UK offshore exploration reaches out to new frontiers

On 6th February, the DTI announced the introduction of a new licence for the exploration and development of petroleum in the UK Continental Shelf (UKCS). Known as the "Frontier" licence, it is designed primarily to help boost the levels of exploration being undertaken in the North Sea. The Frontier licence will allow companies to apply for larger amounts of acreage than held under a traditional licence, with rental fees discounted by up to 90%. After an initial "screening phase", Frontier licensees will then be able to relinquish three quarters of their acreage rather than the usual 50%. In addition, the licence comes with extended exploration and development periods of six years each, an additional two years on the periods usually granted for these phases under a traditional licence.

Frontier licences will be offered in the forthcoming 22nd Offshore Licensing Round (to be announced) in relation to blocks in the West of Shetland area only (areas that were dealt with by the DTI's Strategic Environmental Assessment Processes 1 and 4, and which have seen little exploration activity so far). UK Energy Minister, Steven Timms, who announced the new regime said: "by reducing the cost and extending the exploration time of the licence, we are sending a strong signal to companies that exploration and development in challenging areas will be supported and encouraged by the Government."

The DTI licensing regime is intended to ensure maximum exploitation of the UKCS reserves whilst ensuring there is no adverse impact on the environment or the interests of the other users of the sea. In recent years however, the amount of untouched acreage and the declining levels of exploration activity has become a matter of concern to the Government. Steps to combat the problem were taken by PILOT (formerly the oil and gas industry task force) who instigated the Fallow Initiative to encourage licensees to exploit their rights currently held and their Economic Advisory Group who in March 2003 issued a paper on the UKCS exploration inactivity. The latter prompted James Sassoon, Managing Director of Finance, Regulation and Industry at Her Majesty's Treasury, to put together a Steering Group Consultation to gather information on barriers to exploration and to suggest solutions to the problems.

Amongst the many factors considered, the Steering Group looked at how industry decisions about exploration were affected by the size of prospects, and the high risks and high costs of exploration. The Frontier licence, by reducing the cost and increasing the size of acreage, is a step by the DTI to address these issues, and it has been welcomed as such by UKOOA (the United Kingdom Offshore Operators Association). UKOOA, who are supportive of any efforts to encourage exploration, appraisal and development activity in UK waters, have praised the innovative approach of the Government towards the more difficult areas of the Atlantic Margin in this instance.

The traditional licence will also be on offer in the West of Shetland area in the 22nd Licensing Round but the DTI has stated that the Promote licence will only be available in other areas. The exact terms of the Frontier licence and blocks it will cover are yet to be announced.

For further information please contact Lorna Hingston at [email protected] or on 01224 622002.