Under the recently introduced Offshore Petroleum Licensing Bill (the Bill), the North Sea Transition Authority (the NSTA) would have a new obligation to invite applications for new seaward area (oil and gas) production licences, annually.
The Government hopes that such a requirement will provide certainty to the oil and gas industry, and increase investor confidence that licensing of the United Kingdom Continental Shelf (UKCS) offshore petroleum resources for exploration, development and production of hydrocarbons will continue.
Historically, offshore and onshore petroleum licences have been awarded in ad hoc licensing rounds. The NSTA is responsible for the licensing process in accordance with the Petroleum Licensing (Applications) Regulations 2015 and determines when to hold a licensing round, which geographical blocks to offer and the successful applicants of such licensing process.
However, currently there is no obligation to offer or award licences on a periodic basis. The licences granted as part of the 33rd UK Offshore Licensing Round in 2023 were the first licences granted since 2020, principally as a result of the Covid pandemic and the introduction of a climate compatibility checkpoint (to ensure compliance with the UK’s climate objectives) in 2022. This had been seen by some as potentially creating uncertainty for industry and investors.
Under the Bill, licensing rounds for seaward production licences would be held annually from October 2024 (subject to certain tests being met).
NSTA’s new licensing obligation
The Offshore Petroleum Licensing Bill was introduced in the House of Commons and given its first reading on 8 November 2023 with the second reading taking place on Monday 22nd of January. The Bill received a majority of 82 voting in favour of the Bill (with 211 voting against).
The Bill amends the Petroleum Act 1998 to create a new obligation on the NSTA to invite applications for seaward area production licences annually. Under the new obligation, the NSTA must invite for seaward area production licences of at least one block (as defined by the Petroleum Act 1998) on a yearly basis.
However, such obligation would only be triggered if the carbon intensity and net importer tests under the Bill are met during each annual period (October to September) as follows:
1. Carbon intensity test: this consists of a comparison of the average carbon intensity of domestic gas against the average carbon intensity of imported LNG. If the test determines that the average carbon intensity of domestic (UK) gas is lower than the average carbon intensity of imported liquefied natural gas (LNG), then it would be considered that the test has been met.
The Bill also grants powers to the Secretary of State to expand the scope of the gas carbon intensity test to consider emissions other than carbon dioxide.
2. Net importer test: this consists of an evaluation of current and future production of domestic oil and gas (separately) against demand for oil and gas over a fifteen year period. If the test determines that the UK will remain a net importer of both oil and gas (as has now been the case for a number of years), then it would be considered that the test has been met.
If both the carbon intensity and net importer tests are met, the NSTA would be required to publish an application notice (Notice), inviting applications for new seaward area production licences and setting out information regarding the block(s) which are subject to the Notice together with a list of the criteria for determining successful applicants.
Interested parties will be required to apply within 90 days from publication of the Notice. The details of the Notice and application requirements are more fully set out in the Petroleum Licensing (Applications) Regulations 2015.
Determinations as to licence awards would need to be made by the NSTA in accordance with various legislation, including the Hydrocarbons Licensing Directive Regulations 1995, the Offshore Petroleum Licensing (Offshore Safety Directive) Regulations 2015 and various environmental regulatory requirements.
The seaward area production licences would then be granted once the NSTA obtains consent from the Secretary of State and successful applicants accept the licences.
The Bill will now pass to a third reading on which the House of Commons will determine whether to approve the Bill - which will then require to be approved by the House of Lords before being granted Royal Assent and becoming law.
While the Bill has been supported by oil industry executives, the Government opposition has dismissed the Bill as a political move, not having considerable impact on energy security. There have been also concerns expressed as to whether the Bill would undermine the oil and gas regulator’s independence.
Furthermore, former energy secretary Alok Sharma has expressed that “the Bill reinforces the unfortunate perception about the UK rolling back from climate action” and the Bill has also been criticised by climate campaigners such as Uplift which argues that the Bill’s new tests are “designed to be impossible to fail”.
While the Bill would amend the current licensing process for seaward production licences by imposing a new obligation on the NSTA to offer a licensing round on a yearly basis (subject to the new carbon intensity and net importer tests being met), in reality it is not obvious that this legislation will materially alter the investment landscape for oil and gas in the UK.
Generally speaking, prior to Covid and the introduction of the climate compatibility checkpoint, the UK regulator held oil and gas licensing rounds on an annual basis, and this Bill simply further “cements” that approach. It is also clear that NSTA will continue to have free reign to offer as many or as few blocks annually as it wishes, giving the regulator significant flexibility in terms of acreage awards. In addition, it ought also to be remembered that new licence awards are a small and relatively early stage component of exploration and development of new oil and gas fields in the UK, and that any oil and gas fields being and likely being developed in the UK within the next 5 years or so will more than likely be from existing, and not newly awarded, oil and gas licences.
For investors, and resultantly also from the UK’s energy security perspective, more confidence is likely to be derived from a more stable (and ideally less onerous) UK oil and gas tax regime than has been seen across the last few years. Price floor introduced on Energy Profits Levy (cms-lawnow.com) and Increase and extension of Energy Profits Levy (cms-lawnow.com)