Oil and gas: petroleum licensing guidance
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.
You can go to the UK Oil Portal to apply online for onshore and offshore petroleum licences - and for changes to licences eg assignments and relinquishments (login required).
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.
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’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
- guidance on onshore co-ordinates
- Guidance notes on the use of co-ordinate systems in data management on the UKCS
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 2 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 (eg 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.
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 4 years, although it can be longer for ‘frontier’ licences. For Petroleum Exploration and Development Licences, the intial term is set at 6 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 4 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.
All the qualifying criteria for continuation into a following term of the licensee define the minimum amount of progress that the licensee must make. There is no suggestion that they set maximum amounts of progress that the licensee is allowed to make, or that they limit the exercise of the licensee’s rights.
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.
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 2 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 (eg during house conveyancing).
For further information email firstname.lastname@example.org and include the ordnance survey coordinates of the site in question (DECC can not identify sites using postal addresses or postcodes).
Oil & Gas Licensing Administration
Department of Energy and Climate Change
3 Whitehall Place
London SW1A 2AW
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.
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
Petroleum e-business assignments and relinquishment system (PEARS)
DECC’s new e-licence administration system (PEARS: the Petroleum E-Licensing Assignments and Relinquishments System) is now live.
The new system provides both security and ease of use by enabling licensees to deal with the following casework for their offshore Production Licences without the need for paper documents:
- Licence assignments
- Operator approvals
- Equity interest changes (including field interests and management of subareas)
- Licence administrator changes
- Licence relinquishment
- Surrenders of acreage
- Data confirmations and corrections
You can go to the UK Oil Portal to apply online for onshore and offshore petroleum licences - and for changes to licences eg assignments and relinquishments (login required).
To use PEARS you need a Portal account, to obtain an account follow the PEARS user guidance document below.
Once you have an account, you will see a new link (Licensing Portal PEARS) on the left-hand sidebar when you enter the Portal, and clicking this link will take you into PEARS.
If you need access because a registered user has added you to a case-processing team, and you already have an account, you will now be able to access the case (but nothing else in PEARS).
tel: 0300 068 6038
Telephone: 0300 068 6050
UK Oil Portal Support Line
Telephone: 0300 068 5793
Introduction to PEARS
PEARS is DECC’s portal-based licence administration system. It was designed to make the administration of DECC’s Petroleum Production Licences more efficient for industry as well as for DECC, and to raise the confidence that can be reposed in DECC’s records, whilst continuing to provide accustomed levels of security and confidentiality.
The PEARS screens are designed to act as a wizard, guiding the user through the process of applying for the Secretary of State’s consent to various types of transaction.
Below is a guidance document that sets out step-by-step instructions to the use of PEARS, and Info symbols throughout the PEARS screens carry context-sensitive tips about particular screen items and explanations of error messages. There are also examples of the Consent / Rejection Letters that are issued from the PEARS system.
PEARS example letters
PEARS processes several types of transaction, most of which can be combined in a single case:
- licence assignments (where a user applies for the Secretary of State’s consent to transactions in which one or more parties enter a licence and/or one or more parties leave it);
- interest allocations (where a user applies for the Secretary of State’s consent to transactions in which the parties to a licence apportion licence interests between themselves);
- operator changes (where a user applies for the Secretary of State’s approval of the appointment of an operator);
- licence administrator changes (where a user nominates the licence group’s point of contact for DECC).
- licence relinquishments (the voluntary termination of a licence by the licensee);
- surrenders of acreage (the voluntary relinquishment of part of a licensed area by the licensee while the licence continues over the remainder).
PEARS will help users compile their applications, and will check their input for obvious errors such as interest allocations that don’t add up to 100%, but for the most part leaves users free to assemble their applications as they see fit.
If DECC approves a transaction, PEARS will mail the approval to the applicant and anyone else he has asked for it to be sent to. After execution of an approved transaction, users will be expected to submit a scanned copy of the implementing agreement; and PEARS will make this process easy. PEARS delivers a necessary level of security by restricting access to registered users with password access, but it is the licensees themselves who control the confidentiality of their own data by giving specific account-holders access to their casework and data. For example, a licensee might decide to allow only its own lawyers to access one of its cases, or to allocate one or more access roles to account-holders at a law firm – the choice rests with the applicant.
Access is granted by allocating particular ‘roles’ (eg editors, viewers and submitters). Authority is based ultimately on a signed nomination by an authorised signatory of an Access Manager, but thereafter certain registered users have the authority to nominate further users on a case-by-case basis, creating a case and the team to handle it. We expect most account-holders to be given access to one specific case at a time, but this is not a decision that either DECC or PEARS will impose on licensees.
The first step for a licensee is to choose somebody to act as its Access Manager, who can then allocate certain other top-level roles to particular users. To do so, the licensee needs to complete, sign and return the contact details form below.
As well as processing licence administration casework, PEARS can handle rectifications and restatements, and provides a simple and straightforward way for licensees to tell DECC about errors in records, and to upload supporting documentation.
As part of a general drive towards improvement of the quality of records, each application will be checked for consistency between its starting point and the records of the licence’s current position. The first time each licence is implicated in a PEARS application, the user will have to confirm this consistency, or tell DECC about any discrepancies and upload supporting documentation so that we can consider, and if appropriate implement, a correction. We have made this process as simple as possible, but we do nevertheless strongly recommend licensees to check records well in advance of their next application so that any discrepancies can be sorted out in good time.
All these procedures are covered in the main guidance document.
NB: At PEARS’ Go-Live Date (16 April 2012), it will be ready to handle transactions on all Seaward Production Licences. DECC is continuing to migrate landward licences into it, and plans to start handling landward transactions later in 2012.
Further information and guidance
- Guidance notes on the use of co-ordinate systems in data management on the UKCS
- PEARS team setup and access guidance (PDF, 0.5MB)
- the quick guide to processing a new assignment through PEARS (PDF, 0.3MB)
- contact form (Doc, 52KB)
- frequently asked questions (Doc, 55KB)
- enter the Oil and Gas Portal (login required)
Petroleum Act 1988
Part I of the Petroleum Act 1998 (and before it, the 1934 Act) vests all rights to petroleum in the Crown, including the rights to search for, bore for and get it. It also empowers the Secretary of State to grant licences to search for and bore for and get petroleum to such persons as they see fit.
Part III of the Act deals with submarine pipelines and Part IV with the abandonment of offshore installations.
As with any licensing system, many of the detailed regulatory provisions are laid down in conditions attached to the licences. The Petroleum Act is rather unusual in that it requires these conditions (model clauses) to be published first in secondary legislation. Up to the 19th Round, the model clauses were incorporated into licences by means of a single short paragraph, but from the 20th round onwards they have been set out in full in the licence itself, for the sake of clarity. It is the licensee’s responsibility to understand these conditions and ensure they are observed.
- model clauses in use for Seaward Production Licences
- model clauses in use for Landward Production Licences and for Seaward Exploration Licences
- more information about the 2008 regulations
Model clauses attached to existing licences are not affected by the issue of subsequent sets of model clauses, except through specifically retrospective measures. There are other restrictions on activity besides those contained in the model clauses. All new Seaward Licences (Production and Exploration) contain additional restrictions, eg a requirement to appoint a Fisheries Liaison Officer – and there are other controls (see below) that have nothing to do with the Petroleum Act.
As it is impossible to summarise every control a company might be subject to, it remains the responsibility of every licensee to be aware of all regulatory controls and to comply with them.
Hydrocarbons Licensing Directive Regulations 1995
In 1994 the EU laid down strict rules member states must follow when issuing petroleum licences that comprise the factors that may (and may not) be taken into account when deciding whether or not to issue a licence, and the minimum amount of public consultation required.
These rules are contained in the Hydrocarbons Licensing Directive, which was implemented in the UK in 1995 by means of the Hydrocarbons Licensing Directive Regulations.
Types of licence
*Information about Seaward Exploration Licences at bottom of page
All modern production licences run for the following 3 successive periods (terms):
- Initial term – may continue into a second term if the agreed work programme has been completed and a minimum amount of acreage has been relinquished
- Second term – may continute into a third term if a development plan has been approved and all acreage outside the development has been relinquished
- Third term – runs for an extended period to allow production
The terms are of different durations, in accordance with the licence type, and there is an escalating annual rental.
While each term is commonly associated with a particular phase of a field’s life cycle, the licence gives the same rights from beginning to end; so nothing in the licence can bar production during the initial term, for example, if the licensee were to move that fast.
All Seaward Production Licences have the prefix ‘P’ (eg P001) whereas Landward Production Licences have a range of prefixes.
This is the familiar Seaward Production Licence that has been in use since offshore licensing began. Most licences issued since seaward licensing began have been Traditional Licences.
An applicant must prove technical/environmental competence and financial capacity before an offer of a Traditional Licence will be made.
- Initial term – 4 years
- Second term – 4 years
- Third term –18 years
- Mandatory relinquishment at end of initial term – 50%
This is a variant of the Seaward Production Licence designed to allow small- and start-up companies a Production Licence first and to attract the necessary operating and financial capacity later. The difference is seen more in the application process than the licence itself, except in that the annual rental rate on a Promote Licence is reduced by 90% for 2 years. The licence requires financial, technical and environmental capacity to be in place, and a firm drilling (or agreed equivalent equally substantive activity) commitment to have been made by the end of the second year – or the licence will expire at that time.
Applicants do not need to prove technical/environmental competence or financial capacity before award of the licence but they must do so within 2 years of its start date if they are to keep the licence. They will otherwise not be permitted to operate until they have done so.
- Initial term – 4 years
- Second term – 4 years
- Third term – 18 years
- Mandatory relinquishment at end of initial term – 50%
6-year Frontier Licence
This is another variant of Seaward Production Licence. It has a 6-year exploration phase and is designed to allow companies to evaluate large areas with greater materiality for a period, so they can look for a wider range of prospects.
An applicant must prove technical/environmental competence and financial capacity before offer of a 6-year frontier licence is made.
- Initial term – 6 years
- Second term – 6 years
- Third term – 18 years
- Special mandatory relinquishment of 75% after 3 years with a mandatory relinquishment at the end of the initial term of 50% of the remainder (making seven-eighths in total)
9-year Frontier Licence
This is the most recent variant of Seaward Production Licence. It is designed for the particularly harsh West of Scotland environment, and is similar to the existing Frontier Licence but with an initial term of nine years.
DECC will only consider work programmes of the Drill-or-Drop type with the decision to be made by the end of the sixth year and (if the licensee chooses to drill) drilling to be completed within the remaining 3 years of the initial term. Because geophysical data is especially sparse in this region, DECC expects work programmes to include significant new seismic acquisition.
Applicants must prove technical/environmental competence and financial capacity before a licence offer will be made.
- Initial term – 9 years
- Second term – 6 years
- Third term – 18 years
- Special mandatory relinquishment of 75% after 6 years with a mandatory relinquishment at the end of the initial term of 50% of the remainder, making seven-eighths in total
Petroleum Exploration and Development Licence (PEDL)
This is the full name of the Landward Production Licence. It is similar to the Traditional Seaward Production Licence, although for historical and practical reasons there are many differences in detail.
Applicants must prove technical competence, awareness of environmental issues and financial capacity before offer of a PEDL will be made.
- Initial term – 6 years
- Second term – 5 years
- Third term – 20 years
- Mandatory relinquishment at end of initial term – 50%
Supplementary Seismic Survey Licences
If the operator of a Landward Production Licence wants to shoot a seismic survey right up to the boundary of their licensed area, they will need to operate the survey equipment a little way outside of it. If that means working in unlicensed acreage, they can seek a Supplementary Seismic Survey Licence (SSSL), which lasts for one year and covers a kilometre-wide strip adjacent to the existing Production Licence.
A SSSL will only be issued to the operator of a Production Licence – not to their partners. DECC needs to be told the coordinates of the additional area and provided an A4 map of the area. Any new Production Licence subsequently issued over the same acreage will automatically terminate the SSSL. If there is only a partial overlap, the SSSL will cease to operate on that overlap.
Seaward Exploration Licences
A company that does not need rights to drill or produce can apply for a Seaward Exploration Licence. This is cheaper than a Production Licence and covers all acreage outside those areas covered at any given moment by a Production Licence. It is particularly aimed at seismic contractors who wish to gather data to sell rather than exploit geological resources themselves.
The licence costs a flat rate of £2,000 per year and covers non-intrusive exploration whether carried out for the sake of hydrocarbon production, gas storage, Carbon Capture and Sequestration, or any combination of them.
If the holder of a Seaward Exploration Licence wants to explore acreage covered by a Petroleum Licence, they will need to gain permission from the holder of the Production Licence.
Methane drainage licences and consent for flaring and venting
Under the Energy Act 1976, as amended by the Gas Act 1986, the Secretary of State’s consent is required for the disposal of natural gas (whether at source or elsewhere) by flaring or unignited release into the atmosphere. There are a number of exemptions, including flaring covered by one type of licence and gas supplied by a public gas supplier.
Contact Ivor Newman on 0300 068 6046 or email email@example.com for further details.
Many coal mines vent methane to the atmosphere or else accumulate methane that must be dealt with by the mine owner. Either way, the methane can create a health and safety issue and, as a very powerful greenhouse gas, an environmental problem.
Capture of drained methane requires a Methane drainage licence (MDL) under the Petroleum Act 1998, but safety is the government’s first priority. To regularise methane drainage, DECC is generally prepared to issue a Methane Drainage Licence (MDL) for a nominal fee, which grants permission to get natural gas ‘in the course of operations for making and keeping safe mines whether or not disused’. It grants no exclusive rights and so can overlap geographically with one or more PEDLs. MDLs generally cover much smaller areas than PEDLs – each typically covers one mine, although the Coal Authority holds a licence that covers the whole country.
Older types of onshore licence
Until 1996, the government issued a sequence of separate licences for each stage of an onshore field’s life:
- Exploration Licence
- Appraisal Licence
- Development Licence
- Production Licence
Petroleum Exploration and Development Licences (PEDLs) were introduced at the Eighth Licensing Round (in 1996) to reduce the bureaucratic burden of issuing a series of licences. DECC no longer issues any licences of these types but a number of them, and older licences, are still in force.
The Petroleum (Production) (Landward Areas) Regulations 1984 replaced the previous system of 2 types of licence: * Exploration Licences (XL) * Production Licences (PL)
- a new type of Exploration Licence (EXL)
- Appraisal Licences (AL)
- Development Licences (DL)
The Department of Energy issued EXLs from the First Onshore Licensing Round (1986) until the Sixth (1992). Each Exploration Licence (EXL) ran for 6 years and carried an agreed Work Programme (just like the 6-year Initial Term of a modern PEDL).
The 5-year Appraisal Licence gave the licensee time to prepare a development programme and gain long-term planning permission. Only if both of those were in place would the department consider issuing a 20-year Development Licence. EXLs that have not expired or been relinquished have been converted to the same terms as a the PEDL but their names have not changed, eg EXL141 or EXL169.
Mining Licences (ML)
Dating from the 1950s, these are the oldest licences still in force.
Applying for a licence
DECC issues licences through competitive licensing rounds. It believes this method yields better quality bids than other methods. Unlike auctions, for instance, licensing rounds do not divert significant sums of money away from exploration work and they give a much better expectation that a licence will be awarded to the bid that promises to optimise exploitation of the UK’s petroleum resources.
Onshore and offshore licensing rounds generally take place every year.
DECC is committed to a competitive licensing system in which licences are issued in regular Licensing Rounds, and consultation has also revealed the industry’s preference for this system because of its predictability. There may, however, be exceptional circumstances where it would be reasonable for a company not to have to wait for the next Licensing Round to get a licence, so DECC also has an “Out-of-Round Application” process. It can only be used if justified by exceptional circumstances, and should not be seen as a routine alternative to the Licensing Rounds system.
DECC can only accept licence applications in response to a formal Invitation to Apply, so any company seeking an out-of-round licence must first convince DECC of the case for an Out-of-Round invitation. If DECC agrees to issue an Out-of-Round Invitation, in most cases the process will comply with the Hydrocarbons Licensing Directive, as implemented by the Hydrocarbons Licensing Directive Regulations (which will entail publication of the Invitation in the European Journal with applications usually being taken at least 90 days later), and all other relevant provisions including the Strategic Environmental Assessment Directive.
A case for an Out-of-Round process will generally have to show that waiting for the next Licensing Round would cause unnecessary delay to activities under an existing licence (and that going Out-of-Round would avoid that delay) or that broad competition is not feasible even in a Licensing Round. DECC has, for example, accepted a case to go Out-of-Round where an existing licensee demonstrated that his development plans required a new licence over adjoining acreage, and that even in a Licensing Round nobody else could reasonably have competed with him for it. Out-of-Round awards are not appropriate for pure exploration or where a company simply prefers not to wait for the next Round.
Companies who want DECC to launch an Out-of-Round process should approach John Arnott at firstname.lastname@example.org in the first instance. If DECC invites applications, applications should be made in the same way as during a Licensing Round and the same guidance will apply.
Applying for a Seaward Exploration Licence
You can apply at any time for a new Seaward Exploration Licence (or for an extension to an existing Seaward Exploration Licence) using the Exploration Licence application form below.
Submissions should be emailed to email@example.com
Seismic surveys are subject to a consent procedure, which may require an environmental impact assessment. Email the Environmental Management Team at firstname.lastname@example.org for more information.
Applying for a Supplementary Seismic Survey Licence
The operator of an onshore production licence (PEDL, EXL, AL, DL, etc) can apply for the adjoining Supplementary Seismic Survey Licence at any time, using the application form below. The completed form must be accompanied by an A4 map of the area to be licensed.
Contact Ricki Kiff on 0300 068 6042 or at email@example.com for more information.
Licence assignments (transfers)
A company that is party to a licence may wish to sell its interest, or a part of it, to another company. Any transaction in which one or more companies enters a licence, and/or one or more companies withdraws from it, is referred to in this guidance as a licence assignment.
Licence assignments are prohibited unless they have the prior consent of the Secretary of State. DECC will consider any assignment made without prior consent as a very serious breach of the model clauses attached to every licence licence, and as grounds for immediate revocation of the licence or to reverse the assignment using powers granted in the Energy Act 2008 (s76).
This section applies equally to assignments between unaffiliated companies, to assignments between sister companies within a single company group, and to the withdrawal of a company from a licence.
Overview of procedures
DECC operates a Portal-based procedure for processing applications for consents to licence assignments. Further guidance is available at: PEARS Guidance
At the time of writing (December 2012), the Portal only handles assignments of offshore licences; those of landward licences continue to be handled by email; see below. We are working to integrate them into the Portal during 2013.
DECC will routinely seek advice about applications from the Licensing and Consents Unit’s asset teams, Exploration Team, Decommissioning Unit, DECC financial advisers and others. We also circulate details of each application to HM Revenue & Customs (HMRC).
If there are no reasons to withhold it, DECC will transmit the Secretary of State’s approval of an assignment, and it then rests with the applicant to execute it. DECC requires notification of execution when it has happened so that we can update our records, and will not consider an assignment to be effective until we have received it.
DECC generally considers increased volumes of licence assignments as a positive indication of companies improving their alignment on each licence. This does not mean they are regarded as mere tradable assets, and we expect companies to buy licence interests with a view to exploiting them – not merely to sell them on.
The following issues can cause concern about any particular assignment:
- technical and financial capacity of the licensee – DECC must be satisfied the proposed new company is suitable for the licence, and that it has the capacity to participate fully in licence operations and discharge its licence obligations. See Criteria to become a licensee for more information.
- decommissioning costs – financial capacity will be a greater concern if significant decommissioning costs are likely to be incurred by licensees. The dedicated decommissioning unit in Aberdeen is looking to ensure future decommissioning liabilities are covered.
- effect on operatorship arrangements – DECC will not generally approve an assignment if it would leave the licence without an approved operator. This is always important for production operatorship. Applicants should allow time in their plans for DECC to consider operator approvals (See Operatorship.)
- licence alignment – this is not usually a concern for DECC but we might need to look carefully at a case in which one company gains a completely dominant position on a licence, or where one company has such a small interest that it is not motivated to participate in exploiting the licence but yet can still block work.
- Intragroup assignments – DECC has no objection in principle to assignments to a sister company but if they are made specifically to dispose of the licence interests via a corporate sale, DECC will generally want to know who the buyer is before it is approved. Where the reason for the assignment is tax-related, we recommend applicants should first discuss it with HMRC (but DECC will anyway routinely inform HMRC of new assignment cases as we receive them).
- fragmentation of licence interests – in some circumstances the creation of very small licence interests may be of questionable advantage to the UKCS. It may, for instance, prejudice the licence group’s attempts to agree on new work by introducing new voices. However, such drawbacks may be outweighed by a new licensee’s expertise or experience. As a general rule, DECC suggests any licensee seeking to create small licence interests (under 5%) should justify the transaction in the ‘extra information’ section of the application form..
- infrastructure – this is a conceivable rather than routine issue, but DECC might be concerned if, for instance, it seemed an infrastructure owner was seeking to enter a licence group to influence tariffing negotiations.
- OPOL – DECC expects all offshore operators to be members of the Offshore Pollution Liability Association and to register each of its separate operatorships.
Procedure for application
The current holder of the licence must gain permission to transfer it and therefore must lodge the application to DECC, even though in many cases much of the information DECC needs will have to come from the acquiring company. Consent will not be granted unless DECC has all of the required information.
The Secretary of State’s assignment consents and operator approvals are valid for three months after the execution/handover dates specified in the application form. Completions delayed beyond three months will require a renewal, which we will generally consider on receipt of a revised completion date and confirmation that the details in the original application are still valid.
The form must be fully completed and in accordance with the guidance note. Avoid excessive precision when specifying the size of a licence interest; DECC generally does not record such figures beyond two decimal places.
Submit the completed form (email applications preferred) to firstname.lastname@example.org
Once consent has been granted, the assignee must notify DECC within 2 weeks of execution of the assignment. A confirmation slip to return is included with every consent email.
Please do not address applications to individuals.
If the application for transfer is approved, the Secretary of State’s consent will be sent to the applicant and copied to the assignee. We will simultaneously approve the amendment/novation of all related agreements except operating agreements, which are dealt with separately (see Open Approval Operating Agreements for details).
DECC prefers to email its replies and will copy to other parties as requested if email addresses are provided. A hard copy can also be posted as requested (with the postal address) at box S17 of the application form.
Consent for the transfer is conditional on the Deed of Assignment substantially conforming to a draft approved by the Secretary of State. There are currently two such approved drafts. The first is contained in the PILOT Master Deed, which sets out agreed assignment procedures and forms agreed by PILOT (being a PILOT procedure this is only available to offshore licensees) LOGIC offers guidance on using the PILOT Master Deed.
The alternative is the Approved Model Deed of Assignment:
If you choose to use this method, you can only depart from it in ways that do not materially alter its effect (for instance, you can move the company names to a Schedule). It does not include execution or attestation clauses, which should be added as required. You can disapply the Contracts (Rights of Third Parties) Act 1999 in relation to the deed, and/or provide for the execution of the deed in counterpart. You must also decide whether jurisdiction should lie with the English, Scottish or Northern Irish courts (refer to the Civil Jurisdiction (Offshore Activities) Order 1987 (1987/2197).
Use of either of the approved drafts is not compulsory, but if you want to use a different draft you must submit a copy in advance because it will need to be considered by DECC lawyers, and that will considerably increase its processing time.
No objection in principle
Licensees sometimes ask DECC to confirm it has “no objection in principle” to a proposed transfer – particularly for an Earn-In agreement, in which the assignee’s expenditure necessarily comes before the assignment. DECC may be able to issue an assurance if it receives enough of the information that would be necessary actually to consider the assignment, but DECC won’t be able to offer any binding undertaking or replace the formal consent procedure which will still be required in due course.
This depends on such factors as complexity of the assignment, quality of information initially provided, number of other applications being processed, etc. We aim to process 95% of standard cases in 10 working days (although this cannot be guaranteed). Production operatorship and financial checks in particular can take longer than this; the overall processing time will increase to 25-30 days where such consideration is involved.
If a proposed assignment would affect either the holder of a Pipeline Works Authorisation (PWA) or the operator, user or owner of any offshore pipeline, the holder of the PWA must seek a variation to the relevant Pipeline Works Authorisation (PWA). DECC strongly advises the variation be sought as soon as possible and at least 28 days before the proposed completion of the assignment, so as not to delay it.
Phone 01224 254056 for further information.
Change of control of licensee
The Model Clauses do not impose any requirement for the Secretary of State’s approval of a change of control of a Licensee (e.g. at a corporate takeover), but they do specify it as grounds for revocation (if the Secretary of State has instructed the Licensee to make a further change of control and the Licensee has failed to do so in a certain time).
The existence of this power can result in a request for comfort that the Secretary of State will not exercise it. DECC is generally willing to consider such requests, but we will not be able to offer any cast-iron promises; any comfort we give will be based on the information available to us at the time, and limited accordingly.
DECC’s policy requirement in this regard is that the licensee can demonstrate that the Change of Control will not prejudice its ability to meet its licence commitments, liabilities and obligations.
Information and documentation requirements
Details of the change of control should be sent by email to email@example.com
- the new corporate parent’s name, country of incorporation and company registration number
- post-change of control pro-forma balance sheet for the licensee and a consolidated post-change of control pro-forma balance sheet for the new corporate parent
- a list from the new corporate parent of its prospective subsidiary’s UKCS licence holdings and commitments (especially those arising from Work Programmes, from the Fallow Initiative or the Stewardship Process) and a statement that it will support the licensee in meeting these commitments.
Upon review of the initial information, DECC may seek further information including, but not limited to, evidence of adequate ongoing funding arrangements and assurances from the new corporate parent of continuing financial support for its subsidiary.
Where DECC requires further information to enable it assess the licensee’s post-acquisition financial position, it will send a formal request to the originator of the change of control notification asking for such information as it needs to.
Parent company guarantees
Where a licensee is dependent upon the financial support of its current corporate parent to enable it to meet its licence obligations and will become reliant upon the financial support of its new corporate parent, DECC will require a parent company guarantee from the new corporate parent to replace any existing parent company guarantee which may have been issued. DECC’s forms of words for parent company guarantees may be found here.
DECC would also require a parent company guarantee from the new corporate parent if, prior to the acquisition, sufficient value had been transferred out of the licensee to render it unable to meet its licence obligations without the financial support of its new corporate parent.
DECC requires any new parent company guarantee to be issued on or immediately following the date on which the change of control becomes effective. Parent company guarantees should be on the corporate stationery of the new corporate parent and should use one of the 2 prescribed forms of words which can be found in this document:
Failure by the new corporate parent to provide a parent company guarantee in one of the 2 prescribed formats may constitute sufficient grounds for the Secretary of State to invoke his powers under the Model Clauses to either order a further change of control or to revoke any UK petroleum licences held by the licensee.
Senior Accountancy Adviser
Dept of Energy and Climate Change
3 Whitehall Place
London SW1A 2AW
tel: 0300 068 6049
As the oldest offshore licences expired in September 2010, DECC has incorporated a licence extension process to prevent the 100 producing fields they covered from having to close down. The policy for licence extensions applies only to Seaward Production Licences. Landward Production Licences are far more diverse and the case for extending them will continue to be considered on a case-by-case basis.
DECC has already amended 1st and 2nd Round Licences and has communicated the policy on the extension of 3rd to 7th Round (inclusive) Licences. (The terms ‘1st-Round Licences’ and ‘2nd-Round Licences’ are used here as shorthand for those licences set to expire in 2010 and 2011, respectively, but not all such licences were issued in the licensing round indicated – some were issued later but with shorter lifespans, to expire at the same time as licences issued in the round. These other licences will be treated the same way as those issued in a round.)
Production licences grant exclusive rights over a particular piece of acreage for a specified period. At the end of that period the acreage is returned to DECC’s competitive licensing system so the Secretary of State can decide who, if anybody, should have the next opportunity to exploit it. There are only a few circumstances where exceptions to this would be justified, of which well-managed producing fields are the most important.
Many North Sea fields are capable of much longer productive lifetimes than was foreseen in 1964, when the first Seaward Production Licences were designated 46-year lifespans. The government issues production licences to accommodate production from oil and gas fields and if a field is well-managed and still producing when a licence expires, it makes sense to take steps to let the field carry on producing.
Cessation of production on a field is not necessarily the end of its life. In some cases the field will have been exploited by old and inefficient infrastructure, leaving many hydrocarbons in the ground – and even if the current licensee has no interest in redeveloping the field with new techniques and equipment, somebody else might. DECC will not deem fields as being of no further interest once they cease production, but will instead release them for relicensing.
Duration of extensions
A licence extension is justified only by continuing production, so it should continue for as long as production lasts and no longer. However, future field life cannot be predicted with confidence at the time of extension, so we cannot specify the duration of an extension as part of the extension process. It is also not acceptable to DECC that the licensee decides how long to keep a licence, and licensees would doubtless object to an approach that allows DECC to terminate licences when it sees fit. This leaves only one possible approach: an agreed formula, written into the licence at the time of extension, that determines its duration.
There are various possibilities but none are without drawbacks:
- decommissioning is often associated with the end of field life and could act as a trigger in some cases. There is no necessary connection however, so in some cases it would give unacceptable results, e.g. if a field acts as a transportation hub or is used for CCS after its own production stops, decommissioning might not happen for decades after the end of the field’s own productive life. Besides, the use of decommissioning to trigger licence expiry would disincentivise timely decommissioning, and that would run counter to one of DECC’s most important objectives.
- the ‘cessation of production’ (c.o.p.) procedure is a customary step at the end of a field’s life but it has no legal force and it is instigated entirely at the licensee’s discretion. If DECC were to rely on it to trigger the termination of a licence, the licensee would be able to retain a licence indefinitely by refraining from starting a c.o.p. discussion with DECC, regardless of whether or not production has actually ceased.
- zero production is associated with the end of field life, but it can happen at other times too, e.g. a field’s production can be temporarily ‘backed out’ of a pipeline, and major redevelopment work may also require a suspension of production. In both examples production would temporarily drop to zero, but the field’s life would not necessarily have to end. It may be reasonable to allow a licence to continue in such circumstances.
DECC’s approach is to define the end of field life as a set period with no production, but not enforcing licence termination at that end point. Instead, from that moment onwards unless and until production restarts, the Secretary of State is empowered to terminate(2) the producing area. It is a matter at the Secretary of State’s discretion and DECC will consider requests to let the licence continue on the grounds production will recommence within a reasonable period. (‘Termination’ of an area by the Secretary of State refers to the use by the Secretary of State of powers to remove that area from the licence that currently covers it. If the licence covers other areas, it will continue without the terminated area; otherwise it will also terminate. Either way, the terminated acreage is then free for relicensing.)
DECC acknowledges this solution is not perfect but is confident it will continue to work satisfactorily in practice.
For 1st-Round licences, DECC originally agreed a 2-year period with no production as the cut off for termination, but now considers this too long. In a case where a field has genuinely stopped production, the Secretary of State should not have to wait up to 2 years to terminate the field; and in cases of temporary suspension a shortened period is immaterial. For 2nd-Round and those thereafter, a 1-year period of no production is considered the cut-off for termination.
DECC requires the highest standards of operator competence and environmental protection, and will take action immediately if an operator falls short. There are also minimum standards for stewardship of the UK’s oil and gas fields, in terms of their exploitation, because DECC’s policy is to maximise economic production. There is an expectation licensees will use their exclusive rights to a standard consistent with that policy. Most UK fields are already well-stewarded but DECC operates a Stewardship Programme to ensure there are no exceptions.
We will press an existing licensee to improve their stewardship of fields not being operated to DECC’s satisfaction. If the standard continues to drop the Secretary of State reserves the right to refuse an extension to the licence at the end of its lifespan and instead invite competitive bids for a new licence over the field. The existing licensee would not be barred from entering the competition, and their knowledge, experience and track record would all be taken into account.
Prospective areas and short-term extensions
There may be cases where a discovery is so close to becoming a producing field when the licence expires that DECC will already have issued a production consent over it. In such a case it would generally be reasonable for DECC to grant a short extension to allow the discovery to start production. If the discovery did turn into a producing field during that extension, from then on it would be treated the same way as any other producing field.
In 2009 industry argued that some discoveries (and even prospects) had not even reached the production consent stage but were nevertheless being actively (if belatedly) brought to development. It argued these licences should be considered for extensions to allow production. DECC agreed to consider such cases, but only where there was already an ongoing work programme.
There may be cases where factors beyond the licensee’s control keep them from starting a development until near the end of the licence term. Such factors might include late technical advances and availability of infrastructure. DECC is prepared to consider short-term extensions in such cases but there is no presumption they will be agreed.
Short-term extension are typically for 2 to 3 years. DECC will generally terminate the acreage if it has not reached production in that time. Where the discovery is brought into production however, the licence will automatically be extended long enough to cover production – on the same terms as any other producing field.
Short-term extension may or may not also carry intermediate breakpoints. Their purpose is to ensure a licensee cannot sit around for the whole extension period without making progress towards production. Each such breakpoint specifies a minimum amount of progress that must have been made by that time, e.g. a well to be drilled within one year. Failing that, DECC can terminate the acreage. This specified amount of progress is called a ‘related work element’. It functions as a deadline – not as a commitment by the licensee to do the work.
DECC will usually grant a short-term extension where it has recently issued a production consent, but in any other circumstances a licensee who wants a short-term extension must make a strong case for it and should not assume DECC will agree.
Trading moratorium and active partners on prospective areas
Short-term extensions can only be justified to allow a little more time to a licensee who is working to achieve production as early as possible – not to allow more time for licence trading. DECC feels strongly that where short-term extensions are approved, it is necessary to implement a trading moratorium on the prospective areas to ensure the extra time is devoted to work and not trading.
There are 2 parts to this moratorium:
- DECC will not consent to licence assignments over prospective areas
- the [Open Permission (Operating Agreements) will be amended to withdraw the Secretary of State’s pre-approval of any internal reassignment of licence rights that affects a prospective area.
The moratorium applies for the period of the short-term extension – from the licence’s original expiry date (17 September 2010 for 1st-Round Licences) until the area ceases to be a prospective area by first production or termination.
The moratorium does not apply to inter-affiliate transfers.
An ‘Active Partners’ procedure for 2nd-Round Licences applies in the period after a prospective area has been agreed by DECC but before the trading moratorim begins. This means that when a licensee asks DECC to consider a short-term extension over a prospective area, DECC requires one or more of the current partners to declare themselves as the Active Partner – the person who will the see the discover through to first production. This prevents licensees being able to sell up and get out before the moratorium begins.
- DECC will not agree to a short-term extension if an Active Partner hasn’t been named
- once a short-term extension has begun, trading by an Active Partner beyond that previously agreed by DECC as its trading strategy will cancel the short-term extension.
The Active Partner mechanism applies from the moment a prospective area is created until the short-term extension begins. Beyond that the trading moratorium will be in effect so no trading will be allowed, by Active Partners or anyone else.
- DECC will not prevent trading during this period but will ensure a short-term extension does not begin if an Active Partner has either sold up or reduced their interest to a nominal level.
- DECC accepts some limited trading during this period may not be unreasonable, where an Active Partner seeks to attract partners to their project, so any licensee that nominates themselves as an Active Partner but intends to do any trading before the moratorium should ask DECC to agree their trading strategy.
DECC will not accept the nomination by one company of another as an Active Partner; each Active Partner must nominate themself.
Other licensed acreage
There is no case for an extension over acreage that is not in production – or well on the way to it – after 46 years under licence. The normal expiry process must be allowed to take its course over such acreage so it can be returned to DECC’s competitive licensing system, where it will rest with the Secretary of State to decide who, if anybody, should have the next opportunity to exploit it.
It has become routine for parties to a production licence to arrange and rearrange their commercial interests within the licensed area. This rearrangement often entails defining subareas within the licensed area, e.g. 2 companies might split their equity interest 50/50 in a subarea that corresponds to a producing field, while one of them takes 100% interest in a complementary subarea that corresponds to the remaining exploration acreage. The division into subareas has created 2 issues for licensees:
- joint-and-several nature of licence liabilities and obligations links companies on one subarea to the liabilities arising on another
- excessive fragmentation of a licensed area creates intercompany bureaucracy that puts a drag on further transactions. This is obviously a particular problem for the oldest licences, which have had the longest to accumulate this kind of fragmentation.
Industry (via OGUK) asked DECC to consider ways to split licences among these subareas. DECC has no objection in principle and devised a method to split the licences, but there are 2 major constraints on any such split:
- it must be compliant with all legislative provisions, including the Hydrocarbons Licensing Directive
- it must create no risk that any liabilities or obligations will revert to the taxpayer
DECC’s approach is to let the old licence expire gracefully and replace it with 2 or more replacement licences, each covering a single producing or prospective area. It was not practical to attempt this for 1st-Round licences but we will try to achieve it for 2nd-Round licences.
The advantage of doing it this way is that it saves companies a lot of time and effort if extension and splitting – each of which requires a major licence-amendment exercise – can be done together.
Replacement licences will not be offered to anybody who wasn’t a party to the old licence and they won’t cover acreage not covered by the old licence. This process amounts only to the rearrangement of an existing licence into a more efficient form composed of several documents. It should not be seen as the award of a new licence.
In some cases it may not be possible to achieve one area per licence. If 2 areas are too close together to draw a line between them, or if they exist at different depths and overlap, both will have to go on the same licence.
There are some important points to note about this process:
- while DECC is willing to consider requests to split licences, DECC is in no way committed to agree to any particular split.
- the process of splitting a licence is too cumbersome and time-consuming to ever be seen as routine, and DECC reserves the right to choose which cases should be accorded the highest priority.
- where a multiblock licence has been split into 2 or more licences, liabilities incurred before that moment will continue, inherited by licensees on all the replacement licences – but there will be no joint-and-several liability between those licences for future liabilities yet to arise.
An extension amounts to an amendment of the licence, so it must be implemented by deed. All parties to the licence must sign the deed, which must finally be sealed(3) and signed on behalf of the Secretary of State. There is a standard form of deed DECC uses in all cases (but obviously case-specific information such as area definitions will vary from one case to another). Strictly speaking, the Secretary of State’s seal is needed only for licences that operate under English, as opposed to Scottish, law.
The standard deed for 2nd-Round Licences is different to that used for 1st-Round Licences – to accommodate the additional task of splitting licences – but the terms governing producing and prospective areas are essentially the same.
DECC will draft each deed and make it available to the companies for signature. Once it is signed by all parties, DECC will execute it on behalf of the Secretary of State and return the main copy to the licence administrator. A duplicate copy will be retained by DECC. Creating and circulating certified copies of the deed is a matter for licensees to consider.
A licence must be extended (i.e. the deed must be executed by all parties) before it expires. The licence’s original expiry date is therefore the final deadline for completion of an extension process. If the deed has not been executed in time, the licence will expire and any producing fields must be shut down until a new licence has been issued (and the Hydrocarbons Licensing Directive requires a full competition before any such licence would be issued).
OGUK has expressed its concern that some parties might seek to extract commercial advantage from their partners by threatening not to sign a deed. To prevent this from happening, DECC has agreed to seek execution of each Deed of Variation at least nine months before a licence’s expiry date, allowing time for DECC to deal with a potential situation by offering a replacement licence after a competitive process if absolutely necessary.
Details of the deed
- at the moment of execution, the deed defines the producing and prospective areas.
- between execution of the deed and the original licence expiry date, DECC will enable the extension by written notice to the licensee. In most cases, DECC will issue the notice with the executed deed.
- 1st-Round licences – at the licence’s original expiry date, all parts of the licensed area other than producing and prospective areas are removed from the licence. The remaining areas continue.
- 2nd-Round and remaining licences – the licence expires on schedule and is replaced by one or more replacement licences, each covering one producing or prospective area. The remaining acreage becomes available for relicensing.
- thereafter, each producing area continues while production lasts, and each prospective area continues for the duration of its own short-term extension and converts itself into a producing area if it reaches first production during that time. The Secretary of State is empowered to terminate a prospective area if it has not been brought to production by the end of its short-term extension,or if there is an intermediate deadline and the related work element is not completed by then. The Secretary of State is also empowered to terminate a producing area after any 2-year period of zero production.
- once all of a licence’s producing and prospective areas have been terminated, the licence itself terminates.
DECC (and its predecessors) have always operated a 2D licensing system, in which each licence explicitly specifies a licensed area at the surface and implicitly also covers a volume of rock below that area down to the centre of the Earth.
Some have suggested that DECC should switch to 3D licensing, in which licences cover volumes of rock rather than areas of seabed, and different licensed volumes can overlap. DECC has not ruled out the idea of switching to 3D licensing – in which licences cover volumes of rock that than areas of seabed, and different licensed volumes can overlap – but it is currently not under consideration. It would raise particular issues, particularly regarding access to deep rocks for one licensee via shallow rocks licensed to somebody else.
Many of the claimed advantages of 3D licensing are already available to licensees, e.g licensees routinely divide their commercial interests within a licence group using 3D as well as 2D definitions, agreeing the terms of the division between themselves and specifying the terms of their cooperation in pragmatic case-by-case terms not available to DECC when defining the basic terms of its licences.
Nevertheless, and given the extensions process will eventually require the amendment of all licences anyway, it has eemed sensible to make such minor changes now as might be necessary to enable 3D licensing in the future. If DECC were to switch, there would only be a need to clarify the Secretary of State’s powers relating to field developments.
After 2nd-Round Licences, the next licence expiries are not set to happen until 2014. DECC reserves the right to review any policy at any time, but since 1990 all cases for extensions over well-stewarded producing fields have been formally accepted. This policy is not currently under review.
Given the element of uncertainty in on-field process and application procedure timings, it is never too early to approach DECC about an extension. Phone Jen Brzozowska on 0300 068 6030 for more information.
DECC recognises that a licensee may start work on a licence fully intending to achieve first production in time, but then find externally-imposed delays prevent them from doing so. This might constitute reasonable grounds for a short-term extension, but DECC will not consider the case unless it is clear a short-term extension is actually needed – and not just as a routine precaution. The formal process for the extension would then only begin in the last year before licence expiry. We also recognise there are circumstances under which a licensee will want to be ensured of their chances of being granted a short-term extension at a later date. DECC will consider these cases but is not obliged to grant the licence extension.
Applicants should set out a clear and reasonable timetable of work, with well-defined milestones, that would facilitate a first production before the licence expiry date. DECC may be able to provide a certain level of comfort about a short extension in the event of an unavoidable delay, but this will be conditional on the licensee maintaining at least a specified adherence to the timetable. The possibility of this assurance is not to be treated as an alternative to licensees making the best possible progress with their licence, or a means to keeping acreage out of DECC’s competition procedures.
DECC has clarified this policy to licensees holding licences issued in the 3rd to 7th Round (verbally, at the fallow reviews held September 2011). Where it is clear that assets are not being worked in a timely manner, or are unlikely to attain FDP approval no later than 6 months before licence expiry, relinquishment will be requested.
Contact Jen Brzozowska on 0300 068 6030 for more information.
Previous consultation documents
- The terms ‘1st-Round Licences’ and ‘2nd-Round Licences’ are used here as shorthand for those licences set to expire in 2010 and 2011, respectively, but not all such licences were issued in the licensing round indicated – some were issued later but with shorter lifespans, to expire at the same time as licences issued in the round. These other licences will be treated the same way as those issued in a round.
- In this note, ‘termination’ of an area by the Secretary of State refers to the use by the Secretary of State of powers to remove that area from the licence that currently covers it. If the licence covers other areas, it will continue without the terminated area; otherwise it will also terminate. Either way, the terminated acreage is then free for relicensing.
- Strictly speaking, the Secretary of State’s seal is needed only for licences that operate under English, as opposed to Scottish, law.
Criteria To Become A Licensee
DECC works to maximise licensee exploitation of the nation’s petroleum resources. We believe we can best achieve this with a mix of companies – from multinational super-giants to small niche players. As production licences confer exclusive rights, we must be satisfied no licensee will block exploitation through a lack of technical or financial capacity. In addition, the Government has essential requirements, such as the establishment of a tax base.
Anyone who wants to be a licensee must meet certain criteria, whether they are applying for a new licence or seeking to become a licensee by assignment. There are criteria concerning finance, residence and organisational structure.
Exploiting oil and gas resources can be a very expensive business, especially offshore. DECC will not allow anybody onto a licence if their lack of financial capacity would prevent or impede the exploitation of the exclusive rights granted by the licence, or leave them unable to meet all their liabilities and obligations to the Secretary of State. There are, therefore, financial criteria which often require us to carry out full financial checks. There is a separate document setting out our financial criteria and checks below:
DECC routinely copies new assignment cases to HM Revenue & Customs (HMRC) for information. The vast majority of transactions take a form that is familiar to both DECC and HMRC, and are not expected to raise any new tax issues; so tax is not generally a factor in DECC’s decisions. However, DECC does discuss tax issues with HMRC and may take them into account in any particular decision. HMRC is aware of certain commercial arrangements that would present an inherent tax risk. These include having a partnership on a licence and the assignment of a beneficial interest in a licence to somebody other than the licensee. DECC will exercise a presumption against approving any such arrangements, though any case would be considered on its merits and DECC is prepared to discuss proposals to address the tax issues.
The need to ensure a tax base also gives rise to particular residence criteria for any entity that proposes to be party to a licence. However, DECC doesn’t impose more onerous burdens than are necessary in particular circumstances, which means that there can be different criteria in different circumstances. In short, there is a basic position that applies to any would-be licensee, and a slightly-tighter one that applies only in a case where a producing field is concerned. To join a licence, you need to satisfy DECC that you have a place of business within the UK. This means at least one of the following:
- Having a staffed presence in the UK;
- Being registered at Companies House as a UK company; or
- Having a UK branch of a foreign company registered at Companies House.
To join a licence and take an interest in a producing field, you would need either:
- To be registered at Companies House as a UK company; or
- To carry on your business through a fixed place of business in the UK.
Queries should be addressed to: Nic Rogers DECC Licensing Administration (Energy Development Unit) Tel: 0300 068 6049 Email: firstname.lastname@example.org
Equity interests and operating agreements
Whenever there is more than one party to a Production Licence, the Model Clauses impose joint-and-several liability on them all. Nevertheless, for day-to-day purposes those parties will commonly enter into an agreement that apportions costs and revenues among themselves (for example, two companies agreeing a 50/50 split, often called an equity split). Such apportionment requires the Secretary of State’s consent under the model clauses. It is defined quite broadly (see, for example, Model Clause 41(5) in Sch 10 of the Petroleum (Current Model Clauses) Order 1999).
(Re-)apportionment will inevitably be a feature of many licence assignments (e.g. when a new entrant acquires a departing party’s 25% share), and DECC will treat it as a routine part of any application for consent to an assignment. It may, however, happen by itself (eg when 2 licence parties make a new agreement that switches them from a 50/50 split to a 75/25 split). Either way, applications for consent to apportionment should be made through the UK Oil Portal
Joint operating agreements
Joint Operating Agreements (JOAs) are not controlled in their own right. The creation, amendment or novation of a JOA may entail something that requires the Secretary of State’s consent – for example, it may (re)apportion licence rights or appoint an operator. If so, consent should be sought for the thing that requires it in whatever way is appropriate – via the Portal for a seaward apportionment of rights or an operator appointment, for example. If a JOA does nothing that needs consent, it needs no consent in its own right.
Operating agreements created as a result of the unitisation of a field across several different licences are usually called Unit Operating Agreements, but for the purposes of this page the same principles apply.
Open permission (landward licences only)
Until DECC has migrated all its landward licences (PEDLs, EXLs, PLs, etc) into the UK Oil Portal, some apportionments of rights granted by landward licences continue to be covered by the [Open Permission (Operating Agreements). It grants prior approval to most instances of apportionments made under landward licences.
In this context, an Open Permission is a type of approval that the Secretary of State issues once, to cover a whole class of regulated acts. It is not issued to any particular person or company and so is open to be used by anyone at any time, provided that its terms are complied with. If a company is satisfied that the Open Permission encompasses the transaction that it wants to carry out, and provided it complies with any conditions or restrictions on its use, the company can make its transaction without further individual permission from DECC. A company cannot receive a copy of the Open Permission in its own name, and because it has already been issued nobody can apply for one.
It is the responsibility of the person proposing to use an Open Permission to be sure that it covers the transaction contemplated, and to ensure the satisfaction and compliance with the permission’s provisions. DECC will not provide legal advice. Note that one of the conditions of use is that certain information must be sent to DECC within 2 weeks of its use. This can be made by email to email@example.com.
Where an act is already permitted under the terms of an Open Permission, the Secretary of State will not further approve it with an additional individual approval. However, where an act is excluded from the Open Permission by its conditions or restrictions, the Secretary of State can grant individual approval in response to an individual application, but generally any company seeking it should expect to have to make a special case for exceptional treatment.
The Open Permission only covers the apportionment of licence-granted rights relating to petroleum won and saved, and any proceeds of its sale. Any particular agreement may be subject to other regulatory provisions (including other controls imposed by the model clauses). In these cases it remains the responsibility of the licensee to comply with the provisions. In particular, nothing in this approval affects controls on licence assignments, operator approvals or the Petroleum Act’s decommissioning provisions.
Any queries should be addressed to:
Tracy Selby Licensing Administration (Licensing and Consents Unit) Tel: 0300 068 6050 fax: 0300 068 5003 email: firstname.lastname@example.org
Charges on licences
It is common practice for banks lending money to companies to demand a charge on the company’s assets as a form of collateral. Creation of a charge on a Petroleum Act licence is controlled in accordance with the model clauses attached to each licence.
The open permission (creation of security rights over licenses)
Any licensee wishing to create a charge should first consider the terms of the Open Permission (Creation of Security Rights over Licences) – particularly the conditions of use.
Where the Open Permission has already granted consent to the creation of the charge, the licensee can do so without seeking further individual approval from DECC.
As a condition of use, the Open Permission carries an obligation to notify DECC the following details of the charge within 10 days of its creation:
- size of the loan secured
- licences affected
- identity of the chargee
Notification should be emailed to email@example.com or to the DECC postal address. There is no form to complete or a prescribed format for the notification.
If a borrower defaults on the loan, the lender may wish to seek enforcement of the charge to have a licence interest transferred to itself (possibly after appointing a receiver). This would constitute a licence assignment, which is controlled in its own right under the model clauses. Faced with a request for consent to such an assignment, DECC would take into account all relevant factors, including the expectations of the lender. However, the Secretary of State must exercise their discretion in each specific case, and this cannot be fettered by earlier promises to take, or not to take, a particular course of action. DECC will also not make such promises.
The Open Permission covers charges made to trustees on behalf of other financial institutions and crystallisation of a floating charge into a fixed charge.
Charges under Scottish Law
DECC is aware of forms of security where the assignment of the licence to a chargee occurs at the moment the security is created (rather than later, if and when the charge should be enforced). These forms appear to be particularly relevant where a charge is to be made under Scottish law. Before creating such a charge the licensee would require the Secretary of State’s consent to the immediate assignment of his licence to the chargee, but it is difficult to envisage circumstances in which the Secretary of State could make an informed decision at that time.
The Open Permission (Creation of Security Rights over Licences) was therefore reissued on 6 February 2012 to exclude from its scope the creation of security on such terms. However, such security is very unusual among licensees so this change is not expected to have any material impact on them. This guidance reflects current policy on such security, but DECC is prepared to discuss other ways to address concerns, either on a basis of case-by-case approval or by further changes to the Open Permission.
Exclusion of a charge from the Open Permission should not necessarily be interpreted as a final refusal; it may be DECC is content to grant an individual approval after careful scrutiny. We will consider requests for individual approval on receipt of a written application (to firstname.lastname@example.org or to the DECC postal address) that includes:
- the reason why the charge is excluded from the Open Permission
- information called for in the Open Permission’s notification requirement (in any particular case we reserve the right to call for other information as deemed necessary)
Please address any queries to:
Oil & Gas Licensing Administration
3 Whitehall Place
London SW1A 2AW
tel: 0300 068 6049 email: email@example.com
Streamlined transfer and pre-emption arrangements
The Master Deed
The Master Deed was developed by the United Kingdom Offshore Operator Association (UKOOA) Progressing Partnership Working Group, DECC, and other interested organisations. It aims to expedite the transfer of offshore licence interests and other agreements relating to associated assets and infrastructure, and it introduced a standard pre-emption regime to give confidence to incoming companies.
Under former practice a deal was often delayed by the requirement of signatures on many different documents – even when all parties were content with arrangements. The Master Deed allows licensees to appoint an administrator to act as their attorney for the execution of proforma documents. The administrator is a specially created subsidiary of UKOOA, titled UKCS Administrator Limited. The paid-for service is provided by LOGIC on behalf of the administrator, under a separate services agreement.
Use of the transfer arrangements is voluntary for the party disposing its interest. The arrangements do not affect existing rights of objection to an assignment or provisions for the granting or withholding of consents.
When informed of a proposed licence assignment, companies on a licence have an initial seven-day period in which to waive or reserve their rights to pre-emption. If they reserve their rights, they have 30 days to decide whether or not they want to pre-empt.
Following earlier concerns from new entrants about the risk of pre-emption on new deals, these arrangements were introduced to clarify and assure buyers – particularly those that have entered into extensive and/or expensive negotiations.
Further information is available on the LOGIC website using the current contact details shown there.