27 May 2003
As existing oil and gas fields in the UK Continental Shelf (UKCS) approach the end of their productive lives, it has become common for larger companies operating these fields to dispose of their interests and hand the operatorship to smaller companies, some of which may be new to the UK. It is likely that these newcomers will carry out work that might not have been carried out by the larger companies, which has the effect of prolonging the productive lives of those fields and deferring the time for payment of the liabilities associated with decommissioning or abandoning the facilities.
Such transfers are generally encouraged by the Department of Trade and Industry (DTI), provided that the new entrants can demonstrate the technical and financial ability to assume the operational obligations involved. Indeed, over recent years, the DTI has taken steps towards improving the competitive position of the UKCS in relation to the worlds other oil and gas-producing regions and has sought to improve the capital and operating efficiency in the UK North Sea.
In January 2000, the Government created Pilot (a successor body to the Oil and Gas Industry Task Force), with the stated intention of securing the long-term future of the oil and gas industry in the UK.
The Government has also signalled its intention to develop and support the oil and gas sector and to make those reforms it considers necessary to maintain the UK North Seas contribution to jobs, exports, revenues and energy sufficiency.
Transfers and pre-emptions
For some years, the Government has recognised the need to reduce administrative barriers to new entrants and has sought to move industry practices towards the use of model form documents for transfers. Most recently, the Secretary of State for Trade and Industry has promoted a cross-industry master deed, to be entered into by all UKCS licenceholders, which is intended to streamline the process for completing transfers of interests held under licences and related agreements governing exploration and production operations, and also formalising and constraining the exercise of existing pre-emption rights under operating agreements. This master deed was completed on 28 April 2003.
The Government has recently implemented two new initiatives aimed at encouraging new entrants and promoting development. The first has been the introduction of the promote licence, which has been introduced in the recent 21st round of offshore licensing.
Among other things, this new form of licence results in much reduced rental fees and encouragement for an early commitment to substantive works on the part of licensees. Also, the Government has introduced its fallow initiative, which seeks to achieve early transfers of licence interests or early commitments to investment expenditures in circumstances where existing licensees are taking insufficient steps towards development.
The Government has also made a number of changes to the fiscal regime over recent times, some of which are perceived as being conducive to new investment and increased competitiveness. These changes have affected royalty payments, petroleum revenue tax and corporation tax.
While the supplementary charge to corporation tax introduced last year proved deeply unpopular with existing licensees, the Government also pointed to the enhanced first year allowances for capital expenditure in the sector. In addition, this year has seen the abolition of royalty and a removal of new tariff income from the charge to petroleum revenue tax.
At the same as these commercial and fiscal changes have been introduced, many existing licensees and particularly the major oil and gas companies have been reviewing their businesses and strategies in relation to the UK North Sea.
Whether prompted by moves towards developing new large fields in other parts of the world (rather than seeking to maintain revenues from declining fields in the UK North Sea), or rationalising portfolios of assets resulting from recent corporate takeovers or aggregations, the UK North Sea is seeing a wave of disposals of interests by major oil and gas companies to new entrants or smaller companies.
Perhaps the first example was the acquisition by Paladin Resources from BP of interests in the Montrose, Arbroath, Carnoustie and Arkwright oil fields, although the most notable example so far has been the sale by BP in January this year of its Forties oil field to Apache Corporation. Shortly after the announcement of the sale to Apache, BP also announced the sale to Perenco of a number of gas interests in the southern North Sea. More recently, ConocoPhillips and others have announced the offer for sale of a number of interests.
It has been said for some years that the UK North Sea has now reached a maturity that will result in changes in the nature of participants and licenceholders, together with changes in commercial and business practices. For some, there is a ready precedent for this in the experiences of oil and gas producers in the Gulf of Mexico, with its attraction of new capital for the continued production of existing fields and the development of new fields through existing infrastructure.
However, this precedent relies heavily on the owners of the existing pipelines and other infrastructure to welcome new business as an opportunity and to provide processing and transportation services under published or otherwise predictable commercial terms. Corresponding transparency is not yet evident in the pipelines and other infrastructure of the UK North Sea, and it remains to be seen whether or not the Governments initiatives to date will have their intended effect without a further initiative: the reform of the arrangements for third-party access to upstream pipelines and other facilities.
Paul Griffin is a partner in the energy and infrastructure group at Herbert Smith
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