Petroleum licensing guidance

Petroleum licensing guidance

Arrow on a road

The Petroleum Act 1998 vests all rights to the nation's petroleum resources in the Crown, but the Government can grant licences that confer exclusive rights to "search and bore for and get" petroleum. Each of these confers such rights over a limited area and for a limited period.

Most licences follow a standard format but DECC is flexible with this and will consider adapting new licences to suit special scenarios. The Secretary of State has discretion in the granting of licences, which is exercised to ensure maximum exploitation of national resource. 

 

DECC's expectations

Licences can be held by a single company or by several working together, but in legal terms there is only ever a single licensee despite the number of companies it may represent. All companies on a licence share joint and several liability for operations conducted under it. Each licence takes the form of a deed, which binds the licensee to obey the licence conditions regardless of whether or not they are using the licence at any given moment.

DECC expects companies to work their licences. In recent years, the amount of acreage left untouched, and those exclusive rights unexploited, has become a matter of concern. This led PILOT (formerly the Oil & Gas Industry Task Force) to instigate the Fallow Initiative, which incorporated a process to ensure UK Continental Shelf (UKCS) licences are optimally worked to maximise economic recovery of oil and gas.


Geography

DECC's licensing system covers oil and gas within Great Britain, its territorial sea and on the UKCS. The designated area of the UKCS has been refined over the years by a series of designations under the Continental Shelf Act 1964 following the conclusion of boundary agreements with neighbouring states. This includes the Scottish Adjacent Waters Boundaries Order 1999 (No. 1126), which implements an agreement reached with the Faeroe Islands.

Northern Ireland

Northern Ireland's offshore waters are subject to the same licensing system as the rest of the UKCS. It receives a biennial payment from overall royalty and rental payments calculated in proportion to its population. Northern Ireland issues its own licences to cover its onshore area independently of DECC.

Isle of Man

The Department of Economic Development issues licences for its own onshore area and territorial waters.


Rentals

Each licence carries an annual charge, called a rental. Rentals are due each year on the licence anniversary (except pre-20th Round Seaward Production Licences, which were only due in their initial year). Rentals are charged at an escalating rate on each square kilometre the licence covers at that date.

Rentals have two purposes:

  • to encourage licensees to surrender acreage they don't want to exploit
  • to focus licensees on acreage they decide to retail

Usually the companies on a licence agree among themselves (e.g. joint operating agreements) how to apportion costs, including rentals. However, the licence simply provides that each company is jointly and severally liable to the Secretary of State for all liabilities and obligations arising thereunder, and that it is not for DECC to determine how the rentals should be apportioned. DECC will therefore invoice a single company (known as the licence administrator and nominated by the licence group) for a single rental payment for each licence each year. It will not collect separate rental payments within a single licence.


Terms

Seaward Production Licences, and Petroleum Exploration and Development Licences, are valid for a sequence of periods, called terms. These are designed to comprise the typical life cycle of a field: exploration, appraisal, production. Each licence will expire automatically at the end of each term, unless the licensee has sufficiently progressed to warrant a chance to move into the next term.

The initial term is usually an exploration period. For Seaward Production Licences this is usually set at four years, although it can be longer for 'frontier' licences. For Petroleum Exploration and Development Licences, the intial term is set at six years and carries a work programme of exploration activity that DECC and the licensee will have agreed as part of the application process. This licence will expire at the end of the initial term unless the licensee has completed the work programme. At this time the licensee must also relinquish a fixed amount of acreage (usually 50%). 

The second term is intended for appraisal and development. It is four years for Seaward Production Licences and five for Petroleum Exploration and Development Licences. Both licences will expire at the end of the second term unless the Secretary of State has approved a development plan.

The third term is intended for production. It is 18 years for Seaward Production Licences and 20 for Petroleum Exploration and Development Licences. The Secretary of State has the discretion to extend the term if production is continuing, but DECC reserves the right to reconsider the provisions of the licence before doing so – especially the acreage and rentals.

The qualifying criteria to continue into the next term are minimal. DECC sets no maximum rate of progress and would generally prefer to see a licensee progress through exploration and appraisal to production before the end of the initial term, if possible. DECC would not shorten a licence's overall life.


Relinquishments/surrenders

Licensees are entitled to 'determine' (i.e. surrender) a licence, or part of the acreage covered by it, at any time (unless the licence is still in its initial term and the work programme is incomplete). DECC positively encourages the surrender of acreage if the licensee does not intend to work it, and a minimum relinquishment of acreage at the end of the initial term is a condition of most licences.

Partial surrenders are subject to restrictions, depending on the complexity of the area relinquished. DECC does not wish to create unlicensed areas so irregular in shape to be unattractive to other companies.


Multiblock licences

Many licences cover more than one block. 'Multiblock licences' are offshore licences for which the blocks have widely divergent licence groups of companies. This is common for blocks that are scattered geographically.

DECC recognises the problems that can arise from this and has undertaken not to issue any more licences covering scattered areas. It has no objection, in principle, to splitting existing multiblock licences and will further discuss the issue but encourages consideration of the following two issues beforehand: 

  • While the case for splitting more complicated multiblock licences is greater, it will be more difficult for the partners to reconcile the commercial arrangements.
  • In past discussions industry raised concerns about the robustness of the splitting process. As far as DECC is aware, these are yet to be resolved. 

Onshore licences and landowners

The Secretary of State issues landward production licences (Petroleum Exploration and Development Licences) under powers granted by the Petroleum Act 1998. They confer the right to search for, bore for and get hydrocarbons, but do not confer any exemption from other legal/regulatory requirements such as:

  • any need to gain access rights from landowners
  • health and safety regulations
  • planning permission from relevant local authorities.

In particular, nothing in part I of the Act confers, or enables the Secretary of State to confer, any right to enter on or interfere with land (see section 9(2) of the Act). However, it should also be noted that section 7(1) of the Act applies the Mines (Working Facilities and Support) Act 1966 in England, Wales and Scotland for the purpose of enabling a licensee to acquire such ancillary rights as may be required for the exercise of the rights granted by the licence.

  • Consult the relevant map to see whether any particular site is covered by a licence (e.g. during house conveyancing).
  • For further information email approvals@decc.gsi.gov.uk or write to Oil & Gas Licensing Administration, Department of Energy and Climate Change, 3 Whitehall Place, London SW1A 2AW, and include the ordnance survey coordinates of the site in question (DECC can not identify sites using postal addresses or postcodes).

The Supreme Court made a judgement dated 28 July 2010 in the case of Star Energy Weald Basin Limited and another (Respondents) v Bocardo SA (Appellant), which concerned issues of trespass and damages.


Coal-related hydrocarbons

The Coal Authority manages the UK's coal reserves and must agree to any access to coal formations for any purpose. 

Certain processes capture native hydrocarbons, which originate in coal seams. The use of these require permission from the Coal Authority (for access to the coal) and a licence from DECC (for capture of the hydrocarbons). The processes include:

  • coalbed methane (CBM) – liberates native methane from virgin coal seams
  • vent gas (also called mines gas) – captures methane from working or disused mines

 

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