferable.
Applications for Short-Term Extensionsshould include:
- A clear statement of the duration of the extension that is sought and a map of the acreage that it should cover.
- A description of the ongoing work on the acreage (which includes all the work recently carried out, that currently in progress and that which will be completed before the licence’s original expiry date in 2010). There is no need to include the cost.
- A description of the work planned for the extension, and a case that it is reasonable for us to expect that it will bring the acreage to First Production under a recent FDP before the end of the Short-Term Extension.
- A list of the commitments that the licensee is prepared to make to the Secretary of State as part of the process.
- An indication which companies, if any, who currently hold an equity interest in the acreage and are not committed to the work and so propose to withdraw before 2010, with expressions of commitment from those who are.
I understand OGUK has circulated a template. Licensees are welcome to use that or to choose their own format. Either way the submission should include all relevant information, but we ask licensees to think of the size of the task for us and therefore to be brief and concise; we hope no submissions will be more than two or three pages long.