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The New North Sea – Part 3: Top 10 “MER UK” issues for exploration activities

Exploration is undoubtedly a key area of focus for the bodies responsible for achieving MER UK. In its Corporate Plan, the OGA lists “revitalising exploration” as one of its priorities. It also sets out a proposed pathway for reaching its target of 50 E&A wells drilled per annum by Q1 2021. In addition, an ‘exploration sector strategy’ is awaited which will hopefully set out in more detail how the OGA intends to apply the MER UK Strategy to exploration operations. Our third post in this series sets out our top 10 key “MER UK” changes which may have a bearing on exploration operations in the North Sea.

1. All exploration activities must comply with the central obligation of achieving MER: All offshore petroleum licensees must comply with the MER UK Strategy (pursuant to the changes to the Petroleum Act 1998, brought in by the Infrastructure Act 2015). The MER UK Strategy was developed by the Secretary of State and sets out the proposed strategy for achieving the principal objective – “the objective of maximising the economic recovery of UK petroleum” (see also our previous post on the MER UK Strategy). It is binding upon relevant persons operating in the UKCS, specifically holders of offshore petroleum licences and operators of petroleum licences.

The MER UK Strategy expressly requires licensees under an offshore licence to plan, fund and undertake exploration activities within the licence area, in a manner that is “optimal for maximising the value of economically recoverable reserves” within the licence area. The MER UK Strategy contains more detail as to how “relevant persons” should act. Some of these are discussed in more detail below, but the key requirement is to carry out all functions in a manner compliant with MER.

2. Failure to comply with MER: Failure to comply with the MER UK Strategy may lead to sanctions. The Energy Act 2016 grants the OGA powers to impose sanctions on offshore petroleum licensees for failing to comply with the MER UK Strategy, or for failing to comply with a term or condition of the offshore licence. The possible sanctions range from enforcement notices and fines to, ultimately, the removal of the operator of a petroleum licence and/or revocation of the licence.

3. No relinquishment until firm commitment carried out: The MER UK Strategy provides that, except where the licensee would not make a “satisfactory expected commercial return” (as defined in the MER UK Strategy), a licensee cannot relinquish a licence until it has completed any work programme, to which it made a firm commitment in the licence.

4. Regional exploration plans: The OGA may produce plans setting out its view of how it expects obligations in the MER UK Strategy to be met. The plans may cover exploration activities carried out within specific regions of the North Sea, for example West of Shetland.

As far as we are aware, the OGA has not yet developed any exploration plans. If the OGA wishes to produce a plan under the MER UK Strategy, it must first consult with those persons it thinks may be affected by the plan. As the plans are binding, we recommend you engage with the OGA on any proposed plan that may affect your exploration activities (and potentially future activities down the line, including development and decommissioning).

If you intend to carry out activities in a manner inconsistent with any plan published by the OGA, you will need to first consult with the OGA.

5. Collaboration and competition law issues: The MER UK Strategy requires licensees to consider whether collaboration or cooperation with other licensees or service providers could reduce costs and/or increase the recovery of economically recoverable petroleum, and to give due consideration to such possibilities.

At the same time, the MER UK Strategy states that no obligation imposed by the Strategy permits conduct which would otherwise be prohibited under legislation, including competition law. There appears to be an inherent conflict between these requirements. It is your responsibility to ensure that you do not infringe competition laws whilst complying with MER.

6. New technologies: According to the MER UK Strategy, licensees must ensure that, in carrying out their activities, new and emerging technologies are deployed to their optimum effect. This may also be the subject of an OGA plan, which you may be required to comply with.

7. OGA attendance at meetings: Under the Energy Act 2016, the OGA will have powers to attend meetings between licensees and other relevant persons discussing matters relevant to achieving MER. This includes formal meetings such as Opcom meetings, as well as meetings conducted through electronic means (e.g. telephone calls). The organiser of the meeting has to provide notice to the OGA of any such meetings (14 days’ notice, unless it is not practicable to do so) and provide any papers relating to the MER UK issue, which are distributed to the attendees to the OGA. If an OGA representative does not attend, the organiser must provide a summary of the discussion to the OGA.

In practical terms, employees organising meetings need to be aware of what “MER” issues are, in order to know when the OGA should be given notice and what papers to provide. Waivers of confidentiality from other persons may be required. In addition, papers given to the OGA should only cover those issues relevant to the OGA and not commercially sensitive information.

Whilst these new powers appear to be fairly onerous, they may be useful, if there is an issue that you want the OGA to be involved in.

8. Information and samples: There are new provisions in the Energy Act that give the Secretary of State the power to create regulations to require licensees, operators and owners of petroleum infrastructure to retain specified petroleum related information and samples. Notably, the regulations can require a party to keep information and samples even where it is no longer a licensee (as a result of transfer, surrender, expiry or revocation).

Procedures will need to be put in place to ensure the data and samples are retained. In addition, each licensee is required to have an information and samples coordinator within the organisation to supervise data retention and correspondence with the OGA.

If a licence is transferred, surrendered, revoked or expires, then the OGA can request that the licensee informs it of what is to happen with information and samples (in an information and samples plan). The plan must provide for the party to either: (i) retain the information and samples, (ii) transfer to a new licensee or (iii) secure appropriate storage. So on a transfer of a licence, the licensee has the choice of potentially incurring costs to retain or store the data and samples, or handing over its intellectual property to another licensee.

9. MER UK disputes: Relevant persons, including offshore petroleum licensees and owners of upstream infrastructure, may refer disputes relating to fulfilment of the MER, or relating to activities carried out under an offshore petroleum licence, to the OGA for a non-binding recommendation on how to resolve the dispute. It should be noted that the OGA also has the power to decide on its own initiative to consider a dispute involving such issues.

As there is already a separate procedure for disputes relating to third party access, the new powers do not apply to such disputes relating to third party access.

10. Satisfactory expected commercial return: The general principle behind the MER UK Strategy is that investment made in the UKCS should be made such that the maximum value of economically recoverable petroleum is recovered, and that assets should be in the hands of those who are willing to make such investment.  So the MER UK Strategy contains a safeguard that no licensee or owner of infrastructure is required to invest or fund activity if it would not make a satisfactory expected commercial return. The definition is fairly vague, but prescribes that a satisfactory expected commercial return is not necessarily a return in line with corporate policy.  If a licensee feels that it would not make a satisfactory return, but a “satisfactory expected commercial return” could be made, the licensee could ultimately be required to sell the asset.

 

 

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The New North Sea – Part 3: Top 10 “MER UK” issues for exploration activities

The New North Sea – Part 1: the revolution begins here

How much of a difference will the recent reforms of UK offshore oil and gas regulation make to the industry and its stakeholders? It may be too early to say whether the creation of the Oil and Gas Authority (OGA), the articulation of the “MER UK Strategy” and the other changes introduced by the Infrastructure Act 2015 and the Energy Act 2016 will facilitate solutions to all the significant problems faced by North Sea operators, but in our view it is already clear that the changes of the last two years will have a profound impact on the industry.

Government intervention in the UK’s offshore oil and gas industry is nothing new. It has taken different forms at different times, and has included, as well as numerous changes in taxation, Government participation (or at least the ability of Government to participate) in decision-making at the individual asset level through rights granted to state-owned entities.

More specifically, for almost 20 years, Government has been aware of, and has been taking action to address, the particular set of problems that the UK Continental Shelf (UKCS) faces as a mature basin.  Between 1999 and 2004, the Department of Trade and Industry and its successors took a series of steps to foster investment and innovation in the industry and improve its efficiency: a joint Government / industry report (A Template for Change) was published in 1999; task forces were appointed; changes were made to the administration of the licensing regime; new types of licence were introduced.

PILOT and small-scale regulatory changes, 1999-2004
1999

 

 

Brent at $9/barrel – a record low – in February, but recovers to $25 by December.

Oil & Gas Industry Task Force report (September) set a vision for the UKCS in 2010, aimed at increasing investment and employment, and prolonging UK self-sufficiency in oil and gas.

2000 PILOT established to take over the work of the Task Force and give effect to its recommendations
2002 PILOT “Progressing Partnership” Work Group launched to address behavioural and supply chain barriers. Initiatives include transferring “fallow” assets to those best placed to exploit them.
2003 “Promote” licences offered for the first time to attract new small players.
2004 22nd offshore licensing round: largest number of blocks since 1965.   “Frontier” licences first offered.
   

However, by the time that Ed Davey, as Secretary of State for Energy and Climate Change, commissioned Sir Ian Wood to carry out a review of the industry in 2013 and the Wood Review’s final report was issued early in 2014, it had become clear that all the good work done after the 1999 report had not resolved or prevented some fundamental problems, and that the “vision for 2010” which it articulated had not been fully realised.   Average production efficiency declined from 81% in 2004 to 60% in 2012.  There had been a downward trend in numbers of exploration wells drilled since 2008 (with about 70% fewer being drilled in 2013 than were drilled five years before).  Perhaps worst of all, costs of production per barrel had risen fivefold in ten years.  And all that was before global oil prices began a period of sharp decline which has seen them fall to levels at which most North Sea fields are said to be uneconomic, with no certainty of a rapid or sustained recovery.

A false sense of security? North Sea licensing events highlighted in Government reports, 2005-2012
2005 24 new companies enter the North Sea as part of a record offering of 151 licences.
2006 UK a net importer of gas in value terms for the first time since the early 1980s.
2007 Legislation to allow storage of natural gas under the seabed / unloading of LNG at sea announced.
2008 Brent crude tops $100 / barrel for the first time, rising to over $140 / barrel in June and July.
2010 Largest number of blocks applied for since the first licensing round in 1964.
2011 Brent crude tops $100 / barrel for the first time since 2008.
2012 Demand for offshore licences again breaks all records (applications covering 418 blocks).
   

Many of the concerns that were articulated in the 1999 report and addressed in the initiatives that followed from are echoed in the Wood Report. Both reports are in favour of such things as “collaboration in place of competition”, “improving relationships between licensees” and encouraging innovation, for example.  But the final results of Wood’s work are very different from those of the earlier report and its follow-up.  Where the 1999 report tends to talk about “deregulation”, the Wood Report has led to the creation of a new, more powerful and better resourced body to regulate the industry.  In the words of the Wood report itself: “In the early days with large fields to be found by major operators, the free market model worked well with a light touch Regulator…However, over time, the number of fields has increased, now to over 300, new discoveries are much smaller, many fields are marginal and very inter dependent, and there is competition for ageing infrastructure. Alongside this, the…Regulator has halved in size in 20 years and…is clearly struggling to perform a more demanding stewardship role.

There has been general agreement with Wood’s conclusion that “a stronger Regulator with broader skills and capabilities able to significantly enhance the level of co-ordination and collaboration” would “largely resolve” the problems that his review identified.  It is rare for an industry to be so apparently united in its desire for stronger regulation – even if it was clear from the first that a regulator based on Wood’s prescription would be different from many sector regulatory bodies in terms of its remit, composition, and its interactions with industry.  It has probably helped that the fall in oil prices has made the problems identified by Wood more acute, increasing the demand for a powerful independent regulator to get to work on solving them.  This, together with the compelling nature of Wood’s analysis and strong political support, has enabled the necessary legislative changes to be put in place rapidly.

The Wood Review and its implementation, 2013-2016
2013 Government commissions the Wood Review of offshore oil and gas recovery (June)

The interim report of the Wood Review is published (November)

2014 Final report of the Wood Review published   (February)

Sharp fall in oil price begins (June)

Government response to the Wood Review published (July)

Clauses on MER UK (to amend the Petroleum Act 1998) inserted into Infrastructure Bill (October)

Appointment of Andy Samuel as CEO of OGA (November)

2015 Andy Samuel asked to lead urgent study of key risks to North Sea oil and gas industry (January)

Infrastructure Act 2015, including revised provisions on MER UK receives Royal Assent (February)

OGA issues “call to action” document in response to DECC’s request to Andy Samuel (February)

OGA launched as an Executive Agency of DECC, carrying out DECC regulatory functions (April)

Energy Bill, dominated by provisions on the OGA, introduced into Parliament (July)

Oil & Gas UK launches efficiency task force (September)

OGA reports: call to action 6 months on (September)

OGA publishes draft corporate plan (November)

DECC launches consultation on MER UK strategy (November)

2016 Brent crude falls below $30 / barrel (January)

Government support package for UK offshore oil and gas (January)

Draft MER UK strategy laid before Parliament (January)

OGA publishes Corporate Plan 2016-2021 (March)

MER UK strategy finalised and comes into force (March)

Energy Bill receives Royal Assent, Energy Act 2016 published (May)

Why do we think that North Sea regulation from now on (or at least from the date on which the relevant provisions of the Energy Act 2016 come into force and the Regulator’s staff complement is up to full strength) will be radically different from what operators have been accustomed to? There are six main reasons.

For the first time, the UK offshore regulatory regime (excluding its environmental and health and safety aspects) has a single governing principle articulated on a statutory basis – the objective of maximising the economic recovery of UK petroleum (MER UK).

Although MER UK is defined in general terms in a strategy promulgated by DECC under the Infrastructure Act 2015, its specific meaning and impact in any given situation will in large measure be determined by the Oil and Gas Authority (OGA).

The obligation to act in accordance with MER UK, as so defined and interpreted, applies – or could be said to apply – to at least one person involved in the taking of almost any commercially important decision in the offshore industry.

Under the new regime, the OGA and DECC will potentially have access to vastly more information about North Sea assets and infrastructure, the commercial intentions of those with interests in them, and the relations between them, than DECC has had to date.

The OGA does genuinely appear to be a new kind of regulator, in terms of its composition, capabilities, culture and combination of functions. It is also likely to take a more proactive approach than its predecessors.

The terms of the MER UK strategy and the robustness of the enforcement tools at the OGA’s disposal suggest that it will enjoy unparalleled leverage over licence holders and others to ensure that collaboration “for the greater good” really does happen.

In future posts in this series, we will explain in more detail how the relevant provisions of the Infrastructure Act 2015, the Energy Act 2016 and the MER UK strategy achieve these results and how we think the application of the new rules by industry parties, DECC and the OGA will affect key moments in the life of North Sea infrastructure and assets.

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The New North Sea – Part 1: the revolution begins here

UK Government initiatives for UK oil and gas : forging links with Mozambique

Last week, the UK Government had a busy week on the oil and gas front – publishing the Draft MER UK Strategy and announcing new measures to encourage investment in the sector and a new City Deal for Aberdeen.

Last Thursday (28 January), the Government laid its new strategy for implementing the plan for maximising economic recovery (the Strategy) before Parliament. The document presented before Parliament is the product of consultation on various drafts since November 2014. Not much has changed from the previous version issued for consultation in October 2015 (see our earlier blog post on the consultation). The Strategy is legally binding upon the Secretary of State, the Oil and Gas Authority (OGA) and players in UKCS upstream operations. The new obligations are intended to help fulfil the aims of MER UK, according to the Strategy without cutting across existing legislation including model clauses…

In case the Strategy wasn’t enough information to absorb in one day, on his visit to Aberdeen on Thursday, David Cameron proudly announced new initiatives intended to demonstrate the UK Government’s ongoing commitment to the UK’s oil and gas industry –

  • 250m investment for Aberdeen as part of a City Deal – the Scottish government has committed a further £254m for infrastructure in Aberdeen and the surrounding region
  • £20 million for funding a second round of new seismic surveys on the UKCS – data from these surveys will be made publicly available
  • £1.5 million available through Innovate UK for innovators outside of the energy sector to develop solutions and disruptive technologies to meet challenges of the energy industry
  • OGA publication of a UKCS Decommissioning plan by early summer (one of the plans to fall out of the Draft MER UK Strategy)
  • Appointment of an Oil and Gas Ambassador to promote the North Sea overseas to boost inward investment, but also to develop links with overseas markets to provide UK oil abd gas companies with best possible access

Of course, an even more powerful display of UK Government support to the industry, might comprise some form of tax relief for faltering producers. We wait to see what happens in the March budget.

Due south to Mozambique

David Cameron’s announcement comes as The Secretary of State for Scotland, David Mundell, prepares to travel to the port town of Pemba in Mozambique, to promote relations with Mozambique’s oil and gas industry. This trip is in conjunction with Aberdeen City Council’s Pemba Initiative which aims to support Pemba’s development as an oil and gas hub.

(A place in the sun - Northern Mozambique) (source: tedchang)

(A place in the sun – Northern Mozambique) (source: tedchang)

The level of oil and gas activity in Mozambique is set to increase dramatically in the next decade. Mozambique has hit the headlines in the last few years, due to huge discoveries of gas in the Rovuma Basin, offshore Northern Mozambique. More than 150tcf of gas discoveries have been made since 2010. Operators, Anadarko and Eni, are both pressing ahead with LNG projects – an initial 12mtpa onshore facility for Anadarko from the Golfinho reservoir in Area 1 and a 2.5mtpa FLNG facility for Eni for the Coral reservoir in Area 4.

A flurry of exploration activity is also expected in the next few years. INP announced the results of the fifth licensing round in October last year, inviting six consortia (including relative veterans Eni, Statoil and Sasol, as well as newcomers ExxonMobil) to enter into negotiations for exploration and concession contracts for six new blocks.

It seems that opportunities abound for Aberdeen and the UK to develop partnerships with and provide support to Mozambique’s relatively young petroleum industry. Although anyone wishing to engage in petroleum operations in Mozambique will need to get to grips with the recently revised petroleum laws, new petroleum regulations and other local laws – including the local content rules.

Mozambique does not have a general local content law, instead provisions for local content are to be found in the 2014 Petroleum Law, and for the Rovuma Basin LNG projects, in the 2014 project-specific Decree-Law. The two laws contain rules about the level of Mozambican nationals participating in the workforce, in addition to, requiring those engaged in petroleum operations to give preference to Mozambican companies and partnerships and joint ventures between foreign and local companies and individuals in the context of procurement of goods and services.

If you would like to discuss any of the issues raised above, please do not hesitate to get in touch with the author or any of your other regular contacts in the Dentons oil and gas team.

Dentons has experience going back over 20 years in advising on energy projects in Mozambique and is heavily involved in the current LNG projects in Mozambique.

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UK Government initiatives for UK oil and gas : forging links with Mozambique

Oil Price Crash (1): Options for North Sea oil and gas: shut-ins and taxation relief

Companies involved in oil and gas activities globally are tightening their belts. The decline in the price of Brent crude oil (spot sales) from $115 in June 2014 to less than $50 per barrel in just over six months represents a loss in value of over 60%, leading to a reduction in profits (and for some, no profit at all). Regardless of the macroeconomic effects for GDPs, the economics presently look stark.

Some recent headlines demonstrating the devastating effect of the rapid oil price decline:

  • mega mergers and redundancies in the oilfield service sector;
  • the announcements by BP, Talisman and ConocoPhillips of job losses in their North Sea workforces and other operators looking to change the typical “2 weeks on, 3 weeks off” rotation pattern;
  • projects put on hold in Qatar and the Canadian oil sands, (Russia’s Shtokman project and US shale developments are also feeling the pinch);
  • Shell announced last week it will curtail $15bn of investment over the next three years; and
  • across the board rate cuts for North Sea contractors have been implemented since January.

Difficult times for the North Sea

All this comes at what was already a difficult time for the North Sea industry. It is worth noting that some companies were exiting the UK Continental Shelf (UKCS) even before the price crash and that much of the investment, and growth in the UKCS is expected to be in more expensive “frontier” areas. But now, according to a survey of forecasters conducted by The Independent, the oil price is almost at a point that every barrel produced in the North Sea would be unprofitable. There have been calls for a 50% drop in taxes applicable to the North Sea, as 100 (out of around 300) fields were said to be in danger of being shut in.

Weathering a storm

A North Sea platform weathering a storm

Faced with such a drop in the price of their product, operators of producing fields have four choices: (i) sit tight and hope prices bounce back quickly and sharply, (ii) cut costs and/or investment, (iii) shut in production or (iv) lobby the Government to boost their net revenue by changing the fiscal position. We’ve seen some examples of option (ii) already, as noted above. Companies opting for option (i) may wish to consider overlifting or underlifting their share, within the confines of joint venture arrangements, to ease immediate cashflow worries (and see our previous article for issues to consider dealing companies potentially in distress), or gambling on a return to higher prices, respectively. Here we consider options (iii) and (iv) in more detail.

Shutting up shop

Operators of producing fields might consider shutting in production (i.e. stopping production and shutting wells), either for a temporary period until the oil price rises back to a profitable level or permanently with a view to beginning decommissioning. Below, we take a look at some of the practical and legal consequences.

Recommissioning facilities after a temporary shut-in can be a costly and lengthy process. This can be prohibitive, leading to remaining reserves being left in the ground. According to reports it took BP’s Rhum field (temporarily shut in between November 2010 and October 2014) a year to recommence production due to technical delays after receiving approval from DECC.

Those who choose to shut in production with a view to decommissioning must undertake decommissioning activities in accordance with pre-approved programmes. Early field decommissioning can also result in the premature decommissioning of ageing infrastructure which could otherwise be used by newer fields.

Decommissioning in operation

But before an operator can take steps to shut-in production, it must follow a process and obtain certain approvals (which may or may not be forthcoming). Prior to engaging with Government, the operator must obtain approval from its other joint venture parties in accordance with the voting arrangements in the relevant joint operating agreement.  If the green light is given, the operator will need to seek approval in accordance with the law and licence conditions.

Secretary of State blessing

DECC regulates producers operating in the UKCS through the Petroleum Act 1998, as well as the licence conditions in offshore exploration and production licences granted to companies wishing to explore and produce oil or gas in the UKCS. These conditions are drawn from “model clauses” set out in secondary legislation. The model clauses used vary depending on when a licence is granted. But a general principle applying across model clauses for all licences (regardless of when the licence was granted) is that the Secretary of State for  Energy and Climate Change’s (the Secretary of State) consent or approval is required for certain key steps. Under the licence conditions, a licensee cannot abandon any well, nor may it decommission any assets, without the Secretary of State’s consent. Therefore any decision to shut-in a well governed by a UKCS licence requires the Secretary of State’s blessing.

The Secretary of State has the power to revoke a licence (in respect of one or all licensees) on a failure to comply with licence conditions and may direct at the time of revocation that any well drilled is left in good order and fit for further working; thus providing the possibility of future production.

MER UK

The results of prematurely shutting in production seem diametrically opposed to the Government’s aims of maximising economic recovery from the North Sea resource (MER UK) (in line with the proposals set out in the Wood Review). Prior to the coming into force of the Infrastructure Bill, there is no legal requirement for the Government to take MER UK into account when exercising its licensing and decommissioning functions. It is bound to be a factor in decision-making on any request for Secretary of State consent. The Infrastructure Bill, when in force, will also place obligations on producers (see our previous blog) to act in accordance with the Government’s MER UK strategies. 

Death and taxes

There may be nothing more certain than death and taxes, but taxes applying to the UKCS have been far from certain. The surprise increase in the Supplementary Charge from 20% to 32% in 2011 (due to the high oil price) serves as a reminder to the industry of the temptation to shock (but without awe).  Analysts and industry experts believe that what is needed is (i) a quick fix reduction on tax rates to show UK plc supports the North Sea industry (and help those still making a profit) and (ii) a comprehensive review of the tax system in place to reduce complexity.

Head of Oil and Gas UK (OGUK), Malcolm Webb, would like to see “30% as the top tax rate”, whilst “some companies are paying 80% as the highest rate on fields in the North Sea.” How is it that some companies are paying 80% in tax? The Government currently operates three oil and gas tax regimes, which overlap with each other, as follows:

First steps for improving fiscal competitiveness

The Government did respond to the oil price change in December 2014 announcing various reliefs, including cutting the Supplementary Charge from 32% to 30%, extending the ring-fence expenditure supplement for offshore oil and gas activities for four more years as well as plans for new “cluster” allowances. The industry commended these steps, but they were felt not to go far enough. In addition, these reliefs may be more helpful for those engaging in exploration in newer frontier areas than for those producing from the older fields with marginal economics. With the oil price dropping lower (and the potential for sub-$40 Brent crude), in mid-January, Sir Ian Wood, whose Review recommended a wholesale review of the tax structure to encourage investment in the interests of “MER UK”, advocated lowering the Supplementary Charge within the next few weeks by at least 10%, i.e. back to 20%.  Malcolm Webb’s view is that the December “measures can only be seen as the first steps towards improving the overall fiscal competitiveness of the UK North Sea. We will certainly need further reductions in the overall rate of tax to ensure the long-term future of the industry”.

Budget

What else does the 2015 Budget have in store?

Part of the problem is that the UK operates a licensing regime for exploration and development activities, and the Government obtains revenues from the UK’s natural resources through imposing taxes. As a result every response from the Government to market conditions, or attempt to stimulate activity, takes the form of legislation that applies to everyone and tends to hang around. Other jurisdictions, which operate production sharing regimes, have the luxury of adapting production sharing formulas (often set out in contract) to reflect the level of exploration risk for a particular concession or block, with regard to factors such as geographical location and drilling depth, by allowing the parties’ shares to increase or decrease as aggregate production increases. Those operating in such regimes may also benefit from stabilised taxation for a certain period of time (contributing to the attractiveness of a jurisdiction for investment).

OGA to the rescue?

Whilst the UK has tried to import some mechanisms into the tax system to allow for the recognition of risk in exploration, some commentators feel the UK now fields a convoluted and newcomer-unfriendly fiscal system. As the competition hots up between countries to provide home for petrodollar investments, this provides an opportune time to review the tax system for the North Sea. It seems that the new Oil and Gas Authority is getting cracking undertaking a review of measures which could be taken to relieve the existing crisis.

 

 

 

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Oil Price Crash (1): Options for North Sea oil and gas: shut-ins and taxation relief

Strategies for community energy

On 27 January 2014 DECC published its first Community Energy Strategy (the Strategy). The Strategy seeks to promote the creation of new initiatives and expand existing programmes to encourage community-led development in the UK’s energy industry. The stated ambition of the Government, developed from its commitment to community-led renewable development in the Coalition Agreement, is “that every community that wants to form an energy group or take forward an energy project should be able to do so”.

The Strategy, published following the Government’s review of responses to a call for evidence, issued in June 2013, identifies four areas in which the Government wishes to promote and support communities: generation, energy efficiency, managing energy and purchasing energy.  It recognises that given the diversity of needs and geographies there can be no one size fits all approach for community development. This is captured in the varied support to be made available. As an example, the Strategy envisages that the Cheaper Energy Together scheme will continue to support energy purchasing collectives, but also paves the way for larger projects, announcing the Government’s commitment to consult on raising the maximum capacity for Feed-in Tariffs from 5MW to 10MW.

The Strategy foresees that community involvement will increase through vital partnerships with developers, investors, local authorities and regulators. In addition, it seeks to tackle some of the main challenges communities currently face:  limited access to funding, a lack of knowhow and understanding of energy projects and dealing with the regulatory processes. A new £10 million Urban Community Energy Fund will be set up to provide finance for planning electricity and heat generation projects in England which will be in addition to the existing DECC/ DEFRA Rural Community Energy Fund already established in June 2013. Similar funding schemes are available in Scotland and Wales.

The next key challenge is to build the levels of understanding and knowledge. A ‘One Stop Shop’, developed with community energy groups, for knowledge sharing and ideas will go towards bridging the knowledge gap. But more than this is needed for the community projects to navigate their way through the regulatory and commercial minefield that is the UK’s energy industry and to ensure sufficient buy-in from the wider community to support community energy projects. In addition, it will be interesting to see how the concept of the Licence Lite, an alternative electricity supply licence, with reduced supply obligations, will be developed to enable community projects to supply electricity to the community.

This Strategy comes at a time when the energy industry itself is doing more to engage local communities in new energy developments: the shale gas and oil industry presented a package of benefits for communities located near fracking sites in its Community Engagement Charter in the Summer of 2013. Whilst RenewableUK updated its Community Benefits Protocol in October 2013, which commits developers of qualifying projects to providing certain levels of benefits to host communities. DECC’s plan, however, is for communities themselves to play a greater part in developing local energy strategy, and ultimately it is the extent to which the public is made aware of the resources available and the take-up of those resources, which will determine whether the Strategy achieves its aim.

solarpowered

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Strategies for community energy