Since the first offshore licence, P001, was issued in 1964, the UK Government has issued 1,718 production licences.
Twenty licences survive from the 50 or so issued in the first licensing round in 1964, and it’s quite interesting to realise that these cover more than 100 oil&gas fields, many still producing.
You might wonder whether this is evidence of some strange prescience on the part of the Government in those early days or of the incredible exploration skills of the first generation of oilmen to work on the UKCS.
But while the geo-scientists may well have been very talented, the truth is more prosaic: those early licences were granted over very large areas to encourage exploration.
Where a number of fields have been found on those licences, they have then been sub-divided and, over time, the original licensees have sold parts of the licence area.
As a result, the licences are now a patchwork quilt of in terests. For instance, P.033 is divided into 15 sub-areas with a total of 19 separate licensees from 11 different corporate groups (some groups hold interests through a number of affiliates).
The problem is that the licences granted in that first round are due to expire in 2010, so they need to be extended if production is not to cease prematurely.
The Government has the power to extend licences if they provide for this, but the original licences did not foresee such an eventuality and therefore need to be amended. DECC has proposed to enter into a deed of variation with the licensees of each of the original first-round licences to add such a power.
This government department’s predecessor originally proposed to extend the licences only in respect of producing fields or where there was an agreed field development plan in place and therefore a field was very close to production. The extension would continue until there had been two years of nil or very low production. Other areas covered by the licence would have to be surrendered, and the expectation was that these would be made available in forthcoming licensing rounds for re-licensing.
However, after representations from the industry, the Government has agreed to consider short-term extensions, generally no more than three years, for other areas, such as those where there is no approved field development plan in place but the licensees have already made significant progress towards development of a recent discovery and are firmly committed to starting production in the near future, or where there are other plans in place, such as using a depleted field for gas storage.
In these cases, it is seen to be reasonable to allow the current licensees to continue the development. Such areas will be known as Potentially Producing Areas (PPAs) and the extensions will be subject to the licensees committing to, and meeting, clear work obligations in respect of the PPAs.
If the PPA has not moved to full production within the short-term extension period granted, the licence will terminate for that area, but if production does commence within the relevant time limit, the licence will continue for the life of the field.
All of this is seen to be thoroughly sensible and pragmatic. The only difficulty that remains for the Government is the logistic exercise of getting all of these deeds of variation, with their individual schedules identifying field areas and PPAs, drafted, agreed and signed by the deadline in September 2010.
The challenge is that any transfer of an interest in one of these licences in the middle of the process could invalidate the process and require the parties to start all over again.
The suggestion is, therefore, that any transfers be suspended once the signature process starts and until everyone has signed up.
Another issue is that any amendment to a licence requires the consent of all the licensees. As we have seen, some of these licences are divided into numerous areas, some of which have no production potential, and therefore the process regarding owners of those areas will need to be carefully managed to ensure signatures are obtained on the deed to extend the licence.
Penelope Warne is a partner and head of energy at international law firm CMS Cameron McKenna