Background
1. On 28 September 2002, the Energy Minister, Brian Wilson, launched a consultation on the possible introduction of a 'promote' licence for the UKCS. Such a licence, or modification to existing arrangements, would provide licensees with a period of exclusivity to work up prospects without the usual commitment to undertake substantial seismic or drilling activity at an early stage. In this way it was intended to help stimulate and promote interest and activity from a wide range of players with UKCS knowledge. The consultation document was circulated widely, including to licence holders and key players in the industry, including industry groups and other stakeholders, and published on the DTI Oil and Gas website. It invited comments on a number of issues. The consultation closed on 29 November 2002.
Response
2. 56 written responses were received to the consultation. They represented a complete cross section of the offshore industry, and included 'major' and medium size companies, new UKCS entrants, the seismic and contracting industries, consultancies, and individuals with substantive UKCS and international experience. While most of the replies addressed the specific issues set out in the consultation document, others were more wide ranging, or focussed on one or two issues of concern to the individual respondent or to a particular interest group that are relevant to the concept of a promote licence. To summarise:
Concept
3. The vast majority of respondents believe that the introduction of a promote licence would be a positive step that would have the effect of encouraging additional interest and subsequent UKCS exploration. Not surprisingly, a number of comments remarked on the need for a coherent approach to licensing and dealing on the UKCS- in particular that those different components of the licensing regime and recent initiatives (such as the fallow exercise) geared towards opening up acreage/stimulating activity should be mutually supportive. Equally there were many comments about a change in procedures or even attitudes if the promote concept is to work - a relaxation of financial criteria for assessment - for example. And there were many comments expressed about perceived prerequisites for a promote licence, such as easier and less costly access to data, both on wells and seismic surveys on previously licensed blocks.
Finally there were some views expressed about 'unintentional consequences' of a promote licence - how, for example, individual bidders might react to changes in the regime that might mitigate against the overall objective to increase UKCS activity. Among these might be the possibility that a promote option might 'syphon off' bidders for a substantive work programme, or that it becomes more difficult to encourage 'marriages' between interested parties with complementary skills. But overall the view was very positive.
Proposal - that the licence regime should incorporate a promote licence along the lines set out in the consultation document, to stimulate interest and subsequent exploration on the UKCS by encouraging a wider range of players able to bring in specialist knowledge and expertise.
Format
Given this support, questions of detail about the format etc of a promote licence were then explored:
Duration
4. The consultation asked direct questions about the length of time that a promote licence should last - sufficient to give the licence holder a reasonable opportunity to work up a prospect and add value, but not to tie up acreage any longer than is necessary.
5. By far the majority of respondees favoured a 2 year initial term for this process, during which the licensee would work up, promote, and market the prospect to interested parties, or bring in new partners, who would commit to drilling a well, or pursuing an equivalent, agreed and substantive work programme, within the remaining 2 years of the first stage of the licence (keeping the existing production licence format of 4/4/18 years). The second and third terms of the production licence would remain as at present, covering appraisal and production.
6. On the question of whether the DTI should allow extensions to the initial 2 year period, opinions were mixed. Most of those who indicated that there should be flexibility indicated that this should only be on the basis of good reason - unforeseen or specific circumstances that would not allow the original deadline to be met. It was not envisaged that an extension longer than a year should be allowed.
Proposal - That, for a promote licence, the licensee(s) will have an initial period of up to 2 years within the standard 4 year initial term to come forward with a further work programme - that may or may not involve the original licensee(s) - that includes a commitment, backed with identifiable resources, to drill at least one well, or equivalent agreed substantive work programme, by the end of the Initial Term. If no work programme is forthcoming, the licence will be relinquished at the end of this initial 2 years. Individual requests from licensees to extend the 2 year period will be viewed on a case by case basis.
Should there be a separate promote licensing round?
7. This issue provoked considerable interest. Many respondents from the service industries were anxious to have a visible distinction between rounds to clarify the differences between a traditional (substantive work programme, 4 year timeframe) round and the promote concept (focussed programme to work up and promote prospects). This could be achieved by having a separate promote round that followed a traditional round, to enable all blocks not applied for in the traditional round, wherever possible, to be offered in the promote round. Others took the view that a separate round would be an unnecessary complication that would delay matters, and that distinctions between promote and traditional terms could be built into a single round. Moreover a single round would help to focus bidders' minds onto a single closing date and help companies in their internal bidding processes. Among other suggestions was the idea of an open door policy leaving applicants to make the case for an award of a licence at that time, or for variations to the current procedures for Out of Round Applications.
Proposal - that, on balance, a traditional round and a promote round should take place at the same time. Applicants would be able to bid for each block to be licensed indicating whether or not they wished to be considered under traditional or promote terms. For clarity, it would be expected that a work programme that included a firm commitment to drill a well, or a 'contingent' commitment to drill a well, would be submitted under traditional terms. As noted above, promote would have a 2 year initial term in which to come forward, either by assignment of the licence or otherwise, with a commitment to drill a well, or an equivalent agreed substantive work programme, in the latter 2 years of the initial term. If not, the licence will lapse.
Level of promote licence rental fees
8. Again this topic created considerable discussion. The consensus view was that rentals should be kept low or be removed, at least for the 2 year term, in order to encourage smaller players (who would in any case incur significant costs in putting a bid together). The possibility of charging per licence rather than per unit area was also put forward as one way to keep entry costs low. Some respondents suggested that fees could be ramped up, to encourage early activity by virtue of this 'holding cost'. There was also a suggestion that fees might be rebated once expenditure on a work programme had exceeded a certain level.
In terms of application fees, several respondents also suggested these should be reduced for promote licences. It was also suggested by some that should a traditional application be awarded on a block for which there was also a promote application, then the application fee for the latter might be refunded.
Proposal - that in the interests of maximising interest and encouraging activity, the block rental fees for the first two years of a promote licence be set at a minimal level - 10% of current production licence levels. Rental fees will then revert to the level that a traditional current production licence for the same block(s) would have reached for years 3 and 4. A further option was that application fees for promote licences might be refunded if the prospective promote licensee failed to secure any promote licence whatsoever under a particular application they have submitted. However this would remove the direct link between the application fee and associated administrative costs and was not considered appropriate.
Should there be any limits to the size of acreage/number of blocks that can be applied for under the promote licence?
9. This issue covered the two questions of whether the individual promote licences should cover plays and tranches or just blocks or sub-blocks for specific prospects (ie what would the licence cover) and whether and what limits should there be to these.
10. The theme of respondents on this issue was that, as the aim of a promote licence is to encourage companies to work up prospects where they can add particular value, it would be unreasonable to grant a large number of licences to a single licensee - in particular from a smaller company - that would spread resources thinly. Limits between 1 and 5 blocks were suggested.
Proposal - given that this is the first time promote licences have been offered, we believe it sensible to limit the size of acreage awarded to individual companies. Accordingly, applications should be limited to a maximum of 5 contiguous blocks or part blocks for any given play concept, up to a maximum of 10 blocks in total for any one company. It is expected that companies with significant resources will wish to ensure that they can secure acreage on the most promising leads by bidding in the traditional round.
Are there any particular evaluation criteria that the DTI should use?
11. No new specific criteria were identified. However the emphasis noted by the majority of respondents was the need for strong technical skills - the ability to understand and work up a prospect - coupled with experience of operating on the UKCS. Many respondents noted the need for licensees to have the commercial skills to market the prospect to third parties - essential to capitalise on the technical knowledge and expertise of the original licence holder and underpin raw technical expertise. And while applicants should clearly have the financial resources to undertake the work programme proposed, financial strength alone was not seen as an inherent advantage.
Other factors?
12. Some additional points arose as a result of the consultation, most of which concerned issues that the DTI is aware of and addressing through the vehicle of PILOT, the government/industry group. In summary these were;
